Historically, competition law has been a matter for public enforcement, with those who infringe it subject to penalty from regulators. However, there is an increasing impetus towards so-called "private enforcement" where the victims of anticompetitive behaviour sue for damages. In this regard, three developments are of particular interest:
- >the introduction of follow-on actions;
- >recent reform of the UK damages regime; and
- >current proposals to reform the European damages regime
RECENT REFORM OF THE UK DAMAGES REGIME
The UK government has introduced legislation further to encourage private actions, as follow-on actions have proved to be an insufficient incentive:
- There has been a trickle of claims but, to date, only around 25% of infringement decisions have led to action by victims; usually large companies, not the SMEs and consumers further down the distribution chain who most need protection.
- Actions by "super-complainants" have been ineffective. Damages are only paid to victims who learn of the action and opt into it, which can be a tiny fraction. In the action by Which? against JJB Sports, only about £18,000 of damages was claimed by customers, each of whom paid about £20 too much for a replica football strip. Which?'s legal costs dwarfed this sum.
- Besides, follow-on actions are not the ideal supplement to public enforcement. They take no weight off regulators' shoulders as they require a regulator's decision first.
As well as follow-on actions, the UK and European initiatives seek to encourage standalone actions where regulators have not found infringement so claimants must prove it.
Details of the UK reforms are in Schedule 8 of the Consumer Rights Act which received Royal Assent on 26 March 2015.
To address the three problems above, the main reforms concern:
- The Competition Appeals Tribunal (or CAT); exploiting its expertise by turning it into the venue of choice for private actions, with a low-cost "fast track" for SMEs and consumers.
- Class (or "collective") actions; to address the problems of the super-complainant regime.
- Measures to ensure private enforcement compliments public enforcement.
(1) The CAT
The CAT has been turned into a venue of choice. Previously, despite its expertise, it could only hear follow-on actions. It could therefore be dangerous to start an action in the CAT because if the issues strayed outside the four corners of the regulator's decision, the CAT was stymied.
The Government has therefore decided:
(a) To extend the CAT's jurisdiction to allow it to hear standalone as well as follow-on cases.
(b) To enable the CAT to grant injunctions.
In this regard, the government's Response to its consultation on the Act notes that stopping anticompetitive behaviour is often more important to a business than obtaining redress.
(c) To assist those who find bringing actions prohibitively expensive by introducing a cost-efficient fast track procedure in the CAT for simpler claims.
(d) That, on the fast track, there will be a cap on how much of the winner's costs the loser must pay, the cap to be decided on a case-by-case basis.
The Response says the fast track is principally for the benefit SMEs and consumers, but is not limited to them. However, the CAT prioritises cases by those who would otherwise find it difficult to obtain access to justice.
However, the government Response decided:
(e) Not to tackle the question of whether a passing-on defence should be allowed - i.e. where perpetrators defend themselves by claiming the victim has increased his own price to pass his loss down the distribution chain.
The Response suggests that it seemed already to be settled that the defence does exist; or rather it is not a defence at all; just a reflection of the principle that a claimant must prove his loss. Besides, the Commission has since published its draft Directive which confirms the existence of the defence in European law.
(2) Class (or "Collective") Actions and Settlement
The reforms are:
- That class actions are permitted; for both follow-on and standalone cases.
- To introduce an opt-out class actions regime (in the CAT only).
This is a major development but, to avoid US-style ambulance chasing, there are safeguards making it harder for claims to be jump-started by lawyers and others who can make money out of them. Safeguards include:
1. That claims (opt-on or opt-out) can only be brought by a class member or someone else the CAT thinks it is "just and reasonable" should act. The Response said claims should only be brought by genuine representatives, like trade or consumer associations; not law firms or other third parties. The Bill has chosen not to enshrine this in law, but rather to leave the decision to the CAT as part of its certification regime - point (2).
2. That starting a class action requires certification by the CAT, including a determination of whether it should be opt-in or opt-out, a merits test, an assessment of the adequacy of any class representative and affirmation that a collective action is the best option. In this regard, the Response notes; (i) that businesses might be well-placed to take action themselves, so a collective action should only be certified if it is the best option; and (ii) there may be some collective actions which would be more appropriately brought on an opt-in basis, such as a case brought by a small number of businesses all of whom are clearly identifiable.
3. That any opt-out only applies to UK-domiciled claimants, though non-UK claimants can opt in.
4. The prohibition of exemplary or punitive damages. The consultation considered this because, if damages are only compensatory - i.e. a defendant only risks having to pay back his ill-gotten gains - the threat of private action provides no deterrent. Still, exemplary damages are not part of the UK's legal culture, so the idea was shelved.
5. Applying a loser-pays costs rule.
6. Prohibiting "contingency" fees in opt-out actions - i.e. lawyers cannot be paid a share of any damages. However, as most class actions lack funds to pay lawyers, "conditional" fees will be allowed. This is another form of "no win, no fee" where lawyers charge a higher hourly rate to compensate for the risk of losing and not being paid. The logic is that the winning cases subsidise the losing ones, without the potential windfall of contingency fees. "After the event" insurance for the risk of losing and paying the other side's costs will also be allowed.
7. Requiring any unclaimed damages to be paid to a charity offering free legal representation to those who cannot afford it; most likely the Access to Justice Foundation. However, there is freedom to settle on other bases, including unclaimed sums reverting to the defendant. This creates a significant incentive for settlement, as it's no skin off the class representative's nose where unclaimed money goes. However, settlement terms must be approved by the CAT as "just and reasonable". Terms may include an advertising campaign to inform class members of their right to claim.
- To assist Alternative Dispute Resolution by introducing a new opt-out collective settlement regime in the CAT, which can be used before a claim is brought.
Under this system, the representatives of would-be claimants or defendants can apply to the CAT for approval of a settlement. As with collective actions, the 'opt-out' would only apply to UK claimants, though claimants outside the UK could opt-in. The CAT will need to approve the settlement as "just and reasonable".
- Further to assist Alternative Dispute Resolution by giving the new competition regulator (the CMA) power to certify voluntary redress schemes for victims in return for a reduced fine.
(3) Measures to ensure private enforcement compliments public enforcement
The Response largely sidestepped this issue on the basis it is being addressed at the level of European law. Indeed, the draft Directive does address it; particularly the hot topic of whether leniency applicants - i.e. parties to anticompetitive agreements who inform the regulator in exchange for a reduced penalty - should be protected from documents submitted in their leniency application being used as evidence against them in private actions. The clear concern is that this risk may deter parties from coming forward.
However, the Response does address some UK-specific issue, including amending the CAT Rules:
- So it must notify the new regulator (the CMA) when private actions are initiated.
- To provide an explicit power for the CMA to act as an intervener in such actions.
- To allow the CAT to stay cases being investigated by the CMA or another competition authority.