The EC published guidelines for national courts to estimate the share of overcharge that is passed on. These non-binding guidelines explain the factors impacting the existence and magnitude of passing-on effects and methods to quantify such effects.
The guidelines could contribute to a more balanced assessment of harm in private damages actions in Belgium, by offering a range of quantification methods to bridge the current gap between the (often unrealistic) precise calculation and the (often unverifiable and unpredictable) ex aequo et bono estimation.
Background: increase in private enforcement of competition law
In recent years, an increasing number of claims have been brought before national courts to obtain damages for an infringement of competition law. This trend follows the introduction of European and national legislation that aims to facilitate this type of action to ensure that the victims of infringements may effectively exercise their right to obtain full compensation for any harm suffered:
- 26 November 2014: Directive 2014/104/EU on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union (the Damages Directive);
- 6 June 2017: Belgian law transposing the Damages Directive and introducing procedural and substantive rules in the Code of Economic Law to facilitate such private damages actions (the Belgian Law).
Apart from new rules on the disclosure of evidence, joint and several liability and limitation periods, the legislators have also introduced measures to alleviate the claimant’s burden to prove the infringement and the harm suffered. In particular, the rebuttable presumptions that (i) cartel infringements cause harm and (ii) an overcharge is passed on to indirect purchasers if an infringement has caused an overcharge to a direct purchaser.
Remaining difficulty: quantification of harm and the effects of passing-on
QUANTIFICATION OF HARM (IN GENERAL)
Although the legal presumption of harm shifts the burden of proof to the defendants, it is still for the claimants to demonstrate the extent of the harm that they have suffered in order to obtain damages. As recognised in the Damages Directive, the quantification of harm can constitute a substantial barrier, preventing effective claims for compensation as “[q]uantifying harm in competition law cases is a very fact-intensive process and may require the application of complex economic models.”
The standard of proof for the quantification of harm in competition law cases is determined by national law, but should not be less favourable than rules governing similar domestic actions (principle of equivalence), nor render the exercise of the right to damages practically impossible or excessively difficult (principle of effectiveness).
Back in 2013, the European Commission (EC) provided some non-binding practical guidance to help national courts estimate the harm in a Communication (summarising the existing principles) and a Practical Guide (setting out the types of harm and the methods and techniques to quantify such harm).
QUANTIFICATION OF THE EFFECTS OF PASSING-ON (IN PARTICULAR)
One of the specific areas of dispute over the quantification of harm is the assessment of whether, and if so, to what extent, any harm has been passed on by the victims of the infringement (direct purchasers) to their own customers (indirect purchasers).
In the event of passing-on of overcharge, the indirect customer will face a price effect. Passing-on occurs in two scenarios: (i) an infringer may use passing-on as a defence, claiming that its direct purchasers did not suffer harm as they have passed on the alleged overcharge to their own customers (ie the downstream passing-on or “shield” function), or (ii) an indirect customer may claim that it suffered harm because direct customers have passed on their overcharge (ie the upstream passing-on or “sword” function).
In addition to the price effect, the passing-on of overcharge may also lead to a reduction in demand: a purchaser that passes on the overcharge to its own customers might be confronted with a reduction in sales and thus a loss in the profit margins associated with those sales (ie the volume effect).
The assessment of overcharge and the passing-on of overcharge can be challenging, as national courts will often have to rely on assumptions, because the determination of the counterfactual scenario (ie but for the infringement) is by definition hypothetical and the courts will generally not be able to quantify the harm with absolute accuracy.
The Damages Directive therefore (i) introduces a rebuttable presumption to the benefit of indirect purchasers ("sword" function), (ii) specifies that the national courts must have the power to estimate any share passed on, and (iii) states that the EC would “issue clear, simple and comprehensive guidelines for national courts on how to estimate the share of the overcharge passed on to indirect purchasers.”
Although the EC had already provided non-binding guidance on the quantification of harm (in general) early on in the Communication and Practical Guide, the assessment of passing-on remained unclear: for example, should quantification be based on internal pricing information and witness statements (qualitative evidence) or rather on an economic analysis (quantitative evidence); how should the courts assess claims brought in different jurisdictions and by claimants at different levels in the supply chain; how could courts limit the risk of over- and under-compensation etc.?
EC Initiative: publication of Passing-on Guidelines
THE GENESIS OF THE PASSING-ON GUIDELINES
In 2016, the EC published a Study on the Passing-on of Overcharges, prepared by RBB Economics and Cuatrecases, Gonçalves Pereira with the intention of providing practical guidance to judges and other practitioners on evaluating the plausibility of claims, on quantifying the effects of passing-on and on assessing the total extent of the harm suffered by a claimant.
