Transcript Slide 1

Private and Public Enforcement:
Complements or Substitutes ?
Frederic Jenny
Professor of economics ESSEC
Judge , Cour de Cassation
3rd LEAR Conference on the Economics of Competition Law
What Makes Policy Work ?
Rome June 25-26 2009
1
I) Deterrence
2
A Simple Economic Model
Damage
D=f(O(ps))
Enforcement cost
C= C( O(P,S)P)
Cost of sanction
bpsO(P,S)
Supply of offences
O= O(P,S)
Policy objective: Minimize social cost of violation D=f(O(ps))+ C( O(P,S)P)
+bpsO(P,S)
1st Condition of optimality: P and S must be chosen in such a way that « crime
does not pay » (only risk seekers will commit crime)
2nd Condition of optimality : the marginal cost of enforcement and sanctions must
be equal to the marginal revenue
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Optimal sanctions for antitrust violation
For crime “not to pay”, the expected gain from the violation must be equal to zero
or negative.
In a competitive environment monopoly profits are equal to 0.
Assume π(ac)= profits from the anticompetitive practice
p= probability of getting caught
f= sanction
To discourage a risk averse or risk neutral firm from engaging in an
anticompetitive activity we must have:
p ( π(ac) – f ) + ( 1 – p ) ( π(ac) ) < 0
which gives:
p f > π(ac)
Or f >π(ac) /p
Taking the total reduction in consumer surplus (greater than the extra-profit of the
violators) and multiplying it by the inverse of the probability of detection and
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punishment would lead to an economically efficient sanction.
Insights from the model of optimal sanctions
1) The model assumes that competition authorities or judicial authorities do not make
mistakes. If there is a possibility of mistakes (particularly false positive) large sanctions
may entail substantial costs to society and the optimal amount of sanctions should be
reduced.
Note: ENRICO LEONARDO CAMILLI : « OPTIMAL AND ACTUAL FINES IN
CARTEL CASES: THE EUROPEAN CHALLENGE »
“In a environment characterised by asymmetric information, judicial
errors, particularly of type II (innocents are convicted) can be socially more
harmful with very high fine settings”
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Insights from the economic model
2) To have a deterrent effect, a system of antitrust law enforcement, needs to be
predictable (to allow a calculation of the benefits and costs of the violation). Hence the
degree of discretion of competition authorities or courts in sanctioning anticompetitive
practices should be limited. Their decisions should be transparent and consistent over
time and over analytically similar cases.
Note: ENRICO LEONARDO CAMILLI : « OPTIMAL AND ACTUAL FINES IN CARTEL CASES:
THE EUROPEAN CHALLENGE »
“the transparency of the criteria applied in the determination of the sanction, and their publicity, are
fundamental, in order to strengthen the deterrent effect on the rational criminal’s cost-benefit
analysis. The surprise-effect is not a valuable good, rather uncertainty leads just to underweight the
real amount of the fine at the crucial moment of the cost-benefit analysis about engaging on the
cartel or applying for the leniency”
Note Damien Geradin and David Henry “The EC fining policy for violations of competition law: An
empirical review of the Commission decisional practice and the Community courts’ Judgments”,
Paper prepared for the conference Remedies and Sanctions in Competition Policy Economic and
Legal Implications of the Tendency to Criminalize Antitrust Enforcement in the EU Member States
(February 17-18, 2005)
“it is often difficult to understand the logic of the fines imposed by the Commission. Identical factual
scenarios will be treated differently, while different factual scenarios will be offered the same
treatment ».
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Insights from the economic model
3) The deterrent effect of an enforcement system depends
on several, partly
interdependent, variables. Furthermore, economic agents respond to incentives. Therefore
any innovation leading to the modification of a variable in an enforcement system is likely
to lead to responses by economic agents which will affect other variables. Those
interdependences have to be studied carefully.
ENRICO LEONARDO CAMILLI : « OPTIMAL AND ACTUAL FINES IN CARTEL CASES: THE
EUROPEAN CHALLENGE »
“the coherence of the entire sanctioning system is of paramount importance, since all the elements are
closely interrelated, and the change of one parameter is likely to have effect on all the setting. For that
reason matters like the private damages and the standing to claim them, the international or domestic
feature of the infringement, the type and quantity of investigative tool, the availability of criminal
sanctions are to be taken into account when the question on the optimal fine is addressed”.
