Follow-on damage claims

This week has seen dawn raids in construction chemicals and cartel fines in pharma. What often follows such events in the long run are cartel damage claims. While they have become an essential part in the daily business of many antitrust practitioners, for most companies they are rare events, be it as a claimant or as a defendant. With dawn raid activities and the number of cartel proceedings increasing again, it is the right time for a basic walk-through cartel damage claims.

In the vast majority of cases, damage claims (then referred to as follow-on damage claims) are based on cartel decisions, which are the result of extensive investigations of regulators (including dawn raids). Leniency applications regularly set such investigations in motion and are thus considered extremely valuable for cartel detection. Here is an overview how cartel investigation and leniency applications are interrelated with follow-on damage claims.

First comes first

As, for obvious reasons, there are no follow-on damage claims without cartels being detected, let’s briefly touch up upon them first.

Most cartels are detected because of leniency applications. It does thus not come as a surprise that the declining number of incoming leniency applications was, and still is, of great concern to antitrust regulators. Even though it seems that leniency applications might again be on the uptick, the antitrust family debates why applications decreased in the first place. Have companies simply become more compliant? Are cartels in a digitalized economy more difficult to detect? Do cartelists stand stronger together than ever before?

Certainly one, if not the, reason for increased caution before submitting a leniency application – and insofar this is what most seem to agree on – is intermingled with the threat emanating from antitrust follow-on damages claims. While leniency applicants may hope for complete exemption from fines in the context of public enforcement, this privilege does not exist in the context of private enforcement.

The spectre of fear

Cartel fines imposed by regulators are of course still of concern to cartelists. However, fines are, to some extent, calculable, limited and one might even get a full fine reduction as a leniency applicant, or at least a discount. However, this is only one side of the medal.

The other, meanwhile much more feared, are private enforcement and follow-on damage claims. For a long time, different to public enforcement, no privileges for leniency applicants existed in the world of private enforcement. To the contrary, since leniency applicants are the first (and sometimes only ones) admitting that there have been cartel activities, potential claimants might turn to them first. As any other cartelist, leniency applicants were not only liable for damages of their own direct and indirect customers, but also jointly and severally liable for damages of their co-cartelists’ direct and indirect customers.

The European legislator sought to address this by relieving leniency applicants from being jointly and severally liable for the entire harm caused by an infringement. Any contribution leniency applicants must make vis-à-vis its co-infringers shall not exceed the amount of harm caused to their own direct or indirect customers.

However, and this might still make companies involved in longer-standing cartels particularly cautious, these privileges – at least in Germany – only apply to claims for damages that arose after 26 December 2016.

There’s a whole new industry out there

The “industry” for follow-on damage claims has significantly grown in the past years and become more and more sophisticated. There are companies whose business model consists of examining cartels, analyzing the possibly affected customers, targeting them, and – in cooperation with law firms – financing corresponding litigation. In case of success, these financiers get a premium.

For the respective companies claiming damage compensation, there is no financial risk. They either win and get their claimed damage (minus the premium agreed upon with the financer) or lose (not having to pay for lawyers, economists, other experts, court fees or other advances expenses). Cartels which have affected many customers and which are based on facts which allow for a rather straightforward theory of harm and a comparably easy damage calculation, are, for obvious reasons, of greater interest for these financing companies than cartels where the facts are highly complex, that led to dispersed damages, and which come along with a most difficult damage calculation. The legal boundaries of the litigation financing business model are currently being put to test in German courts – outcome open.

Hopping on is easier than doing it yourself

Talking about private enforcement, one automatically thinks of follow-on damage claims. Nothing is wrong about that. But: Private enforcement is (in theory) also possible without having a cartel decision of a regulator. The (big) difference is that claimants themselves must prove the existence of the cartel they are basing their claim on. This will most likely be extremely challenging if one wants to prove the existence of a cartel as such, but can possibly be more promising – still being an uphill battle – if one, e.g., wants to argue for a broader geographic scope or other products affected by the cartel compared to what was sanctioned by antitrust regulators.

This being said, in case a regulatory decision exists, courts are generally bound by that decision (to what extent is, in part, very controversial). The idea is that parties and courts shall not waste their time argue about a cartel which has been thoroughly investigated by the regulators beforehand

Although this significantly facilitates the enforcement of private damage actions, there are still other obstacles when it comes to proving and substantiating private damage claims. These can concern aspects and strategic questions such as: Which is the right company to address the claim against? Is it wise to bundle the claim with others? How do I prove my damage?

As regards the latter, in practice, one will regularly not get around submitting an economic expert report. As one can image, this often ends in a “battle of economic expert reports”, as all parties and interveners submit economic expert reports – and finally, the court commissions its own economic expert report from an independent expert, which is then again commented on by all parties…

Public and private enforcement go hand in hand

As a wrap-up, below are a few aspects, which companies shall have in mind:

As a company defending itself against cartel damages: Have in mind that all findings in a cartel decision regarding the geographic, temporal, and factual scope of the infringement are binding on civil courts. Any cut-off you achieve during the administrative proceeding will be to your benefit later, and therefore potential damage claims should also be kept in mind during the administrative proceeding. This includes trying to avoid any statements by a regulator as regards effects/impacts the sanctioned conduct had on customers. Obviously, getting off the hook completely would be best to exclude follow-on damage claims.

As a company claiming cartel damages: Check beforehand whether you can base your claim on a cartel decision. This makes many things much easier. Nevertheless, in most jurisdictions, you will still have to prove your alleged damage. Be assured, you will most likely not be able to avoid consulting economic expertise. Keep in mind that there are limitation periods by when you need to have filed your damage claim. Entering into a limitation waiver agreement with the cartelist may be an option to reduce the time pressure to take a case to court. When filing your claim, also take into consideration that the decision against whom to bring the action has implications for the court’s jurisdiction.

Photo by Hugues de BUYER-MIMEURE on Unsplash