On 01 July 2019, the European Commission adopted Guidelines for national courts on how to estimate the share of overcharge which was passed-on to the indirect purchaser.
On 01 July 2019, the European Commission (the Commission) adopted Guidelines for national courts on how to estimate the share of overcharge which was passed-on to the indirect purchaser (the Guidelines).
The Guidelines complement the EU Practical Guide on Quantifying Harm (SWD(2013) 205), by describing the most relevant legal instruments and economic methods available to national court and parties to estimate the amount of the overcharge that was passed on to indirect customers and final consumers. They are non-binding in nature, though may likely prove to be persuasive in courts across the EU. The Guidelines can be useful both when an infringer invokes passing-on in its defence against a damages claim (ie pass-on as a shield) or when an indirect purchaser claims damages from the infringer alleging passing-on of an overcharge (ie pass-on as a sword).
While the EU Antitrust Damages Directive (Directive 2014/104/EU) better enables citizens and companies to claim compensation for harm suffered as result of an infringement of competition law 1, the quantification of such harm is not always a straight-forward endeavour. This is in part because infringements of competition law are always by reference to a given “market”, and a market rarely functions in isolation but rather interacts with related markets in its supply chain. In other words, the harm may have been suffered by different persons at different levels of the supply chain, resulting not only in several victims, but also with each of these victims having suffered a different level of harm, depending on how much was “passed-on” in the supply chain.
It is therefore important for both national courts and relevant parties to be able to assess whether and to which extent the harm has been passed on down the supply chain.
A failure to do so carries two principal risks: first it would allow for a harmed party to recover more than he/she is owed, at the detriment of those who would be prevented from recovery their full due; and second, in cases where there are parallel proceedings (potentially in different jurisdictions) between different players in the supply chain, it may cause inconsistencies in the determination of the level of pass-on, exposing both infringers and purchasers to large degrees of legal uncertainty.
Unsurprisingly, this assessment is challenging, as national courts have to construct the hypothetical situation in which the claimant would have been had the infringement not taken place. The challenge was clearly foreseen to require further guidance from the Commission, which is made evident by the EU Antitrust Damages Directive which states:
“The Commission should issue clear, simple and comprehensive guidelines for national courts on how to estimate the share of the overcharge passed on to indirect purchasers.” (recital 42); and “The Commission shall issue guidelines for national courts on how to estimate the share of the overcharge which was passed on to the indirect purchaser.” (Article 16)
Seeking to deliver on this requirement, the Commission opened a consultation in July 2018 to collect input from stakeholders on its draft guidelines. The consultation closed in October 2018, and the Guidelines adopted this week complete the process.
Contents of the Passing-on Guidelines
The Guidelines consist of an introduction, 5 sections, and two annexes, for a total of 54 pages.
Section 3 of the Guidelines reiterates the most important factors, according to economic theory, affecting the existence and magnitude of a passing-on effect:
- The nature of input costs subject to an overcharge (52). This affects whether and to what extent this overcharge can be passed on, as if the overcharge impacts the direct purchaser’s fixed costs (ie which do not vary according to the input quantity), it is less likely to be passed on because such costs typically do not affect the direct purchaser’s price setting, at least not in the short run.
- The nature of the product demand that the direct or indirect customers face (53). This affects the level of passing-on and is based on the idea that the demand a firm faces (ie the quantity it sells) decreases when it raises its price, and therefore the extent to which a seller increases his prices (ie trying to pass-on) depends on how his demand reacts to a price change.
- The strength and intensity of competition (54). This also affect the level of passing-on in the markets where the direct or indirect customers are active. If the overcharge affects only one direct purchaser, fiercely competing with other direct purchasers, passing-on is less likely compared to a situation where the only affected direct purchaser faces weak competition. However, if there is an industry-wide overcharge, a large number of fiercely competing direct purchasers will generally favour a higher passing-on of that overcharge compared to a situation where there is weaker competition among these direct purchasers.
- Case-specific factors (56). These include price adjustment costs, proportion of costs affected, buyer power, customer vertical, price regulation or the timing of the pricing decisions undertaken at the various levels of the supply chain.
The main sections of the Guidelines (sections 4-6) focus on the different economic theories and assessment models available to the court for determine the amount of pass-on. These include both price effects and volume effects. However, the Guidelines focus on the passing-on of price increases and the related volume effects, and do not focus on non-pricing effect “such as reduced quality of products or hampered innovation (…) which may arise” (48).
- Section 4 focuses on general aspects of quantifying pass-on. It is remarked that such an analysis may sometimes involves quantifying up to three underlying factors: (1) the overcharge itself (as described above), (2) the pricing effects, and (3) the volume effects. The Guidelines suggest that these factors may be analysed sequentially or simultaneously (69-73). This section also provides examples of relevant types of information and data which a court might be called to look at, both qualitatively (eg internal documents on pricing, strategy, contracts and financial reporting) and quantitative (data on actual prices, costs or margins as well as external indicators which would influence pricing decisions of firms, eg aggregated measures of economic activity (such as GDP growth, inflation and employment rates)) (76-77). Lastly, this section explores the use of expert evidence in assisting courts to assess the level of pass-on and promotes “facilitating a discussion between experts representing the parties involved”, where the national legislation allows for it (81). The Guidelines remind that where expert evidence is inconclusive, or in disagreement, the court may call on the relevant national competition authority for input (under Article 17(3) of the EU Antitrust Damages Directive) (83).
- Section 5 focuses specifically on price-related effect. It proposes that a court may rely on different models to assess price-related effects, though it addresses two in more detail: (A) the comparator-based approach (which looks at the price set by the direct purchaser during the infringement period with the price set in the comparator market, which is usually the non-infringement, or counterfactual, scenario) (90), and (B) the passing-on rate approach (which analyses how previous changes in a firm’s costs have affected its prices before or after the infringement period) (121). The Guidelines clearly prefer the former approach over the latter, noting that the passing-on rate approach “can deliver misleading results in some cases (…) because the court can neither establish if the overcharge is actually passed on nor can it observe whether changes in the cost of the affected input are reflected in prices in the downstream markets” (122). In other words, as the passing-on rate approach relies on the assumption that changes in input costs are reflected in downstream prices, if that assumption is wrong (which cannot be easily verified) then you may end up modelling a price-related effect which has not actually happened.
- Section 6 reviews the methodologies for assessing volume-related effects. The Guidelines are clear that a volume effect must always be taken into account when there is a price-related effect, as failing to do so “can underestimate the true harm” (134). The Guidelines note two relevant factors for volume effects: (i) the change in quantity due to increased prices and (ii) the counterfactual margin (137). The Guidelines again focus on two methods: the comparator-based approach (as explained above) and the elasticity approach (which estimates the volume effect by combining the price increase observed as a result of the passing-on related price effect with an estimate of the price sensitivity of the relevant demand) (146). This time the Guidelines do not suggest that one approach is preferable and point out the limitations in both approaches (145 & 151).
Overall, the Guidelines strike a balanced tone, confirming that “the manner in which a national court would wish to approach the assessment and estimation of passing-on is likely to be influenced by the nature and size of the claim, the merits of the submission and the availability of data” (5). It is moreover recognized that firms do “not always take pricing decisions that are entirely consistent with the predictions on the basis of economic theory” (50), and consequently any insight by economic theory must be balanced by “the factual evidence available in the case at hand” (ibid).
Whilst they do not change existing EU laws, or affect previous decisions, the Guidelines are likely to be a welcome tool to educate both parties and courts on an otherwise obscure and complicated interface between law and economics.
1 An infringement of Article 101 or 102 TFEU, or of national competition law.
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