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Insights from the economic model
4) Decreasing the cost of enforcement ( ceteris paribus) is an important goal (hence the
necessity to assess whether leniency programs actually achieve this goal and to eliminate
perverse effects that they may have)
Evguenia Motchenkova “Effects of leniency programs on cartel stability”
We find that in most cases leniency reduces duration of cartel agreements but this result is not
unambiguous. In case leniency programs are not too strict and fines are proportional to the
accumulated illegal gains from price-fixing the result is as follows. Under strict antitrust
enforcement, the possibility to self-report and be exempted from the fine increases the incentives for
the firms to stop cartel formation, and, hence, reduces the duration of cartels. However, when
penalties and rate of law enforcement are low, introduction of leniency programs may, on the
contrary, facilitate collusion.
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Insights from the optimal sanctions model
5) Optimal sanctions by the competition authorities may not always be feasible for a
variety of reasons:
- The social cost of errors may be high
- When firms cannot pay bankrupcy may entail a social cost
- Optimal sanctions may violate the proportionality principle;
- High fines are likely to give an added incentive to offenders to
avoid detection (an effect which is not factored into the analysis)
“According to Werden and Simon (1987), firms would need assets six times higher than annual
sales for a firm to pay the optimal fine. As a consequence, they conclude that most price fixers
should go to prison.
Craycraft, Craycraft and Gallo (1997) analyze the effect of the firm's ability to pay the fine levied
and find that all firms in their sample of 262 price-fixing firms between 1955 and 1993 were able
to pay the actual fine imposed. However, only 47, or 18% of the sampled firms were able to pay
the “optimal” fine. All 262 firms were able to pay the fine actually levied as well as the maximum
fine out of cash on hand, defined as cash immediately available, and short-term investments, i.e.
treasury bills. Paying the fine out of cash on hand and short-term investments denies
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stockholders payment of a cash dividend and also affects payment to short term creditors”.
Insights from the economic model
6) It is the overall level of sanctions (together with the probability of detection and
conviction) which determines the deterrent effect of an enforcement system. It make no
difference whether payments are made to the government budget or to consumers. But we
must remember that different types of sanctions may entail different costs and that
competition authorities have some control over administrative sanctions but not over
private suits.
Note: In the worldwide Vitamins cartel, the amount of fines and private damages paid in the US was
roughly US$ 2 billion vis à vis the 855 million Euros paid to the Commission in the European case, not
to mention the imprisonment of nine executives.
In the worldwide Graphite electrodes case: even if the estimates of the affected market are similar
(more than two billion Euros in the EU, US$ 2 billion in the US ), the EU fine represents only 11% of
the affected market, while the US fine represents more than 24%, without taking into account jail
sentence for two executives.
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Summary of the insights from the
economic model
1) Administrative fines will often be insufficient to achieve the optimal level of
deterrence; therefore criminal sanctions and or civil sanctions are useful complements
to admnistrative sanctions
2) Civil sanctions should be coordinated with administrative sanctions to avoid
overdeterrence
3) Enforcement should be predictable which raises the question of the economic
expertise of courts ( both to establish the violation and to assess the damages to
Particular plaintiffs)
4) The protection of the efficiency of the leniency programs cannot be a goal
In itself. is the optimality of the global system.
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II) A plaintiff’s model
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The role of private enforcers in the EU
Private parties are involved in public enforcement by lodging
complaints to the Competition authorities. In this case private
parties initiate proceedings
They can also act as “private enforcers” as well by either
invoking EC antitrust prohibitions as a “shield” in private
litigation (defensive private enforcement) or as a “sword” by
sueing for damages and/or injunctive relief (offensive private
enforcement).
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Private litigations
1) litigation brought by competitors of the defendants alleging that
they have been excluded or injured by reason of anticompetitive
actions by the defendant or defendants. This type of litigation is
often suspect because of the concern that the plaintiffs are seeking to
use the antitrust laws to reduce competition, and protect themselves,
rather than increase competition in their market.
2)The other main category of private litigation consist of the cases
brought by direct purchasers of products or services where
producers of these items have violated the antitrust laws. Typically,
these law suits involving price fixing and other per se violations of
the antitrust laws and often are brought as class actions (cases
brought on behalf of all persons similarly affected by the illegal
conduct).
