Submission to the Commission for the European Communities by Claims Funding International plc White Paper on Damages actions for breach of the EC anti-trust rules A. INTRODUCTION Claims Funding International plc ( CFI ) is pleased to submit these comments to the European Commission ( the Commission ) in response to its White Paper on damages actions for breach of the EC anti-trust rules (the White Paper ). CFI is a litigation funding company incorporated in the Republic of Ireland and is a joint venture between IMF (Australia) Ltd, a publicly listed litigation funding company in Australia, and interests associated with Maurice Blackburn Lawyers, one of Australia s leading plaintiff law firms. CFI s principal business is to identify, organise and fund multi-party legal actions in the EU and elsewhere in the world, other than Australia. This will include actions arising out of anticompetitive European and global cartels. Both of CFI s joint venture partners have considerable experience in Australia in funding and litigating large scale multi-party actions. CFI meets the costs of bringing the actions and, if the actions are successful, recovers its costs and an agreed percentage from any damages or settlement payment. Without CFI s funding, it is likely that large numbers of claimants would otherwise be unable to seek compensation for the losses caused to them by the illegal conduct of the cartels. Australia has an established class action regime that allows groups of persons to seek redress cheaply and efficiently. 1 It is an effective and well-regarded system. Litigation funding is a well established practice in Australia. In the relatively recent case of Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd, 2 the High Court of Australia (HCA) held by a majority that litigation funding is not contrary to public policy and does not lead to any abuse of the court s process. 3 This was the court s judgment even though the funder in that case enjoyed considerable control over the proceedings and actively solicited claimants. 1 It is set out under Part IVA of the Federal Court of Australia Act, passed in 1992. See the Second Reading Speech to the Federal Court of Australia Act, Hansard, at 3174 (14 November 1991). 2 [2006] HCA 41, ( Fostif ). 3 Ibid, per Gummow, Hayne and Crennan JJ, at para 88.
B. SUMMARY OF CFI S SUBMISSION CFI welcomes the majority of the measures proposed in the White Paper. CFI thoroughly endorses the central objective and philosophy of the White Paper, namely: that all victims of infringements of Commission competition law have access to effective redress mechanisms so that they can be fully compensated for the harm they have suffered. In relation to the proposed measures set out under section 2 of the White Paper, CFI submits in summary: 2.1 Standing: CFI agrees with the Commission s proposals; 2.2 Access to evidence: CFI agrees that a minimum level of disclosure inter partes would be an important step towards promoting an effective private enforcement regime; 2.3 Binding effect of NCA decisions: CFI agrees with the Commission s proposals; 2.4 Fault requirement: CFI agrees with the Commission s proposals; 2.5 Damages: Subject to the comments below CFI agrees with the Commission s proposals; 2.6 Passing on Defence: For the reasons given in section 3 below, CFI cannot accept the Commission s proposals; 2.7 Limitation Periods: CFI agrees with the Commission s proposals; 2.8 Cost of Damages Actions: CFI broadly agrees with the Commission s proposals and submits that the Commission must also address the pressing need for the development of a viable litigation funding industry in Europe to give claimants the practical financial means to vindicate their rights (see further section 1 and 2 below); and 2.9 Leniency programs: CFI does not accept the Commission s proposals (see section 6 below). CFI will make submissions in respect to litigation funding before commenting on proposals 2.2, 2.5, 2.6, 2.8 and 2.9 in order below. 2
C. DISCUSSION C.1 Litigation funding Lack of funding remains one of the most potent deterrents for European plaintiffs seeking compensation for damage arising from anti-trust breaches. As Lord Justice Simon Brown observed, access to justice must include an equality of arms. 4 Litigation funding is not specifically addressed in the White Paper. It was referred to in passing by Mr de Smijter in his presentation to the FEB conference in Brussels on 5 June 2008. CFI suggests that any legislative reforms that may be contemplated by the Commission must encourage the development of strong professional litigation funding industries in Member States to facilitate effective access to justice for victims of cartels. The nature of private anti-trust litigation In many of the cartels prosecuted by the Commission, the companies involved are large multinational businesses, well resourced to strongly defend any private litigation. No doubt their financial strength has been augmented by their anti-competitive practices. Recovering compensation is therefore very expensive for plaintiffs. Estimating costs can be difficult, but it is likely that lawyers fees and expert s costs will amount to hundreds of thousands of euros and potentially millions of pounds in the UK. Added to this is the risk of an adverse cost order (ACO). Even in jurisdictions where ACOs may be limited, CFI estimates that the potential liability for a plaintiff in an action against the members of a multinational cartel could be tens or hundreds of thousands of euros. In jurisdictions such as the UK and Ireland, ACOs may be millions of pounds. A further hurdle for plaintiffs in these jurisdictions is availability to the defendants of security for costs orders. If one or more of the defendants in an action sought a security for costs order, few plaintiffs would