Presentation on theme: "1 Private and Public Enforcement: Complements or Substitutes ? Frederic Jenny Professor of economics ESSEC Judge, Cour de Cassation 3rd LEAR Conference."— Presentation transcript:
1 Private and Public Enforcement: Complements or Substitutes ? Frederic Jenny Professor of economics ESSEC Judge, Cour de Cassation 3rd LEAR Conference on the Economics of Competition Law What Makes Policy Work ? Rome June
2 I) Deterrence
3 A Simple Economic Model Damage D=f(O (ps) ) Enforcement cost C= C( O (P,S) P) Cost of sanction bpsO (P,S) Supply of offences O= O (P,S) Policy objective: Minimize social cost of violation D=f(O (ps) )+ C( O (P,S) P) +bpsO (P,S) 1st Condition of optimality: P and S must be chosen in such a way that « crime does not pay » (only risk seekers will commit crime) 2 nd Condition of optimality : the marginal cost of enforcement and sanctions must be equal to the marginal revenue
4 Optimal sanctions for antitrust violation For crime “not to pay”, the expected gain from the violation must be equal to zero or negative. In a competitive environment monopoly profits are equal to 0. Assume π(ac)= profits from the anticompetitive practice p= probability of getting caught f= sanction To discourage a risk averse or risk neutral firm from engaging in an anticompetitive activity we must have: p ( π(ac) – f ) + ( 1 – p ) ( π(ac) ) < 0 which gives: p f > π(ac) Or f >π(ac) /p Taking the total reduction in consumer surplus (greater than the extra-profit of the violators) and multiplying it by the inverse of the probability of detection and punishment would lead to an economically efficient sanction.
5 Insights from the model of optimal sanctions 1)The model assumes that competition authorities or judicial authorities do not make mistakes. If there is a possibility of mistakes (particularly false positive) large sanctions may entail substantial costs to society and the optimal amount of sanctions should be reduced. Note: ENRICO LEONARDO CAMILLI : « OPTIMAL AND ACTUAL FINES IN CARTEL CASES: THE EUROPEAN CHALLENGE » “In a environment characterised by asymmetric information, judicial errors, particularly of type II (innocents are convicted) can be socially more harmful with very high fine settings”
6 Insights from the economic model 2) To have a deterrent effect, a system of antitrust law enforcement, needs to be predictable (to allow a calculation of the benefits and costs of the violation). Hence the degree of discretion of competition authorities or courts in sanctioning anticompetitive practices should be limited. Their decisions should be transparent and consistent over time and over analytically similar cases. Note: ENRICO LEONARDO CAMILLI : « OPTIMAL AND ACTUAL FINES IN CARTEL CASES: THE EUROPEAN CHALLENGE » “the transparency of the criteria applied in the determination of the sanction, and their publicity, are fundamental, in order to strengthen the deterrent effect on the rational criminal’s cost-benefit analysis. The surprise-effect is not a valuable good, rather uncertainty leads just to underweight the real amount of the fine at the crucial moment of the cost-benefit analysis about engaging on the cartel or applying for the leniency” Note Damien Geradin and David Henry “The EC fining policy for violations of competition law: An empirical review of the Commission decisional practice and the Community courts’ Judgments”, Paper prepared for the conference Remedies and Sanctions in Competition Policy Economic and Legal Implications of the Tendency to Criminalize Antitrust Enforcement in the EU Member States (February 17-18, 2005) “it is often difficult to understand the logic of the fines imposed by the Commission. Identical factual scenarios will be treated differently, while different factual scenarios will be offered the same treatment ».
7 Insights from the economic model 3) The deterrent effect of an enforcement system depends on several, partly interdependent, variables. Furthermore, economic agents respond to incentives. Therefore any innovation leading to the modification of a variable in an enforcement system is likely to lead to responses by economic agents which will affect other variables. Those interdependences have to be studied carefully. ENRICO LEONARDO CAMILLI : « OPTIMAL AND ACTUAL FINES IN CARTEL CASES: THE EUROPEAN CHALLENGE » “the coherence of the entire sanctioning system is of paramount importance, since all the elements are closely interrelated, and the change of one parameter is likely to have effect on all the setting. For that reason matters like the private damages and the standing to claim them, the international or domestic feature of the infringement, the type and quantity of investigative tool, the availability of criminal sanctions are to be taken into account when the question on the optimal fine is addressed”.
