Quantifying damages in competition cases

DG Competition has just, as of 19 January, published an external study, done by Oxera, on quantifying the harm suffered by victims of competition law infringements (alternatively, "everything you always wanted to know about quantification but were afraid to ask". The document is available here: http://ec.europa.eu/competition/antitrust/actionsdamages/documents.html Faced with 179 pages of analysis or the housework, I'm afraid that I opted for the housework this weekend. However, I hope to return to this but if there is anyone with less competition law marking who would like to summarise it, be my guest.

This is a fun one, although not for the defendants. The case is Safeway v Twigger [2010] EWHC 11 Comm, decided on 15 January 2010 which arose out of the OFT's investigation into price fixing between the dairy processors and the supermarkets back in 2002-03. The OFT has issued a statement of objections, claiming a breach of the Chapter I prohibition. A number of those accused, including Safeway, entered into early resolution agreements with the OFT in order to resolve the case. For Safeway, the penalty is likely to be in the region of £10 million, including the discount for co-operation. Faced with this penalty, Safeway's, now under new ownership, decided to sue a number of its past employees and directors in order to obtain an indemnity against the penalty, as well as damages. The claim is that this group of people have acted in breach of their contracts, as well as in breach of their fiduciary duties, and negligently. The real target of this action, as the judge noted, would be the directors' and officers' liability insurance available to the defendants.

The defendants responded by arguing that this claim was barred as a matter of public policy for two reasons: it infringed the principle of public policy expressed in the maxim ex turpi causa non oritur actio, and in particular the rule that a person who commits an illegal or unlawful act cannot maintain an action for an indemnity against the liability which results from the act and it was fundamentally inconsistent with the United Kingdom competition regime established by the Competition Act 1998 and other statutes. This case dealt with the defendants' attempt to have the action struck out so the facts alleged by the plaintiff are assumed to be true. The defendants were able to satisfy the judge that a breach of the competition rules was sufficiently serious to engage the ex turpi causa principle, although the judgment contains an interesting discussion of the nature of such liability, but had more difficulty showing that the acts were those of the claimant, Safeway.

 

The problem here is that the defendants' actions were not obviously those of the company, for the purposes of the ex turpi causa rule. There was no decision of the board of directors or the shareholders in general meeting to pursue this course of conduct. As Flaux J put it this, "is wrongdoing for which the claimants have to take responsibility as a matter of law under the Competition Act." Therefore, he thought that the claimants has a real possibility of defeating the ex turpi causa defence at trial. As for the alternative claim, that this was contrary to the competition regime, he thought, "Parliament in both the 1998 Act and the 2002 Act was not intending to affect any common law remedies which an undertaking might have against its directors or employees which (unlike a claim for breach of statutory duty to which the defendants referred) arise wholly independent of the statute." As a result, he dismissed the striking out actions.

 

It strikes me that, if this is correct, then a couple of undesirable consequences flow from it. First, it moves the burden from the offending company to the insurers, albeit with quite a lot of transaction costs on the way. True, this claim will not always run, but it would seem plausible in the case of most companies with some spread of shareholding. Secondly, it would seem to reduce the incentive to enter into early resolution agreements or otherwise admit liability for the directors, as they may subsequently be hit with a claim and it might be more in their, and the insurance companies, personal interest to fight the liability issue. Alternatively, it could encourage them to be first in under leniency to try and obtain a 100% reduction. It's a difficult one, as neither party looks particularly meritorious, and the pre-existing law is difficult, to be polite. I suspect that we will here more about this.

 

Information about the OFT's case can be found here: http://www.oft.gov.uk/oft_at_work/markets/goods/dairy-products/

Public interest mergers: BSkyB and ITV

On 21 January, the Court of Appeal (CA) decided BSkyB's appeal against the decision of the CAT upholding certain findings of the Competition Commission (CC) in its report on BSkyB's acquisition of a 17.9% share in ITV. The CC had found that the acquisition would have led to a substantial lessening of competition (SLC), although it would not have had an adverse effect on media plurality. To remedy the SLC, the CC recommended that BSkyB be required to reduce its shareholding to below 7.5%. The CAT upheld the CC's findings on the SLC and the remedy, but disagreed with it on the media plurality issue. Since it found that the remedies were unaffected by this conclusion, they remained.