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Towards a Constructive Public-Private Partnership to Enforce Competition Law Spencer Weber Waller*
Follow-on cases
Many of the private treble damage cases follow government
cases or investigations and seek to take advantage of guilty
pleas or convictions in an earlier criminal case. When a
defendant is convicted or found liable in a government
antitrust case, it is presumed liable for any subsequent civil
cases brought by private plaintiffs A private plaintiff under
these circumstances need do little more than prove damages in
order to prevail in this scenario. For example, the guilty pleas
and convictions in the international vitamins case spawned
dozens of private treble damage individual and class action
law suits against the same defendants.
Towards a Constructive Public-Private Partnership to Enforce Competition Law Spencer Weber Waller*15
A plaintiff’s model,
Assume that the prospective costs for a plaintiff are the
opportunity cost of time spent in litigation (OCt) or settlement
(OCs), costs of access to courts (AC) and – depending on the fee
allocation rule chosen – legal costs for litigation (LCt) and
settlement (LCs). Expected rewards are the damages claimed (D),
times the probability of winning at trial (w), and the expected
settlement amount (S), times the probability to settle the claim
before trial (1 – p).303 The plaintiff will then sue whenever
(1) p[wD – (OCt + LCt + AC)] + (1 – p)[S – (OCs + LCs)] > 0
where OCs < OCt; LCs < LCt; and S < D. In other words, the
plaintiff‘s net expected reward from filing suit has two main
components: the reward from settlement and the reward from
trial. The relative weight of these two components, of course,
depends on the (perceived) likelihood of settlement and trial.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust 16
damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007 ,
Insights from the plaintiff’s model
1) Multiple damages increase the incentive to sue
2) A reversal of the burden of proof in favour of the plaintiff
increases the incentives to sue, alongside with w.
3) A one-way fee-shifting rule increases incentives to sue, as it
removes LCt and AC from the equation.
4) All the rules that increase the probability of victory for the
plaintiff (w) or increase the prospective cost of the defendant, in
turn, have the effect of increasing the probability that the case
will settle (1 – p), and also the settlement amount (S).
5) All means of funding private litigation increase the probability
that the plaintiff will sue, of course, as they would reduce or
eliminate LCt and AC.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust
17
damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007 ,
Centre for European Policy Studies (CEPS)
Qualifications:Do private enforcers have
better information than public
enforcers?
A possible advantage of private litigation ( over public litigation) is
that the cost of detecting possible violations and gathering initial
evidence are lower (private enforcers are better informed about
their particular industry) as Shavell (1984), Brodley (1996), R.
Preston McAfee, Hugo M. Mialon, and Sue H. Mialon (2008) have
suggested .
But is this advantage important in a world in which we have
effective leniency programs and in which private litgants can refer
cases to competition authorities ?
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Qualifications: do plaintiffs accurately
predict the result of litigation ?
The plaintiff‘s decision to sue depends on her subjective perception
of p, w and S. With imperfect information, the following cases may
arise:
1) The plaintiff overestimates the probability of winning at trial (w).
For example, if the plaintiff incorrectly interprets the defendant‘s
conduct, she may expect the judge to award damages; however,
especially in cases where a rule of reason applies, the judge may find
redeeming efficiencies and decide in favour of the defendant;
2) The plaintiff mistakenly estimates the probability of settling the
case (1 - p). This can occur, for example, whenever the plaintiff
expects the defendant to agree on the likelihood of plaintiff victory;
whereas in reality, the defendant expects a different outcome – i.e.,
the parties are both optimistic on the trial outcome.
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Qualifications: are courts accurate ?
Adding private enforcement to public enforcement is always
socially beneficial if the court is sufficiently accurate. (…) In this
case, firms never strategically abuse the laws, only suing when their
competitors have committed an antitrust infraction, so that private
enforcement only serves to counter antitrust harm.
But if the court is less accurate, adding private enforcement is
beneficial only if the government’s litigation costs, which depend on
its efficiency, are sufficiently high. In this case, firms always sue
when their rivals take efficient actions, preferring to take a chance
with the courts than suffer a certain loss in market share. Society
benefits from private suits only if the government is sufficiently
inefficient in litigation and the legitimate private suits outweigh the
strategic suits.
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Private v. Public Antitrust Enforcement: A Strategic Analysis R. Preston McAfee, Hugo
M. Mialon, and Sue H. Mialon January 12, 2008
Can plaintiffs use litigation strategically ?
In reality, potential private enforcers may have incentive to behave
strategically. This danger is particularly high in the antitrust field
because the plaintiffs are often competitors or takeover targets of
defendants. They may have an incentive to employ private
enforcement strategically, that is, to sue even if they know that
their competitors did not violate the antitrust laws.
