Despite its broad title, this article – available here – investigates mainly the interaction between leniency programmes and civil damages claims. 

Dutch Cartel

Most competition authorities have adopted leniency programmes to uncover cartels. To increase the overall deterrent effect of competition law, many jurisdictions have also introduced private competition enforcement, which increases the total potential financial exposure of cartel members. The impact of private competition enforcement – and particularly the concomitant increase in the liability of potential leniency applicants – on leniency programmes has been discussed in the literature, but there is an absence of empirical studies.

This article tries to fill this gap by studying the empirical impact of private competition enforcement on leniency. It uses two methods: surveys of Dutch firms and competition lawyers, and econometric conjoint analysis. The authors conclude that firms’ decisions to apply for leniency are affected by the magnitude of the personal penalty to which directors are subject and the amount of fine reduction following a successful leniency application. Despite the increasing number of damages claims in the Netherlands, Dutch firms do not consider civil claims as a determining factor in deciding whether to apply for leniency. Lawyers, on the other hand, consider private enforcement when advising on whether a leniency application should be made. In particular, they advise their clients to apply for leniency subject to leniency documents not being disclosed in civil procedures and the burden of proving damages caused by the cartel lying with the claimant.

Section 2 describes debates concerning how public and private cartel enforcement deter collusive behaviour and what factors influence a company’s decision to apply for leniency.

Leniency incentivises cartelists to report unlawful agreements to a competition authority. In return, leniency applicants are offered immunity or a reduction in the amount of a penalty. Since the first leniency applicant typically receives the largest reduction in fine, leniency destabilises the cartel by spreading distrust among cartel members and stimulating a race to be the first to apply.

The literature on the factors that are relevant for decisions to apply for leniency focuses on the trade-off between the pay-off of a firm collaborating with the competition authority when compared to a non-leniency applicant. Such factors include the amount saved in fines by the leniency applicant; the extent of potential civil liability of cartelists to victims and related factors, such as whether leniency documents can be disclosed to claimants; the risk of detection; and reputational damages.

In light of this, it has been argued that civil liability can undermine the effectiveness of leniency programs because successful leniency applicants may still be liable for the payment of substantial damages, and may even be more exposed to (follow-on) damages claims that their fellow cartelists.

Section 3 describes the model used in this article.

Direct observation of companies’ behaviour is, when it comes to deciding on leniency applications, not possible because it would exclude all those companies that decided not to apply for leniency. To determine the impact of private enforcement on leniency programmes, the authors presented the firm managers of 476 firms and 27 competition lawyers with eight hypothetical scenarios where they would discover a price agreement with a competitor within their own company, so that self-incrimination was not a relevant concern. They were then asked to choose the situations in which they were likelier to apply for leniency or to continue the cartel.

The authors then applied a nested logit model which serves to identify the relative importance of a number of factors that may influence a firm’s decision on whether to apply for leniency. The factors investigated by the authors are: (i) magnitude of the financial penalty for the company; (ii) magnitude of the financial penalty for directors; (iii) amount of fine reduction achieved by applying for leniency; (iv) extent of exposure to damages claims; (v) the burden of proving damages.

Section 4 discusses the empirical results of the analysis.

18.5% of respondents answered that they would not end a cartel in any of the presented scenarios, and 55% of firms identified at least one scenario where they would not apply for leniency. There are a number of possible explanations for this. First, firms may perceive the likelihood of detection by the authorities to be low. Second, firms may, even if they terminate a cartel, desire to cooperate lawfully with competitors in the future. Third, there may be personal considerations that influence whether apply for leniency or not (e.g. by directors). Third, there may be upcoming transactions (e.g. a merger) which would be adversely affected by a decision to apply for leniency. The authors’ regressions find that personal fines are seen as a more important consideration than corporate fines in decisions by firms on whether to apply for leniency. Furthermore, the authors do not find strong evidence that other attributes of public and private antitrust enforcement affect firms’ decisions on whether to apply for leniency.

In line with the result for firms, 16.2% of competition lawyers would not advise their clients to apply for leniency in any of the scenarios. On the other hand, competition lawyers take into account a mix of public and private enforcement factors when advising whether to apply for leniency – including the amount of fine reduction, whether leniency documents can be disclosed to claimants and the burden of proof damages claims. Personal penalties are not a relevant consideration for lawyers, unlike for firms.

Section 5 describes an additional survey to complement the analysis.

Respondents were asked to consider the probability that their company would claim damages if a supplier charged a higher price because of illegal agreements with its competitors. The average perceived probability of a claim by a company was 48.7%, but the average perceived probability of a claim by customers towards that same company was a lot lower, at 29.5%. Competition lawyers were much more balanced: the likelihood of a claim by a victim company who is their client was said to be 44%, while the likelihood of a claim against a cartelist who is their client was 41%. According to competition lawyers, the results for firms could reflect the sectors in which the companies operate: competition lawyers thought that firms in sectors that supply directly to consumers perceive a lower probability of being the subject of a claim for damages. However, the authors found that this probabilistic assessment did not vary much per sector.

Interestingly, when asked to identify which consequences of a cartel being uncovered were more negative for the firm, the most damaging was reports in national newspapers and the internet (43%), followed by damages claims by customers (18%), reports in professional journals (16%), fines by the competition authority (15%), and, finally, reports on the competition agency’s website. Furthermore, 38% of respondents thought a fine from the competition authority for a cartel was more likely, while 30% found that a claim by a customer was more likely than an infringement decision (the numbers were 57% and 30%, respectively, for competition lawyers).

Lastly, if the respondents identified a cartel in their company, it was more likely that they would terminate a cartel without applying for leniency (40.5%) than by applying (37%). When asked to list reasons not to apply for leniency, the majority of answers focused on negative effects on the reputation of the company. Other reasons include an upcoming merger, the chance of detection by the authority, personal influences of the management or other staff, the overall financial position of the company, and the impossible position the company would find itself in the market after a leniency application. These results again fail to match those of competition lawyers, who found more likely that a firm would quit a cartel by applying for leniency (56%) than not (40%).

Section 6 concludes.

The analysis makes clear that applying for leniency can have significant negative effects for applicants, which are not restricted to exposure to civil liability. The question is whether a fine reduction is enough to offset these negative effects.

Comment:

This interesting paper goes well beyond the scope promised in its introduction. In any event, the paper’s finding that private enforcement does not adversely affect decisions to apply for leniency is remarkable, and firms’ concerns with the reputational effects of an infringement match my (admittedly anecdotal) experience in private practice. Further, as a lawyer I find it unsurprising that competition lawyers seem to pay more attention to the implications of private enforcement than firms when deciding whether to apply for leniency.

At the same time, I wonder whether a number of results could be explained by greater awareness and knowledge of competition law by the lawyers. If this were the case, then the results concerning firms may not really reflect firms’ behaviour when actually confronted whether to apply for leniency, since that behaviour would likely be influenced by the legal advice they receive. This may be an interesting topic for further research, together with seeing whether these results can be replicated in other jurisdictions.

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