29 Nov 2010

(by Sebastian Peyer) Cartels are rightly punished for breaking the law. However, the headline fines, and even criminal penalties, neither compensate buyers nor relate very directly to the economic harm done. Damages claims should be able to address compensation, but they are incredibly difficult to get through the courts for at least two reasons: buyers are often small and dispersed; and immediate buyers can sometimes pass on the costs to downstream buyers known as ‘indirect purchasers’. A recent court decision highlights the need for legislation to get around these problems.

On 18th November 2010 the Court of Appeal handed down judgement in . The Court of Appeal dismissed Emerald’s appeal against the confirming that the direct and indirect purchasers of air freight services represented by Emerald do not have ‘the same interest’. The claimants imported cut flowers and sought damages from BA which had participated in a cartel fixing air freight charges. The issue arose from the fact that the claimants sued both for own damages and on behalf of all other direct and indirect purchasers of air freight services who suffered harm as a consequence of BA’s actions.

In the absence of an explicit regulation of class actions in England and Wales, the claimants sought collective damages under Civil Procedure Rule (CPR) 19.6.This provides that representative actions can be brought if the individuals involved have the same interest. Lord Justice Mummery refused to accept that victims on different levels of the supply chain share the same interest, especially if BA invokes the passing-on defence against direct purchasers at a later stage of the proceedings. The second argument against Emerald’s appeal was that it must be possible to determine whether or not a person is a member of the represented class before the question of liability is tried. This is not possible unless the extent of the passing-on of the cartel overcharge is determined.

If this decision becomes final, it will hamper the bringing of representative actions in English courts for the violation of competition law if victims are on different levels of the supply chain. Although this judgement is most likely to be upsetting for victims of anticompetitive conduct, it was probably right considering the lack of a framework for class actions. Lord Justice Mummery refused to bend the CPR stating that “[t]his appeal is a bold attempt at keeping a procedural novelty alive.” If Emerald had succeeded with its representative action, it would have effectively introduced an uncertified class action. Given the lack of a proper legal framework for class actions, he was probably right. Nevertheless, class or group actions are a valuable tool to address the incentive problem for victims caused by dispersed and small individual losses. Some jurisdictions, most notably the United States, have introduced effective class actions, allowing for an accumulation of those claims. In England and many other European jurisdictions there is lack of tools to aggregate small individual claims that cause big losses to consumers as a group. This has been recognised by the Court of Appeal too. However, this should not give an excuse for overstretching the existing law as Lord Justice Mummery hinted at. It is the task of the legislator to set up rules de lege ferenda that properly govern issues related to representative or class actions. Joaquín Almunia, the head of DG Competition, indicated in that group actions are currently under consideration in Europe and the European Commission is planning to develop common standards for those actions in Europe. Let’s hope it does not take too long.

The European Commission fined 11 air cargo carriers for their participation in the cartel earlier this month confirming price fixing allegations.