Full steam ahead: German Supreme Court provides further guidance on ‘umbrella claims’ and the ‘passing-on defence’

Are there no public benefits from a hardcore cartel? The German Rails Cartel, at least, continues to contribute to the general development of private claims for damages resulting from an infringement of the EU cartel prohibition (Article 101 TFEU) and its national equivalent. From this perspective, it supports consumers, by promoting legal certainty for an effective compensation of cartel-based losses. Several decisions of Germany’s Supreme Court (Bundesgerichtshof, ‘BGH’) originating from that cartel have already answered questions on applicable law, joint and several liability of the cartel infringers, as well as the standard of proof for causality and quantification, in antitrust damages actions. Now, for a further landmark judgment dated 19 May 2020 (KZR 8/18, Rails Cartel IV), the BGH has followed the rails on a curvy route to the stations ‘umbrella claims’ and ‘passing-on defence’. Again, the Court’s engine is richly fuelled by principles of EU law.

Providing a route map

In 2013, the German competition authority fined producers of rails, points, and sleepers for infringing national as well as EU cartel prohibition by agreements to fix prices and allocate customers between 2001 and 2011. This has led to many follow-on actions before different civil courts in Germany. The plaintiff in the case at hand is the City of Munich. It claims that the cartelists are jointly and severally liable for damages because it had to pay overcharges for products affected by the anticompetitive agreements to both members and non-members of the cartel. The Higher Regional Court (Oberlandesgericht) of Munich as the appeal court found for the plaintiff on the merits, assuming damage caused by the cartel, but leaving open its extent. On further appeal, the BGH rejected this assumption. Remanding the decision back to the appeal court, the BGH gave a route map, i.e. instructions, for the new damage assessment in that case, however. This sets the course for any similar litigation for antitrust damages as well.

Station 1: umbrella claims – a regular companion

Grounds for liability

The ride starts with the plaintiff’s right to claim damages from the defendants. The BGH held, as it did with regard to prior actions against the rails producers, that a defendant is liable if it is guilty of an anticompetitive conduct which – through sales transactions or otherwise – is ‘capable’ of directly or indirectly harming the plaintiff. The question of whether the cartel actually affected a certain transaction is not relevant for the causality giving rise to liability. It is sufficient that the plaintiff acquired from cartel members goods which were subject to the cartel agreement.

Following the tracks laid by the Kone judgement of the European Court of Justice from 2014 (C-557/12), the BGH added that the purchase of such goods from persons not participating in the cartel (non-cartelists) was likely to cause damage to the plaintiff as well. Non-cartelists benefiting from the protection of the cartel’s practices may have set their own prices higher than they would have done under competitive conditions. Thus, possible effects of a cartel include overcharges resulting from such ‘umbrella pricing’. They may also be claimed from the defendants.

Occurrence and extent of a cartel-caused loss resulting from umbrella pricing

Turning to the damage assessment, the BGH denied prima facie evidence, contrary to the Munich appeal court. The question of whether and to what extent particularly umbrella pricing was present in a cartel-affected market depends on a variety of factors, given the competitive interdependency of the market players, and typically can only be answered by a comprehensive assessment of the circumstances of the individual case. For this, the BGH refers to the principles formulated in Kone.

Even so, under ‘certain conditions’, the non-cartelists ‘can be expected’ to be able to charge higher prices on the market than they would have done without the cartel. According to the BGH, ‘this probability is higher, the greater the market coverage of the cartel and the longer the infringement lasts.’

The BGH continued that the ‘extent’ of umbrella effects depends on several factors. The ‘umbrella effect is higher’, the lower the supply elasticity of the non-cartelists, the greater the market transparency, the greater the degree of substitutability of the products offered on the market and the lower the intensity of competition between the non-cartelists and the competitive pressure from the demand side. Trial judges shall rule on this at their own discretion and conviction, based on an evaluation of all circumstances, under their statutory power to estimate damages.

Travelogue

Article 17(2) of the European Directive 2014/104/EU on antitrust damages provides a rebuttable presumption that cartel infringements cause harm. The BGH did not have to deal with the question of whether this includes umbrella pricing. The statutory presumption is not yet applicable to the Rails Cartel case. Even so, under the legal standard of the BGH, umbrella claims are likely to succeed in typical cartel cases.

Station 2: passing-on defence – a ghost train?

The rail producers tried to build a buffer to protect themselves against liability by arguing that the City of Munich (the plaintiff) could not claim damages for paying any overcharge because it had received from the Free State of Bavaria public subsidies for the transactions in question. Furthermore, the plaintiff had allegedly passed on the overcharge, through a subsidiary, to the passengers using the local transport services, by increasing the fares.