Private v. Public Antitrust Enforcement: A Strategic Analysis R. Preston McAfee, Hugo
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M. Mialon, and Sue H. Mialon January 12, 2008
Can private enforcement be used
strategically by private plaintiffs ?
Firms may use the antitrust laws
-to prevent large potential competitors from entering their
market, as in the classic case of Utah Pie Co. v. Continental
Baking (386 U.S. 685, 1967, U.S. Court of Appeals, 1978).
-to prevent their rivals from competing vigorously,
- to extort funds from successful rivals,
-To improve contractual conditions,
-To enforce tacit collusive agreements,
-To respond to existing suits, and
-To prevent hostile takeovers.
R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon, Private v. Public Antitrust 22
Enforcement: A Strategic Analysis, January 12, 2008
Strategic use of civil enforcement
if private enforcement fosters strategic abuse of antitrust laws,
this can lead to increased Type I errors (false convictions), and
thus to inadequate investment, unmeritorious (strategic) suits
and unmeritorious settlements. This has led authoritative
commentators to argue that private enforcement is inferior to
(effective) public enforcement and should not be encouraged in
Europe.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust
23
damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007 ,
Centre for European Policy Studies (CEPS)
What will determine the level of private
litigation?
What is the socially optimal level of litigation given its expense, and
how does it compare to the privately determined level of litigation?
The former and the latter levels of legal activity generally differ, and
the reasons involve two fundamental types of externality. The first
is a negative externality: When a party spends on litigation, he does
not take into account the litigation costs that he induces others to
incur. The second is a positive externality: When a party engages in
litigation, he does not take into account the effect that this has on
incentives to reduce harm. In consequence, the privately determined
level of litigation can depart from the socially optimal level—in either
direction—and corrective social policy may help to remedy the
divergence.
24Suit
STEVEN SHAVELL The Level of Litigation: Private Versus Social Optimality of
and of Settlement International Review of Law and Economics 19:99 –115, 1999
The cost of using the legal system
The fact that the private and the social incentives to use the legal
system are divergent—is likely to be of substantial empirical
significance. A reason for believing this is that the costs of the legal
system are large: The sum of litigation and the related costs of
providing a dollar to a victim through the legal system appear to
be on the order of a full dollar. Given its roughly 100%
transaction costs, the deterrence benefits of the legal system must
be considerable to justify its use. One suspects, however, that
deterrence is sometimes not sufficient to make the transaction
costs of the legal system socially advantageous to bear.
STEVEN SHAVELL The Level of Litigation: Private Versus Social Optimality of Suit and
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of Settlement International Review of Law and Economics 19:99 –115, 1999
Can private enforcement displace public
enforcement ?
We find that the combination of private and public enforcement
tends to lead to a greater probability of private than public action,
as is observed empirically. In most cases, firms have sufficient
incentive to sue if they learn that their rivals have actually violated
the antitrust laws.
Knowing this, the government has little reason to sue, since it can
expect that most of the rightful suits are already being initiated
privately. Thus, public enforcement tends to give way to private
enforcement when the two are in play. This is consistent with the
observation that private antitrust suits have outnumbered public
suits in the U.S. by a 9-to-1 ratio from 1970 to 1995.6
26
Private v. Public Antitrust Enforcement: A Strategic Analysis R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon
January 12, 2008
Private enforcement as a useful
complement to public enforcement
Numerous important private cases in the US where the government
believed that it would not be successful or that the case otherwise
was not worth bringing. These include challenging:
-a boycott of the US insurance market organized by British firms
(Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993)
-a separate price fixing conspiracy in the food additive industry from
the group of cases brought by the government (In re High Fructose
Corn Syrup Antitrust Litig., 295 F.3d 651 (7th Cir. 2002), cert.
denied, 537 U.S. 1188 (2003)(subsequently settled for $525 million).
-the structure and operation of the United States credit card
market.(In re Visa Check/Master Card Antitrust Litig., 280 F.3d 124
(2d Cir. 2001), cert. denied, 536 U.S. 917 (2002).
27
Spencer Weber Waller Towards a Constructive Public-Private Partnership to Enforce
Competition Law
Private enforcement as a complement to
public enforcement
Private rights of action also provide a safety net ensuring the
viability of theories endorsed by the legislature and the courts that
the government disfavors at a particular time.
