a legal blog on market regulation

Collective Actions: loss in complex cases

The big news from last week’s UK announcement on reforming private competition enforcement is that the government plans to introduce opt-out class actions for competition claims.

The proposals incorporate various “safeguards” designed to ensure that the perceived excesses of US class actions do not become a problem here. Some of the safeguards are really no more than statements of the obvious – no-one can be surprised that we will not have US-style triple damages, or that law firms won’t be able to bring a claim without even having a claimant. On the other hand, some safeguards – such as the prohibition on contingency fees – will surely serve to limit the usefulness of UK class actions.

Financing aside, the big unanswered question is how attractive claimants will find such class actions (or “collective actions”, as the government prefers to call them, emphasising the differences with the US). The ideal competition class action would be a cartel between retailers, all imposing the same overcharge on their customers, all of whom are end consumers. Such a cartel would be a claimant lawyer’s dream – all of the consumers could be treated as a class, and the total overcharge could be calculated and distributed between those consumers.

Unfortunately life is often more complex. A good example of the problems of loss in complex cases is the US hydrogen peroxide litigation. The Court of Appeals for the Third Circuit quashed a class certification order because of the difficulty of showing injury on a class-wide basis. The defendants had argued (among other things) that the industry had changed significantly over the period of the cartel, that there was no empirical evidence suggesting that prices charged to individual customers moved in tandem, and that a number of contracts were individually negotiated.

The problems of individualised loss become even more pronounced if the calculation has to take account of indirect purchasers (“IPs”) as well as direct purchasers (“DPs”). In any case brought on behalf of IPs, the court will need to work out how much of the overcharge was passed on from the DP to the IP, and potentially from that IP further down the chain of increasingly remote IPs.

The IP problem has been addressed in a series of US and Canadian decisions. One American academic has analysed all of the US indirect purchaser class certification decisions. In a sobering article, he suggests that the historic success rate for certification has been about 50% (a total of 42 out of 78 decisions allowed certification).

IP class actions face a range of problems which make proving loss on a class-wide basis difficult. To give just a few examples: the cartelised product may be sold through multiple distribution channels; it might be incorporated into other products; different purchasers might have different relationships with the cartelist; the price of the cartelised products (or downstream products) might be subject to negotiation; the cartel might vary geographically or over time; other competitive conditions might also vary over time and space.

It is also worth keeping in mind that in the UK, these problems will not only afflict IP class actions. Assuming that pass-on is a valid defence in the UK to a private competition claim (which it is not in the US), these issues will also arise in the context of DP class actions. If the DPs have passed on the overcharge to IPs then, for the same reasons as arise in the IP context, it is quite possible that some DPs will have passed on more of the overcharge than others. Their common interest in establishing that there was a cartel may be outweighed by the individualised issues relating to loss and pass-on.

An obvious answer to the problem of variation between purchasers might be to certify a class for the purpose of resolving particular issues. A class could potentially be certified in order to establish: (a) whether there was an infringement of the Competition Act; and possibly (b) if so, what was the total amount of the overcharge. Purchasers could then find separate representation for the purposes of arguing between themselves over how the total pot of money should be distributed – what might be called the ‘distribution’ stage.

However, this proposal itself raises a series of complex problems. First, in order to get the idea off the ground you would need to show that the class really does have a common interest at the infringement stage (including on such questions as market identification) and that the total overcharge is capable of calculation without having to delve into details relating to every purchaser.

Secondly, how would the ‘distribution’ actually work? The whole point of adopting this staged approach would be to avoid having to have one massive trial involving every claimant. But could you avoid that at the distribution stage? If the total overcharge pot was fixed, there might be conflicts between DPs over who bought what volume. And there obviously would be conflicts between DPs and every IP beneath it in the supply chain, each arguing over how much loss was passed on to the next person in the chain. Very quickly you might find yourself having a “distribution” trial which raises the exact complexities you were seeking to avoid.

It would be wrong to be unduly pessimistic. These problems would not arise in every case. If they do arise, many of them could be resolved with a little imagination and a strong dose of active case management. They are, however, important cautionary notes. A combination of the proposed safeguards and the problems raised by indirect purchasers (taken together with the pass-on defence) certainly suggest that the government is not about to open the floodgates to class action claims.

[This blog is based on a paper presented by the author at the Jordan’s Junior Competition Lawyer Conference. The issues are discussed in more detail in the paper: see Collective Actions – Loss in Complex Cases.]



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