On 5 July 2012, the Competition Appeal Tribunal (CAT) handed down its 220 page judgment in 2 Travel Group plc (in liquidation) v. Cardiff City Transport Services Ltd. The CAT's decision to award the claimant just under £94,000 for losses suffered as a result of the defendant's abuse of a dominant market position makes this the first ever UK competition 'follow-on' damages claim to proceed to final judgment. As well as being the first such award by the CAT under section 47A of the Competition Act 1998 (CA98), this is also the first time that damages have been awarded by a UK court to compensate for losses suffered as a result of a competition law infringement, as well as the first time that a competition law infringement has led to the award of exemplary damages.
On 18 November 2008, the Office of Fair Trading (OFT) found that Cardiff City Transport Services Limited (trading as Cardiff Bus) abused its dominant position in relation to urban commercial bus services in Cardiff by introducing and running a "no-frills" bus service at a loss between April and February 2005 with the intention of forcing a rival bus company, 2 Travel Group Plc (2 Travel) (now in liquidation), out of the market. Although this constituted a serious infringement of the CA98's Chapter II prohibition, Cardiff Bus was not fined, on the basis that its annual turnover was less than £50 million and hence its conduct was covered by the statutory immunity from fines provided by s.40 CA98 for conduct of "minor significance".
In January 2011, the liquidators of 2 Travel brought a 'follow-on' action under section 47A CA98 before the CAT, seeking damages from Cardiff Bus as compensation for losses it had suffered as a result of the predatory conduct carried out by Cardiff Bus. Specifically, it sought damages for lost profits, loss of its business, wasted management and staff time, loss of opportunity and also for exemplary damages. The total claim exceeded £20,000,000, plus interest.
Section 47A, which was inserted into the CA98 by the Enterprise Act 2002, gives the CAT jurisdiction to hear damages claims that are based on a prior infringement decision of a competition authority applying UK or EU law. For the purposes of such a claim, the original infringement finding is binding on the CAT and any findings of fact in the decision are binding on the parties. As a result, assuming that a section 47A claim does not go beyond the scope of the original infringement decision, the CAT's focus will be concerned solely with establishing causation (i.e. did the infringement cause the claimant's loss) and quantum (i.e. how much can the claimant recover for that loss?).
The CAT ruled that, given the binding nature of the OFT's finding that the very operation of the no-frills service by Cardiff Bus infringed the Chapter II prohibition, the basis for the CAT's damages assessment should be a counterfactual in which Cardiff Bus did not operate the service at all, rather than a situation where the service did operate, but in a different way. Such a finding follows the well-established 'but for' approach to causation, namely to assess what would have happened 'but for' the wrongful act on which the claim is based.
Following a detailed assessment of the evidence, the CAT concluded that 2 Travel had indeed suffered a loss of revenues as a direct result of the diversion of passengers from its services to Cardiff Bus's predatory services, which ran on exactly the same routes and were timed to run just ahead of 2 Travel's own buses. By the CAT's calculations, this resulted in a loss of revenues for 2 Travel of £33,818.79. Since 2 Travel still ran the services in question, albeit at lighter loading, this loss of passenger revenues equated directly to a loss of profits, which was awarded as damages, plus interest.
The CAT rejected the other four claims for compensatory damages, on the basis that the relevant losses suffered by 2 Travel were not the result of the infringement by Cardiff Bus. Based on ample evidence of the chaotic management of 2 Travel, culminating in its loss of transportation permits, de-listing from AIM and ultimate liquidation, the CAT concluded that "2 Travel was a badly run company, with enormous financial difficulties, even before it commenced the In-Fill services, and providing poor transport services. This is why the company failed." Although the CAT agreed that Cardiff Bus had caused 2 Travel to lose £33,818.79, it concluded that this "was a drop in the ocean", in the context of 2 Travel's poor overall financial position, and was therefore "causally irrelevant to 2 Travel's demise". It was therefore not sufficient for a company that was, in the words of the CAT, "exceptionally badly managed" to blame its misfortune entirely on the abusive conduct of its competitor.
2 Travel had more success with its claim for exemplary damages. Based on an examination of the case law, particularly the judgment of Lord Devlin in Rookes v. Barnard, the CAT noted that the purpose of exemplary damages was to "punish and deter" and should be awarded only if compensatory damages alone are insufficient to punish the defendant, as a means of teaching "the wrongdoer that tort does not pay". Conduct justifying such an award would include behaviour that was "outrageous" or which showed "a cynical disregard for the plaintiff's rights". Following Lord Hailsham in Cassell v. Broome, the CAT noted that it was not sufficient for behaviour to be wrong but rather there should be "(i) knowledge that what is proposed to be done is against the law or a reckless disregard whether [it] is illegal or legal and (ii) a decision to carry on doing it because the prospects of material advantage outweigh the prospects of material loss".
The CAT went on to consider how this case law should be applied in the competition law context and, in particular, to situations involving the abuse of a dominant position under Chapter II CA98 (or, by extension, Article 102 TFEU, which prohibits the abuse of dominance under EU law). It acknowledged that in such cases a company will very often be unable to predict with any certainty as to whether its conduct amounts to an abuse. A dominant company will therefore often have to make decisions in the knowledge that there is a risk that such an action could be found to be in breach of the competition rules. In such circumstances, the CAT considered that it would be wrong to expose the company to exemplary damages. Rather, what was required was intentional or recklessness infringement. Defining recklessness as "the knowing disregard of an appreciated and unacceptable risk" of causing injury, the CAT concluded that knowledge that the conduct concerned was either "probably unlawful or clearly unlawful" was required for a risk to be viewed as "unacceptable". Factors that would be relevant in determining this included, in the CAT's view, whether the conduct had any expected pro-competitive effects, the degree and seriousness of any anti-competitive effects, the motive of the undertaking and the practicability of achieving the same objectives through a course of action with less serious anti-competitive effects.