Currently, the federal government rarely, if ever, enforces the
prohibitions against resale price maintenance, tying, price
discrimination, and brings few if any monopolization or attempted
monopolization cases. The enforcement of these aspects of the
antitrust laws thus falls almost entirely to private parties and the
law would be in effect repealed by inactivity if left to the agencies.
For example, during the 1980s, the agencies brought so few merger
cases that enforcement of the law was kept alive by private parties
and the state attorneys generals bringing
these cases in the federal courts.
28
Spencer Weber Waller Towards a Constructive Public-Private Partnership to Enforce
Summary of the discussion on the
plaintiff’s model
-Private litigation
effect
has a compensatory function and a deterrent
- The social benefit of private litigation depends crucially on
whether the courts are sufficiently accurate ( which limits the
possibility of strategic litigation)
-Even without strategic behaviour on the part of litgants, private
litigation can lead to overenforcemnt or under enforcement
depending on a large number of variables
(procedural
arrengements) because private incentives are not aligned on the
social benefits
- Private litigation can be useful complement of weak or very costly
public enforcement
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-Private litigation is a (very) costly process. To achieve deterrence,
there are usually less costly alternatives
The OECD Competition Committee
discussion of private litigation
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OECD principles
(1)Private antitrust enforcement can substantially improve the
functioning of a competition regime.
But more private enforcement is not always beneficial. Getting
the "dosage" right must be a key, objective of reforms, in order
to ensure that private antitrust enforcement will encourage
greater compliance with antitrust norms while avoiding litigation
that is wasteful and could discourage socially beneficial conduct.
(….) virtually all participants also agreed that private
enforcement can have risks and impose unnecessary costs on
society, in particular when poorly designed substantive rules
and/or inadequate procedural rules result in excessive litigation
31
and discourage pro-competitive conduct.
OECD principles
(2) It is a widely held view that private antitrust enforcement, like public
enforcement, should in the first place aim to increase deterrence and
compliance with competition laws.
Many concurred that rules concerning private litigation should in the
first place be designed to increase deterrence and better compliance
with competition rules. Accordingly, public and private antitrust
enforcement should be viewed as complements that serve the same
goal of deterring anticompetitive conduct that harms consumer
welfare;
The concept of "optimal deterrence" suggested that each country
should seek a mix of private and public enforcement that minimizes
the costs of under-deterrence and overdeterrence. Another view
holds, however, that optimal deterrence should be a concern
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primarily for public enforcement.
OECD principles
(3) Substantive competition law rules and procedural rules are
interdependent. When creating procedures to encourage more private
enforcement, the relationship between enforcement rules and
substantive norms should be carefully considered.
Encouraging more private enforcement would have overall
benefits only when substantive rules were sound. Along the same
lines, many participants recognized that private enforcement
would work best if substantive rules are clear and well defined.
The interdependence between substantive norms and private
enforcement also means that private litigation is not uniformly
desirable across all areas of antitrust law. Many participants
opined that private enforcement was most effective in areas with
clear standards of liability and a general consensus on what
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constitutes unlawful conduct.
OECD principles
(4) Competition policy and competition law enforcement, including
private enforcement, should be viewed as an integrated policy
system in which a number of factors contribute to the goals of
deterrence and compensation.
Several speakers highlighted during the discussion that the
effectiveness of private litigation instrengthening the goals of
deterrence and compensation depended on a number of factors
which formed an "organic" competition policy system. In
particular Professor Gavil noted that substantive competition
rules, evidentiary rules, and procedural rules, including rules
for the compensation of attorneys, would work together as parts
of a broader mix to create deterrence and ensure compensation.
He emphasized that these factors were interdependent; and
changing one without taking account of the others would 34
be
difficult and could be ineffective.
OECD principles
(5) As private antitrust litigation increases, competition authorities no
longer have a monopoly over the development of competition law and
economics, and the setting of enforcement priorities. Courts can
contribute to the development of better substantive rules; but there is
also a risk that the outcomes of private cases will deviate from what is
generally accepted as sound competition policy. Institutional
measures can be taken to achieve greater consistency between public
and private enforcement.
The discussion addressed various measures that can contribute to
greater consistency between private and public enforcement and a
more uniform set of policy goals. These include efforts by
competition authorities to develop clear substantive norms;
participation of competition authorities in private litigation as
amicus curiae; and procedural rules that either allowed or obliged
courts to seek the opinion of the competition authority before
35
deciding on an infringement of competition laws.