be able to meet the order. To most plaintiffs, the prospect of pursuing such actions therefore appears to be very unattractive. In contrast to the profile of a typical defendant, the victims of cartels are often small to medium businesses and consumers few of which would be in a position to finance this type of litigation. As the White Paper identifies and our own experience shows, follow on actions arising out of anti-trust infringements are likely to be lengthy and involve complex econometric issues. These factors mean that only plaintiffs with very significant losses and very substantial assets are in a position to consider seeking compensation. The result is a paltry amount of private litigation in this area to date, both in Australia and the EU. This represents not only a gross injustice to the victims of cartels, but also sends a clear signal to infringers that breaching anti-trust law is cost effective because the threat of litigation is extremely remote. 4 Hamilton v Al Fayed (2002) EWCA Civ 655 para 9. 3
Solution offered by litigation funding Professional litigation funding provides practical solutions to these issues by rectifying the power imbalance that exists in many of these cases. It allows the plaintiff access to capital for the purpose of conducting litigation against cartelists and to meet any ACO should the case fail. As the former Master of the Rolls Lord Phillips explained: 5 public policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation. In difficult, large scale cases arising out of breaches of competition law, litigation funding has a vital role to play in promoting private enforcement. The Australian experience is instructive in this regard, in particular the Fostif case. The case arose after two major tobacco companies in Australia refused to compensate thousands of small businesses who had paid tobacco license fees to them that were subsequently found to be invalid by the HCA. 6 This remained the case for three years until litigation funding was obtained from a funder to issue proceedings against the tobacco companies. The writs named around 8,000 small tobacco retailers who had signed litigation funding agreements. One defendant settled at the door of the court and the other at the conclusion of the hearing. A settlement of $80 million passed from the tobacco companies to the small retailers who each received an average of $10,000. This case study demonstrates the practical reality of multi-party cases: that no single retailer could have taken action against the tobacco giants. 7 In cases with many plaintiffs who have sustained reasonable loss, funding makes recovery of that loss practical where otherwise it would be uneconomic if pursued individually. These are exactly the type of cases that are likely to arise out of cartel prosecutions by the Commission. Submisson to the Commission: litigation funding CFI therefore respectfully suggests, as far as is possible in the current state of European law and respecting Member States respective civil legal orders, that the Commission: 1. Endorse litigation funding as an essential element of the system for the effective private enforcement of competition law and to ensure that victims have true access to justice; 2. Establish minimum procedural standards in Member States that prevent the defendants from obstructing recovery of compensation by virtue of the involvement of a litigation funder; and 3. Establish minimum legislative standards in Member States to allow the enforceability of litigation funding agreements. 4. Recommend removal of barriers and regulatory hurdles to litigation funding in Member States. 5 Gulf Azov Shipping Co Limited v Idisi (2004) EWCA 4. 6Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516. 7 Indeed, none of them did, until litigation funding became available. 4
C.2 Proposal 2.2: the need for appropriate access to evidence The White Paper rightly acknowledges that cartel cases are often fact-intensive, with much of the key evidence held by the defendants. CFI welcomes the Commission s attempt to address this information asymmetry. Pursuant to this, CFI proposes that the Commission allow as much information as possible gathered in any prosecution to be made available to national courts. CFI recommends that any legislative reforms include sensible but fair provisions for discovery, in line with the recommendations made in the White Paper. This will assist the aim of legal certainty, given that there are currently different regimes in place in various Member States. CFI believes that this should apply to all defendants, regardless of any application for leniency. Defendants should not be at an evidentiary advantage by virtue of such an application to the Commission. See further our position below under section C.6. C.3 Proposal 2.5: calculation of damages CFI welcomes the Commission s proposal to establish guidelines for the purposes of calculating damages. The White Paper rightly notes that calculating quantum is excessively difficult or even practically impossible. In Australia, calculating quantum tends to be the most time consuming and expensive task in this type of litigation. CFI agrees with the Commission s suggestions, in particular reference to the right to interest. The cartelist should not be able to benefit in the short term from their infringement and in particular, from the successful concealment of their wrongdoing. CFI further submits that the loss be calculated to include loss of market share in appropriate cases. This is an established principle in Australian law and cases such as Vitamins demonstrate that it is possible to econometrically determine loss of market share in these situations. The Australian experience In Australia, the court effectively adopted a guideline approach in the Vitamins settlement