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The European Private Enforcement Regime Reaches a Milestone

On April 17, 2014, the European Parliament approved the European Commission’s (Commission) proposal for a Directive on damages actions for competition law infringements (the Directive).1 The Directive, which is intended to enhance private enforcement of competition law by facilitating damages actions for direct and indirect purchasers in the EU Member States (Member States), represents a significant milestone following a decade-long debate about whether damages claims for antitrust infringements should be facilitated in the European Union.

Approval of the Directive follows the European Court of Justice’s (ECJ) rulings in Courage & Crehan2  and Manfredi3  that the full effectiveness of Article 101 of the Treaty of the Functioning of the European Union (Article 101 TFEU), and in particular, the practical effect of the prohibition laid down in Article 101 would be put at risk if it were not open to any individual to claim damages for loss caused by conduct that restricts or distorts competition.

A 2004 study assessing the actual condition on claims for damages within the European Union had identified obstacles to successful individual damages actions in the EU.4 The study revealed a “total underdevelopment” of actions for damages for breach of EU competition law as well as an “astonishing diversity” in the approaches taken by the Member States on the subject. Consequently, the Commission commenced its plans for harmonizing private enforcement rules in the EU by issuing its Directive.  

The Directive announces two main objectives:

  1. to ensure full compensation for actual loss, loss of profit and interest of any individual harmed by competition law infringements; and
  2. to improve the interaction between leniency programs and private actions.

The Directive undoubtedly was inspired by the legal remedies available in the United States, where private enforcement of competition law is well established. However, the Directive departs from the U.S. system in several significant respects, which can be explained by the different policy objectives across the Atlantic. In the U.S. private damages claims serve both compensation and deterrence functions, with the focus 2 on deterrence. The Directive, however, centers on full compensation -- deterrence plays a lesser role.  

The following summarizes several of the Directive’s most important features:

  1. Passing on defense and indirect purchaser standing

According to the Directive, defendants will have the right to defend themselves against damages claims by proving that the claimant passed on a cartel-driven price increase (overcharge) to its customers (the “indirect” purchasers). This defense is called the “passing on” defense.  A successful passing on defense means that the losses incurred by direct purchasers that are then passed down the distribution chain to indirect purchasers no longer constitute harm to the direct purchasers.  The burden of proving the passing on defense will lie with the defendant.

In order to assist national courts with estimating the portion of an overcharge passed on, the Commission is expected to issue estimating guidelines. The complexity of calculating a passed on amount is one of the reasons that the U.S. Supreme Court has rejected the passing on defense and indirect purchaser standing in Sherman Act cases.5

Linked to the passing on defense is an indirect purchaser’s right to claim damages, explicitly acknowledged in the Directive.  If national courts reject indirect purchaser standing, competition law infringers may escape liability by successfully invoking the passing on defense.

To support indirect purchasers in their claims, the Directive contains a presumption in their favor: the indirect purchaser must prove only that an infringement of competition law occurred and the direct purchaser passed on the overcharge to the claimant. 

  1. Disclosure of evidence

Pursuant to the second objective, the Directive contains extensive rules on evidence disclosure, one of the most intensely debated aspects of the Directive. The ECJ has held that no category of documents may be exempted from disclosure requests. However, the final decision on which evidence is to be revealed rests with the national courts.6  This opened the debate on the protection of leniency applications. The Commission has a leniency policy whereby companies that provide information about a cartel in which they participated might receive full or partial immunity from fines.  In the EU most cartel cases have been discovered as a result of leniency applications. In order not to deter cartel members from applying for leniency when exposed to vulnerability in follow-on private damages actions, it was argued that not all evidence should be disclosed for use in such actions. 

The Directive provides for a sliding scale of documents protected. Evidence can belong either in a “black”, “grey” or “white” list.  The black list contains leniency corporate statements and settlement submissions.  Those documents may never be disclosed.  The prohibition on disclosure extends to extracts from such documents that appear in otherwise grey or white list documents.

  1. Joint and several liability

According to the Directive, infringers of competition law will be held jointly and severally liable for the entire harm. This is in line with the Directive’s full compensation objective. Nonetheless, the rule is subject to several exceptions:

  1. leniency recipients will only be liable for the harm caused to their own direct and indirect purchasers; and
  2. small and medium-sized enterprises that did not lead or coerce other companies into the infringement nor previously committed a competition law infringement will only be liable for damages to their own direct and indirect purchasers if their market share was below 5% during the infringement and application of the normal rules would jeopardize their economic viability.
  1. Limitation periods

In order to ensure the exercise of the right to full compensation, Member States will be able to maintain or introduce generally applicable absolute limitation periods.  The minimum limitation period for bringing an action will be five years.

The limitation period will only begin to run from the moment the claimant knew or could reasonably be expected to have known that the particular defendant infringed competition law and caused harm to the claimant.

The period will be tolled if:

  1. a competition authority has commenced an investigation or proceeding.  The suspension will last until at least one year after an infringement decision has become final or proceedings have been terminated; and
  2. the infringer and victim are involved in consensual dispute resolution.  In such an event, the period will be suspended for a maximum of two years.
  1. Quantification of harm

A main obstacle to private damages claims is the recognition of the claimant’s actual harm.  National courts are often unable to precisely estimate harm caused to direct or indirect purchasers with the available evidence.  In order to remedy this difficulty, the Directive empowers national courts to estimate the harm themselves.  Additionally, the Directive introduces a rebuttable presumption that a competition law infringement causes harm.

The Future

The EU Council of Ministers is expected to formally approve the Directive in the coming weeks. Once adopted, the Member States have to implement the Directive within two years.

So far, in theory, the Directive appears to achieve the Commission’s aim of enhancing private enforcement of competition law in the EU.  Moreover, the Directive may signal the end to national debates about whether or not to accept the passing on defense, or which documents should be exempt from disclosure to private claimants.

 1 Directive of the European Parliament and of the Council on rules governing actions for damages under  national law for infringements of  the competition law provisions of the Member States and of the European Union.     UP 

 2  [Case C-453/99, Courage Ltd v Bernard Crehan [2001] ECR I-6297.     UP

 3  Joined Cases C-295/04 to C-298/04 Manfredi v Lloyd Adriatico Assicurzaioni SpA [2006] ECR I-6619.     UP

 4  In 2004, the law firm Ashurst completed a study into the possibilities for bringing damages actions for infringements of EU and national competition law in the legal systems of 25 EU Member States.     UP

5  See Illinois Brick Co v. Illinois, 431 U.S. 720, (1977) (Illinois Brick); Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481(1968) (Hanover Shoe). The U.S. Supreme Court considered that the passing on defense and  indirect purchaser standing to sue for damages would introduce additional allocation of damages complexity into an already complex case. Additionally, the Supreme Court considered that deterrence is best achieved by giving direct purchasers the right to recover full damages as they are most motivated and capable.     UP

Case 360/09, Pfleiderer AG v. Bundeskartellamt, June 14, 2011 and Case C-536/11, Bundeswettbewerbsbehorde v. Donau Chemie AG and Others, June 6, 2013.     UP