The ‘passing-on defence’ is a common tool of antitrust defendants. In Europe, even before Directive 2014/104/EU, not only a direct purchaser may claim damages, but also an indirect purchaser, provided it has suffered harm because upstream purchasers passed on the overcharge. In turn, the infringer can argue that the claimant reduced its loss by passing it on to its own customers. Particularly in Germany, it is settled case law that, under the general principles of the set-off of benefits, a cartel infringer can invoke as a defence that any benefit the claimant has received in an adequate causal context of the harmful event has to be deducted from the claim, provided that this corresponds to the legal goal of this claim, and unless the relief for the infringer from its liability was unreasonable. Both overcompensation of the claimant and unreasonable absence of liability of the infringer shall be avoided thereby. As the BGH now clarified, this standard for the passing-on defence is also in line with the (future) standard under Articles 12 to 14 of Directive 2014/104/EU.

State railway: objection of public subsidies

Accordingly, the BGH in principle allowed the rail producers to rely on the subsidies by the Bavarian State to the plaintiff, given that these subsidies, also in terms of amount, depend on the plaintiff’s individual purchases of the cartelised goods. The overcharge could thus have been passed on to Bavaria which hence may claim damages itself (similar to an indirect purchaser).

The defendants moreover in principle argued that the plaintiff might have passed-on the overcharge to passengers using the local transport services. The BGH explained this with the existence of a ‘downstream market’, for those services.

Ultimately, however, the BGH had fundamental objections against the application of the passing-on defence, which may apply beyond the case at hand:

No train crash: vertical bundling of claims to overcome disputes over pass-on of overcharges between different market levels

In Rails Cartel IV, the plaintiff-side coupled its wagons in a specific manner. Bavaria had, by way of assignment, precautionarily transferred any own damage claim following a possible pass-on to the City of Munich.

The BGH thus held that, ‘if the different claims for damages within a chain of damages are bundled by assignment in one hand, the objection of set-off of benefits is generally excluded.’ In such a case the cartelist sued faces no risk of double recovery. So, if the judge finds that the cartel has damaged its direct purchasers, she ‘need not examine the question of whether and to what extent the damage was passed on’, i.e. the court has not to assess any pass-on, and ‘may leave the apportionment of the damages to be paid to the internal relationship between the assignor and the assignee bringing the action.’

This presupposes, according to the BGH, that the assignee in fact asks for liquidation of all the actual loss adequately caused by the cartel, irrespective of the court’s examination of whether any passing on of the damage actually occurred. Besides, the cartel members must have been notified of such assignment, and further pass-on to customers or third parties downstream of the assignor shall be excluded.

The approach of the BGH is on the right track. It simplifies antitrust litigation for both claimants and courts significantly and reduces transaction costs. It avoids lengthy discussions on the passing-on, creates information synergies on the part of the cartel victims acting jointly, and thwarts the popular tactic of cartel infringers to play off direct and indirect purchasers against each other with the aim not to compensate any of them. At the same time, the infringers themselves benefit from the bundling of claims of different market levels by a reduced risk of costly multiple actions, double recovery and contradictory decisions.

The BGH did not expressly address the issue of collective redress. Nevertheless, the Court’s rationale is close to corresponding suggestions on overcoming the regular problems related to passing-on:

  • The EU Commission, in its 2019 Passing-on Guidelines (para. 27), suggests that, in the interest of consistency between judgments resulting from parallel claims from purchasers at different market levels, national courts should consider and allow the use of appropriate procedural means that are at their disposal under national law (e.g. joinder of claims). But this is not the only train connection to the destination of consistency between damages actions related to the same competition law infringement: Pointing to the last (but not least) alternative of Article 2(4) Directive 2014/104/EU, the Commission (ibid.) also refers to the possibility that a person may acquire the claim of another person, thus to claims assignments aiming at a joint action, such as in Rails Cartel IV.
  • The 2016 Study on the Passing-on of Overcharges, which the Commission ordered in preparation of its Passing-on Guidelines, points to the goals of Articles 12(5) and 15 (and Recital 44) of Directive 2014/104/EU. Accordingly, besides ensuring the consistency of rulings when there are multiple antitrust claims at different levels of the supply chain, both over- and under-compensation shall be avoided (para. 525). Collective proceedings are a means to this end (paras. 531 et seqq.), but also the assignment of claims, e.g. to a special purpose vehicle which subsequently file them together before the same court. In this regard, the Study points to an existing practice that has developed during the last years in several Member States (para. 816).
  • Across the Atlantic, the Supreme Court of Canada has also clarified that direct and indirect purchasers may jointly bring antitrust class actions (Sun-Rype Products Ltd v Archer Daniels Midland Co, 2013 SCC 58). It held that, close to the reasoning of the BGH, where indirect and direct purchasers are included in the same class, there will be no double or multiple recovery, as recovery is limited to that aggregate amount, no matter how it is ultimately shared by the direct and indirect purchasers. To the extent that there is conflict between the class members as to how the aggregate amount is to be distributed upon the awarding of a settlement or upon a successful action, this is not a concern of the defendants and hence does not hinder joint action. At this stage, both direct and indirect purchasers share the common interest of maximizing the amount recoverable from the defendants.
  • ‘Efficiency arguments for vertical chain class action suits in private antitrust damage claims’ have already been assessed, and confirmed, by J Rüggeberg under EU competition law in early 2005 (see ici), perhaps an early pacemaker, if not a locomotive. It is quoted by the 2007 Impact Study for the Commission on antitrust damages. Besides, the Commission itself has indicated even in December 2005, that, while actions from direct and indirect purchasers would be in principle separate and independent, ‘in practice there is no reason why parties could not seek to coordinate their actions and thereby possibly save costs and time.’ For this, it points to various means of bundling claims (see ici, at para. 181).

