Pass-on Defences and Indirect Claims: Will UK Courts Apply the Same Antitrust Sauce to the Goose as to the Gander?
How the UK is sorting out the rights of direct and indirect purchasers to claim damages for anti-competitive conduct.
By Richard Pike
It is well-established in economic literature that anti-competitive conduct may increase prices not only for direct purchasers but also for indirect purchasers. As UK courts are now demonstrating, however, determining who should be allowed to recover, and what each party must prove, raises difficult policy and practical issues.
In the United States, the Supreme Court largely resolved these issues at the federal level in its landmark decisions of Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U. S. 481 (1968), and Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), which effectively bar indirect purchasers from bringing damage claims under antitrust law. Similarly, federal antitrust defendants are foreclosed from arguing that the claims of direct purchasers should be reduced because the loss was actually suffered by others further on in the supply chain (i.e., asserting a “pass-on defence”).
In contrast, Europe, and the UK (as well as many U.S. states), have chosen a different approach. These jurisdictions consider it unfair to deprive indirect purchasers of damage claims when they have been harmed. As the flipside of this, though, defendants are allowed to assert a pass-on defence.
However one might feel about the fairness, or otherwise, of the two competing approaches, the European and UK approach certainly leads to complicated questions about how to apportion a recovery between the direct and indirect purchasers. These issues have recently come to the fore in the point-of-sale interchange litigation against Visa and Mastercard in the UK courts.
Pass-on first arose in this context in a claim by a supermarket, Sainsbury’s, which was treated, for all practical purposes, as a direct purchaser. The UK Supreme Court held that pass-on by a direct purchaser should be treated as a species of mitigation, for which long-standing legal tests already existed. The test for mitigation is claimant-friendly: it is for the defendant to show that the claimant avoided part of the loss, which requires proof of legal and factual causation (i.e., that there is a direct link between the loss being suffered by the claimant and some reaction to that, whether by the claimant increasing its own prices or reducing other costs that it would not otherwise have done). Applying this test, the court held that Sainsbury’s had not passed on any of its loss since the defendants could not show that any increase in the point-of-sale interchange it paid caused Sainsbury’s to increase its prices to consumers.
Since that time, a consumer representative (Mr. Merricks) has received permission to bring an opt-out collective action on behalf of consumers to recover the loss suffered by them as indirect purchasers caused by anti-competitive conduct in relation to one particular aspect of point-of-sale interchange (Mastercard’s cross-border interchange fees imposed between 1992 and 2008). There have also been many additional claims by retailers.
At a hearing on 23 and 24 May 2022 in a claim brought by a group of retailers, the Competition Appeal Tribunal grappled with the issue of pass-on in all these various claims at different levels of the supply chain. The hearing was ostensibly procedural, to determine whether witness evidence and disclosure would be needed on how each retailer set its prices or whether, instead, it could be permissible to take a more approximate “sector wide” approach looking at the extent to which changes in costs feed through into changes in prices in a particular retail sector. It was acknowledged, however, that resolution of the procedural issues required some prior determinations on the legal rules applicable to passing-on—not least since it appears difficult, if not impossible, to reconcile the requirements imposed by the Supreme Court in Sainsbury’s with application of a “sector wide” approach to direct purchasers.
The retailers in the recent hearing (essentially direct purchasers) are, no doubt, concerned that watering down the Supreme Court requirements will make it easier to establish that pass-on has occurred and that this will reduce the damages they receive. The Tribunal, on the other hand, is clearly concerned about the practicability of having to take detailed witness evidence and claimant-specific disclosure for each claimant. Indeed, everyone seemed to accept that it would be impossible to do so for the consumer collective action, and the retailers themselves proposed that it should be done for only a representative sample of their retailer claimants.
Visa and the consumer claimants might also favour the “sector wide” approach because they anticipate that it will mean that more of the losses flow down to consumers. This would benefit the consumers in the Merricks case but also benefit Visa since the Merricks case is only against Mastercard—and there appears to be no prospect of a consumer claim against Visa. (It is notable that Mastercard appears to largely side with the retailers on this issue.)
The assumption underlying all of this is that whatever approach is adopted for direct claimants must also be applied to indirect claimants, i.e., (to use an English idiom) that whatever is sauce for the goose must also be sauce for the gander. If this is correct, then it is easy to see how strictly applying the Supreme Court’s mitigation test is likely to undermine indirect claims; if it is very difficult for defendants to establish pass-on by direct claimants then it will be equally, or even more difficult, for indirect claimants to establish that they have a claim at all.
Is it right, though, that the same sauce must apply to both? With one possible exception, it seems that all parties in the Tribunal hearing accepted that this must be so. It was said that doing anything else would be problematic because it would lead to over-compensation of claimants and double-payment by defendants. European legislators have always shied away from such things as they see deterrence as something wholly or mainly for criminal and regulatory law; the US concepts of treble and punitive damages have long been anathema as a result. For civil damages claims, the touchstone has always been compensation—ensuring that those harmed can be fully compensated, but without the defendants paying out more than the loss they have caused.
But are antitrust defendants in Europe really at much risk of over-paying? Consumer class actions are still at a very early stage of development in Europe, with no practical mechanism in most jurisdictions, so the vast majority of indirect claims will never be pursued. Plus, not only are there questions about the viability of class actions for direct claimants, but many potential claimants choose not to assert such claims even in the case of the most egregious cartels.
There is, in truth, a much greater risk of under-compensation and under-payment than of the reverse. Making it too easy for defendants to establish pass-on by direct claimants will reduce the number of direct claims (as more will need to be bundled together to make them cost-effective). Equally, however, making it too difficult to establish indirect claims will make them completely impracticable. It would also be most unfair to indirect claimants if they have not had the opportunity to participate in the direct purchaser proceedings—especially given that there is not the same policy justification for imposing a high burden on indirect purchasers to establish passing-on as applies in the case of a defendant looking to reduce its liability in a claim by a direct purchaser.
The EU Antitrust Damages Directive is prepared to accept a degree of inconsistency in relation to pass-on. While the Directive places the burden on defendants to establish pass-on in relation to direct purchasers, it adopts a rebuttable presumption that a loss has been passed-on to indirect purchasers when they are shown to have purchased products that were the subject of an overcharge paid by the direct purchaser.
Moreover, as noted by the retailers in the Tribunal hearing, the UK legislature has expressly allowed a more rough-and-ready approach to the calculation of damages for collective actions that contemplates the possibility that individual claimants may receive more or less than their actual loss. It is difficult to see, in these circumstances, why the English courts should be too fixated with the idea of applying the same test to direct and indirect purchasers outside the collective action regime.
The English courts should give the benefit of doubt to both direct and indirect claimants, recognising that the aggregate risk of under-compensation is much greater than the risk of over-compensation. If defendants can really show in any particular case that they may be required to pay more than the total loss they caused across all relevant markets, that is a fair thing to consider. But, absent such a showing, the courts should attempt to ensure that all types of reasonable claims remain practicable and attractive. If that means applying different tests for direct and indirect claimants, then it is difficult to see any real unfairness to defendants from doing so.
Written by Richard Pike
Edited by Gary J. Malone