In front of the CA BSkyB argued that the CAT should have applied a greater intensity of review to the CC's report than in normal judicial review proceedings and, if it had, it would have set aside the CC's analysis on key points. As regards media plurality, BSkyB argued that the CC had been correct and was joined in this by the Secretary of State and, unsurprisingly, the CC. This argument was opposed by Virgin Media.

On the judicial review point, BSkyB's argument was that the CAT should conduct its review with greater intensity because it was a specialist tribunal or, as he put it, "hyper-competent". The CA seemed unimpressed with this argument and, after pointing out that the application and intensity of review varies from case to case, relying on OFT v IBA Health [2004] EWCA Civ 142 and concluding by saying that the argument flew "in the face of the words" of the statute. Of course this is not the same as saying that the practice of the CAT is the same as the High Court in judicial review cases and there seems to be some evidence that the CAT is less deferential to the CC and the OFT than the High Court is when faced with challenges to analogous regulatory bodies (and yes, I know reasoning by analogy is dangerous).

Once this point fell, BSkyB's other arguments were in some difficulty. BSkyB made submissions on the standard of proof applied by the CC and the counter-factual analysis. After dissecting these, the CA concluded that, "this is not really a point of law, but an attempt to re-assess the evidence and to produce a different conclusion" and so rejected them. On the question of alternative remedies offered by BSkyB, notably a voting trust, the CA agreed with the CAT that the CC had not been irrational in rejecting these.

That left the media plurality point which, although it was not necessary for the case, everyone wanted decided. The problem here arose because s. 58 2C (a) of the Enterprise Act provided that there was a need to take into account whether or not there was a sufficient plurality of persons with control of media enterprises, while s. 58A (5) said that where two or more media enterprises would fall to be treated as under common ownership or control for the purposes of deciding whether or not they have ceased to be distinct enterprises, then they should be treated as under the control of one person. The problem this created in this case was that although BSkyB's shareholding was enough to ensure that this meant it and ITV were no longer distinct enterprises, in reality that level of shareholding only gave BSkyB control or influence over a limited range of issues. The CC took the view that it should take into account the quality of control, what it called "internal plurality" which meant that there was not a problem here, because BSkyB had only a limited influence. The CAT disagreed, saying that, in effect, BSkyB and ITV had to be treated as one because of s. 58 (5) and therefore there was a problem because the number of persons had been reduced. The CA regarded this as a finally balanced point of statutory construction, but ultimately came down on the CC's side saying that, "whereas in reckoning the number of controllers of media enterprises for the purposes of section 58(2C)(a) only one controller is to be counted in respect of both or all of the relevant enterprises (here Sky and ITV), nevertheless, when it comes to assessing the plurality of the aggregate number of relevant controllers and to considering the sufficiency of that plurality, the Commission may, and should, take into account the actual extent of the control exercised and exercisable over a relevant enterprise by another, whether it is a case of deemed control resulting from material influence under section 26 or rather one of actual common ownership or control."

The Court of Appeal's judgment is here: http://www.bailii.org/ew/cases/EWCA/Civ/2010/2.html

The CC's report is here: http://www.competition-commission.org.uk/inquiries/ref2007/itv/index.htm

CAT proceedings are here: http://www.catribunal.org.uk/238-656/1095-4-8-08-British-Sky-Broadcasting-Group-plc.html

European Commission: procedures in competition cases

DG Competition has just published three papers explaining how their procedures work in practice (available at: http://ec.europa.eu/competition/consultations/2010_best_practices/index.html). The papers are called "Best Practices in proceedings concerning Article 101 and 102 TFEU" (procedures), "Best Practices on submission of economic evidence" (evidence) and "Guidance on the procedure of Hearing Officers" (Hearing Officers). This is not just a publication but a consultation inviting comments. While economists will no doubt have a lot to say about the evidence paper, the first paper on procedures will be of the most general interest. "Best Practices" is perhaps a misleading title as, although this is a useful and relatively short guide to the way such proceedings are conducted, whether these are the "Best Practices" is another question altogether.

