Private enforcement of competition rules Germany

21 November 2005

Prof. h.c. Klaus-Jürgen Michaeli

As noted by Neelie Kroes, the Competition Commissioner, private enforcement of the competition rules has direct benefits for the functioning of the market as it has a strong deterrent effect and it promotes a culture of competition. It also provides direct justice for those who have suffered losses due to breaches of the competition rules. The Commission is keen to develop private enforcement in Europe and is due to issue a Green Paper on this topic by the end of the year, considering such issues as the passing-on defence, calculation of damages, indirect purchasers and collective actions. This is clearly a very important issue for the future development of EC competition law.

In this report, we discuss the possibilities, advantages and obstacles to the private enforcement of competition rules, i.e. (civil) actions between private parties with respect to alleged infringements of the competition rules and/or claims for damages following such infringements, for the following European countries: UK, Sweden, The Netherlands, Belgium, France, Germany and Italy.

Instead of merely listing the pros and cons of private enforcement actions in various countries, we have chosen a more practical approach. We discuss the various aspects of civil actions in the countries mentioned above by discussing the possible strategies in three different types of competition law disputes:

1. cartel agreements – cartel agreements can be damaging to third parties, e.g. competitors that are excluded or foreclosed from a market or purchasers who are overcharged for the products/services of the cartel members;

Case 1: cartel agreement

Hospital X purchases vitamin supplies on a regular basis. When attending a conference organised by a European branch organisation for hospitals, the head of X’s purchasing department learns that the same vitamins are sold at much lower prices by the same suppliers outside the country where X is located. However, upon X’s request, the vitamin suppliers refuse to sell the vitamins to X for the lower price at which they sell the same vitamins in other European countries. X has the impression that this is caused by an agreement whereby the larger pharma­ceutical companies jointly set minimum prices for their products in certain territories.

2. horizontal or vertical agreements – these can cause damage to the other party. We have chosen a vertical agreement for our example, but the strategies and considerations are not much different in the event of parties seeking enforcement of the competition rules with respect to a horizontal agreement, to which they are party.

Case 2: vertical agreement

A and B are parties to a distribution agreement. A is the producer and has a market share of 40% of the market for sales of sports gear and equipment in the EEA. B has been appointed as A’s sole distributor of its sport shoes in the national territory concerned. B has a market share of 30% on the national retail market for sport shoes.

According to their distribution agreement, which has a duration of 10 years, (i) A imposes on B an exclusive purchase obligation; (ii) B is compelled to purchase a fixed minimum quantity of products from A; and (iii) B must sell the products at prices specified in a price list applicable to A’s distributors. B wishes to challenge the distribution agreement and subsequently ask for damages.

3. abuse of dominant position – a purchaser or competitor can be the victim of abusive behaviour by a dominant undertaking and suffer damage as a result of excessive pricing, exclusionary practices, refusal to deal or grant access etc.

Case 3: abuse of dominant position

X is an alternative provider of fixed telephone services which entered the national market for fixed telephone services a few years ago. Originally X, like other new entrants to this market, was able to win a substantial amount of customers for its services. Recently, however, X has seen a substantial number of its customers switch to the incumbent operator Y, which holds a dominant position on the national market for fixed telephone services. Based on rumours in the market and implicit indications from its lost customers, X suspects that Y lures back customers by offering loyalty rebates and package deals for fixed telephone services and leased lines, on which market Y is also dominant.

X files a complaint with the national competition authority, who concludes – after a thorough investigation of Y’s business practices – that Y has abused its dominant position against X and other new market entrants. X wants to obtain compensation for the damage, which it suffered as a result of Y’s abusive behaviour.

We hope this case-by-case overview will help you to decide whether or not to engage in private enforcement actions and which jurisdiction you may choose, if you have a choice between various jurisdictions in view of the cross-border effect of the infringement concerned.

