One of the primary aspects covered by the 9th reform of the German Competition Act that has just entered into effect is the transposition of the EU Cartel Damages Directive into German law. The preparatory works in the draft bill as well as the government draft thereby come to a conclusion.
Despite their long tradition and intended relevance, the rules on cartel damages claims in the Competition Act have been rather dormant for quite some time. However, in recent years, the topic gained in importance considerably. Now, the legislator stays abreast of this trend. The competition law reform significantly supplements the rules dedicated to private cartel damages claims, providing a legal basis upon which both claimants and defendants can rely upon in cartel damage proceedings. By further improving the legislative base, the reform will contribute to the reputation of Germany as a preferred venue for cartel damages litigation.
Good things come to those who wait!
Already in 2001, the European Court of Justice found in Courage that the cartel prohibition provides a basis also for individuals to claim compensation for damages caused by cartel infringements. However, it should take considerable time to introduce a harmonized uniform standard.
But what is coming exactly?!
The reform establishes a specific set of rules for cartel damages claims in various areas which differ from general tort law. We will take a closer look at the most important provisions.
Spot on – The basis of the claim
Up to now, the statutory basis of the claim for cartel damages claims hid in a paragraph in between other rules concerning the civil law consequences of cartel infringement.
That’s over now: The new Section 33a ARC introduces a specific basis for damage claims in a highlighted position, separated from claims for injunctions and rectification.
You are family
As to the question whether parent companies can be individually held liable in addition to the infringing unit, the new provision only provides limited clarification. Clearly, parent companies will often be an attractive target for the plaintiff’s perspective, not least due its extended resources. Although Section 33a para.1 ARC does not modify the previous wording, German law will most likely have to adapt to the European approach and depart from its strict adherence to the separation of legal entities. Coherently, the cartel damages directive refers to the undertaking (being the entire economic unit) as potential counterparty. Acknowledging the practical impact of this matter, the question will be discussed in depth in a separate blog entry in this series.
Where there’s a cartel, there is harm … probably
Pursuant to Section 33a para.2 ARC it will be presumed in the future that cartel infringements cause harm. The presumption extends to the existence of damage as well as the fact that it was caused by the infringement. However, it does not allow for any assumptions with regards to the quantification of the damages. Therefore, substantiating the amount of damages will still pose a challenge for the claimant. Furthermore, the defendant retains the opportunity to rebut the presumption, for instance on the basis of an expert’s opinion.
Competition authority – always by your side
At the same time, claimants will continue to profit immensely from the groundwork done by the competition authorities. An infringement by the competition authority is deemed to be irrefutably established for the purposes of an action for damages brought before courts in Germany. Before this background, plaintiffs will continue to file their damage claims subsequent to the official fining decision to impose a fine in most cases.
Who has been passed the buck?
The entitlement to damages serves the purpose to compensate the claimant for losses incurred through the illegal actions. This does not only mean that the imposition of penalties as a consequence of the illegal actions remains exclusively with the competition authorities. Furthermore, overcompensation is to be avoided. In fact, the aim is to the claimant into the position that he would have been in if the infringement hadn’t taken place.
Hence, compensation of additional costs incurred because of the infringement cannot be claimed if the plaintiff had been able to pass-on the mark-up to his own (indirect) customers. Instead, it is the respective customer who is entitled in this case to claim compensation for the sustained losses himself. Of course, only if he did not pass-on the overcharge himself.
This so-called passing-on defence had been acknowledged in Germany already prior to the 9th reform. Although in practice there are often compelling indications that subsequent market levels were being compromised by the illegal actions as well, it was hard to fulfil the requirements defined by the pertinent case law regarding the burden of proof. In this respect, the new rules in the German Competition Act lead to significant facilitation.
This is particularly true from the perspective of indirect customers. They now benefit from a legal presumption: If the illegal actions resulted in overcharges vis-à-vis direct customers and also the indirect customer demonstrates relevant purchases of the respective goods or services, it is legally presumed that the overcharged was passed-on. The presumption applies not only at the expense of the injuring party, but also at the expense of buyer on upstream markets.
Furthermore, there are grounds to believe that the new rule also benefits the injuring party. It appears that the new rule is widely interpreted as stating softer requirements for successfully invoking the passing-on defence compared to the principles set-out by the German Federal Court of Justice in ORWI. Whether that is really correct and the passing-on defence might therefore generally gain importance will be subject to a separate blog entry in this series.
One for all – All for one?
Already prior to the reform, the parties participating in the infringement were jointly and severally liable debtors. Section 33d ARC newly introduces a genuine rule of competition law, containing multiple deviations from the general rules of civil law.
