This case, available here, is the first cartel damages claim to reach final judgment in the English courts.
This was a follow-on claim from the European Commission’s Power Cables cartel infringement decision (the “cartel”). The cartel operated globally between 1999 and 2009 in the market for (extra) high voltage submarine and underground power cable projects.
The Claimant – “BritNed” – is jointly owned by the operators of the UK and Dutch electricity systems, and operates a 1,000-megawatt (“MW”) capacity electricity submarine cable system connecting the Dutch and UK electricity grids, constructed in 2009-2010. The defendant, cartelist ABB, supplied the cable element of the electricity submarine cable system connecting the Dutch and UK electricity grids, and bid for the other significant element of the system, a converter. The claim was for: (i) an overcharge in the cable element of the submarine cable system; (ii) lost profits derived from the overcharge having led BritNed not to buy a higher-capacity cable, which would have generated additional revenues; and (iii) compound interest.
The decision begins by assessing the relationship between infringement and quantification of damages.
On the one hand, there are past facts. Under English law, these must be established on the balance of probabilities, and the court adopts an “all-or-nothing” approach towards them (i.e. ‘Anything that is more probable than not [the court] treats as certain’). In the context of a claim for cartel damages, what the claimant must show, as the “gist” damage, is that the unlawful conduct of the defendant has, on the balance of probabilities, led to the claimant suffering loss as a result of the prevention, restriction or distortion of competition created by the cartel. Such a restriction or reduction of consumer welfare might take the form of an increased price payable, but, equally, it might take the form of a reduction in the number of suppliers properly participating in a tender process.
In addition to establishing causation between infringement and loss, the court must also deal with the hypothetical measure of loss. This is a matter of quantification that, while related to causation, is nonetheless treated differently. Quantification of loss requires the identification of the amount of damages that will place the claimant in the situation he or she would have been in, had the infringement/ tort not been committed. This involves an assessment of what would have happened in a hypothetical or counter-factual where the tort was not committed, so that the claimant’s damages can be quantified. During this quantification exercise, English law moves away from the balance of probabilities that applies to the existence of an infringement and to the causal link between infringement and loss. Instead, quantification requires the adoption of a pragmatic approach that takes into account of all manner of risks and possibilities.
Relying on the Asda v MasterCard decision I reviewed here (particularly its para. 306), the decision holds that:
(i) the level of certainty and particularity required to prove damages must be reasonable and have regard to the circumstances and to the nature of the acts by which the damage is done;
(ii) The fact that it is not possible for a claimant to prove the exact sum of its loss is not a bar to recovery. In many cases, the assessment of damages will involve an element of estimation and assumption, and compensation will be achieved by “sound imagination” and a “broad brush”.
(iii) Quantification of loss is not a question of mathematical calculation (although mathematical calculations will, no doubt, have their place), but turns on developing a robust understanding of what would have happened in the counterfactual scenario. The broad brush must be used to paint a canvass that is a consistent and rational portrayal of circumstances in which the claimant and the defendant operated, so that the central question (what would have happened, had the tort not been committed) is answered in its context. This is similar to the ‘theories of harm’ that must be articulated by competition bodies.
(iv) The quantification of damages must be grounded in the evidence before the court. In doubt, the court should err on the side of caution, and recognise that it must rely estimates or assumptions which have a certain probability of not holding good.
A related point concerned the identification of the appropriate measure of harm regarding the overcharge – i.e. what is the appropriate counterfactual for the overcharge. The question is whether the measure of harm corresponds to the difference between the price actually agreed and that which would have been agreed between the parties absent the cartel; or between the agreed price and that which the claimant would have agreed with any other potential supplier absent the cartel. Given the evidence and the type of infringement, the court preferred the second option.
A third point concerned whether, in line with the EU Damages Directive, there should be a presumption of harm in this case. At the time when the infringement took place, the EU Damages Directive did not apply. The question before the court was thus whether the EU principle of effectiveness (of the right to compensation for competition loss) requires the court to presume that the claimant suffered harm. The court decided that no such presumption was required. Instead, effectiveness could be ensure by the court taking into account the informational gaps, and the potential asymmetry in information that will exist between a cartel member and an outsider, when estimating damages.
The following section of the judgment assesses the evidence submitted to the court. I do not intend to go over this in detail, but there are some important takeaways from the court’s discussion.
A particularly important point concerns the value of the European Commission’s infringement decision. Such decisions are binding on the parties. However, there is ambiguity regarding the meaning of ‘infringement decision’ in follow on cases. One possible interpretation is that the concept refers to the whole document issued by the Commission. A narrower interpretation is that the part of the decision which is binding is only ‘the operative part’ – which is usually quite short, identifying the infringement, the infringing parties, when they participated in the infringement, and the fines.
