The UK Supreme Court has today provided important legal guidance (PDF) on the issue of the 'passing-on' of any damages in antitrust litigation. This guidance is likely to be relevant to all companies that are facing, or could in future face, damages claims in the UK arising out of actual or alleged infringements of UK or EU competition law.
The issue of 'pass-on' is ubiquitous in competition damages claims in Europe. It involves seeking to identify the level of the supply chain at which any losses for breach of competition law have ultimately been suffered, and therefore who can seek to obtain compensatory damages. Pass-on can be used as a ‘shield’ by a defendant arguing that a claimant passed any overcharge on to its own customers, or as a ‘sword’ by an indirect purchaser claimant arguing that any overcharge was passed on to it by a direct purchaser of the product.
The Supreme Court’s judgment primarily addresses the legal and evidential burdens, and the degree of precision required, where pass-on is sought to be used as a ‘shield’ by a defendant. It finds, amongst other things, that a defendant can use the legal concept of the ‘broad axe’ (ie rely on estimates) to quantify the level of pass-on. However, the judgment also provides some insights into the position where pass-on is sought to be used as a ‘sword’ by a claimant in indirect claims. Each of those points is addressed in turn below.
Pass-on as a ‘shield’ – direct purchaser claims
The Supreme Court has confirmed the decision of the lower courts that, where pass-on is sought to be used as a ‘shield’ by a defendant, the legal burden is on the defendant to establish whether an unlawful overcharge has been passed-on by the claimant and thereby mitigated its losses.
However, the Supreme Court has identified a number of factors that reduce the practical impact of the legal burden being placed on the defendant, such that 'the significance of the legal burden should not be overstated'. In particular, the Supreme Court has found that:
- Once a defendant has raised the issue of mitigation in the form of pass-on, there is a 'heavy evidential burden' on the claimant to provide evidence as to how it has dealt with the recovery of its costs in its business. That is because the relevant information about what a claimant actually has done to cover its costs will be exclusively in the hands of the claimant itself. The claimant must therefore produce that evidence in order to prevent adverse inferences being taken against it by the court seeking (as it must) to apply the compensatory principle in assessing damages.
- In order to satisfy the legal burden, and with the benefit of the heavy evidential burden on the claimant, a defendant is able to rely on the so-called ‘broad axe’ to quantify the level of pass-on. The ‘broad axe’ means that the Court has the power to estimate the effects of passing on, without requiring unreasonable precision in the proof of the amount of loss which the merchants have passed on to suppliers and customers. In effect, this overturns for the purpose of other cases the finding in the judgment of the Court of Appeal in the Sainsbury’s case (at paragraph 331) that only a claimant can use the broad axe to quantify its losses, although the determination of that issue in that particular case was no longer live in this appeal.
The Supreme Court’s judgment will therefore reduce – potentially significantly – the practical difficulty faced by defendants who seek to use pass-on as a ‘shield’ in competition damages claims in the UK.
Pass-on as a ‘sword’ – indirect purchaser claims
The Supreme Court judgment does not address or affect the settled position under English law that, where pass-on is used as a ‘sword’ by an indirect purchaser claimant: (i) the legal burden is on the claimant to establish its losses, including that any overcharge has been passed-on to it*; and (ii) a claimant can use the so-called 'broad axe' to quantify the level of pass-on. Instead, today’s judgment focuses on the direct purchaser claims that were before the Supreme Court in that case.
As noted above, however, the Supreme Court judgment confirms that relevant evidence about whether and the extent to which any overcharge has been passed on to an indirect purchaser claimant will (exclusively) be in the hands of the relevant direct purchaser. This means that in an indirect purchaser claim, the burden will be on the claimant to obtain evidence capable of satisfying the legal burden placed upon it, if need be by way of third party disclosure from the direct purchaser(s). Although questions of adverse inferences may not arise in those circumstances (ie where the claimant itself does not hold the relevant evidence), the Supreme Court’s judgment reinforces and clarifies the challenges that such claimants face, consistent with them bearing the burden of proof, in obtaining sufficient evidence to satisfy that legal burden, even applying the so-called ‘broad axe’.
Similar issues are currently being considered separately by the Supreme Court in relation to a proposed class action by Walter Merricks CBE. That action seeks to combine the indirect 'interchange fee' claims of approximately 46 million UK end consumers for the period 1992 to 2008, in respect of their purchases from up to 800,000 upstream merchants during that time. A key issue being considered by the Supreme Court, at the certification stage of those proceedings, is whether the Competition Appeal Tribunal was legally entitled to conclude that it was not satisfied that sufficient evidence would be available from those merchants (and other sources) for Mr Merricks to be able to establish and quantify merchant pass-on at trial, even applying the so-called ‘broad axe’, and therefore that the claims were not suitable to proceed collectively. The Supreme Court’s highly anticipated judgment in that appeal, which was heard in May 2020, is expected later this year.
Compensatory principle re-affirmed
In making the findings outlined above, the Supreme Court has emphatically re-affirmed the basic principle that damages to be awarded for loss caused by tort – including tort claims for breach of statutory duty in respect of competition law – are compensatory.
Having provided that welcome re-affirmation, the Supreme Court will, in its forthcoming judgment in Merricks, provide further guidance as to whether the availability of aggregate damages awards (under the class actions regime that was introduced in the UK in 2015) displaces or precludes any reference or consideration being had, at the class certification stage, to whether damages of individual class members would bear any relationship at all to their actual losses.
Such a position would, it is submitted, be a fundamental change to long-established principles of English law to have been implemented without any express indication of an intention to do so in the relevant policy or legislative materials underpinning the class actions regime that was introduced in 2015 (and, indeed, would be contrary to the position of both of the parties before the Competition Appeal Tribunal in the Merricks case). Ultimately, however, the judgment of the Supreme Court on that matter – in light of the re-affirmation of the basic compensatory principle in this judgment and the framing of the issues by the parties before the Tribunal in that case – must be awaited.
Today’s judgment covers a number of other topics in the so-called ‘interchange fee’ litigation. Watch this space for further commentary on other aspects of the Supreme Court’s judgment.
Freshfields acts for Mastercard in the Merricks case referred to in parts of this post.
* Subject to article 14 of the EU damages directive (2014/104/EU), which, under the UK implementing legislation, will apply only to damages claims arising from infringements of competition law that commenced on or after 9 March 2017 (see Competition Act 1998, Schedule 8A, Parts 2 and 10), and are therefore unlikely to apply to claims before the English courts for some time.