Germany

On 1 July 2005, the 7th Amendment to the German Act against Restraints of Competition (ARC) came into force. The main objective of the Amendment is the harmonisation of German competition law with European competition law. Consequently, it also aims to pave the way for effective private antitrust litigation in Germany and brings about major changes regarding the rules relating to private antitrust enforcement before the German courts.

Case 1: cartel agreement

Hospital X purchases vitamin supplies on a regular basis. When attending a conference organised by a European branch organisation for hospitals, the head of X’s purchasing department learns that the same vitamins are sold at much lower prices by the same suppliers outside the country where X is located. However, upon X’s request, the vitamin suppliers refuse to sell the vitamins to X for the lower price, at which they sell the same vitamins in other European countries. X has the impression that this is caused by an agreement whereby the larger pharma­ceutical companies jointly set minimum prices for their products in certain territories.

Purpose of an action by X

Hospital X can bring an action before the competent civil courts for infringement of article 81 EC and its German equivalent, § 1 ARC by the pharma­ceutical companies for agreeing minimum prices for their products. During the court proceedings, X can demand that the cartel members cease the infringement and at the same time claim damages for losses suffered as a consequence of the infringement. In principle, a preliminary injunction is possible, but would be uncommon due to the complexity of such cases.

Legal basis for the action

Section 33 ARC is the legal basis for orders and damages claims arising from infringement of both EC and national competition law. A claim for damages requires fault by the infringer.

Standing and jurisdiction

Section 33 ARC employs an “affected parties” test to limit the circle of potential plaintiffs. Proceedings can be brought by anyone who can claim an (alleged) right, be it a natural or legal person, as well as those entities without legal personality which are entitled by law to have rights and duties.

The jurisdiction of the German courts in competition law related matters is governed by Regulation 44/2001. In the absence of international treaties, the German Code of Civil Procedure governs the question of jurisdiction vis-à-vis countries outside. Among other forums, e.g. the place of the defendant's seat, claimants may, as a rule, rely on the rule of forum delicti (i.e. the jurisdiction where the offence was committed) where the anti-competitive acts take place in Germany or are directly related to the German market.

As X is directly affected by the alleged cartel, it (or the legal entity running the hospital) is allowed to initiate proceedings.

Collective action

Under the amended ACR, only associations for the promotion of commercial interests are entitled to sue for injunctive relief but they may not claim damages for losses suffered by their respective members.However, they may claim the profits made by infringers of EC and national competition law or an order from the competition authority, provided that the profits have been obtained at the expense of a large number of customers, and provided that these profits have not already been claimed by the competition authority. Still, any damages awarded for loss of profit will not be awarded to the claimant but to the state. The Federal Cartel Office will be in charge of reimbursing the claimant for the costs "necessary" for conducting the litigation. It is to be seen whether public interest litigation proves to be an effective tool.

In spite of the possibilities to start proceedings on its own, X may decide to join forces with other injured parties and initiate joint actions either by instructing the same lawyer or by assigning the individual claims to a particular legal entity. The result would be a bundle of claims brought to court by one authorised legal person.

Burden of proof

As a general rule, each party bears the burden of proof for all the facts upon which its claim is based. So X has to prove all the facts that it relies upon in its claim.

Causation and calculation of damages

X has to prove that the losses suffered would not have occurred without the infringement of the prohibition of cartels and that its causation was "adequate", a requirement that excludes contributions that were causative only under very exceptional circumstances.

As the claimant bears the burden of proving anything on which the claim is based, the defendants have to prove the facts they rely upon for their defence. This includes any possible justification for their behaviour.

Evidence

X must substantiate with sufficient evidence that an infringement of EC or national competition law has occurred. Evidence may be submitted in all possible forms, such as documentary evidence, witness statements or expert opinions. Unlike in other countries, there are only limited means of obtaining evidence from the other party under German civil procedure, even the court has only limited authority to order the disclosure of documents.