OECD principles
(6) The growing importance of competition economics across all
jurisdictions increases the role of economic experts in private
litigation, whether they serve as court appointed experts or experts
for the parties. Rules that encourage economic experts retained by
the opposing parties to meet early in the process and identify items on
which they agree can help the court to better manage a trial.
36
OECD principles
(7) As plaintiffs in private actions for damages frequently will have
insufficient evidence to support their claims, rules that facilitate their
access to evidence in the defendant’s possession can be an important
component of a well-functioning private enforcement system.
However, rules allowing for discovery must be carefully designed to
avoid excessive costs and abusive litigation strategies. In addition,
active case management by courts appears critical to limit the risk
that parties abuse the discovery process.
37
OECD principles
(8) As violations of competition laws may harm different groups of
market participants, including direct and indirect customers, a private
enforcement regime must decide which groups should be allowed to
bring actions for damages. Although this issue has received enormous
attention in the public debate and academic literature, no consensus
exists on the most appropriate rules on standing. There is also very
little empirical evidence available that could illuminate the debate.
Some believe that the goal of optimal deterrence can be served most
effectively when only direct purchasers are allowed to sue for
damages or at least are given a preferred role in private enforcement;
others believe that actions by indirect purchasers can be an important
component of an effective enforcement regime and should not be
restricted
38
OECD principles
(9) If an enforcement regime allows indirect purchasers to sue for
damages, rules should be in place to coordinate multiple law suits; in
addition, indirect purchaser suits typically will be meaningful only if
rules exist that make it possible to aggregate a large number of
individual claims.
39
OECD principles
(10) The theory of optimal deterrence suggests that damage awards
in competition cases should reflect the net harm caused to
consumers plus social cost, with a multiplier in the case of
concealed offenses such as cartels to reflect the likelihood that the
offence would be detected. The multiplier could either be a fixed
multiplier, such as treble damage awards in the United States, or
other mechanisms to ensure that damage awards exceed pure
compensation, such as the award of pre-judgment interest or
exemplary damages that can be awarded in the discretion of the
court. Although concerns are frequently raised in the public debate
about “excessive damage awards” in competition cases, there is no
empirical evidence that damage awards, even in combination with
public fines, have reached a level where they would be considered
40
an optimal deterrent.
OECD principles
(11) Class actions, collective actions, or other forms of actions that
allow the aggregation of a large number of small claims for damages
can be an important element in a competition regime that seeks to
effectively deter anticompetitive conduct. They can be a useful form
of deterrence in particular with respect to hard core cartels. Although
to date very few countries outside the United States and Canada have
much experience with class actions/collective actions in competition
cases, many members and observes are interested in developing rules
and incentives to establish them as part of their enforcement regimes.
41
OECD principles
(12) A system that allows actions with an aggregation of claims has
features that are distinct from other forms of private litigation: the
focus shifts from clients to lawyers, from damages to attorney’s fees,
and from litigation to settlements. Specific measures can be
considered to ensure that such a system is successful and effective.
These include, for example, proper incentives for counsel to litigate
on behalf of a large class of plaintiffs as well as a series of measures
to ensure that the interests of the class members are protected, such
as active court supervision, rules against frivolous suits, and
procedures to assure fairness to the class when damage awards are
distributed.
42
OECD principles
(13) As individual damage claims of class members can be small,
other mechanisms to distribute damage awards in class
actions/collective actions may have to be considered. These might in
certain cases include coupon settlements, even though this form of
compensating plaintiffs should not generally be favored in
competition cases. A cy pres approach may be an alternative where
the court decides to give the award to a charitable organization or
some other public interest organization, rather than individual
plaintiffs.
43
OECD principles
(14) Competition authorities can facilitate private actions by making
evidence in their possession available to courts for use in private
litigation. However, any assistance to courts and private plaintiffs
must be carefully weighed against the risk that the sharing of
evidence could interfere with the competition authority’s
investigation. Because of these concerns, some competition
authorities will as a matter of policy resist all attempts by private
plaintiffs to obtain documents from them.
44
OECD principles
(15) Concerns exist in particular about the interaction between
private actions for damages and leniency programs. A number of
policies can be considered to minimize the risk that the threat of
private litigation could undermine incentives to apply for leniency.
This includes, for example, limiting a leniency applicant’s liability in
private actions for damages. But limiting exposure to private
damages, if it is in fact necessary to incentivize leniency applications,
also reduces the deterrent effects of private enforcement. There is no
consensus about how to best resolve this trade-off.