The CAT also considered whether there were any public policy reasons why exemplary damages could not be imposed. The Court of Appeal had concluded in the last competition case in which this issue was considered, Devenish Nutrition Ltd v. Sanofi Aventis SA, that such considerations excluded the award of exemplary damages in circumstances where a defendant had either been fined by a competition authority, or would have been fined if the defendant had not benefited from immunity as a whistle-blower, on the basis that would lead to double punishment, contrary to the principle of non bis in idem. The CAT concluded that such concerns did not arise here, since Cardiff Bus had not been fined by the OFT, or benefited from the leniency regime applicable to whistle-blowers. The CAT it saw no grounds for excluding an award of exemplary damages simply because the defendant was a small undertaking that had benefited from a statutory exclusion from fines.
Notwithstanding the high threshold for exemplary damages, the CAT found that the requirement for "outrageous" behaviour by the defendant had been met in this case and that, as a result, exemplary damages were appropriate. It found that the directors of Cardiff Bus at the relevant time had introduced their predatory, no frills service solely to exclude 2 Travel from the Cardiff market, on the basis that they commenced at the same time and on the same routes, they were intended to operate just in front of 2 Travel's services, the prices were designed to undercut or match 2 Travel's prices, they were introduced without any consideration as to their cost or profitability and they were introduced with minimal publicity. The CAT concluded its examination of these circumstances with the observation that there was something "inherently repugnant in a service being commenced by a dominant undertaking for the sole reason of excluding another".
The CAT also concluded that the directors knew that what they were doing was illegal and had deliberately failed to take legal advice on the risk of infringement, in circumstances where the limited advice that they had received suggested that there was such a risk. In addition, the CAT observed that the directors had given the board a "bland assurance of legal propriety without having any foundation for giving that assurance" and that any documentary discussion of the predatory no-frills services had been "curiously stilted, undetailed and euphemistic". It was striking, observed the CAT, that the company's otherwise detailed business plan had contained no mention of the services. The CAT inferred from this that Cardiff Buses had been concerned to avoid "an excessive paper trail". On this basis, the CAT concluded that Cardiff Buses had indeed "deliberately decided to disregard the law", and that this conduct was done in "cynical disregard" of 2 Travel's rights.
In fixing the size of the award, the CAT provided useful guidance for future cases. It noted that exemplary damages should have some relation to the compensatory damages being awarded (which it acknowledged were low in this case), it was important to have regard to the economic size of the defendant (here, a relatively small company), and the fact that the defendant was connected with a public authority meant that a relatively low award should be sufficient to ensure punishment and deterrence. On this basis, it concluded that an award of £60,000 (without interest) was appropriate. In concluding, the CAT reminded future claimants seeking exemplary damages that to avoid such a claim being struck out, "it will be necessary to plead, and to plead with specificity, facts and matters alleging that the competition law infringement in question was executed either intentionally in breach of the law or recklessly so as to be regarded as sufficiently outrageous as to fall within Lord Devlin's second category". A finding of infringement alone will therefore not be sufficient.
Although the claimant in this case recovered less than half of one per cent of what it originally claimed, this judgment nevertheless marks a significant step forward for private competition law damages actions in the UK. While the CAT has been far from quiet as a forum for damages actions since it gained this jurisdiction back in 2003, much of its time so far has been spent on preliminary procedural skirmishing and a number of cases have settled before reaching trial. At a time when the UK government is considering various initiatives to encourage private competition law claims, and to enhance the standing of the CAT, this judgment will be a particularly welcome development. The quality of the judgment, and the detail of the CAT's analysis, are also a testament to its expertise and determination to prove itself as an effective forum for claims. (It is notable that all three members of the tribunal in this case are QCs and one is a past Chair of the Competition Commission.)
It will be particularly interesting to see how much of 2 Travel's litigation costs its liquidator is able to recover from Cardiff Bus, given that these are likely to exceed the final damages award. The presumption is that 2 Travel should be able to recover all or most of its costs, since it did win the case to the extent that it proved that it had suffered loss at the hands of the defendant, that the harm was deliberately caused and that it was entitled to damages. The CAT applies a more flexible approach to costs awards than the High Court, however, and it could take the view that 2 Travel's claim for such an inflated sum, compared with the final award, extended the trial unnecessarily and reduce the award accordingly. Since there has been little precedent in this area, due to the shortage of final awards, the outcome should provide helpful guidance as to the CAT's attitude to costs in damages cases.
It is important to bear in mind that the CAT does not have a monopoly on hearing competition law claims, since the High Court shares this jurisdiction, and the CAT's order on 24 July to transfer a section 47A claim from the CAT to the High Court is a timely reminder of this. The High Court has also produced significant judgments recently concerning the status of competition law follow-on claims while appeals are pending and the disclosure of sensitive documentary evidence relating to leniency applications and marked a milestone of its own by finding that Heathrow Airport abused a dominant position and ordering it to cease the infringement.
It is to be hoped that the healthy competition between the High Court and CAT to attract competition law claims will continue to produce judgments such as this one.