8 Insights from the economic model 4) Decreasing the cost of enforcement ( ceteris paribus) is an important goal (hence the necessity to assess whether leniency programs actually achieve this goal and to eliminate perverse effects that they may have) Evguenia Motchenkova “Effects of leniency programs on cartel stability” We find that in most cases leniency reduces duration of cartel agreements but this result is not unambiguous. In case leniency programs are not too strict and fines are proportional to the accumulated illegal gains from price-fixing the result is as follows. Under strict antitrust enforcement, the possibility to self-report and be exempted from the fine increases the incentives for the firms to stop cartel formation, and, hence, reduces the duration of cartels. However, when penalties and rate of law enforcement are low, introduction of leniency programs may, on the contrary, facilitate collusion.
9 Insights from the optimal sanctions model 5) Optimal sanctions by the competition authorities may not always be feasible for a variety of reasons: - The social cost of errors may be high - When firms cannot pay bankrupcy may entail a social cost - Optimal sanctions may violate the proportionality principle; - High fines are likely to give an added incentive to offenders to avoid detection (an effect which is not factored into the analysis) “According to Werden and Simon (1987), firms would need assets six times higher than annual sales for a firm to pay the optimal fine. As a consequence, they conclude that most price fixers should go to prison. Craycraft, Craycraft and Gallo (1997) analyze the effect of the firm's ability to pay the fine levied and find that all firms in their sample of 262 price-fixing firms between 1955 and 1993 were able to pay the actual fine imposed. However, only 47, or 18% of the sampled firms were able to pay the “optimal” fine. All 262 firms were able to pay the fine actually levied as well as the maximum fine out of cash on hand, defined as cash immediately available, and short-term investments, i.e. treasury bills. Paying the fine out of cash on hand and short-term investments denies stockholders payment of a cash dividend and also affects payment to short term creditors”.
10 Insights from the economic model 6) It is the overall level of sanctions (together with the probability of detection and conviction) which determines the deterrent effect of an enforcement system. It make no difference whether payments are made to the government budget or to consumers. But we must remember that different types of sanctions may entail different costs and that competition authorities have some control over administrative sanctions but not over private suits. Note: In the worldwide Vitamins cartel, the amount of fines and private damages paid in the US was roughly US$ 2 billion vis à vis the 855 million Euros paid to the Commission in the European case, not to mention the imprisonment of nine executives. In the worldwide Graphite electrodes case: even if the estimates of the affected market are similar (more than two billion Euros in the EU, US$ 2 billion in the US ), the EU fine represents only 11% of the affected market, while the US fine represents more than 24%, without taking into account jail sentence for two executives.
11 Summary of the insights from the economic model 1)Administrative fines will often be insufficient to achieve the optimal level of deterrence; therefore criminal sanctions and or civil sanctions are useful complements to admnistrative sanctions 2) Civil sanctions should be coordinated with administrative sanctions to avoid overdeterrence 3) Enforcement should be predictable which raises the question of the economic expertise of courts ( both to establish the violation and to assess the damages to Particular plaintiffs) 4) The protection of the efficiency of the leniency programs cannot be a goal In itself. is the optimality of the global system.
12 II) A plaintiff’s model
13 The role of private enforcers in the EU Private parties are involved in public enforcement by lodging complaints to the Competition authorities. In this case private parties initiate proceedings They can also act as “private enforcers” as well by either invoking EC antitrust prohibitions as a “shield” in private litigation (defensive private enforcement) or as a “sword” by sueing for damages and/or injunctive relief (offensive private enforcement).
