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Leniency, damages, and EU competition policy

VoxEU (Paolo Buccirossi, Catarina Marvão, Giancarlo Spagnolo 14 July 2015) – EU anti-cartel decisions have imposed billion of euros of fines in recent years, but private actions by cartel victims are also possible. This column discusses a 2014 EU Directive that facilitates private actions by cartel victims while attempting to reduce conflicts between private and public enforcement.

Many large cartels have been discovered in recent years (Connor 2013, Dominte et al. 2013), which suggests that antitrust enforcement still has limited deterrence effects. The 2014 EU Directive on damages is therefore very welcome, as it aims at improving deterrence by facilitating damage claims by cartel victims, which will add to antitrust fines in terms of expected sanctions. However, not all parts of the Directive seem likely to improve enforcement. One obvious aspect that may prevent effectiveness is that damages are limited to the harm caused, thus not allowing compensation for the probability of cartels going undetected and that damage action is unsuccessful, as treble damages do in the US. A second, less obvious aspect, on which we will focus here, relates to the interaction between private damages and leniency programmes, which provide a fine reduction (up to immunity) to cartel members in exchange for the reporting of the cartel and substantial cooperation with an investigation.

The conflict between private and public antitrust enforcement  

As the legal debate that brought the Directive made clear, private action for damages may jeopardise leniency programmes, since a leniency application may increase the risk of a successful damage claim by the cartel’s victims (see Komninos 2011, Cauffman 2011, and MacCulloch and Wardhaugh 2012, among others).

First, the evidence provided by the leniency applicant (not protected against civil law consequences) may be used by the claimants in the damage action to prove the existence and effects of the infringement.

Second, leniency applicants, especially immunity recipients, do not challenge in court the infringement decision adopted by the competition authority, at least regarding the existence of the cartel, while the other cartel members typically do.

Since the cartelists are joint and severally liable towards all the cartel’s victims, each victim is entitled to claim its entire loss from each liable party, including the leniency applicants, who become the preferred target of the damages action. The incentive to apply to the leniency programme stemming from the avoidance of the fine may then be counterbalanced by the disincentive of being condemned to pay damages.

Two issues are particularly important to this conflict.

The first is whether leniency applicants (and in particular, the immunity recipient) should have the same level and type of liability as all other cartel members.

The second is whether access to leniency statements and related documents should be granted to the claimants in the damage action.

The legal debate culminated in the Directive

Before the Directive, the two conflicts mentioned above were dealt with by applying some general legal principles: the right to full compensation of antitrust infringements’ victims,1 and the possibility to access leniency statements on a per case basis.2 While the position of the European Court of Justice has the merit of clarifying that actions for damages may increase deterrence, the legal debate has (incorrectly, as we will see) taken for granted that an inherent conflict must exist between the proper functioning of a leniency programme and private damage claims, so that any proper legislation necessarily has to compromise between the interests of the public enforcement system and of private cartel victims to be fully compensated. 

The 2014 EU Directive on damage actions follows this path and it intervenes on the two issues described above. As for the rule on the liability, it reduces the immunity recipient’s liability: “ (a) to its direct or indirect purchasers or providers; and (b) to other injured parties only where full compensation cannot be obtained from the other undertakings that were involved in the same infringement of competition law” (Art. 11(4)). As for the access to the leniency documents, the Directive provides that “national courts cannot at any time order a party or a third party to disclose any of the following categories of evidence: (a) leniency statement; and (b) settlement submissions” (Art. 6(6)). Moreover, Article 7(1) provides that “Member States shall ensure that evidence in the categories listed in Article 6(6) which is obtained by a natural or legal person solely through access to the file of a competition authority is either deemed to be inadmissible in actions for damages or is otherwise protected under the applicable national rules”.

A new study

Some legal scholars have already informally highlighted the risks linked to this legal ‘compromise’ (Lande and Davis 2011, Bernard 2012). In a new paper (Buccirossi et al. 2015), we examine these issues within a formal model. We study the interaction between private damage actions and leniency programmes and whether the solutions adopted by the EU legislator are the most appropriate ones. We take into consideration the objectives of preserving (or improving) the effectiveness of the leniency programme and guaranteeing the right to compensation of cartel’s victims. Our results show that there is actually no conflict between the objectives of maximising deterrence and allowing full compensation to victims, nor by public antitrust enforcement through leniency programmes and private damage actions, as presumed by the legal debate which led to the Directive. The analysis suggests that a legal regime in which the immunity recipient’s liability is minimised (even eliminated) and that grants victims full access to all files of the competition authority, including leniency statements, maximises both the effectiveness of public antitrust enforcement and the ability of victims to obtain compensation for damages (treble damages for non-applicants would have further improved the outcome).

The possibility of victims to obtain compensation for harm is also shown to be maximised, provided that immunity recipient’s co-cartelists are able to jointly cover the private damages caused by the cartel. Claimants are worse-off with the Directive in comparison with both the previous legal system and one that would result from the optimal solutions we propose.

We then extend our analysis to take into account the additional deterrence channel induced by the presence of a leniency programme (the “risk of being turned in by a cartel partner” – see Spagnolo 2004, and Bigoni et al. 2015) and the cost of being the preferred target of the damage action, under different legal regimes. Taking into account these additional factors, both the loss of deterrence and of compensating damages obtained by victims implied by the Directive increase when compared to the optimal policy discussed.

Conclusions

Existing evidence indicates that anti-cartel enforcement is by far the most important competition policy tool available in terms of the effects on a country’s productivity growth (Buccirossi et al. 2013). Optimising the effectiveness of antitrust enforcement against cartels is therefore a priority, and the 2014 EU Directive has gone in the right direction by facilitating private claims by victims. However, our new study (Buccirossi et al. 2015) shows formally that the compromise it struck between private and public antitrust enforcement – or between the objective of cartel deterrence and the right of cartel victims to be compensated – was never actually needed. We need not limit cartel victims’ ability to recover their loss by hindering the access to leniency statements to preserve the effectiveness of a leniency programme. We can do that by further limiting leniency recipients’ liability. Once we go in that direction, damage actions will directly improve the effectiveness of such programmes by increasing the cost of not applying for leniency. In this legal regime, public and private enforcement are perfectly complementary. Their alleged conflict appears the result of existing rules rather than a consequence of their inherent features and goals. This proposed regime cannot be claimed to be ‘legally unfeasible’ either, as it is close to what is done in the US and it is practically the same regime that has been valid in Hungary since 2011. There, an immunity recipient is only liable to pay his (direct only) damages in the very unlikely event that all other cartel members go bankrupt. We leave to the EU the burden of explaining why Hungary has to change their excellent system.

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