45
The debate in Europe
46
Ms Kroes 2006 Private enforcement as a
complement to public enforcement
« Competition authorities – whether European or national – have
to work within certain constraints. Inevitably, the resources
available are not unlimited. So (…) priorities have to be set as to
how and where to use enforcement powers. Consequently, there
is huge potential for public enforcement to be complemented by
the actions of individuals and business – who will naturally make
their own cases the top and only priority! If we can help citizens
and businesses to enforce their rights – then potential offenders
will be more likely to think twice before breaking EC
competition rules. And that objective – greater compliance with
European competition law – is a key factor in the Green Paper
which the Commission published last December ».
Neelie Kroes The Green Paper on antitrust damages actions: empowering European
47
citizens to enforce their rights Opening speech at the European Parliament workshop
on
damages actions for breach of the EC antitrust rulesBrussels, 6 June 2006
Ms Kroes 2006 Plea for stand alone actions
Secondly, if we are to succeed in creating a competition culture, we
must encourage ‘stand-alone’ actions which do not simply follow-on
from public enforcement activity.
Neelie Kroes, The Green Paper on antitrust damages actions: empowering
European citizens ton enforce their rightsOpening speech at the European Parliament
workshop on damages actions for breach of the EC antitrust rules,Brussels,
48
6 June 2006
W. Wills on the superiority of public
enforcement to private action deterrence
and punishment in follow-on cases
As far as deterrence and punishment are concerned, public
antitrust enforcement is superior to private actions for
damages.
Follow-on actions for damages do have some additional
deterrence effect (…). However, if additional monetary
penalties were indeed required for optimal deterrence, these
could be provided for at less expense and more reliably by
increasing the fines imposed in the public enforcement
proceeding.
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Can fines imposed in public proceedings be
brought to the optimal level for deterrence ?
Werden and Simon (1987) find that the optimal fine for the
average cartel convicted by the Department of Justice from 1975 to
1980 was 111 times higher than the fine actually paid;
Wils (2005) finds that the optimal fine would reach 150% of
affected sales, and within the range of 5.0 to 7.5 times the
overcharge;
Motta (2007) estimates that the minimum level of fine (relative to
market turnover) necessary to deter cartel formation (if the
competitive mark-up is 50% and the demand elasticity is 0.6) is
around 68% per year of the relevant market turnover of the firm.
Combe (2007), under rather conservative assumptions, calculates
the optimal sanction as being 6.6 times higher than the loss50of
consumer surplus, or – for a five-year cartel – 300% of turnover
2008 White paper : separate task approach
If public antitrust enforcement is the superior instrument to
pursue the objectives of clarification and development of the law
and of deterrence and punishment, whereas private actions for
damages are superior for the pursuit of corrective justice through
compensation, then the optimal antitrust enforcement system
would appear to be a system in which public antitrust enforcement
aims at clarification and development of the law and at deterrence
and punishment, while private actions for damages aim at
compensation
Such a separate-tasks approach, under which public antitrust
enforcement and private actions for damages are each assigned the
tasks they are best at, appears to be the approach adopted by the
European Commission in its 2008 White Paper on Damages
actions for breach of the EC antitrust rules.
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Wouter P.J. Wils The Relationship between Public Antitrust Enforcement and Private Actions for Damages World
Competition 32, no. 1 (2009): 3-26.
2008 White Paper: rejection of the deterrent
approach to private litigation
If the European Commission has adopted in its 2008 White Paper the
separate-tasks approach, it has thus rejected a different approach,
which it had put up for discussion in its 2005 Green Paper on
Damages actions for breach of the EC antitrust rules under which
private actions for damages serve the same deterrence objective as
public antitrust enforcement (hereafter: ‘the deterrence approach’).
The deterrence approach is the one taken by US federal antitrust
law, as shown in particular by the provision of treble damages, the
exclusion of the passing-on defence in actions brought by direct
purchasers and the denial of standing to indirect purchasers.
52
Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private
Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
Consequences of the separate approach
(…) The European Commission has thus rejected in its 2008
White Paper on Damages actions for breach of the EC antitrust
rules the American-inspired options of multiple damages,
exclusion of the passing-on defence and denial of standing to
indirect purchasers, which may make sense within a deterrence
approach, but certainly do not if the task of deterrence and
punishment is left to public enforcement and the objective of
private actions for damages is to achieve compensatory justice.
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Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private
Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
Consequences of the separate approach
the European Commission stressed in its 2008 White Paper on
Damages actions for breach of the EC antitrust rules that it only
wanted to propose ‘balanced measures’, that avoid ‘a situation
where unmeritorious litigation is encouraged or facilitated’.
