Civil actions to recover damages for breach of UK and EC competition law are set to rise significantly in the next few years.

Competition disputes usually blow up unexpectedly and often as a result of a change of policy or strategies of a trading partner or “sharp” practices of a competitor.

In all cases however they can have enormous financial and reputational consequences for the businesses concerned.

Consequently it is important for companies to be fully aware of how to enforce their rights before the Courts as well as how to safeguard their interests when threatened.

Our considerable experience in this field has made us aware that most businesses are unprepared to tackle these unfamiliar issues and are considerably exposed. With this in mind we have produced this short briefing providing preliminary guidance on the subject together with some attached illustrations as to when private enforcement actions can arise and the nature of damages and other remedies potentially available.

Recent Developments

Historically in the United Kingdom few actions for private damages and/ or interim relief have been brought, despite the fact that the enforcement of competition law (by means of such actions) has long been available as an effective alternative to regulatory enforcement. It is, however, now widely accepted that there will be a significant increase in the level of civil actions in the national courts as a consequence of a number of key factors including:

  • Public Policy: As a matter of public policy the EU Commission sees private litigation as a key complement to the public enforcement of the competition rules. As part of a general policy of devolving down enforcement to national level, the EU Commission published a Green Paper setting out its proposals for the promotion of private enforcement of the competition rules. More recently in April and November 2007 respectively the Office of Fair Trading published its own consultation and recommendation documents on how consumers and businesses can gain redress for breaches of competition law. The EU Commission is due to publish a White Paper in the near future to further encourage private enforcement.
  • The Enterprise Act: Private actions are strongly encouraged by the Enterprise Act 2002. Under this Act once there has been a finding of infringement by the national or EU regulator, this finding will be binding on a court in a civil claim for damages;
  • Case Law: The judgment of the European Court of Justice in the case of Courage -v- Crehan has confirmed the availability of the remedy of damages in the national courts for breach of the competition rules as well as extending potential liability to co-contractors in certain given situations.
  • The Modernisation Legislation: Under the overhaul of the competition regulations, implemented primarily in the UK through Council Regulation 1/2003, it is no longer possible for companies to voluntarily notify the EU Commission of agreements that might have anti-competitive effects. One consequence of this is that businesses are stripped of a line of defence, thus opening the door to more private litigation in the national courts.

In essence, victims and perpetrators of anti-competitive behaviour are witnessing the development of a set of coherent rules on private competition actions for damages. This, coupled with a general increasing awareness of seeking damages and/or interim relief through the courts, is likely to result in a marked increase in the number of actions brought. Accordingly, businesses can no longer afford to ignore the opportunities and threats created by these developments.

Some Advantage of Private Enforcement

Depending upon the circumstances of the individual case a business may consider that the most appropriate course of action is to seek to use regulatory findings to establish liability as a stepping-stone to a claim for compensation in the civil courts. For example, a company on the receiving end of anticompetitive conduct, such as a margin squeeze by a dominant player, may consider submitting a complaint to the regulator to be followed on by litigation in the Competition Appeals Tribunal (the “CAT”) to recover damages based on a finding of infringement by the regulator.

Alternatively, however, in certain circumstances standalone litigation may be viewed as more appropriate and/or advantageous. For example, some of the benefits that private enforcement of competition law can offer include the following:

  • Interim Relief: Interim injunctions are not available from the CAT. Accordingly, where urgent action is required to force a discontinuance of the anti-competitive behaviour, an application to the court for interim relief might be the most appropriate remedy;
  • Disclosure: The CAT has no power to order pre-action disclosure or disclosure by third parties.
  • Costs: Courts can order the unsuccessful party to pay the successful party’s legal costs. An undertaking’s legal costs, which may be substantial, are not recoverable in the case of a complaint to a public authority.

In general terms the private enforcement of the competition rules has direct benefits for the functioning of the market as it has a strong additional deterrent effect over and above the sanctions that can currently be imposed via public enforcement and it promotes a culture of competition.

To illustrate both the types of situation in which private enforcement of the competition rules might be appropriate and the nature of damages potentially recoverable and/or other remedies potentially available, we have set out some examples on separate sheets of unilateral anti-competitive behaviour adopted by dominant companies in a particular market or as a result of restrictive agreements between competing companies more commonly known as “cartels”. 

Economic / forensic Issues

In Article 82 or Chapter II abuse of dominance cases, proof of infringement is very likely to be heavily dependant upon sophisticated economic analysis and expert evidence. For example, given the importance of market share in assessing dominance, the definition of the relevant product, service and geographical market is a fundamental element in any analysis. Similarly, a key principle underlying the quantification of damages is the identification of a ‘but for’ scenario (which would have occurred in the absence of the defendant’s actions) and a quantification of the resulting harm to the plaintiff. This analysis is generally the preserve of experts with the appropriate skills in economics, financial accounting and valuation etc.

In Article 81 or Chapter I anticompetitive agreement cases, proof of the infringement is likely to be focused on the existence of and adherence to the anti-competitive agreement itself. In most cases actions under this heading will tend to be follow on actions relying on the existence of a regulatory finding of anti-competitive behaviour.

Tying or bundling diminishes consumer choice and is a device which dominant companies can use to foreclose new entrants and existing competitors from downstream or neighbouring markets.