14 1)litigation brought by competitors of the defendants alleging that they have been excluded or injured by reason of anticompetitive actions by the defendant or defendants. This type of litigation is often suspect because of the concern that the plaintiffs are seeking to use the antitrust laws to reduce competition, and protect themselves, rather than increase competition in their market. 2)The other main category of private litigation consist of the cases brought by direct purchasers of products or services where producers of these items have violated the antitrust laws. Typically, these law suits involving price fixing and other per se violations of the antitrust laws and often are brought as class actions (cases brought on behalf of all persons similarly affected by the illegal conduct). Towards a Constructive Public-Private Partnership to Enforce Competition Law Spencer Weber Waller* Private litigations
15 Follow-on cases Many of the private treble damage cases follow government cases or investigations and seek to take advantage of guilty pleas or convictions in an earlier criminal case. When a defendant is convicted or found liable in a government antitrust case, it is presumed liable for any subsequent civil cases brought by private plaintiffs A private plaintiff under these circumstances need do little more than prove damages in order to prevail in this scenario. For example, the guilty pleas and convictions in the international vitamins case spawned dozens of private treble damage individual and class action law suits against the same defendants. Towards a Constructive Public-Private Partnership to Enforce Competition Law Spencer Weber Waller*
16 A plaintiff’s model, Assume that the prospective costs for a plaintiff are the opportunity cost of time spent in litigation (OCt) or settlement (OCs), costs of access to courts (AC) and – depending on the fee allocation rule chosen – legal costs for litigation (LCt) and settlement (LCs). Expected rewards are the damages claimed (D), times the probability of winning at trial (w), and the expected settlement amount (S), times the probability to settle the claim before trial (1 – p).303 The plaintiff will then sue whenever (1) p[wD – (OCt + LCt + AC)] + (1 – p)[S – (OCs + LCs)] > 0 where OCs < OCt; LCs < LCt; and S < D. In other words, the plaintiff‘s net expected reward from filing suit has two main components: the reward from settlement and the reward from trial. The relative weight of these two components, of course, depends on the (perceived) likelihood of settlement and trial. Prof. Andrea Renda, Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007, Centre for European Policy Studies (CEPS)
17 Insights from the plaintiff’s model 1)Multiple damages increase the incentive to sue 2)A reversal of the burden of proof in favour of the plaintiff increases the incentives to sue, alongside with w. 3) A one-way fee-shifting rule increases incentives to sue, as it removes LCt and AC from the equation. 4) All the rules that increase the probability of victory for the plaintiff (w) or increase the prospective cost of the defendant, in turn, have the effect of increasing the probability that the case will settle (1 – p), and also the settlement amount (S). 5) All means of funding private litigation increase the probability that the plaintiff will sue, of course, as they would reduce or eliminate LCt and AC. Prof. Andrea Renda, Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007, Centre for European Policy Studies (CEPS)
18 Qualifications:Do private enforcers have better information than public enforcers? A possible advantage of private litigation ( over public litigation) is that the cost of detecting possible violations and gathering initial evidence are lower (private enforcers are better informed about their particular industry) as Shavell (1984), Brodley (1996), R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon (2008) have suggested. But is this advantage important in a world in which we have effective leniency programs and in which private litgants can refer cases to competition authorities ?
19 Qualifications: do plaintiffs accurately predict the result of litigation ? The plaintiff‘s decision to sue depends on her subjective perception of p, w and S. With imperfect information, the following cases may arise: 1) The plaintiff overestimates the probability of winning at trial (w). For example, if the plaintiff incorrectly interprets the defendant‘s conduct, she may expect the judge to award damages; however, especially in cases where a rule of reason applies, the judge may find redeeming efficiencies and decide in favour of the defendant; 2) The plaintiff mistakenly estimates the probability of settling the case (1 - p). This can occur, for example, whenever the plaintiff expects the defendant to agree on the likelihood of plaintiff victory; whereas in reality, the defendant expects a different outcome – i.e., the parties are both optimistic on the trial outcome.
