25 Apr 2012
(by Bruce Lyons) The UK Government yesterday published a . It includes a suggestion that there should be a rebuttable presumption that the cartel has resulted in higher prices. 20% is offered as a possible presumed increase due to the cartel. This is an excellent idea and should be widely supported. The only room for debate should be over the precise presumption to adopt and whether to extend this approach beyond cartels.
Even when a cartel has been successfully prosecuted by the OFT, the current burden of proof is that a customer seeking damages has to prove how much she has been harmed. It is as if the presumption is that the proven cartel did not raise prices. If that were true, it would make you wonder why cartels were illegal in the first place. Of course, it is not true and there is well documented evidence that most cartels raise prices very substantially. Consequently, it is both equitable and efficient to presume that a cartel raises prices.
Why does the burden of proof matter if all you have to do is look at the evidence on prices? There are two problems. First, statistical data needs to be collected, but most of this is in the hands of the cartel. Second, the data must be processed to understand the economic effects of the cartel, and there is more than one way to do this. Taken together, there is plenty of room for obfuscation and it makes it very hard work for the (often numerous) customers to prove a precise level of damages. In other areas of law, judges fully understand the principle that an informational advantage of one party should naturally lead to that party taking on the burden of proof. There is no reason not to adopt it for cartels.
The next issue is that if we are to presume a price rise, we need to have a suitable number to presume. Needless to say, no two cartels have exactly the same price increase, but that is not the point because the presumption is rebuttable if either plaintiff or defendant has the evidence to show otherwise. A casual thinker might claim that this requirement to specify a default number is a fundamental problem with the change in presumption from ‘no harm’. This is not a serious argument because zero is just another number but, unlike twenty, it is one that we know to be at the lower bound rather than somewhere in the middle of the true range. For the same reason, it provides a useful focus for a quick, low-cost, out-of-court agreement if 20% is ‘about right’ for a significant number of cases.
Is 20% the best number to use? Much of the economic evidence points to a somewhat higher average cartel effect, so I would not be averse to a slightly higher figure, but it is a cautious start that might be revised in the light of evolving evidence. As the consultation document notes, it also has the virtue of being the number I suggested when making the case for a rebuttable presumption in on its draft guidance paper on the quantification of damages.
My only serious concern with the BIS proposal is in an important footnote attached to the relevant section (starting #4.40). This states that references to cartels should be taken to refer to any breach of the Chapter 1/Article 101 prohibition on anticompetitive agreements. This goes too far. In the case of cartels, damages in addition to a fine have a positive effect on deterrence. This is because the probability of detection times the size of fine is likely to be less than the payoff to cartel formation. Even in the unlikely event that it is not, there is no competition downside of excessive deterrence of cartels. However, where the main offence is an exclusionary practice, as opposed to exploitation of consumers, there is neither economic evidence to support the 20% figure nor a strong presumption of under-deterrence.
In particular, there is a substantial danger of chilling competition in the context of business practices that may result in foreclosure but in other circumstances may be pro-competitive (e.g. quantity discounts, exclusive dealing). Excessive deterrence is possible if the penalties of a business practice are seen to be large in one case where it is anticompetitive, and consequently other businesses play safe in avoiding the practice in circumstances where it would be pro-competitive. Furthermore, the reward of damages can act as an incentive for a weak competitor to threaten a private action in order to induce a strong competitor to compete less aggressively. This does not mean that there should be no damages actions in foreclosure cases. However, alongside the informational advantages a competitor is likely to have in relation to the relevant calculation of damages (relative to the information available to customers), it does suggest that courts might reasonably place the burden of proof on the plaintiff (i.e. foreclosed firm) in quantifying damages above zero.