scheme. Economists created 32 different categories of business within the group using econometric tools such as multiple regression analysis to estimate the overcharge and tax incidence models that incorporated various supply and demand factors to determine the effect on market share. This analysis was used to develop guidelines for determining compensation. The achievement lay in the integration of a large number of economists estimates into the scheme, which streamlined its implementation and ensured the interests of all categories of group members were met. The Australian experience shows that it is possible to create general rules and guidelines using economists analysis to compensate loss effectively, without the need to establish each individual s entitlement to damages. A novel feature of the Vitamins settlement scheme was that it provided for payments to be made to particular applicants/group members that provided special assistance with the 5
running of this case (for instance by providing extensive evidence, detailed instructions, attending meetings with economists and legal representatives etc). 8 Response to the Commission: calculation of damages CFI therefore respectfully suggests, as far as is possible in the current state of European law and respecting Member States respective civil legal orders, that the Commission: 1. Develop guidelines for the calculation of damages that incorporate simplified rules on estimating loss; 2. Ensure that these guidelines incorporate actual loss, loss of profit (including loss of market share), loss of use of the funds and interest as part of the assessment of damages; and 3. Incorporate into these guidelines provisions for recognising the special assistance of plaintiffs who assist in running the litigation. C.4 Proposal 2.6: passing on overcharges One of the significant proposals put forward by the White Paper is the creation of a passing on defence. The White Paper argues that a passing on defence ought to be available to defendants to invoke against direct and indirect purchasers, which the defendant must then prove to the same standard as that imposed on the claimants to prove their loss. In the case of indirect purchasers, a rebuttable presumption would also apply that the overcharge was passed on to them in its entirety. This White Paper argues that: to deny [the passing on defence] could result in unjust enrichment of purchasers who passed on the overcharge and in undue multiple compensation for the illegal overcharge by the defendant. The Commission s proposal is surprising, given the comments in the Green Paper at 2.4: The passing-on defence substantially increases the complexity of damages claims as the exact distribution of damages along the supply chain could be exceedingly difficult to prove. Evidentiary problems also burden actions of indirect purchasers, as they might be unable to prove the extent of their damages and the causative link with the infringing behaviour. CFI believes that the position expressed in the White Paper is not desirable in large scale litigation against anti-trust infringers. A passing on defence, in the proposed format, will add a further complex and costly step to proceedings which is likely to significantly undermine the policy perspective of the White Paper. Furthermore, CFI is concerned by the White Paper s proposal in relation to joint, parallel or consecutive actions brought by purchasers at different points in the supply chain. The White Paper suggests that: 8 Darwalla Milling Co Pty Ltd & Ors v F Hoffman La Roche & Ors (No 2) [2006] FCA 1388, para 88, per Jessup J. 6
national courts make full use of all mechanisms at their disposal under national, Community and international law in order to avoid under- and over-compensation of the harm caused by an infringement of competition law. It is CFI s respectful opinion that this proposal underestimates the economic and legal complexity of the passing on defence and the difficulty that will be faced by national courts in applying it. CFI believes guidance from the Commission is needed to ensure legal certainty and just outcomes for parties. The passing on defence: the compensatory principle The evidentiary burden and practical difficulties posed by the introduction of the passing on defence as proposed in the White Paper are alarming. Cases will simply not be brought. It is not merely a procedural issue, it represents a substantive incursion on the right to claim damages. The Commission estimates that the amount of compensation that plaintiffs have failed to seek is around 25-69 billion per year. 9 The introduction of any potential procedural barrier to private enforcement must be very carefully considered. The obvious and disappointing result of this is a victory for the cartelists. The unjust enrichment of infringers is a highly objectionable outcome from a public policy perspective, particularly given the Commission s ongoing battle against anti-competitive behaviour. Between 1998 and September 2007, the Commission imposed fines on firms for anticompetitive behaviour totalling over 10 billion. 10 In 25 of the decisions by the Commission, the fines imposed on 148 firms were increased to achieve a level of sufficient deterrence. The Commission estimates that its rate of detection of hard core cartels is only about 10-20%. 