20 Qualifications: are courts accurate ? Adding private enforcement to public enforcement is always socially beneficial if the court is sufficiently accurate. (…) In this case, firms never strategically abuse the laws, only suing when their competitors have committed an antitrust infraction, so that private enforcement only serves to counter antitrust harm. But if the court is less accurate, adding private enforcement is beneficial only if the government’s litigation costs, which depend on its efficiency, are sufficiently high. In this case, firms always sue when their rivals take efficient actions, preferring to take a chance with the courts than suffer a certain loss in market share. Society benefits from private suits only if the government is sufficiently inefficient in litigation and the legitimate private suits outweigh the strategic suits. Private v. Public Antitrust Enforcement: A Strategic Analysis R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon January 12, 2008
21 Can plaintiffs use litigation strategically ? In reality, potential private enforcers may have incentive to behave strategically. This danger is particularly high in the antitrust field because the plaintiffs are often competitors or takeover targets of defendants. They may have an incentive to employ private enforcement strategically, that is, to sue even if they know that their competitors did not violate the antitrust laws. Private v. Public Antitrust Enforcement: A Strategic Analysis R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon January 12, 2008
22 Can private enforcement be used strategically by private plaintiffs ? Firms may use the antitrust laws -to prevent large potential competitors from entering their market, as in the classic case of Utah Pie Co. v. Continental Baking (386 U.S. 685, 1967, U.S. Court of Appeals, 1978). -to prevent their rivals from competing vigorously, - to extort funds from successful rivals, -To improve contractual conditions, -To enforce tacit collusive agreements, -To respond to existing suits, and -To prevent hostile takeovers. R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon, Private v. Public Antitrust Enforcement: A Strategic Analysis, January 12, 2008
23 Strategic use of civil enforcement if private enforcement fosters strategic abuse of antitrust laws, this can lead to increased Type I errors (false convictions), and thus to inadequate investment, unmeritorious (strategic) suits and unmeritorious settlements. This has led authoritative commentators to argue that private enforcement is inferior to (effective) public enforcement and should not be encouraged in Europe. Prof. Andrea Renda, Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007, Centre for European Policy Studies (CEPS)
24 What will determine the level of private litigation? What is the socially optimal level of litigation given its expense, and how does it compare to the privately determined level of litigation? The former and the latter levels of legal activity generally differ, and the reasons involve two fundamental types of externality. The first is a negative externality: When a party spends on litigation, he does not take into account the litigation costs that he induces others to incur. The second is a positive externality: When a party engages in litigation, he does not take into account the effect that this has on incentives to reduce harm. In consequence, the privately determined level of litigation can depart from the socially optimal level—in either direction—and corrective social policy may help to remedy the divergence. STEVEN SHAVELL The Level of Litigation: Private Versus Social Optimality of Suit and of Settlement International Review of Law and Economics 19:99 –115, 1999
25 The cost of using the legal system The fact that the private and the social incentives to use the legal system are divergent—is likely to be of substantial empirical significance. A reason for believing this is that the costs of the legal system are large: The sum of litigation and the related costs of providing a dollar to a victim through the legal system appear to be on the order of a full dollar. Given its roughly 100% transaction costs, the deterrence benefits of the legal system must be considerable to justify its use. One suspects, however, that deterrence is sometimes not sufficient to make the transaction costs of the legal system socially advantageous to bear. STEVEN SHAVELL The Level of Litigation: Private Versus Social Optimality of Suit and of Settlement International Review of Law and Economics 19:99 –115, 1999
26 Can private enforcement displace public enforcement ? We find that the combination of private and public enforcement tends to lead to a greater probability of private than public action, as is observed empirically. In most cases, firms have sufficient incentive to sue if they learn that their rivals have actually violated the antitrust laws. Knowing this, the government has little reason to sue, since it can expect that most of the rightful suits are already being initiated privately. Thus, public enforcement tends to give way to private enforcement when the two are in play. This is consistent with the observation that private antitrust suits have outnumbered public suits in the U.S. by a 9-to-1 ratio from 1970 to Private v. Public Antitrust Enforcement: A Strategic Analysis R. Preston McAfee, Hugo M. Mialon, and Sue H. Mialon January 12, 2008
27 Private enforcement as a useful complement to public enforcement Numerous important private cases in the US where the government believed that it would not be successful or that the case otherwise was not worth bringing. These include challenging: -a boycott of the US insurance market organized by British firms (Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) -a separate price fixing conspiracy in the food additive industry from the group of cases brought by the government (In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651 (7th Cir. 2002), cert. denied, 537 U.S (2003)(subsequently settled for $525 million). -the structure and operation of the United States credit card market.(In re Visa Check/Master Card Antitrust Litig., 280 F.3d 124 (2d Cir. 2001), cert. denied, 536 U.S. 917 (2002). Spencer Weber Waller Towards a Constructive Public-Private Partnership to Enforce Competition Law