Case One: Tying

Scenario

Company A is a computer manufacturer. Company B is in the business of providing hardware maintenance. Due to company A’s policy of tying the provision of hardware maintenance to the provision of software maintenance

Company B contends that it is suffering loss as a substantial amount of business is foreclosed to it. In essence, Company B is prevented from maintaining any hardware supplied by Company A and is restricted in its ability to tender for hardware maintenance for those customers requiring one person to maintain numerous different vendors’ equipment at one site.

Advice to Company B

We would advise Company B that the practice whereby Company A ties the provision of its hardware maintenances services to the provision of its software maintenance services could constitute a breach of Article 82 and/or Chapter II of the Competition Act 1998. Subject to the proviso of being able to establish that Company A is dominant and has abused that dominance, Company B might be able to recover its losses by bringing a private action for damages through the UK Courts.

The categories of loss for which Company B could be seeking to recover damages through any such private enforcement action would include:

  • Losses resulting from any termination of pre-existing contracts that can be shown to result from Company A’s actions. This will require analysis of before and after customer retention measures in order to identify any abnormal customer losses; as well as an analysis of any variable costs saved as a result of those losses.
  • Losses resulting from a reduction in the level of new business caused by Company A’s actions. Similar analysis will be required, using before and after measures of customer acquisition.

Experience has taught us that in a case like this the parties will undoubtedly hold divergent views as to the correct market definition against which dominance is to be assessed. Typical issues include, for example, whether there is both a primary and a secondary market; whether the relevant market is the market for hardware maintenance services for Company A’s proprietory hardware only or for hardware maintenance services for hardware generally. Input from experts with the requisite knowledge of the market and the right economic and financial skills is therefore invaluable – both in determining the questions of market definition and dominance, and in making an independent assessment of resulting losses.

Dominant suppliers that cut off supply to an existing customer or refuse to supply a potential new entrant can have a highly damaging effect on competition.

Case Two: Refusal to supply

Scenario

Company A is a publishing company specialising in the provision of business information over the Internet. Company A recently entered into an agreement with a trade association (representing the interests of the IT recruitment industry) pursuant to which Company A was to design, develop and operate an IT recruitment web site on which the trade association members could exclusively advertise their vacancies.

Company B supplies advertising services to the IT recruitment industry, particularly via its website. Company B accepts advertisements from recruitment agencies and posts them on its online job board. Company B has an adopted policy of not accepting advertising from agencies that have their own job boards. In addition, Company B has recently informed IT recruitment agencies that if they advertise on Company A’s recruitment website they will not be allowed to advertise on Company B’s website.

Advice to Company A

Company B is refusing to supply services to existing customers, because those customers also wish to purchase services from a new competitor. On the proviso that Company B is dominant (possibly in the market for on-line advertising services for IT vacancies in the United Kingdom although the correctness of this market definition would need to be established by economic analysis), its behaviour may well amount to an abuse of Article 82 and Chapter II of the Competition Act 1998. In essence, Company B’s threat to exclude those advertising on Company A’s site from its site effectively prevents or restricts potential competitors from entering and/or competing on the relevant market.

Accordingly, we would advise Company A in the first instance to apply to the Court for an injunction ordering Company B to terminate the alleged infringing activity pending trial of the claim. To succeed in its application Company A would have to satisfy the court that there is a serious question to be tried between the parties and that a subsequent award of damages would not be an adequate remedy - for example because Company A could be forced out of the market, damaging both its reputation and its European expansion plans.

This is exactly the type of case in which private enforcement of the competition rules, with the additional injunctive remedies that such an action can offer, can be truly advantageous. In short the granting of injunctive relief can make the difference between a company being forced out of the market and being able to remain in it.

By their very nature agreements to fix prices and their trading conditions constitute a very serious restriction on competition

Case Three: Cartel Behaviour

Scenario

Companies A, B, C and D are developers and suppliers of integrated circuits (ICs) to original equipment manufacturers (OEMs) which make a range of telecommunications products. The OEMs in turn sell their finished products to telecommunications companies - principally carriers - for onward sale to their end users.

Company E is an OEM, which has had a trading relationship over many years with Company A for the provision of ICs for integration into its products.

Companies E and A agree prices on an annual basis for the supply of products. This year Company A increased its prices by over 10 per cent, much to Company E’s surprise. Despite some heated negotiations between the two companies Company A refused to move on price. Concurrent with its negotiations with Company A, Company E approached Companies B, C and D for quotations for ICs of a similar specification and finds their prices similar.

Reluctantly and because no cheaper sources of supply can be found and in view of their existing commercial relationship Company E places an order for ICs with Company A at the higher price demanded. Company E subsequently takes delivery of the ICs from Company A and uses them in the production of its telecommunications products which it sells on to its customers. Company E increases its prices to its customers blaming increased raw material costs for the increase.

Two years later Company E reads in the Press that the EC Commission has commenced an investigation into an alleged cartel in the IC industry involving Companies A, B, C and D. The Commission’s investigation concludes with a finding that Companies A, B, C and D engaged in a price fixing cartel for ICs over a number of years which led to an artificial raising of prices. The Commission issued a Decision condemning the companies for serious breaches of Article 81(1) of EC Treaty and imposing substantial fines. None of the companies fined decided to appeal.

Alert to the fact that they have been significantly overcharged for their requirements of ICs, Company E was anxious to obtain compensation.

Advice to Company E

Company E has found that it has paid higher prices for its ICs than it would otherwise have done in a competitive market. The Commission has already condemned Company A for its part in an anticompetitive cartel and Company A has not lodged an appeal.