The White Paper indeed commends single compensatory
damages, generally approves of the ‘loser pays’ principle, which
‘plays an important function in filtering out unmeritorious cases’
and advocates a system of disclosure of evidence inter partes
‘based on fact-pleading and strict judicial control of the
plausibility of the claim and the proportionality of the disclosure
request’.
Note does that really eliminate unmeritorious claims ?
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Fee allocating schemes: uncertainties
To quote Avery Katz (2000), : the current state of economic
knowledge does not enable us to reliably predict whether a move
to fuller indemnification would raise or lower the total costs of
litigation, let alone whether it would better align those costs with
any social benefits they might generate. The reason for this
agnostic conclusion is straightforward. Legal costs influence all
aspects of the litigation process, from the decision to file suit to
the choice between settlement and trial to the question whether
to take precautions against a dispute in the first place ... The
combination of all these external effects are too complicated to
be remedied by a simple rule of loser-pays. Instead, indemnity of
legal fees remedies some externalities while failing to address
and even exacerbating others.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust
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damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007 ,
Centre for European Policy Studies (CEPS)
Should competition authorities reward
compensation by offenders ?
« Public antitrust enforcement should in principle focus on the
objectives of clarification and development of the law, and of
deterrence and punishment, whereas the task of ensuring
compensation for the victims of antitrust infringements can
normally be left to private actions for damages. Competition
authorities should thus certainly not facilitate compensation at the
expense of deterrence and punishment.
56
Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private
Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
Should competition authorities reward
compensation by offenders ?
On the other hand, competition authorities should also avoid
condoning inadequate compensation. It may be possible to satisfy
all these concerns by having a policy under which a fine reduction
(of an amount well below the amount of compensation (expected
to be) paid) is granted if the offender has either reached
settlements with injured parties, and/ or has accepted an
independent arbitration system the use of which is optional and
free for damage claimants. Such a policy could help the victims of
the obtain compensation at lower cost, without undermining
deterrence and without using significant public enforcement
resources.
57
Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private
Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
Leniency and private enforcement
It is of course true that the incentives to apply for leniency could be
increased by granting leniency recipients immunity or a reduction in
follow-on liability for damages.
This is however not necessary for the effective functioning of
leniency. If there were a need to enhance the attractiveness of
leniency, this could always be done by increasing the level of fines or
other public penalties from which leniency recipients are granted
immunity or reductions.
In the absence of any necessity in the public interest, it would also be
unjust to deprive, wholly or partially, the victims of antitrust
infringements of their subjective right to claim compensation for the
harm caused to them by antitrust offenders.
58
Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private
Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
Conclusions
It is likely that public competition law enforcement in Europe is
stronger and more stable than public competition law enforcement in
the US. As a result, in Europe there is less necessity to rely on private
litigation to remedy the weaknesses of public enforcement.
But it should be recognized that private litigation necessarily has an
effect on deterrence (irrespective of the fact that compensation may
be the only objective of private litigation).
The alleged superiority of public enforcement over private litigation
for deterrence is based on assumptions concerning the ability of
public enforcers to impose sanctions which will be dissuasive and the
idea that competition authorities are generally better at discovering
and proving antitrust infringements than private parties. The first
assumption is challenged in US literature. There is a debate about the
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second assumption.
Conclusions
The reluctance of competition authorities to reduce the fines of
violators that have compensated their victims reflects a lack of
understanding of the complex relationship between deterrence and
compensation and imposes unnecessary costs on society.
The necessity, perceived by competition authorities, to prevent any
weakening of the effectiveness of leniency programs, even if it
means limiting the possibilities of private enforcement, may be
misguided if there is an effective deterrence effect of private
enforcement.
The argument that courts are better placed to evaluate damages in
competition cases than competition authorities is weak given the
cost of using the legal system, the fact that competition authorities
are used to dealing with microeconomic evidence and the fact that
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they have access to a large set of data concerning markets.
Conclusions
Any attempt to promote private litigation in competition cases in
Europe requires a sustained effort to help courts deal with
economic evidence as often either the decisions of NCAs will not
be binding on NCs or will be nonexistent.
There may be good reasons to allow the passing-on defence and
to give standing to indirect purchasers in Europe; but the cost of
retaining these options may be such as to prevent effective private
litigation, particularly in front of national courts with little
understanding of economic reasoning.
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