Recognition of National Competition Authority/Commission decisions

Under the new law, a national court is bound by the final and binding decisions of the Federal Cartel Office, the Commission and the national competition authorities of other Member States, subject to these authorities having found an infringement of EC or national competition law. The same applies to final and binding judgments following an appeal of such decisions. So if there is any such ruling, this would have binding authority for any proceedings by X against the cartel.

Calculation of damages

Under German law, damages consist of ‘full compensation’ for ‘actual damages’ suffered. This means that the amount of damages awarded should (as far as possible) put X in the same (financial) position it would have been in had the infringement not occurred. “Punitive damages” are generally excluded but the court may take into account the defendant’s profits when calculating damages.

X will presumably find it difficult to determine actual losses, as it is not easy to establish what the market prices for vitamins would have been had the cartel not existed. However, damages may be estimated as long as it can be established that some sort of actual damage has occurred. Instead of claiming actual damages, X may also claim loss of profits, i.e. the profits the claimant would have made had its business carried on in the same way.

Interest on damages is awarded from the date that the infringement occurred. The level of statutory interest for unlawful acts or torts is determined by the German National Bank and regularly adjusted to allow for market circumstances.

Passing-on defence

The passing-on defence is explicitly excluded by section 33 ARC. However, the passing-on defence may be taken into account by the judge in assessing the reasonable level of damages. In this case, X would probably have adjusted its (retail) prices on the basis of the prices charged by the pharmaceutical companies. The defendants could argue that X has passed on these prices to customers and therefore there is no or little damage suffered by X. However, they will bear the burden of proving this argument.

However, the passing-on defence may be taken into account by the judge in assessing the reasonable level of damages. In this case, X would probably have adjusted its (retail) prices on the basis of the prices charged by the pharmaceutical companies. The defendants could argue that X has passed on these prices to customers and therefore there is no or little damage suffered by X. However, they will bear the burden of proving this argument.

Nevertheless, when calculating damages, it is also relevant whether X has benefited itself from the infringement. Any such benefit must, to the extent reasonable, be taken into account.

Timing

Proceedings have to be initiated within three years of the claimant becoming aware of the infringement. Without any such knowledge of the infringement, the limit is either 10 years from the date the damage occurs or 30 years from the date of infringement, whichever may be shorter. Any similar proceedings by the Commission or Cartel Offices in any other MemberState of the EU delay the relevant period.

The average duration of first instance proceedings is about 7 months. However, complex cases may take several years, especially when taken to higher courts.

Costs

All court fees must be paid up front by the claimant. If either party wins the case outright, that party has to bear the full costs of the proceedings, including the opponent's attorney’s fees. However, costs may be apportioned between the parties if neither party fully succeeds in the claim.

Advice to X

Considering the duration and costs of private enforcement, X may prefer to enter into a settlement as an alternative to litigation. However, initiating a procedure is often necessary to force the defendants to negotiate. Provided that X can produce any evidence of the alleged infringement, we would advise X to initiate proceedings against the members of the cartel and request:

1. Injunctive relief, forbidding the continuation of the cartel; and

2. Compensation for the losses caused by the infringement.

If X cannot satisfy the burden of proof with respect to the infringement, other options may be considered. For instance, if one of more of the defendants is established in a common law country, it may be worthwhile to start pre-trial discovery proceedings to gather the necessary evidence before initiating proceedings for damages in Germany. But before starting those proceedings, it is worth considering whether the evidence gathered can really be used as evidence in front of German courts. Another option would be to file a complaint to the Federal Cartel Office. If the Office starts its own proceedings, the decision can be used in a claim for damages.

Case 2: vertical agreement

A and B are parties to a distribution agreement. A is the producer and has a market share of 40% of the market for sales of sports gear and equipment in the EU. B has been appointed as A’s sole distributor of its sport shoes in Germany. B has a market share of 30% on the national retail market for sport shoes.