As has been the case in the past, injured parties can claim full compensation from each of the cartel participants. It is then upon the respective defendant to seek a fair share from the other participants. However, the 9th reform provides two meaningful exceptions from this general rule, favouring small and medium-sized companies as well as the most important key witness.
The liability of small and medium-sized companies with a small market share (<5%) is limited to the compensation of the damages of their own direct and indirect contractual partners, subject to certain requirements. According to Section 33e ARC, the same applies to leniency applicants who contributed substantially to the disclosure of the cartel infringement. However, congruent with the cartel damages directive, the latter only applies if the respective companies were granted full immunity under the applicable leniency program. By contrast, a mere reduction of the fine does not suffice. Instead, subsequent leniency applicants remain jointly and severally liable to the full extent.
Apart from the aforementioned contractual partners, all other customers of the affected goods have to claim their damages from the other cartel participants first. They may hold the privileged companies liable only to the extent that compensation cannot be obtained from the other participants.
In addition to that, the modifications also affect the internal relationship between the cartelists. Corresponding to the aforementioned privileges, the amount of contribution of the respective participant is limited to the amount of harm caused by the competition law infringement to their direct and indirect customers.
Different from the general rules, the amount of contribution from an individual participant shall not be calculated per capita, but rather based on the circumstances of the particular case. In this context, the relative responsibility for the harm caused shall be considered primarily. In addition, criteria such as relevant market share, affected sales volume or cartel-inflated profits shall be considered.
The details of the new rules updating the joint and several liability in cartel damages cases will be subject to an upcoming blog entry in this series.
Cartel damage proceedings usually last for years and involve considerable costs for parties on both sides. Moreover, the eventual outcome often is hard to predict. This increases the incentive to find an amicable solution. The willingness to accept a settlement in cartel damages claims is already exceedingly high in the pre-court stage, a situation which does usually not change significantly once the legal dispute becomes one in front of a court.
It has been even more unfortunate before this background that the consequences of a settlement on the joint and several liability were subject to much uncertainty. Section 33f ARC significantly contributes to increased clarity in this respect. Accordingly, settlements in cartel damages cases, on the one hand, release the cartelist from his responsibility to compensate the respective counterparty. On the other hand, the other participants’ obligation to compensate this claimant is reduced as a consequence of the settlement – not only by the settlement amount, but by the full share attributable to the settling participant. A subordinate liability in the event that full compensation cannot be obtained from the other participants can be mutually excluded in the settlement.
The transparent opponent
Another very important new provision is Section 33g ARC. In excess of what the cartel damages directive required, it offers a basis to independently claim disclosure of evidence and supply of information. The claim can be brought, for instance, to support pre-court settlement negotiations. At the same time, the claim fits in the overall scheme of disclosure and access to information in cartel damage cases. The claim benefits claimants, but also cartel participants. Two of the coming blog entries from this series are dedicated to information gathering.
Those who come too late, the statute of limitations will catch.
Last but not least, Section 33h ARC introduces additional changes with a view to limitation periods applicable for cartel damages claims. Previously, the only special rule in this context provided for a suspension of the limitation period during official actions of a competition authority. The 9th reform act now introduces additional modifications of the general rules. Most importantly, the general limitation period is extended from three years to five years. In addition, under the new regime, the suspension will only end one year after termination of the official proceedings. Furthermore, the provision protects the defendant by ensuring that recourse claims will not become time-barred before they can be brought against other participants.
A comprehensive overview as to statutory limitation periods will be provided in a separate blog entry in this series.
Cartel damages claims – quo vadis?
In its very first Article, the cartel damages directive emphasizes its goal “to ensure that anyone who has suffered harm caused by an infringement of competition law by an undertaking or by an association of undertakings can effectively exercise the right to claim full compensation for that harm from that undertaking or association.”
Correspondingly, the 9th reform introduces a comprehensive set of rules applicable for the assertion of cartel damages claims. This has to be welcomed, not least with a view to an increased harmonization of the national rules in the member states. At the same time, the new provisions take into account antitrust law-specifics in various ways which had so far been ignored by the general rules.
What remains is the practical test. To what extent the new rules will really contribute to a continuous boost to cartel damages litigation remains to be seen. The relevance of cartel damages claims increased significantly over the last few years already on the basis of the ‘old provisions’. Also, the modifications introduced by the reform do not just unilaterally serve the claimant side. The new provisions also offer some potential for the defendant to improve its position. Hence, the cartel damages rules of the 9th reform might emerge as a sheep in wolf’s clothing from a claimant’s perspective, should it fail to adequately take this aspect into account.