There is not much that is surprising, but two comments can be made on the procedures document. First, as it makes clear, this document has to be read in the context of the myriad other documents which relate to European Commission procedures; from Regulation 1/2003 to the various guidance documents put out by the Commission. Secondly, the one thing that the document does not do is to give even indicative timescales for when the Commission will reach a decision during the various stages of proceedings. The one exception to this is that the Commission will endeavour to inform complainants what it is going to do within four months. Everything else, in terms of the timing of Commission decisions, is left open.

Follow on actions

Shortly before Christmas, the Competition Appeal Tribunal (CAT) decided the case of Enron Coal Services v English Welsh & Scottish Railway (EWS) [2009] CAT 36; the first follow on action to come to trial in the CAT. This was an action by Enron claiming damages from EWS for abuse of a dominant position in consequence of a finding by the Office of Rail Regulation (ORR) that EWS had abused its dominant position by, among other things, engaging in unlawful price discrimination against Enron (see http://www.oft.gov.uk/advice_and_resources/resource_base/ca98/decisions/ews-rail). EWS was, and still is, the major supplier of rail freight services in Britain. Enron was a coal supplier but also offered “end to end” (E2E) arrangements, from the purchase of coal through its shipping and delivery to the customer. Enron claimed that the behaviour of EWS had meant that they had lost a tender for hauling coal by rail to two power stations owned by East Midlands Electricity (EME), which EWS had won, worth around £19.1 million, and also a substantial chance of supplying coal to one of EME’s power stations as well. Enron claimed that EWS had overcharged it for its services and, as a result, it could not submit competitive tenders for EME’s business.

Although EWS accepted that it had acted unlawfully, it defended itself by arguing that Enron had failed to prove that the abuse had caused it to lose the tender.

The CAT took the view, based on Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602, that the claimant needed to show, first, on the balance of probabilities, what it would have done but for the infringement. Then, secondly, where the loss depends on what a third party would have done, the claimant had to satisfy the CAT that there was a real or substantial chance that the third party would have acted in the way asserted by the claimant. In the context of the case, Enron had to show that, but for the infringement, they would have submitted a bid to EME and sought to negotiate an E2E contract with EME and that there would have been a real chance of their being awarded the contract.

The CAT decided that Enron had failed to make its case on either point. On the first point, the CAT felt that the evidence before it was not consistent with the behaviour of a company in pursuit of an attractive business opportunity. On the second point, the CAT found that there was no real chance of Enron being awarded the contract for a variety of reasons, including the past history between EME and Enron and the lack of flexibility in Enron’s offer.

The CAT decision and, indeed, the litigation as a whole, is yet another cautionary tale for those bringing private actions to enforce competition law, even on the back of infringement decisions by competition authorities. To put it simply, it is one thing to show an infringement of competition law; it is another, not necessarily straightforward, thing to show that you have been damaged by that infringement.

For those who are struggling with the change in Treaty numbers post Lisbon, I have compiled a table of equivalences. It's in two parts: one for the Treaty on European Union (TEU) and one for the Treaty on the Functioning of the European Union (TFEU).

My apologies for the length of this and sincere thanks to Bonnie Calhoun of http://howcanidothat.blogspot.com

Treaty on European Union (TEU) as amended by the Treaty of Lisbon: from 1st December 2009	Treaty on European Union (TEU) or European Communities Treaty (EC) : from 1st May 1999 to 30 November 2009	Treaty of Rome: from 1st January 1958 to 30 April 1999
Article 3 TEU	Article 2 EC	Article 2
Article 4, para 3	Article 10 EC	Article 5
Article 6 TEU	Article 6 TEU	No equivalent
Article 19, para 1 TEU	Article 220 EC	Article 164
Article 19, paragraph 2, first subparagraph	Article 221, para 1 EC	Article 165
Article 19, paragraph 2, secondsubparagraph	Article 224 EC The first sentence of the first subparagraph	Article 168a