28 Private enforcement as a complement to public enforcement Private rights of action also provide a safety net ensuring the viability of theories endorsed by the legislature and the courts that the government disfavors at a particular time. Currently, the federal government rarely, if ever, enforces the prohibitions against resale price maintenance, tying, price discrimination, and brings few if any monopolization or attempted monopolization cases. The enforcement of these aspects of the antitrust laws thus falls almost entirely to private parties and the law would be in effect repealed by inactivity if left to the agencies. For example, during the 1980s, the agencies brought so few merger cases that enforcement of the law was kept alive by private parties and the state attorneys generals bringing these cases in the federal courts. Spencer Weber Waller Towards a Constructive Public-Private Partnership to Enforce Competition Law
29 Summary of the discussion on the plaintiff’s model -Private litigation has a compensatory function and a deterrent effect - The social benefit of private litigation depends crucially on whether the courts are sufficiently accurate ( which limits the possibility of strategic litigation) -Even without strategic behaviour on the part of litgants, private litigation can lead to overenforcemnt or under enforcement depending on a large number of variables (procedural arrengements) because private incentives are not aligned on the social benefits - Private litigation can be useful complement of weak or very costly public enforcement -Private litigation is a (very) costly process. To achieve deterrence, there are usually less costly alternatives
30 The OECD Competition Committee discussion of private litigation
31 OECD principles (1)Private antitrust enforcement can substantially improve the functioning of a competition regime. But more private enforcement is not always beneficial. Getting the "dosage" right must be a key, objective of reforms, in order to ensure that private antitrust enforcement will encourage greater compliance with antitrust norms while avoiding litigation that is wasteful and could discourage socially beneficial conduct. (….) virtually all participants also agreed that private enforcement can have risks and impose unnecessary costs on society, in particular when poorly designed substantive rules and/or inadequate procedural rules result in excessive litigation and discourage pro-competitive conduct.
32 OECD principles (2) It is a widely held view that private antitrust enforcement, like public enforcement, should in the first place aim to increase deterrence and compliance with competition laws. Many concurred that rules concerning private litigation should in the first place be designed to increase deterrence and better compliance with competition rules. Accordingly, public and private antitrust enforcement should be viewed as complements that serve the same goal of deterring anticompetitive conduct that harms consumer welfare; The concept of "optimal deterrence" suggested that each country should seek a mix of private and public enforcement that minimizes the costs of under-deterrence and overdeterrence. Another view holds, however, that optimal deterrence should be a concern primarily for public enforcement.
33 OECD principles (3) Substantive competition law rules and procedural rules are interdependent. When creating procedures to encourage more private enforcement, the relationship between enforcement rules and substantive norms should be carefully considered. Encouraging more private enforcement would have overall benefits only when substantive rules were sound. Along the same lines, many participants recognized that private enforcement would work best if substantive rules are clear and well defined. The interdependence between substantive norms and private enforcement also means that private litigation is not uniformly desirable across all areas of antitrust law. Many participants opined that private enforcement was most effective in areas with clear standards of liability and a general consensus on what constitutes unlawful conduct.
34 OECD principles (4) Competition policy and competition law enforcement, including private enforcement, should be viewed as an integrated policy system in which a number of factors contribute to the goals of deterrence and compensation. Several speakers highlighted during the discussion that the effectiveness of private litigation instrengthening the goals of deterrence and compensation depended on a number of factors which formed an "organic" competition policy system. In particular Professor Gavil noted that substantive competition rules, evidentiary rules, and procedural rules, including rules for the compensation of attorneys, would work together as parts of a broader mix to create deterrence and ensure compensation. He emphasized that these factors were interdependent; and changing one without taking account of the others would be difficult and could be ineffective.
35 OECD principles (5) As private antitrust litigation increases, competition authorities no longer have a monopoly over the development of competition law and economics, and the setting of enforcement priorities. Courts can contribute to the development of better substantive rules; but there is also a risk that the outcomes of private cases will deviate from what is generally accepted as sound competition policy. Institutional measures can be taken to achieve greater consistency between public and private enforcement. The discussion addressed various measures that can contribute to greater consistency between private and public enforcement and a more uniform set of policy goals. These include efforts by competition authorities to develop clear substantive norms; participation of competition authorities in private litigation as amicus curiae; and procedural rules that either allowed or obliged courts to seek the opinion of the competition authority before deciding on an infringement of competition laws.
36 OECD principles (6) The growing importance of competition economics across all jurisdictions increases the role of economic experts in private litigation, whether they serve as court appointed experts or experts for the parties. Rules that encourage economic experts retained by the opposing parties to meet early in the process and identify items on which they agree can help the court to better manage a trial.
