Beyond ORWI: German Supreme Court continues clarifying the ‘passing-on defence’ in cartel damages cases

Cartel members sued for damages regularly invoke as a defence that the plaintiff passed on the overcharge resulting from their unlawful behaviour to its own customers (the ‘indirect purchasers’) and was hence not entitled to claim damages for it.

In the well-known ORWI judgment of 28 June 2011 (KZR 75/10), the Federal Court of Justice in Germany (Bundesgerichtshof, ‘BGH’) relying on primary EU law allowed that passing-on defence, as well as own claims for damages by the indirect purchasers. It was the first decision in those matters by a Supreme Court in Europe, and of great impact. The ORWI principles are widely reflected by the later Directive 2014/104/EU and hence by the national laws of all EU Member States that have implemented this Directive.

Recently, on 23 September 2020, the BGH rendered even two further landmark judgments on antitrust damages, one (the BGH’s first) concerning the international trucks cartel (KZR 35/19, Cartel des camions), and another one (out of many) on a domestic cartel of rail producers (KZR 4/19, Rails V). In both cases, albeit from different angles, the BGH again takes the opportunity to provide fundamental, helpful, clarifications on the passing-on defence.

Especially in Rails V, where in fact it may be assumed that overcharges had been passed on from the plaintiff even down to the end-consumers, it becomes relevant in that regard that ‘the legal concept of damage must be distinguished from the economic concept’.

General requirements of the passing-on defence

In Cartel des camions, the defendants asserted that, following the payment of an overcharge, the plaintiff’s subsidiaries had charged higher prices to their own customers for the construction services they had provided. Similarly, in Rails V, the rail producers argued that damages of the there-plaintiff, the City of Essen, should be reduced by benefits that accrued to the latter from its fare increases for local transport services in the cartel period.

Confronted with these objections, the BGH recalls ORWI at first. Accordingly, passing on costs would not eliminate the damage (‘in the legal sense’, the BGH clarifies in Cartel des camions), because the buyer’s damage (‘finally’) arises with conclusion of the contract obliging it to pay the overcharge. However, under the general principles of the set-off of benefits, an infringer can invoke that any benefit received by the claimant in an adequate causal context of the harmful event has to be deducted from the damages claim. This forms the basis of the passing-on defence in private antitrust cases under German law.

Reading Cartel des camions et Rails V together, the BGH then draws the following conclusions:

  • Burden of proof

The cartel members bear the burden to demonstrate and prove the prerequisites of the passing-on defence. A ‘secondary burden of proof’ on the part of the cartel victim with regard to the detailed circumstances of its price calculation vis-à-vis its own customers shall ‘only be considered in exceptional circumstances’.

  • Sufficient evidence on a cartel-induced price increase on the downstream market on the basis of the relevant market conditions

In principle, for a successful passing-on defence, it is up to the cartelists to show that, based on the general conditions on the relevant downstream market (‘in particular the elasticity of demand, the price development, and the product characteristics’), passing-on of the cartel-induced price increase (i.e. the overcharge) is, at least, a serious possibility. The complexity of the economic context in the individual case may be taken into account. The ‘strict requirements’ of that defence shall not be applied in a way that makes it impossible for the cartelist from the outset to sufficiently present it. The BGH rather points to the power of the courts to estimate the passing-on of an overcharge.

  • No presumption of passing-on in favour of the cartel defendant

On the other hand, given that pricing can be influenced by numerous factors of market structure and commercial strategy, neither price increases on the downstream market temporally close to the cartel, nor the fact that a corporate plaintiff has a typical interest in aligning the price of its goods or services with the costs, are sufficient to justify the passing-on defence, generally. The empirical proposition of price effects of a cartel, on which direct purchasers of the cartelised good may base their damage claims, does also not allow conclusions on the probability of a pass-on to indirect purchasers by itself. Rather, the cartelist must provide sufficient evidence that a price increase on the downstream market precisely resulted from the cartel and not from other factors.

