The umbrella effect

On 5 June 2014, the European Court of Justice delivered an important judgment on the availability of private damages for breach of competition law in C-557/12 Kone.

In 2007 the European Commission uncovered and punished a cartel which had rigged bids for lifts and escalators. The Austrian state railway company, which had paid for a number of projects to install such equipment, claimed damages. This is simple enough if a bid was rigged and awarded to a cartel member. However, sometimes the cartel was unsuccessful and had been underbid by an innocent
third party.

Nevertheless, the claimant suggested that the cartel’s existence had raised prices generally. It sought damages for projects where the cartel had not operated directly, but where the price had been increased by means of an ‘umbrella effect’.

The Austrian court thought that such damages were too remote under Austrian law, reasoning that the cartel participants should not be
held liable for projects in relation to which no illegality had operated. The CJEU disagreed. If the claimant could establish that the cartel was ‘liable to have
the effect of umbrella pricing’ because of specific circumstances that ‘could not
be ignored by the members of that cartel’ then damages could be recovered.

The decision has been criticised. The first being that the CJEU has over-extended EU competence and should have instead left the ‘remedies’ to member state law. That criticism seems misplaced. In cases of delict, under the Rome II Regulation (Regulation (EC) No 864/2007), the law governing the delict determines ‘the existence, the nature and the assessment of damage or the remedy claimed’.

Since, in the competition law field, EU law itself constitutes the applicable law, it seems right that questions of remoteness – which are inextricably linked to the substance of the claim – should be decided uniformly and by
EU law. The twin principles of non-discrimination and effectiveness operate only at the procedural level: but rules of remoteness in this context are not properly analysed as procedural, but as substantive.

A second criticism is that the judgment undermines sound policy for the enforcement of competition law. The perceived problem is that broad liability for damages to private parties undermines the advantages of the ‘leniency regime’, under which whistleblowing cartel members are relieved of all or part of their liability to pay fines. The concern is that the risk of heavy damages, not subject to any leniency regime, may be a disincentive to whistleblowing, and this may make it harder to uncover cartels in the first place.

The CJEU reasoned that
this was irrelevant. If private individuals have a right to damages (as they do) then that right cannot be reduced by the regulatory authorities’ leniency programmes. It is one thing to say that the right to damages cannot be removed by the regulators, however the breadth of the right to claim damages is fixed by the court, which, in the pursuit
of ‘effective’ competition law enforcement, may inadvertently have weakened the protection for third parties. For a broad right to damages is no use to anyone unless the cartel is first detected. If Kone makes detection less likely then it will paradoxically have made the right to damages less effective, as a practical matter.

A third possible criticism is purely legal. The CJEU’s statement of the rule that is to be applied seems somewhat vague. It is insufficient merely to say that an umbrella effect exists: the court requires that its existence should have been in some way predictable in advance, so that it ‘could not be ignored’ by the cartel members. Quite what that means and how it will be proved seems open to question. Proof may turn out to be difficult
and unpredictable.

PRACTICE NOTES

SJ

Paul Stanley QC is a barrister practising from Essex Court Chambers 

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