It is quite clear from the European Union jurisprudence that only “decisions” in the “narrow” sense are binding, including those recitals constituting the essential basis for the operative part of the decision. A recital not constituting part of the essential basis for a decision is not binding in follow on actions; instead, it is simply evidence properly admissible before the English court which, given the expertise of the Commission, may well be regarded by the court as highly persuasive.
In this particular case, the decision dealt with the cartel but not, specifically, with the interconnector cable; and large parts of the decision were redacted. As such, the court decided to be cautious as to the weight to be assigned to statements in the infringement decision.
The bulk of the decision is devoted to evaluating the evidence, which I think is of limited interest to readers. More relevant is the (general) challenge of extracting from different types of evidence (witness, documentary, official and expert evidence) a counter-factual scenario allowing for a calculation of damages.
In short, the learned judge found that the people preparing the bid for the submarine cable within the cartelist were unaware of the cartel. On the evidence, the people who knew about the cartel did not directly influence those who did not know about it and which were responsible for the pricing of the project. Nonetheless, it was possible for the price to be indirectly influenced by a number of factors. In particular, even if the negotiating team was unaware and unaffected by the cartel, an overcharge may nonetheless still arise in two ways: by way of baked-in inefficiencies (e.g. the cartelist was an inefficient producer of cables as a result of the cartel, and therefore tendered a higher (non-competitive) price for the project) or cartel savings (e.g. by suppliers who have less demand for their products, and hence will sell inputs for a lower price).
An issue which is discussed at great length is how to deal with the expert economists’ very different approaches to calculating the overcharge. The claimant’s expert developed a model which built on a number of assumptions regarding the impact of a cartel, and pursued a generic before-and-after analysis (i.e. what was the price difference in projects during and after the cartel) that sought to identify average changes caused by the cartel. The defendant’s expert approach was tied very closely to the facts of the case and to the data produced by the defendant.
The learned judge found that where there is a choice between using actual data and a proxy for that data, the former ought to be preferred, unless there is good reason for not relying on the actual data. He also found that the defendant data was accurate, with the exception of baked-in inefficiencies. Furthermore, analysis which aims to show generalised effects of a cartel during the period of infringement will likely not be persuasive, or at least conclusive, if the elements of the sample varied significantly from one to another. The claimant’s model, which adopted proxies and focused on the average impact of the cartel, was found to have poor predictive power and to be unable to produce reliable estimates of the alleged overcharge.
Ultimately, the court found four potential sources for an overcharge of the interconnector cable project: by way of impact on common costs by way of direct influence of people who were aware of the cartel, by way of baked-in inefficiencies, by way of cartel savings and by indirect influence on direct costs of the project. On the evidence, the only sources which were proved were the baked-in inefficiencies, amounting to EUR 7,516,639, and cartel savings to the amount of EUR 5,492,929. The final price in the contract between BritNed and ABB, which was EUR 263,072,231 plus interest revenue, was inflated by an overcharge in the total amount of EUR 13,009,568.
This is a long judgment (198 pages long) that looks in detail at the challenges of quantifying damages in competition claims. It is apparent that these challenges are significant, even when those claims are follow-on (i.e. the competition infringement has already been established).
The decision provides guidance on a variety of issues that courts must face when establishing causation in quantum of damages in competition cases, as described above. To do this, the decision takes into account the nature and functioning of the cartel, the characteristic of the market where loss was suffered (i.e. submarine cables), the negotiation processes between the parties, the competitive pressures these negotiations were subject to and how they were deformed by the cartel. The judgment makes clear how difficult it is to calculate damages even in the case of a straightforward cartel – particularly one where the practice was to allocate markets and where, as a result, there is no direct evidence of price increases.
I also found it interesting that the assessment of expert evidence brought into the light the inherent tension and trade-offs between adopting a methodology to calculate harm based on average overcharges – which is likely to prove less onerous, and underpins a lot of the work on the presumption of harm – and a calculation methodology that relies on the details of the specific relationship between the infringing parties, and might be more accurate. Given the English court’s attention to detail – with inherent costs – I am surprised that the latter approach was favoured in this case. I wonder, however, whether other courts may favour the former methodological approach, which is less data intensive. If any reader of this email / blog – particularly those who can read Dutch or German – knows anything about this, I would appreciate it if you could get in touch.
Lastly, I am not completely clear as to where the dividing line between establishing causation of loss and quantifying that loss lies. This is relevant mainly for determining the applicable rules on burden and standard of proof (e.g. in this case, the distinction was relevant because it had an effect on the evidentiary requirements to demonstrate that a party suffered harm by losing an opportunity). But the potential for overlap between the two is, to my mind, evident – and made clear by the learned judge’s reference to counterfactuals and theories of harm in the context of quantifying harm, when such terms are commonly used by competition agencies and courts when determining whether a conduct had (i.e. caused) anticompetitive effects and thus infringed competition law.