37 OECD principles (7) As plaintiffs in private actions for damages frequently will have insufficient evidence to support their claims, rules that facilitate their access to evidence in the defendant’s possession can be an important component of a well-functioning private enforcement system. However, rules allowing for discovery must be carefully designed to avoid excessive costs and abusive litigation strategies. In addition, active case management by courts appears critical to limit the risk that parties abuse the discovery process.
38 OECD principles (8) As violations of competition laws may harm different groups of market participants, including direct and indirect customers, a private enforcement regime must decide which groups should be allowed to bring actions for damages. Although this issue has received enormous attention in the public debate and academic literature, no consensus exists on the most appropriate rules on standing. There is also very little empirical evidence available that could illuminate the debate. Some believe that the goal of optimal deterrence can be served most effectively when only direct purchasers are allowed to sue for damages or at least are given a preferred role in private enforcement; others believe that actions by indirect purchasers can be an important component of an effective enforcement regime and should not be restricted
39 OECD principles (9) If an enforcement regime allows indirect purchasers to sue for damages, rules should be in place to coordinate multiple law suits; in addition, indirect purchaser suits typically will be meaningful only if rules exist that make it possible to aggregate a large number of individual claims.
40 OECD principles (10) The theory of optimal deterrence suggests that damage awards in competition cases should reflect the net harm caused to consumers plus social cost, with a multiplier in the case of concealed offenses such as cartels to reflect the likelihood that the offence would be detected. The multiplier could either be a fixed multiplier, such as treble damage awards in the United States, or other mechanisms to ensure that damage awards exceed pure compensation, such as the award of pre-judgment interest or exemplary damages that can be awarded in the discretion of the court. Although concerns are frequently raised in the public debate about “excessive damage awards” in competition cases, there is no empirical evidence that damage awards, even in combination with public fines, have reached a level where they would be considered an optimal deterrent.
41 OECD principles (11) Class actions, collective actions, or other forms of actions that allow the aggregation of a large number of small claims for damages can be an important element in a competition regime that seeks to effectively deter anticompetitive conduct. They can be a useful form of deterrence in particular with respect to hard core cartels. Although to date very few countries outside the United States and Canada have much experience with class actions/collective actions in competition cases, many members and observes are interested in developing rules and incentives to establish them as part of their enforcement regimes.
42 OECD principles (12) A system that allows actions with an aggregation of claims has features that are distinct from other forms of private litigation: the focus shifts from clients to lawyers, from damages to attorney’s fees, and from litigation to settlements. Specific measures can be considered to ensure that such a system is successful and effective. These include, for example, proper incentives for counsel to litigate on behalf of a large class of plaintiffs as well as a series of measures to ensure that the interests of the class members are protected, such as active court supervision, rules against frivolous suits, and procedures to assure fairness to the class when damage awards are distributed.
43 OECD principles (13) As individual damage claims of class members can be small, other mechanisms to distribute damage awards in class actions/collective actions may have to be considered. These might in certain cases include coupon settlements, even though this form of compensating plaintiffs should not generally be favored in competition cases. A cy pres approach may be an alternative where the court decides to give the award to a charitable organization or some other public interest organization, rather than individual plaintiffs.
44 OECD principles (14) Competition authorities can facilitate private actions by making evidence in their possession available to courts for use in private litigation. However, any assistance to courts and private plaintiffs must be carefully weighed against the risk that the sharing of evidence could interfere with the competition authority’s investigation. Because of these concerns, some competition authorities will as a matter of policy resist all attempts by private plaintiffs to obtain documents from them.
45 OECD principles (15) Concerns exist in particular about the interaction between private actions for damages and leniency programs. A number of policies can be considered to minimize the risk that the threat of private litigation could undermine incentives to apply for leniency. This includes, for example, limiting a leniency applicant’s liability in private actions for damages. But limiting exposure to private damages, if it is in fact necessary to incentivize leniency applications, also reduces the deterrent effects of private enforcement. There is no consensus about how to best resolve this trade-off.
