The UK Competition Appeal Tribunal (CAT) has awarded damages to 2 Travel Group plc (2Travel) for breach of the Chapter II prohibition on abuse of dominance, ordering Cardiff City Transport Services Limited (Cardiff Bus) to pay compensatory damages for loss of profits of £33,818.79 (plus interest) and exemplary damages of £60,000. It remains to be seen how costs will be dealt with.
This is not only the first final damages award made by the CAT, but also the first case in which an English court has found that exemplary damages can be awarded for breach of competition law. The judgment demonstrates that the consequences of a breach of competition law do not end with investigations by regulators and the risk of very high fines: companies may also face significant private damages actions by customers and/or competitors. The damages ultimately awarded here were relatively low, due to the particular facts of the case, showing that the onus very much lies on a claimant to prove that an infringement has caused it loss. However, there is no indication of any judicial reluctance to award damages in competition cases. The result is therefore unlikely to deter claimants’ rising appetite for bringing such claims, which will increase further if Government proposals to facilitate private competition claims are adopted.
Background to the claim – the OFT infringement decision
2Travel's claim was a "follow-on" claim from the OFT's November 2008 decision that Cardiff Bus had engaged in predatory conduct contrary to the Chapter II prohibition of the Competition Act 1998, which prohibits the abuse of a dominant position. 2Travel was a small bus operator which operated tendered services. To expand its business it decided to introduce, in April 2004, a "no-frills" commercial bus service on four routes in Cardiff, on which Cardiff Bus (the incumbent local authority-owned operator) ran liveried services. In response, Cardiff Bus introduced its own no-frills service (the so called White Services) on the relevant routes with discounted fares. By December 2004 2Travel had withdrawn its services. Cardiff Bus then dropped its White Services in February 2005.
The OFT found that Cardiff Bus held a dominant position in the relevant markets and had abused that dominance by engaging in predatory conduct, through launching the loss-making White Services with exclusionary intent (the Infringement). The OFT found that the revenues generated by the White Services failed to cover the costs of running the services, and that Cardiff Bus had launched these services with the intention of excluding 2Travel from the market, rather than for any legitimate commercial strategy. Despite the infringement finding, the OFT did not impose fines on Cardiff Bus, because due to its low turnover, it benefited from a statutory immunity from fines in respect of "conduct of minor significance".
2Travel’s damages claim
In January 2011 2Travel (by that time in liquidation) brought a claim in the CAT against Cardiff Bus under section 47A Competition Act 1998, which provides the right to bring a follow-on damages claim from an EU or UK infringement decision in the CAT. 2Travel claimed that it had suffered loss as a result of the Infringement and sought damages (plus interest and costs) from Cardiff Bus. The damages claimed were substantial, running into tens of millions of pounds, and comprised six broad heads:
- Loss of profits.
- Loss of a capital asset, i.e. the business of 2Travel as a going concern.
- Loss of a commercial opportunity in relation to a depot which 2Travel claimed it had been forced to sell.
- Wasted staff and management time expended by 2Travel during the Infringement.
- Costs relating to 2Travel’s liquidation.
- Exemplary damages.
2Travel essentially claimed that the Infringement had immediate effects on revenues, and also longer-term effects, which caused it to go out of business in May 2005. Cardiff Bus could not contest liability in light of the OFT's Infringement finding, but disputed the claim on the grounds of causation and quantum. It argued that "but for" the Infringement 2Travel would still have gone into liquidation when it did, and therefore that the Infringement caused no loss to 2Travel. In the alternative, Cardiff Bus argued that, even if the Infringement could be said to have been a factor in 2Travel's demise, the losses claimed were grossly excessive. Cardiff Bus argued that exemplary damages could not or should not be awarded.
Following a 10-day trial, the CAT handed down judgement on 5 July 2012. The CAT awarded damages and interest in respect of loss of profits, but rejected 2Travel’s other compensatory damages claims. It also awarded exemplary damages. It remains to be seen what costs order will be made, in light of the limited level of damages awarded compared to that claimed.
The CAT’s judgment on causation and quantum is on the particular facts of the case. However, its approach to a number of issues is important for the future.
The CAT followed its previous approach in Enron v EWS and applied the standard English law "but for" test. This requires the claimant to evidence that it is more likely than not that, "but for" the wrongdoing of the defendant, the damages claimed would not have occurred. The CAT rejected 2Travel’s arguments for a broader approach.
For the purposes of judging what would have happened "but for" the Infringement, the CAT found that the counter-factual was that Cardiff Bus had not operated the White Services at all, rather than that it had operated them on some other legitimate basis. The CAT also found that it was in the best position to determine exactly what loss and damage the Infringement had caused. It was therefore prepared to look carefully at any putative findings of fact by the OFT and decide which should be binding on the parties. The CAT directed that a (potential) finding of fact by the OFT that, due to 2Travel’s financial position, it may have been forced to exit the market regardless of the Infringement, should not be binding, but should be assessed by the CAT on the evidence. The CAT went on to consider detailed documentary and witness evidence as to 2Travel’s financial state and the impact of the Infringement.
Loss of profits
In relation to the loss of profits claim, the CAT accepted that during the period of the Infringement passengers were diverted away from 2Travel’s services, resulting in a loss of revenues. The CAT assessed how many passengers using the White Services during that period would otherwise have travelled on 2Travel’s services. The CAT applied 2Travel’s prices to these passengers and concluded that lost revenues (and therefore profits in the absence of additional costs) were £33,818.79. The CAT awarded interest of 2% above base rate, rejecting 2Travel’s claim for a higher rate to reflect Cardiff Bus’s intentional breach of competition law as inappropriate in relation to a compensatory damages award.