11 These statistics paint an alarming picture of flagrant abuse of anti-trust law. It is therefore imperative that the introduction of a passing on defence does not represent a set back for private enforcement of anti-trust breaches. A framework for private enforcement should aim to strip cartelists of any unjust enrichment they have received as a result of the violation. Any reforms ought to strongly guard against the infringer taking any advantage from their anti-competitive behaviour. The implementation of a passing on defence in the manner proposed in the White Paper would be an unfortunate step in this direction in our view. Finding the appropriate balance In its proposal, the Commission has attempted to structure the passing on defence in a way that addresses the procedural burdens faced by claimants. CFI recognises the efforts to lighten the victims burden with the rebuttable presumption and supports this part of the proposal in the event that an alternative is not implemented. 9 White Paper Impact Assessment Report (2008), para 42. 10 Cento Veljanovski, European Commission Cartel Prosecutions an Fines 1998-2007, Competition and Regulatory Economists (20 September 2007), pg 5-8. The majority of offences prosecuted during this period were treated as serious (31%) or very serious (40%). See also pg 7: in 21% of cases, the basic amount of the fine was increased by an average of 48.7% for aggravating circumstances, which can include leadership of the cartel. 11 White Paper Impact Assessment Report (2008), para 44. 7
However, there are alternatives which ensure that fair compensation is received by plaintiffs without undermining the deterrent effect of private enforcement in cases where plaintiffs are scattered indirect purchasers who, for whatever reason, do not seek compensation. Indirect purchasers rarely take part in actions to recover compensation from anti-trust infringements because their loss is likely to be small. An ideal system would be one that is sufficiently flexible to facilitate claims from both indirect and direct purchasers but simple enough to ensure that cartelists do not benefit from complex causation arguments that make it difficult for plaintiffs to establish loss. CFI refers the Commission to the German law principle of Vorteilsausgleichung. The principle provides that a cartelist is only permitted to claim that the overcharge was passed on if: 12 i. The cartelist can establish, with detailed evidence, that overcharge was passed-on; and ii. This would not result in an unjustified benefit to the cartelist (ie by retaining the proceeds of prohibited behaviour because there is nobody who will recover it). The principle is simple and has proven to be effective in the courts of a Member State. It prevents cartelists (who have, after all, breached competition law) from benefiting from their behaviour. It respects the Commission s commitment to compensating loss, whilst ensuring that procedural requirements neither deter plaintiffs nor encourage infringers. Response to the Commission: passing on defence CFI therefore respectfully suggests, as far as is possible in the current state of European law and respecting Member States respective civil legal orders, that the Commission: 1. Does not proceed with the passing on defence as proposed in the White Paper; 2. Implements simplified rules to determine causally linked loss at a European level using the Vorteilsausgleichung principle as a model. This would permit the defendant to invoke the passing on defence only if it can be proven with sufficient evidence; and it would not result in the cartelists retaining any profit obtained through a breach of anti-trust laws. C.5 Proposal 2.8: cost of damages actions CFI therefore welcomes the Commission s proposal that national courts be allowed to issue cost orders that derogate, in justified cases, from normal cost rules. In line with the discussion above in relation to litigation funding, CFI notes that the current cost regimes in national courts put private enforcement out of reach for most claimants. CFI suggests to the Commission that cost capping orders be introduced at a European level to facilitate this. Cost capping orders have been made in proceedings in the UK. 13 They 12 See Rinne, Damages Actions, above n 11. 8
serve to prevent well resourced defendants persisting with cases litigiously in the hope that the less powerful claimants are priced out of the litigation they even the playing field. If made at the outset, cost capping orders provide certainty to both sides that they will recover their costs should they succeed in the litigation. It furthermore places an incentive on all parties to resolve the dispute expeditiously and efficiently. C.6 Proposal 2.9: immunity applicants CFI is concerned by the approach to immunity applicants set out in the White Paper. CFI understands the need for the Commission to encourage cartelists to assist them with their investigations, however this should be limited to their liability in relation to the Commission s prosecution. It is important to distinguish between prosecutions by public bodies and private actions for compensation arising from anti-trust infringements. CFI believes that cooperation by cartelists in exchange for a potential reduction in fines from the Commission is a sufficient incentive to apply for immunity/leniency. This should not occur at the expense of plaintiffs. CFI strongly objects to the concept that an infringer should be able to limit their civil liability simply because they have cooperated with the Commission s investigations. It undermines the compensatory principle at the heart of the White Paper, weakens the incentive for private enforcement of anti-trust breaches and unjustly enriches the cartelist. We see no reason why a distinction cannot be drawn between public prosecution and civil recompense for victims. D. Further Comment CFI appreciates the Commission s commitment to public consultation and hopes that this submission has been of assistance. CFI is available to comment further on the issues raised should this be required. Claims Funding International plc Dublin, Republic of Ireland July 2008 13 Dawson & ors v First Choice Holidays & Flights Ltd (2007)Queen s Bench Division, Birmingham District Registry No 5BM 15097, see paras [66]-[69]. 9