On 5 July 2018, the EC published draft passing-on guidelines, which were subject to a public consultation in which stakeholders could submit their views and comments.
This process led to the adoption of guidelines on 1 July 2019 to help national courts estimate the share of price increases caused by a cartel that is passed on to indirect purchasers and final consumers (the Passing-on Guidelines).
The Passing-on Guidelines are non-binding: there is no obligation for national courts to follow the Passing-on Guidelines and they are without prejudice to the jurisprudence of the Court of Justice of the European Union. However, the Passing-on Guidelines provide best practices, and should be read together with the Practical Guide and Communication to obtain insight into the assessment of an overcharge and the passing-on of such overcharge.
USEFUL INSIGHT INTO ECONOMIC THEORY
Although national courts must estimate the passing-on effects on a case-by-case basis, a general understanding of the economic theory of passing-on and its effects is important, because economic theory may: (i) provide a framework within which courts may evaluate quantitative and qualitative evidence to assess whether or not a required standard of proof is met; (ii) guide courts in deciding on requests for the disclosure of evidence by assessing its relevance; and (iii) assist courts in judging the credibility and reliability of economic explanations of the link between an overcharge and a passing-on.
In particular, it is relevant for national courts to understand the most important factors affecting the existence and magnitude of the passing-on (price or volume) effects:
QUANTIFICATION OF PASSING-ON (PRICE AND VOLUME) EFFECTS
The principle of full compensation requires putting the injured party in the position that it would have been in had the infringement not occurred (the counterfactual scenario). When constructing such hypothetical situations, one must isolate the effect of the infringement from other factors affecting the price (ie introduce controls for such other variables) to determine the overcharge. The next step is to estimate the magnitude of the passing-on related price effect. Finally, the court should also take into account the passing-on related volume effect.
Quantification of passing-on related price effect
The most common method for establishing the counterfactual scenario on the basis of quantitative evidence is the comparator-based approach. This method compares the price set by the direct purchaser during the infringement period with the price set in a comparator market; this can be a comparison of data related to prices or margins:
- on the same market before, during and after the infringement (before-during-after approach);
- on different product markets or on the same product market in different geographical areas (cross-sectional approach); or
- on a combination of differences over time and across product or geographical markets (difference-in-difference approach).
The advantage of this approach is that it uses real-life data (actual prices). The downside is that there is never a perfect comparator market and it might be disproportionately complex and costly to compile the required data.
An alternative method listed in the Passing-on Guidelines is the passing-on rate approach. This method analyses how previous changes in a firm’s costs have affected its prices before or after the infringement period. However, courts should exercise caution when using this approach as it can deliver misleading results; because it relies on the assumption that, during the infringement period, changes in input costs are reflected in prices downstream and does not distinguish between changes in small or larger fractions of the marginal costs.
A final method listed in the Passing-on Guidelines is the simulation approach, where an economic expert develops a model of competition at distribution-chain level, where the claimant is active and simulates the effect of the relevant overcharge on the claimant’s profit during the infringement period. However, this method requires extensive data and depends on assumptions that might be difficult to validate.
Apart from the above quantitative methods, the Passing-on Guidelines recommend that judges also take qualitative evidence (eg internal documents or witness statements) into account when estimating the passing-on related price effect.
Quantification of passing-on related volume effect
The estimation of the loss of profit due to reduced sales that result from passing-on (volume effect) requires an assessment of: (i) the change in quantity due to increased prices; and (ii) the counterfactual margin. The lost profit can be estimated by multiplying the counterfactual margin by the reduction in sales volumes stemming from the passing-on of overcharges.
If sufficient data can be collected on: (i) the observed quantity sold by the firm affected by the overcharge; (ii) the counterfactual volume sold; and (iii) the price-cost margin that would have been achieved by the purchaser in the absence of the infringement, national courts could use the comparator-based approach to estimate the passing-on related volume effect.
An alternative method is the elasticity approach, according to which the volume effect is estimated by combining the price increase observed as a result of the passing-on related price-effect with an estimate of the price sensitivity of the relevant demand. The downside of this method is the need for a vast amount of data on prices and quantities, which may not be available or may be disproportionately costly to obtain in comparison to the total value of the claim.
As for passing-on related price effects, the Passing-on Guidelines emphasize the important role of qualitative evidence (if available) when estimating the passing-on related volume effects.