All 2Travel’s other claims were rejected by the CAT. It held that the lost revenues would have been a "drop in the ocean" compared to the financial losses 2Travel was already suffering due to its own poor management and poor services, and would have made no difference to the fate of the company. The CAT concluded that, absent the Infringement, 2Travel would have also ceased operations and ultimately gone into liquidation. Therefore Cardiff Bus could not be said to have caused any of the other losses claimed, which were rather due to the pre-existing poor state of the 2Travel business.
Despite continued references by policy-makers to the difficulties of assessing damages in competition cases, the CAT was clearly able to do so here. Although complex questions of causation and quantification do arise in competition cases, such questions also arise in many other areas of commercial litigation, and the CAT’s judgment illustrates that English courts are able to address these in competition cases as in any other. The CAT did in effect indicate, however, that it would take a pragmatic approach to evidence where necessary, including that:
- In cases where conscious wrongdoing is alleged, whether in secret cartel or abuse cases, and as a result documentary evidence is sparse, circumstantial evidence and deductions/inferences may be sufficient.
- Even sparse documentary evidence may be sufficient where due to the passage of time this may be more reliable than witness evidence.
The CAT’s judgment in respect of exemplary damages is of great interest and, as the CAT recognised, "likely to incentivise the bringing of claims for exemplary damages in competition cases", albeit that future claims will need to be pleaded and decided on their own facts.
The High Court had previously ruled in Devenish Nutrition v Sanofi-Aventis (see our e-bulletin here), a follow-on damages claim from a cartel decision, that where the EU Commission has imposed fines this precludes an award of exemplary damages under the principle of double jeopardy/non bis in idem, as both serve the purpose of punishing and deterring anti-competitive behaviour (even if fines have been reduced or commuted through a leniency programme). In the present case, where no fines had been imposed and no questions about protection of the leniency programme came into play, the CAT held that there were no policy reasons not to award exemplary damages.
The CAT considered whether exemplary damages may be appropriate under the second head in Rookes v Barnard, i.e. whether Cardiff Bus had engaged in conduct calculated to make a profit which will probably exceed the damages payable to the claimant, in "cynical disregard" for 2Travel’s rights or reckless to these, such that exemplary damages are necessary to punish the defendant’s "outrageous conduct".
The CAT recognised that in many abuse cases a company may not be able to predict with any certainty whether its actions would in fact be illegal. Companies may act in the knowledge that there is a degree of risk that the behaviour could be found to be abusive. The CAT found that to expose companies to exemplary damages in all cases where the company proceeds despite a risk of a breach would be inappropriate, and could have a chilling effect on conduct that may well be non-abusive and in fact pro-competitive. The CAT therefore stated that a "small" risk is not enough, and it is only where a company takes an "unacceptable" risk of breach that exemplary damages can be awarded. The CAT stated that whether risk would be "unacceptable" would depend on an assessment of all the facts of the case, including:
- (As a threshold question) whether a company is aware or deliberately closes its mind to the risk that the conduct is "clearly unlawful" or "probably unlawful" (any lesser degree of risk – for example where the position is unclear – will not be sufficient).
- Any expected pro-competitive effects of the conduct.
- The degree and seriousness of any anti-competitive conduct.
- The motive of the company.
- Whether the commercial effects could be achieved by action with less serious anti-competitive effects.
Application to facts
In this case the CAT found that Cardiff Bus’s behaviour was only consistent with that of an organisation deliberately deciding to disregard a clear or probable breach of the law, in cynical disregard of 2Travel’s rights, and that a compensatory award would be insufficient absent an award of exemplary damages. The CAT was influenced by a number of factors including:
- The White Services were launched for the sole reason of excluding 2Travel from the market (the CAT noting that there was something "inherently repugnant in a service being commenced by a dominant undertaking for the sole reason of excluding another").
- Cardiff Bus created a "deliberate smoke screen" in explaining that its launch of the White Services was to test the market, which was a lie, implying that it knew it was acting illegally.
- The Cardiff Bus managers responsible for the decision deliberately did not take specific legal advice as they knew what the answer would be, and were minded to commence the White Services no matter what.
- There were no pro-competitive benefits of Cardiff Bus’s conduct.
On the level of damages, the CAT rejected the argument that exemplary damages should be measured against the level of fine the OFT could impose. It held that exemplary damages must bear some relation to the compensatory damages being awarded, which in this case were low. It rejected 2Travel’s claim for over £3 million in exemplary damages, awarding £60,000. In doing so the CAT took into account the small size of Cardiff Bus (noting that in other cases the defendant may be so economically powerful that the exemplary damages must be of greater magnitude, sufficient to deter and punish the defendant), and that it is owned by a public authority.
The CAT’s judgment in this case, although very much on its facts, is significant as it indicates how the CAT will approach issues such as causation and the counter-factual, quantification of loss, evidence, interest and exemplary damages. This is important given that the vast majority of competition damages cases are settled before trial. The only other follow-on damages claim in the CAT to reach judgment to date has been Enron v EWS, where the claimant failed on causation (although the CAT has previously reached the stage of awarding interim damages in the Healthcare at Home v Genzyme case (see our e-bulletin here). In the High Court, where both follow-on and stand-alone cases can be brought, there has been only be one award of damages in a competition case to date, in the Crehan v Courage case (see our e-bulletin here), but that was overturned on appeal.
However, the number of competition claims being brought continues to rise. We may therefore see in the coming year further cases reaching trial, such as the abuse of dominance follow-on claim by Albion Water against Dwr Cymru in the CAT, which also includes a claim for exemplary damages, as well as continued interlocutory skirmishes as to jurisdictional and procedural issues. There will be a further increase in claims if some or all of the Government's proposed reforms to further facilitate private enforcement of competition law (see our e-bulletin here), currently under consultation, are adopted. EU-wide proposals in this area are also expected from the Commission later this year.