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The Passing-On Defense in European Cartel Damages Litigation: A Comparative Perspective

Katharina Kolb

The Passing-On Defense in European Cartel Damages Litigation: A Comparative Perspective
Kryssia Campos via Getty Images

Cartel damages litigation in Europe has been on the rise in recent years, following the adoption of the EU Damages Directive from 2014 and its transposition into national laws of the member states and in particular following the European Commission’s sanctioning of the truck cartel. The Directive aimed at harmonizing certain aspects of the legal framework for private enforcement of competition law, such as the disclosure of evidence, the presumption of harm, the joint and several liability of cartelists, and the passing-on defense. The passing-on defense refers to the argument that a direct purchaser of a cartelized product or service, who has suffered an overcharge due to the cartel, has mitigated its damage by passing it on, wholly or partially, to its own downstream markets. The Directive provides that the burden of proving the pass-on lies with the defendant, who can invoke it as a means of reducing its liability vis-à-vis the direct purchaser, and that the claimant can rebut the passing-on defense by showing that it did not, or could not, pass on the overcharge. Vice versa, the Directive also recognizes the right of indirect purchasers, who have paid a higher price due to the pass-on, to claim damages from the cartelists, subject to the corresponding burden of proof.

However, the Directive leaves considerable discretion to the national courts on how to apply and interpret the passing-on defense in practice, taking into account the specificities of each case and the principles of effectiveness and equivalence of EU law. Also, the Directive is not yet temporally applicable to many of the cases currently being litigated in European courts. As a result, there is a significant diversity and complexity in the approaches of, and challenges faced by, the parties and the courts across the EU member states, as illustrated by some recent examples from Germany, France, and the UK:

Germany: A High Hurdle for Defendants

Germany is one of the most active jurisdictions for cartel damages litigation in Europe, with several landmark cases decided by the German Federal Court of Justice (FCJ) and lower courts on various aspects of the passing-on defense. In its famous ORWI judgment from 2011, the FCJ has established a high hurdle for defendants to invoke the passing-on defense, requiring them to demonstrate and prove that the cartel caused a price increase on the relevant aftermarket, taking into account the market conditions and in particular the elasticity of demand, the product characteristics and price, market coverage of defendants, and the amount of competition on the aftermarket. Furthermore, according to the ORWI jurisprudence, the defendant has to demonstrate that the direct purchaser did not suffer any negative volume effects or other detriments and that the price increase on the aftermarket was not caused by the direct purchaser’s own value-adding behavior. Moreover, the FCJ ruled that the defendant has to prove the passing-on for each relevant downstream market, which can be very costly and impractical in cases involving multiple levels of distribution or different types of products or services. The FCJ also confirmed that there is no factual (prima facie) presumption of a pass-on.

Any secondary burden of proof of the direct purchaser claimant can apply only in limited situations and cautiously, keeping in mind that the direct purchaser claimant should not have to disclose business secrets unnecessarily. At the same time, the burden on the defendants cannot be so high as to practically disallow the passing-on defense from the outset.

The FCJ's approach has been followed by most lower courts, which have generally rejected or limited the passing-on defense in cases involving various cartels damages litigation cases, such as sugar, rail tracks, chipboard, or drugstore products, in particular by recognizing a normative exception of the generally permissible passing-on defense in cases in which the indirect purchasers are not expected to claim damages, e.g. due to damages being scattered among consumers or indirect purchaser claims being time-barred.

The disclosure claims of defendants against claimants in order to obtain information to help defendants prove a pass-on, which were introduced into the German Act against Restraints of Competition in 2017 (together with disclosure claims of claimants against defendants in order to obtain information to help claimants prove damages in the first place), have not yet significantly affected the situation of defendants in the pass-on context in practice.

France: A High Bar for Claimants

France is another jurisdiction on the rise for cartel damages litigation in Europe.

Before the transposition of the Directive and in cases to which the Directive is not yet temporally applicable, in France, it has been on the claimant to demonstrate that it did not pass on the overcharge to its customers as part of its demonstration that it suffered harm. This is often the ground used to dismiss cartel damages claims. For instance, the Cour de Cassation, France’s highest civil court, dismissed Carrefour’s case against Johnson & Johnson and Vania in its home and personal care cartel follow-on claim as Carrefour had not demonstrated the absence of pass-on of the cartel overcharge to front margins, as is generally the case in the retail sector.