Treaty on the Functioning of the European Union (TFEU): from 1st December 2009	European Communities Treaty: from 1st May 1999 to 30 November 2009	Treaty of Rome: from 1st January 1958 to 30 April 1999
Articles 3-6 TFEU and Article 8 (para 2). Note also Protocol 27 on the internal market and competition	Article 3	Article 3
Article 14	Article 16	No equivalent
Article 18	Article 12	Article 6
Article 37	Article 31	Article 37
Article 93	Article 73	Article 77
Article 101	Article 81	Article 85
Article 102	Article 82	Article 86
Article 103	Article 83	Article 87
Article 104	Article 84	Article 88
Article 105	Article 85	Article 89
Article 106	Article 86	Article 90
Article 107	Article 87	Article 91
Article 108	Article 88	Article 92
Article 109	Article 89	Article 93
Article 119	Article 4	Article 3a
Article 251 now contains paras 2 and 3	Article 221, paras 2 and 3	Article 165
Article 254	Article 224 (except first sentence of first subparagraph)	Article 168a
Article 258	Article 226	Article 169
Article 259	Article 227	Article 170
Article 263	Article 230	Article 173
Article 265	Article 232	Article 175
Article 267	Article 234	Article 177
Article 268	Article 235	Article 178
Article 296	Article 253	Article 190
Article 340	Article 288	Article 215
Article 346	Article 296	Article 223
Article 352	Article 308	Article 235

Competition law and the Lisbon Treaty

The Treaty of Lisbon which came into force on the 1st December 2009 amending the Treaty on European Union (TEU) and creating a new Treaty on the Functioning of the European Union (TFEU) has important implications for all those engaged in the study and practice of competition law. Some of this is necessary, but not very interesting, consequential changes to which we will all have to adapt. So, there are a new set of Treaty numbers to remember and we will no longer refer to the Court of First Instance, which has become the General COurt.

The more interesting question is whether or not these changes herald an increased emphasis on the internal market objectives for competition law as opposed to the "more economic" approach which the Commission has been pushing and which seems to represent the favoured consensus amongst competition law practitioners? There is certainly a change in the language of the Treaties. The old Article 3 (g) of the European Community Treaty, which talked about a system ensuring the competition in the internal market is not distorted and was often referred to in the case law, has been removed and replaced by Article 3 (1) (b) TFEU which talks about establishing the competition rules necessary for the functioning of the internal market. Article 3 of the new TEU says that the EU shall work for the sustainable development of Europe based on, among other things, a highly competitive social market economy, a concept which, at least from and English perspective, obscures more than it clarifies. The concept of a "social market economy" has been used in political science and economic literature to describe the German economy and often to contrast it with what is labelled the Anglo-American model of capitalism. Within this way of framing the issues, the focus would be on competition as a process and trying to ensure the commercial freedom of participants in a market, rather than focusing exclusively on the consumer welfare effects of a practice. So these changes could be seen as a move back to an approach to competition law which was characteristic of enforcement policy in the early years of the EU, focusing on preventing barriers between national markets emerging and protecting competitors to dominant companies.

The Treaty texts do not, however, all point in this direction. Article 119 TFEU says that an economic policy shall be adopted which is based on the principle of an open market economy with free competition, which certainly seems a different conception from a "social market economy." Protocol 27 to the Treaties states that the Member States consider that the internal market includes a system ensuring that competition is not distorted and the background to this Protocol was that it was inserted to respond to worries that deleting the reference to undistorted competition represented a significant shift in EU competition policy and therefore this Protocol was needed to demonstrate that no such change had been made.

It would be regrettable if the progress that has been made in the substantive, as opposed to procedural, reform of EU competition law was lost by the changes introduced by the Lisbon Treaty, particularly as there was little or no debate at the time about the possible implications of the changes. Although the financial crisis has damaged many peoples' faith in competitive markets, no alternative approach for organising economies has been suggested. One might perhaps paraphrase Winston Churchill and say that competition is the worst form of economic organisation except for all the others that have been tried!

A beginning

Since it is the New Year, I thought it was an appropriate, if trite, time to start this blog off. I will try and get to it at least once a week.