Impact on Belgian private damages claims?
ABSENCE OF CLEAR LEGAL FRAMEWORK FOR THE QUANTIFICATION OF HARM
The Damages Directive refers to the power of national courts to estimate the amount of harm if it is practically impossible or excessively difficult to quantify this precisely on the basis of the available evidence. The European legislator has specified that such power to estimate is necessary, as the assessment of how the market would have evolved had there been no infringement (but-for analysis) implies a comparison with a situation which is by definition hypothetical and can thus never be made with absolute accuracy.
This power to estimate was not included in the Belgian Law transposing the Damages Directive. According to the preparatory works, such express inclusion was not required, as this power to estimate is already built into the Belgian legal system on the basis of the consistent case law of the Belgian Supreme Court.
It is important to note that the Belgian Supreme Court has indeed accepted that a court has the discretion to decide whether it will assess harm in an ex aequo et bono manner. However, such approach should only be used if there is insufficient evidence available to come to a mathematically precise quantification of the harm (ie subsidiarity condition). Although certain courts have decided otherwise, it does not follow from the case law of Belgian Supreme Court that courts may also apply an ex aequo et bono estimation if the gathering of (available) data and an economic analysis would lead to costs that are disproportionate to the total value of the claim (NB: the condition of proportionality is expressly referred to in the Passing-on Guidelines). In addition, if this ex aequo et bono approach is taken, courts are not required to identify the (factual) elements taken into account or to express the basis on which they have come to the amount of damages awarded.
This “black box” approach does not necessarily correspond to the "power to estimate" that the Damages Directive refers to, which also follows from the different factors, methodologies and techniques set out in the Practical Guide and the Passing-on Guidelines to assist national courts in quantifying the harm in private damages claims.
LIMITED CASE LAW ON THE QUANTIFICATION OF HARM OR PASSING-ON
Although the principle of passing-on of overcharge is accepted in Belgian case law, there are limited cases where the court made a decision on the quantification of harm in general and the quantification of passing-on in particular.
In such (limited) cases, it seems that the courts often (i) find that they cannot quantify harm in a mathematically accurate manner and rely on a quantification ex aequo et bono and (ii) decide against the background of economic reports submitted by the parties or reports prepared by a court-appointed expert. This is illustrated by some recent judgments in follow-on private damages claims:
- In the elevator cartel cases, the Brussels commercial court decided that: (i) there was insufficient evidence of the existence (let alone the quantification) of actual and certain damage; (ii) the economic analyses were insufficiently representative, conclusive and robust to demonstrate the existence of damage; and (iii) a court may estimate the damage on an ex aequo et bono basis if the damage cannot be precisely quantified (but not in this case as no evidence of damage was demonstrated).
- In the motorbike abuse case, the Ghent commercial court decided that: (i) it would be practically impossible or excessively difficult and costly to precisely quantify the damage, given the time that had lapsed since the facts constituting the abuse of dominance; and (ii) it would therefore be acceptable to estimate the damage on an ex aequo et bono basis.
- In the oxygen therapy case, the Liège commercial court decided to (i) award damages for loss of profit on the basis of a before-and-after comparator approach; (ii) reject a claim for impediment of growth for lack of harm on the basis of the same before-and-after comparator approach; and (iii) award damages to compensate for the increased costs incurred on an ex aequo et bono basis.
CONTRIBUTION TO THE DEVELOPMENT OF A BALANCED ASSESSMENT OF PRIVATE DAMAGES CLAIMS
The current case law of the Belgian Supreme Court identifies a subsidiary role for the ex aequo et bono assessment of harm and does not require courts to express the criteria and factual elements used to come to the amount of damages quantified in such way. One could argue that the current 'black box' translation in Belgian case law of the power to estimate in the Damages Directive does not contribute to legal certainty or predictability for the parties in such actions for private damages, nor for any future infringers or victims.
Initiatives, such as the Passing-on Guidelines, will not resolve this issue immediately, but they can only contribute to a more transparent and consistent approach to the quantification of (passed on) harm in this type of case. It can only be hoped that the Passing-on Guidelines will offer national courts more tools and comfort to estimate harm in more specific ways and with express reference to factors that were taken into account rather than the current application of the ex aequo et bono approach.
In the context of the on-going cartel litigation in Belgium, where claims for damages are pending before several commercial courts in Belgium, it can be expected that more case law will be developed in the following months and years, including on the quantification of harm and the estimation of passing-on