This approach has not yet been fully abandoned by the French courts, which have not yet had the opportunity to apply the Directive’s provisions on the passing-on defense in the cases currently in front of them. In particular, the French commercial courts, which are competent to rule on cartel damages claims of private plaintiffs in the first instance (French administrative courts are competent for the claims of public entity plaintiffs), have shown little scrutiny in, and analysis of, the economic and factual complexities of the passing-on defense. For example, in the lysine cartel follow-on damages action, the Paris Court of Appeal awarded compensation based on economic studies on the overcharge produced by the parties, without examining any pass-on in detail. In the linoleum cartel follow-on case as well, the Paris Court of Appeal did not examine the details of the pass-on theory put forward by the parties’ economic studies, and appointed an expert to determine quantum.

There is hope as the Cour de Cassation recently ruled that judges must take into account the specific internal policies of the company concerned when assessing a pass-on theory. In this case following the dairy cartel, even though normal commercial practice in the sector implies that overcharge would be passed on, the Cour de Cassation upheld the compensation awarded to the Cora and Match supermarkets, looking not only at the prices actually charged to consumers, but also, in the case of Cora, on the company’s refusal to pass on the overcharge by maintaining a difference of at least 20% between private label and branded products.

The French courts have not yet regarded the possibility that defendants may be released from full compensation if a pass-on is assumed and the indirect purchasers do not claim damages.

UK: A Targeted and Expert-Led Approach

The UK is another prominent jurisdiction for cartel damages litigation in Europe. The UK has adopted a similar approach to the passing-on defense as the Directive, placing the burden of proof on the defendant to demonstrate the pass-on, and on the claimant to rebut it.

The UK courts have started to develop a pragmatic approach to deal with the passing-on defense, especially in cases involving large and complex groups of claimants or defendants, such as the truck cartel follow-on litigation.

In its Royal Mail vs. DAF judgment, the Competition Appeal Tribunal (CAT) ultimately rejected the passing-on defense, arguing that the economic concept of pass-on is much broader than the legal concept of pass-on, with the latter requiring a proximate causal connection between the cartel overcharge and an increase in downstream prices which goes beyond the mere concept of recovery of costs, whereby the CAT also looked at the (small) likelihood of downstream customers claiming damages themselves.

In the second wave of the trucks proceedings, the CAT has adopted a “targeted claimant” approach, whereby the defendants can request information from a selected number of claimants, representing different types of purchasers or lessees of trucks, in order to establish pass-on. The idea is to limit the effort and cost for the majority of claimants, who do not have to respond to the information requests, and to make the process more efficient and proportionate. The CAT has also structured the process as an “expert-led” approach, whereby the parties’ experts are expected to discuss and resolve the disagreements on the information requests, and to present their views to the CAT, which will then rule on the disputed requests. The CAT has considered the relevance and proportionality of the information requests, taking into account the importance of the trucks costs for the claimants, the availability and reliability of the data, and the potential impact on the passing-on defense. The CAT has also considered the pass-on along with the volume effect, as part of the overall damage caused by the cartel.

United States: A Different Approach

The United States’ legal system takes a different approach to the passing-on defense, primarily influenced by the Supreme Court’s decision in Illinois Brick Co. v. Illinois. In this landmark case, the Supreme Court ruled that indirect purchasers do not have standing to seek damages under federal antitrust laws, specifically the Sherman Act. This decision was aimed at simplifying antitrust litigation and avoiding the complexities of apportioning damages among various levels of purchasers. As a result, the passing-on defense is generally not relevant in federal courts, as only direct purchasers can claim damages for overcharges caused by a cartel.

However, the situation is more nuanced at the state level. More than 30 states have enacted laws or judicial decisions that allow indirect purchasers to sue for damages, effectively repealing the Illinois Brick decision for state antitrust claims. These state laws create a patchwork of rules where the passing-on defense may become relevant again, depending on the jurisdiction.

Additionally, certain exceptions to the Illinois Brick rule exist, such as in cost-plus contracts where the overcharge is directly and clearly passed on to the indirect purchaser.

While the US approach seems easier at the outset, it would not be in line with the European system, which is based on damages being compensatory (and not punitive) and aims at full compensation for all victims of antitrust violations, while also preventing overcompensation.

Conclusion

Now that courts in Europe are slowly but surely getting their arms around damages quantification, in particular after years of expert battles in the many truck cartel litigation cases, standards for dealing with the passing-on defense will still have to be developed.

The EU Damages Directive has provided a common framework and some guidance on the passing-on defense, but it has also left room for interpretation and discretion by the national legislators and courts. As a result, the parties and the courts face various challenges and opportunities in applying and proving a pass-on or rebutting the passing-on defense, depending on the jurisdiction, the case, and the evidence. Pass-on is a key issue in cartel damages litigation in Europe and will continue to be in the years to come.

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