46 The debate in Europe
47 Ms Kroes 2006 Private enforcement as a complement to public enforcement « Competition authorities – whether European or national – have to work within certain constraints. Inevitably, the resources available are not unlimited. So (…) priorities have to be set as to how and where to use enforcement powers. Consequently, there is huge potential for public enforcement to be complemented by the actions of individuals and business – who will naturally make their own cases the top and only priority! If we can help citizens and businesses to enforce their rights – then potential offenders will be more likely to think twice before breaking EC competition rules. And that objective – greater compliance with European competition law – is a key factor in the Green Paper which the Commission published last December ». Neelie Kroes The Green Paper on antitrust damages actions: empowering European citizens to enforce their rights Opening speech at the European Parliament workshop on damages actions for breach of the EC antitrust rulesBrussels, 6 June 2006
48 Ms Kroes 2006 Plea for stand alone actions Secondly, if we are to succeed in creating a competition culture, we must encourage ‘stand-alone’ actions which do not simply follow-on from public enforcement activity. Neelie Kroes, The Green Paper on antitrust damages actions: empowering European citizens ton enforce their rightsOpening speech at the European Parliament workshop on damages actions for breach of the EC antitrust rules,Brussels, 6 June 2006
49 As far as deterrence and punishment are concerned, public antitrust enforcement is superior to private actions for damages. Follow-on actions for damages do have some additional deterrence effect (…). However, if additional monetary penalties were indeed required for optimal deterrence, these could be provided for at less expense and more reliably by increasing the fines imposed in the public enforcement proceeding. W. Wills on the superiority of public enforcement to private action deterrence and punishment in follow-on cases
50 Can fines imposed in public proceedings be brought to the optimal level for deterrence ? Werden and Simon (1987) find that the optimal fine for the average cartel convicted by the Department of Justice from 1975 to 1980 was 111 times higher than the fine actually paid; Wils (2005) finds that the optimal fine would reach 150% of affected sales, and within the range of 5.0 to 7.5 times the overcharge; Motta (2007) estimates that the minimum level of fine (relative to market turnover) necessary to deter cartel formation (if the competitive mark-up is 50% and the demand elasticity is 0.6) is around 68% per year of the relevant market turnover of the firm. Combe (2007), under rather conservative assumptions, calculates the optimal sanction as being 6.6 times higher than the loss of consumer surplus, or – for a five-year cartel – 300% of turnover
White paper : separate task approach If public antitrust enforcement is the superior instrument to pursue the objectives of clarification and development of the law and of deterrence and punishment, whereas private actions for damages are superior for the pursuit of corrective justice through compensation, then the optimal antitrust enforcement system would appear to be a system in which public antitrust enforcement aims at clarification and development of the law and at deterrence and punishment, while private actions for damages aim at compensation Such a separate-tasks approach, under which public antitrust enforcement and private actions for damages are each assigned the tasks they are best at, appears to be the approach adopted by the European Commission in its 2008 White Paper on Damages actions for breach of the EC antitrust rules. Wouter P.J. Wils The Relationship between Public Antitrust Enforcement and Private Actions for Damages World Competition 32, no. 1 (2009): 3-26.
White Paper: rejection of the deterrent approach to private litigation If the European Commission has adopted in its 2008 White Paper the separate-tasks approach, it has thus rejected a different approach, which it had put up for discussion in its 2005 Green Paper on Damages actions for breach of the EC antitrust rules under which private actions for damages serve the same deterrence objective as public antitrust enforcement (hereafter: ‘the deterrence approach’). The deterrence approach is the one taken by US federal antitrust law, as shown in particular by the provision of treble damages, the exclusion of the passing-on defence in actions brought by direct purchasers and the denial of standing to indirect purchasers. Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
53 Consequences of the separate approach (…) The European Commission has thus rejected in its 2008 White Paper on Damages actions for breach of the EC antitrust rules the American-inspired options of multiple damages, exclusion of the passing-on defence and denial of standing to indirect purchasers, which may make sense within a deterrence approach, but certainly do not if the task of deterrence and punishment is left to public enforcement and the objective of private actions for damages is to achieve compensatory justice. Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
54 Consequences of the separate approach the European Commission stressed in its 2008 White Paper on Damages actions for breach of the EC antitrust rules that it only wanted to propose ‘balanced measures’, that avoid ‘a situation where unmeritorious litigation is encouraged or facilitated’. The White Paper indeed commends single compensatory damages, generally approves of the ‘loser pays’ principle, which ‘plays an important function in filtering out unmeritorious cases’ and advocates a system of disclosure of evidence inter partes ‘based on fact-pleading and strict judicial control of the plausibility of the claim and the proportionality of the disclosure request’. Note does that really eliminate unmeritorious claims ?