According to their distribution agreement, which has a duration of 10 years, (i) A imposes on B an exclusive purchase obligation; (ii) B is compelled to purchase a fixed minimum quantity of products from A; and (iii) B must sell the products at prices specified in a price list applicable to A’s distributors. B wishes to challenge the distribution agreement and subsequently ask for damages.

Purpose of an action by B

B has suffered damages as a result of the restrictive conditions of the agreement and wants to end the agreement and recover damages from A.

To achieve this goal, B has two options. B can initiate proceedings in front of a Civil Court of First Instance to end the agreement, and claim damages, both due to nullity because of the infringement of competition law. The second option is for B to initiate proceedings in front of the German Federal Cartel Office asking for an injunction, stopping the performance of the agreement.

Legal basis for the action

Vertical agreements with an exclusive purchase obligation are considered to be agreements that may restrict competition, unless a block exemption applies. The general rule that applies in relation to block exemptions for vertical agreements is that the prohibition contained in § 1 ARC, or Article 81 of the EC Treaty respectively, does not apply if the undertakings involved have a market share of less than 30%, unless the agreement contains restrictions which are absolutely prohibited or other non-exempted restrictions.

In this case, the distribution agreement does not fall under the block exemption because A’s market share is more than 30% and the agreement contains a restriction on B’s ability to determine its sale price (this is a hard-core restriction). Furthermore, an exclusive purchase obligation has been agreed upon, the duration of which exceeds five years. The exemption would also not apply to this obligation. Given the exclusive purchase obligation, the minimum purchase requirements, fixed sale prices and the length of the distribution agreement, the agreement will most likely restrict competition.

According to § 134 BGB (German Civil Code), any agreement which substantially infringes a statutory prohibition is in itself void from the outset. As A’s practices are forbidden by the ARC as well as Article 81 of the EC Treaty, B can base its claim for damages on the general provisions of the German Law of Obligations. However, it might as well rely on Section 33 ARC as this is the main legal basis for injunctions and damages claims arising from infringement of both EC and national competition law.

Procedural issues

In terms of procedural issues, these proceedings are similar to the ones in Case 1. Please see above.

Alternative legal basis for the action

With the same reasoning as above, B could file a complaint for infringement of the competition rules with the Federal Cartel Office under § 54 ARC. However, it is within the Office’s sole discretion as to whether to accept and investigate the complaint. This decision depends on the Office's workload and the importance of the case.

As the Office’s proceedings are carried out on its behalf, any proceedings and ruling would be free of costs for B. Furthermore, its decision would be binding for all proceedings in front of any court.

However, due to the workload of the Office, there is no certainty that it would pursue the complaint.

Advice to B

Given the fact that in this case a party to a distribution agreement wants to contest the terms of the agreement, the case is appropriate for private enforcement. If B does not want to recover damages but only wants the agreement annulled, B could either (i) consider the agreement void and wait for A to take legal action; or (ii) initiate summary proceedings to obtain a declaration to that effect. If B wants to recover damages, we would advise B to initiate proceedings against A and request:

1. An injunction stating that the agreement is null and void and therefore unenforceable; and

2. Compensation for the losses caused by the infringement.

Case 3: abuse of dominant position

X is an alternative provider of fixed telephone services which entered the national market for fixed telephone services a few years ago. Originally X, like other new entrants to this market, was able to win a substantial amount of customers for its services. Recently, however, X has seen a substantial number of its customers switch to the incumbent operator Y, which holds a dominant position on the national market for fixed telephone services. Based on rumours in the market and implicit indications from its lost customers, X suspects that Y lures back customers by offering loyalty rebates and package deals for fixed telephone services and leased lines, on which market Y is also dominant.

X files a complaint with the national competition authority, who concludes – after a thorough investigation of Y’s business practices – that Y has abused its dominant position against X and other new market entrants. X wants to obtain compensation for the damage, which it suffered as a result of Y’s abusive behaviour.

Purpose of an action by X

Since it is likely that the abusive behaviour will be terminated due to the Competition Authority’s investigation, X is likely to want to claim compensation for the losses suffered as a result of Y’s abusive behaviour.

