23 Jul 2012

(by Morten Hviid) Should there ever be the possibility of awarding exemplary damages in a private follow-on action for breach of competition law? To my mind, the answer to this general question should be “NO”. To be a follow-on claim, there must already have been an infringement decision by a relevant competition authority. Where it finds an infringement, the competition authority is tasked with designing an appropriate punishment aimed at deterring and punishing the anticompetitive conduct. When the follow-on case is commenced, the matter of punishment has already been dealt with and non bis in idem [not twice for the same] should rule out subsequent exemplary damages. It should not be for a court or a Tribunal to run the case again as regards punishment unless this is as a result of an appeal of the original infringement decision. With no differences in the standard of proof, arguments that “the defendant should have been fined” belongs to an appeal of the OFT decision, not in a new action for damages.

On the whole this logic has been followed in the UK, for example in Devenish where Lewison J held (at [48]) that “the imposition of fines and an award of exemplary damages serve the same aim: namely to punish and deter anti-competitive behaviour”. However, based on a logic that, while a zero fine as a result of a leniency programme is still a punishment, immunity from a fine arising from an OFT policy decision is not, the Competition Appeals Tribunal [CAT] in their recent chose to award £60,000 in exemplary damages.

The decision is timely as the Department of Business, Innovation and Skills is currently , creating an opportunity to clarify when exemplary damages should be available. More generally, it gives BIS a chance to consider what sort of damages should be available and when.

Despite having been found to have violated Chapter II of CA98 through predatory behaviour, Cardiff Bus benefitted from immunity under section 40 of CA98. This provides limited immunity from financial penalties for conduct of minor significance in relation to infringements of the Chapter II prohibition. As Cardiff Bus’s turnover did not exceed £50 million it qualified for such immunity, but this is not automatic. The OFT in its decision does not offer any reason for not imposing a financial penalty. The CAT would appear to have taken silence by the OFT to mean “no punishment”, enabling them to award exemplary damages. While the Act is silent on the motivation for enabling the OFT to grant such immunity, OFT guidelines regarding Enforcement (OFT407) provide the context of the enforcer: essentially the policy exists to avoid the prohibition regime being unduly burdensome on small businesses. As a small fine is not obviously very burdensome, did the OFT envisage that a smaller firm might have been punished by other means? In practice, Cardiff Bus received a form of punishment in the form of public opprobrium as its actions were made public through the OFT decision and press release. In fact, CCP research suggests “naming and shaming” is a punishment which is preferred by the public.

In the first paragraph I gave one reason why there should be no access to exemplary damages in a follow-on case. The specific case and the arguments used by the CAT raise several more. Firstly, for compensatory damages, the CAT does not run the case again in terms of finding a violation, but to award exemplary damages, it is required to do so because it must show that the infringement is particularly heinous. One cannot help but wonder whether this is the best use of scarce resources.

Secondly, with hindsight, Cardiff Bus should probably have requested a 1p fine. If it had, the CAT could not have awarded any exemplary damages without going against the decision in Devenish. If the OFT wanted no punishment in accordance with its guidelines, it could have done that itself or at least have provided the argument for the immunity from a fine. Alternatively, Cardiff Bus could have considered an appeal of the OFT decision. Predation cases are notoriously difficult to prove and hence an appeal might well have been successful. But how would Cardiff Bus have justified an expensive appeal to its shareholders when it had been given immunity?

Thirdly, note that the immunity which enabled the CAT to award damages only applies to small firms and to Chapter I (section 39) and Chapter II (section 40) infringements. Whether intentional or not, the CAT essentially introduces multiple damages in follow-on competition cases which involve financially small defendants who trade in (parts of) the UK. It is not immediately obvious that treble damages to incentivise plaintiffs are relatively more appropriate in such cases.

In the OFT press release from their decision on the Cardiff Bus predation case, the final paragraph reads:

“Cardiff Bus benefits from immunity under section 40 of the Act …”

How wrong they were!

Finally, I cannot resist commenting on the substance of the abuse that riled the CAT sufficiently to impose exemplary damages in this specific case. In paragraph 584, the CAT argues that “There is something inherently repugnant in a service being commenced by a dominant undertaking for the sole reason of excluding another.” This assessment certainly does not follow from economics, unless the firm excluded is at least as-efficient as the dominant firm. There is no assessment in the decision about whether 2 Travel Group Plc was as-efficient. In its conclusion in paragraph 594, the CAT argues that there were “serious anti-competitive effects” of Cardiff Bus’s conduct. To show such negative effects on competition, you have to show recoupment – intent is not relevant. It is worth recalling that while we often think of recoupment primarily as a test of the rationality of the defendant’s action and essential to corroborate any claims about predatory behaviour, it is also a necessary condition for aggregate consumer harm. The CAT may have shown that there was harm to a competitor, but it is less clear from the decision that there was harm to competition.

Devenish Nutrition v Sanofi-Aventis SA [2009] 1 Ch 390.

1178/5/7/11 2 Travel Group PLC (in liquidation) v Cardiff City Transport Services Limited. [2012] CAT 19.

A Stephan, ‘Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain’ [2008] 5(1) Comp. Law Review pp 123-145.

Arguably the strategies of Cardiff Bus described in the case would be entirely rational and pro-competitive if the market was contestable. In a contestable market, weaker rivals will be forced out of the market through tough but fair competition. The deregulation of bus services in the middle of the 1980s was based on an assumption that this market in general had the characteristics of a contestable market.