  • Individual assessment of different downstream markets

If a pass-on to different downstream markets is possible in the case in question, especially because the plaintiff resold the cartelised product into more than one distribution channel, the cartelist must show ‘separately’ for each of those markets ‘that, and in what way,’ a cartel-induced price increase influenced this market. In fact, the Cartel des camions defendants did not meet this requirement, given different downstream markets in that case, namely one for construction services and another one for used trucks, for any of those two markets. For this reason, the BGH fully rejected the passing-on defence in Cartel des camions.

Refusal of the passing-on defence to avoid de facto absence of liability (especially in case of passing-on of overcharges to end-consumers)

In Rails V, in contrast, based on an in-depth analysis of the market and financing structures relevant for the pricing of local public transport, the BGH accepted that the defendants had sufficiently shown that a passing-on of overcharges may be considered seriously. But only ‘from an economic perspective’.

Holding that the concept of damage has both an economic and a legal side, the BGH then elaborates a well-reasoned answer to the legal question, still left open in previous decisions, of what happens if 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 cartel infringers due to a lack of enforcement of possible damage claims by the customers at the downstream market level. This is especially, but not only, the case where such indirect purchasers of the cartelised product are private end-consumers suffering from atomized (‘scattered’) damages, i.e. very small individually, nevertheless large in their entirety.

In essence, the BGH concludes that, in such circumstances, the cartelist does not as a rule have to reckon with multiple claims for the same damage. Applying the passing-on defence would rather lead to a situation where the direct purchaser (‘primary victim’), despite normally best-placed for proving claims against its cartelised business partners, would be deprived of a significant incentive to file such a claim at all, given the litigation and cost risks, while there is a complete lack of incentives for the indirect purchasers to raise claims against the cartel members. But cartel members shall not be allowed to escape civil liability and hence to retain the fruits of their illegal conduct, irrespective of administrative fines. Cartel damage claims do not only serve the purpose of defending private interests, but also contribute to the protection of the public interest in an effective prohibition of cartels, complementary to the public enforcement of this provision.

Thus, according to the BGH, it must be taken into account whether, to what extent, and for what reasons, the assertion of claims by indirect purchasers against the cartel members is to be expected or, conversely, is remote in the case at hand. Furthermore, it may be relevant whether the direct purchasers have lost profits due to quantity effects, the compensation for which they can claim in addition to any price level damage. In case of doubt, as the BGH indicated in previous decisions already, the preventive function of cartel damages claims must be given priority over the prohibition of overcompensation of the plaintiff, that is, of the direct purchaser here.

The BGH considers those principles in line with EU law. In the first place, it points to the case law of the EU Court of Justice (CJEU) that the right to claim antitrust damages shall deter undertakings from entering into cartel agreements prohibited by Article 101 TFEU (e.g., see Case C-436/18, Otis, paras. 22, 24) and that, given that Directive 2014/104/EU was not yet applicable to the case at hand, it is for the domestic legal system of each Member State to set the criteria for determining the extent of the damages for harm caused by such an agreement, subject to the principles of equivalence and effectiveness (Case C-295/04, Manfredi, para. 98). In that context, the BGH also refers to the UK Supreme Court in Sainsbury’s Supermarkets ([2020] UKSC 24). Additionally, the BGH takes from the CJEU in Manfredi (loc. cit., paras. 92 to 93) that the cartel prohibition under Article 101 TFEU did not prevent the national courts from awarding punitive damages in excess of the damage actually suffered, nor from limiting the amount of damages in such a way as to prevent overcompensation.

Having said that the Directive did not yet apply, the BGH also indicates that under its regime the outcome would be the same. That is, it will be still possible to deny cartelists the passing-on defence from a normative point of view. It is true, the injured party shall not be overcompensated under Articles 3(3) and 12 of the Directive, but, according to its Article 12(1), the Member States must also avoid ‘absence of liability’ of the infringer. Moreover, in line with the Directive’s recitals 1, 3 and 4, damages claims shall ensure the full effectiveness of primary competition law (Articles 101, 102 TFEU).

Thus, the BGH rejected the passing-on defence again, this time ‘for legal reasons’.

Public subsidies; bundling of different damages claims

The passing-on defence in Rails V, however, did not only concern fare increases for local transport services, but the defendants also objected that the plaintiff should be credited with public subsides granted for the purchase of rails and other cartel-affected transactions. The BGH in principle agrees with the defendants that those subsidies have to be set off against the damages claimed, provided that the subsidies were causally connected to the event causing the damage, that is, granted – ‘also in terms of the amount’ – in dependence on individual transactions affected by the cartel.