55 Fee allocating schemes: uncertainties To quote Avery Katz (2000), : the current state of economic knowledge does not enable us to reliably predict whether a move to fuller indemnification would raise or lower the total costs of litigation, let alone whether it would better align those costs with any social benefits they might generate. The reason for this agnostic conclusion is straightforward. Legal costs influence all aspects of the litigation process, from the decision to file suit to the choice between settlement and trial to the question whether to take precautions against a dispute in the first place... The combination of all these external effects are too complicated to be remedied by a simple rule of loser-pays. Instead, indemnity of legal fees remedies some externalities while failing to address and even exacerbating others. Prof. Andrea Renda, Prof. John Peysner Prof. Dr. Alan J. Riley Prof. Barry J. Rodger « Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios » 21 December 2007, Centre for European Policy Studies (CEPS)
56 Should competition authorities reward compensation by offenders ? « Public antitrust enforcement should in principle focus on the objectives of clarification and development of the law, and of deterrence and punishment, whereas the task of ensuring compensation for the victims of antitrust infringements can normally be left to private actions for damages. Competition authorities should thus certainly not facilitate compensation at the expense of deterrence and punishment. Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
57 Should competition authorities reward compensation by offenders ? On the other hand, competition authorities should also avoid condoning inadequate compensation. It may be possible to satisfy all these concerns by having a policy under which a fine reduction (of an amount well below the amount of compensation (expected to be) paid) is granted if the offender has either reached settlements with injured parties, and/ or has accepted an independent arbitration system the use of which is optional and free for damage claimants. Such a policy could help the victims of the obtain compensation at lower cost, without undermining deterrence and without using significant public enforcement resources. Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
58 Leniency and private enforcement It is of course true that the incentives to apply for leniency could be increased by granting leniency recipients immunity or a reduction in follow-on liability for damages. This is however not necessary for the effective functioning of leniency. If there were a need to enhance the attractiveness of leniency, this could always be done by increasing the level of fines or other public penalties from which leniency recipients are granted immunity or reductions. In the absence of any necessity in the public interest, it would also be unjust to deprive, wholly or partially, the victims of antitrust infringements of their subjective right to claim compensation for the harm caused to them by antitrust offenders. Wouter P.J. Wils, The Relationship between Public Antitrust Enforcement and Private Actions for Damages, World Competition 32, no. 1 (2009): 3-26.
59 Conclusions It is likely that public competition law enforcement in Europe is stronger and more stable than public competition law enforcement in the US. As a result, in Europe there is less necessity to rely on private litigation to remedy the weaknesses of public enforcement. But it should be recognized that private litigation necessarily has an effect on deterrence (irrespective of the fact that compensation may be the only objective of private litigation). The alleged superiority of public enforcement over private litigation for deterrence is based on assumptions concerning the ability of public enforcers to impose sanctions which will be dissuasive and the idea that competition authorities are generally better at discovering and proving antitrust infringements than private parties. The first assumption is challenged in US literature. There is a debate about the second assumption.
60 Conclusions The reluctance of competition authorities to reduce the fines of violators that have compensated their victims reflects a lack of understanding of the complex relationship between deterrence and compensation and imposes unnecessary costs on society. The necessity, perceived by competition authorities, to prevent any weakening of the effectiveness of leniency programs, even if it means limiting the possibilities of private enforcement, may be misguided if there is an effective deterrence effect of private enforcement. The argument that courts are better placed to evaluate damages in competition cases than competition authorities is weak given the cost of using the legal system, the fact that competition authorities are used to dealing with microeconomic evidence and the fact that they have access to a large set of data concerning markets.
61 Conclusions Any attempt to promote private litigation in competition cases in Europe requires a sustained effort to help courts deal with economic evidence as often either the decisions of NCAs will not be binding on NCs or will be nonexistent. There may be good reasons to allow the passing-on defence and to give standing to indirect purchasers in Europe; but the cost of retaining these options may be such as to prevent effective private litigation, particularly in front of national courts with little understanding of economic reasoning.