Legal basis for the action

As in cases 1 and 2, Section 33 ARC is the main legal basis for injunctions and damages claims arising from infringement of both EC and national competition law.

Standing and jurisdiction

Being a customer of the cartel members and therefore affected by their infringement of the competition rules, it can be assumed that X has sufficient interest to bring an action before the court. As it can be assumed that the breach of competition law found by the Federal Cartel Office affected the relevant market in Germany, X can rely on the rule of forum delicti and bring the action in a German court.

Recognition of National Competition Authority decision

Under the new law, a national court is bound by the final and binding decisions of the Federal Cartel Office, the Commission and the national competition authorities of other Member States as well, subject to these authorities having found an infringement of EC or national competition law. Therefore, the decision of the Federal Cartel Office will be binding in relation to X’s proceedings for damages.

Procedural issues

In terms of procedural issues, these proceedings are similar to the ones in Case 1. Please see above.

Calculation of damages

Under German Law, damages consist of ‘full compensation’ for ‘actual damages’ suffered. This means that the amount of damages awarded should (as far as possible) put X in the same (financial) position it would have been in had the infringement not occurred. “Punitive damages” are generally excluded, but the court may take into account the defendant’s profits when calculating damages.

X will presumably find it difficult to determine its actual losses. However, damages may be estimated as long as it can be established that some sort of damage has actually occurred. Instead of claiming actual damages, X may also claim loss of profits.

Interest on damages is awarded from the date that the claim was filed. The amount of interest due is determined according to the standard base rate issued by the German National Bank, which is regularly adjusted to allow for market circumstances.

Advice to X

Due to the existing decision of the Federal Cartel Office, proving the infringement will not present any difficulties in this case. However, X may still encounter some difficulties in obtaining compensation for the losses caused by the infringement. These mainly relate to the evidence of the damage suffered by X and it will often be clear beforehand whether X can establish the necessary evidence. Also, initiating proceedings may prompt Y to negotiate a settlement and pay damages without going through a lengthy court procedure.

Summary

To summarise our experiences with private enforcement in the various European countries, we have drawn up the two matrices below, in which the obstacles and advantages to private enforcement have been indicated.

Matrix I: Obstacles to private enforcement

The matrix below indicates which factors may present obstacles (on a scale of 1 to 5) to private enforcement in the main EU Member States.

1=no problem, 2=minor problem, 3=neutral, 4=possible problem, 5=major problem

UKSwedenNetherlandsBelgiumFranceGermanyItaly
standing

1

1

1

1

1

1

1

obtaining evidence

1

4

5

5

5

5

3

collective action

4

4

4

4

4

5

4

limitations on forms of evidence

1

1

1

2

1

1

3

witness hearing

1

1

3

4

4

3

3

expert evidence

1

1

2

1

2

1

3

recognition of NCA / Commission decisions

1

2

1

1

1

1

3

burden of proof

4

4

4

4

4

4

3

causation

3

3

4

4

4

4

3

calculation of damages

2

4

4

4

4

4

4

passing-on

3

3

3

4

3

1

4

indirect injury

3

5

4

5

5

4

4

timing

5

5

3

5

4

3

4

costs

5

3

3

5

2

3

3


Matrix II: Advantages for private enforcement
The second matrix indicates which factors may facilitate private enforcement in the various EU Member States and thus may constitute a reason to choose a certain Member State for launching a private enforcement action.

UKSwedenNetherlandsBelgiumFranceGermanyItaly

standing

X

X

X

X

X

X

X

obtaining evidence

X

X

collective action

limitations on forms of evidence

X

X

X

X

X

witness hearing

X

X

expert evidence

X

X

X

X

X

X

recognition of NCA / Commission decisions

X

X

X

X

X

X

burden of proof

causation

calculation of damages

X

passing-on

X

indirect injury

timing

X

costs

X

X

X

X

X