Such ‘vertical bundling’ of damages claims from purchasers at different market levels in the hands of a single plaintiff may be part of the modern generation of trains moving forward private enforcement of competition law in the EU.

Emergency exit: refusal of passing-on defence to avoid de facto absence of liability

Tickets, please! Regarding the fares for local transport services, the BGH does not see sufficient evidence for a pass-on of overcharges. Besides, the passengers asking for such services at the downstream market had only suffered from ‘scattered damages’, if any, which hardly anyone of them would claim for.

The BGH ‘leaves open’ the question of whether the passing-on defence was ‘excluded from the outset’ if expected effects of passing on to the downstream market are at best marginal and determinable only at great expense, while there is a risk of unreasonable relief for the infringers due to a lack of enforcement of possible damage claims by the customers at the downstream market level (‘in this case predominantly private final consumers’). Having said this, the BGH directly continued, albeit in the context of the question of burden of proof, that, in such circumstances, it will be of ‘decisive importance that the cartel infringer does not as a rule have to reckon with multiple claims for the same damage, so that refusing the set-off of benefits does not place an unreasonable burden on it (…). In case of doubt, the preventive function of claims for damages under cartel law must then be given priority over the prohibition of overcompensation of the injured party.’

The Regional Court (Landgericht) of Dortmund referred to this finding in its judgment of 30 September 2020 (8 O 115/14 (Kart)), at the parallel track of another action against the rails producers. It clarifies that, in similar circumstances, if an overcharge was passed on at all, the ‘passing-on defence must be inadmissible,’ given that ‘damages reaching the final consumer at the latest, but also, depending on the length of the supply chain, at previous market levels, are regularly so small that they will not be pursued and the cartelist would thus be de facto released from its obligation to pay damages.’ For this, the Dortmund Court also pointed to the lack of (effective) collective redress mechanisms, as well as similar case law in England and the Netherlands. Furthermore, it referred to Directive 2014/104/EU whose Articles 12(1) and 15 stipulate that not only overcompensation of the claimant, but also (and following the BGH: even more) absence of liability of the infringer shall be avoided.

In fact, several court decisions in Germany have shared this opinion already, also with regard to other cartels (e.g. Trucks; for an overview, please see ici).

The conductor: burden of proof

As far as the passing-on defence was still relevant in the case at hand, the burden of proof is not on the plaintiff, but on the defendant(s). According to the BGH, any exception from this rule could only be granted with great restraint, in order to avoid risks for the effective enforcement of competition law. Even this might be too far-reaching for future cases covered by Article 13(2) Directive 2014/104/EU. This provision clearly stipulates that the burden of proving that the overcharge was passed on ‘shall be on the defendant, who may reasonably require disclosure from the claimant or from third parties’, without exemption. It is hence reasonable to expect that the narrow, cautious, approach of the BGH will also apply to the question of disclosure under the new regime.

Final destination?

The fleet of follow-on litigation concerning the Rails Cartel is large. The mentioned judgment of the Regional Court of Dortmund, for example, has already provided further valuable insights in private antitrust enforcement. It has exercised, contrary to the Munich decisions in the lower instances prior to Rails Cartel IV, a full, and well-reasoned, damage assessment at the level of quantification. We have to wait whether this will be confirmed on appeal. But waiting is something passengers are used to, especially in Germany. Anyway, the trains may move slowly, but they are moving ahead. BGH Rails Cartel V (judgment of 23 September 2020, KZR 4/19) has just approached.

By Carsten Krüger

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