The BGH leaves the factual assessment of this point to the lower appeal court, to which it remands the decision back.

However, in this context, the BGH reminds of its ruling of 19 May 2020 in Rails IV (KZR 8/18). Accordingly, setting-off benefits received by a plaintiff due to the cartel would be excluded, if (i) the third party to whom the plaintiff allegedly passed on its damage has assigned to that plaintiff any own claims in this respect against the cartelist sued, (ii) the plaintiff has notified that assignment to this cartelist, and (iii) there is no possible pass-on of damage to further customers or third parties downstream of the assigning party. In such a case, according to the BGH, there is ‘no need’ to set off any benefit received from the assignor against the damage suffered by the plaintiff, because all claims with regard to this ‘chain of damage’ are bundled in the plaintiff’s hand and, therefore, the cartelist faces no risk of double recovery.

Comment

Trains and trucks transport things. To some degree, they compete, in Germany even in competition law. But there is no doubt as to the fundamental nature of the findings in both Rails V et Cartel des camions, especially with regard to the limits of the passing-on defence.

In Rails V, the BGH stated expressively that its case law on the passing-on of overcharges, reaching back to ORWI, corresponds to Articles 12 to 14 of Directive 2014/104/EU, regardless of the fact that these provisions were yet inapplicable for temporal reasons.

The concept of the ‘secondary burden of proof’ of the plaintiff may form an exception. Article 13(2) of the Directive clearly requires the Member States to ensure 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. However, it may well be possible that the BGH, in future cases, at least transfers its basic idea that such a secondary burden of proof shall be considered exceptionally at best, ‘to avoid risks for the effective enforcement of private competition law’ (Rails V), to the new disclosure regime in an appropriate manner.

For the rest, in any event, the reasoning of the BGH is convincing and does comply with the Directive indeed.

With regard to the influence of the passing-on defence on incentives of cartel victims to sue the infringers for damages, the BGH also takes up valid concerns expressed by the US Supreme Court already (Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968)). The latter also pointed to the fact that end-consumers had only a tiny stake in a lawsuit, and little interest in attempting an action, so that those who violate the antitrust laws by price-fixing or monopolizing would retain the fruits of their illegality if, at the same time, a possible passing-on of the overcharge would prevent purchasers at market levels upstream of the end-consumer level from claiming damages. This would put an effective enforcement of the antitrust laws at risk. However, while the US Supreme Court therefore denied the passing-on defence in principle, the BGH provides a balanced approach. It brings that defence and the goal of an effective competition law regime together, by limiting the scope of the objection of passing-on only where necessary, based on an assessment of the individual case.

In particular, the courts will assess, as a condition of a successful passing-on defence, whether the defendants have shown that customers of the plaintiff have actually raised own damages claims against them, and whether the plaintiff is entitled to claims for lost profits with regard to volume effects. In fact, the BGH refused the latter, and hence the passing-on defence, in Rails V due to the price inelasticity of demand for local transport services. This is not without irony, because price inelasticity is exactly what defendants invoking that defence notoriously try to demonstrate in antitrust litigation, in Rails V as well. From now on, cartel members will have to rethink their defence strategy.

Cartel victims, however, will also reconsider their options. By pointing to the bundling of damages claims of different market levels, the BGH has taken up, albeit implicitly, suggestions of, e.g., the EU Commission that national courts should consider and allow such vertical claims bundling in the interest of consistency between judgments. Possible means are the substantial transfer of those damages claims by way of assignment, as mentioned in Rails V, or procedural tools under national law such as a joinder of claims or mechanism of collective redress (e.g., see Commission Passing-on Guidelines, para. 27; 2016 Pass-on Study, paras. 531 et seqq., 816; Canadian Supreme Court, Sun-Rype Products Ltd v Archer Daniels Midland Co, 2013 SCC 58, especially paras. 17 et seqq., 38). We have commented on this in more detail already.

Altogether, the concept of passing-on of overcharges takes shape.

By Carsten Krüger

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