1 July 2015
Partner Bruno Augustin recently had an interesting article published in Competition Law Insight, a unique resource that keeps you up to date with the latest developments in the law and economics of competition policy in Europe, America and around the world.
In it he looks at the proposed voluntary redress scheme by the UK Competition and Markets Authority (CMA). He discusses the strengths and weaknesses of the proposed rules that would govern arrangements where parties who have found to have infringed Competition law (usually by cartel activity) can set up voluntary redress schemes. The purpose of these is to compensate purchasers and end consumers who may have suffered losses as a result of such infringements.
The CMA’s voluntary redress scheme has a major flaw
It is presumably the European Commission’s hope that the implementation of the EU directive governing damages actions for infringements in competition law will bring about more of such actions in member state courts, thereby strengthening the private enforcement regime throughout the Union.
However, there is still one element of the competition law enforcement process that has yet to become fully operational in Europe. This is the means by which a group of similarly affected direct purchasers or end consumers are able to obtain collective redress from infringing parties.
By their nature, competition law infringements tend to be committed by dominant parties in a sector conspiring or abusing their position of market strength in order to squeeze more profits out of weaker purchasers or end consumers. The losses suffered in these cases are often too small to make it cost- effective for individual parties to bring separate claims for compensation. Therefore, if full compensation is to be provided, a means needs to be found whereby these claimants can obtain fair compensation for minimal cost and effort.
The Commission has expressed the view in the past that it wants to avoid the “excesses” of US style litigation, with its extensive class actions and triple damages. The furthest the Commission has gone thus far in advocating a form of collective redress was to suggest an opt-in system in a recommendation published in June 2013, whereby individual undertakings can decide to join together on particular actions on a case-by-case basis. This does not amount, however, to a fully regulated collective redress scheme implemented throughout the EU as some may have wished.
Enter the UK’s Competition and Markets Authority (CMA), which has decided to take a lead through the provisions of the Consumer Rights Act 2015, which has just received royal assent (see further pp16-17). The Act allows the UK Competition Appeal Tribunal (CAT) to hear collective actions for damages arising out of infringements of competition law, either on an opt-in or opt-out basis, and to approve collective settlements entered into between infringers and their customers.
The CMA has also given itself the power to allow infringers of competition law to set up a CMA-approved voluntary redress scheme so as to provide compensation to relevant claimants in a (hopefully) cost-efficient manner. The CMA published its draft guidance on this subject on 2 March of this year, inviting comments by 29 March. The rest of this article discusses the merits of this scheme as envisaged by the CMA.
The CMA voluntary redress scheme
According to the CMA’s draft guidance, a party wishing to set up such a scheme could do so either prior to (perhaps when the statement of objections has been issued) or after the CMA’s infringement decision. The party’s application must be in writing and contain a summary of the scheme. Some of the key issues it would need to cover are:
- details of the application process for claims for redress and estimates as to how long it will take to determine applications for compensation;
- details of who is eligible to claim compensation and the scope of compensation offered under the scheme – for example, will it cover both direct and indirect purchasers, and will there be variable compensation depending on the varying level of harm suffered?;
- the proof of harm that a potential beneficiary under the scheme woud need to provide;
- confirmation that the scheme will operate for at least nine months from the date it commences, as specified in regulations that will be confirmed by the government; and
- details of the independent board that will be responsible for determining compensation under the scheme.
The board must consist at least of (1) a chair who must be a senior lawyer or judge, (2) a suitably experienced economist, (3) an industry figure with experience of the industry of the compensating party and/or its customers and (4) a representative of the potential beneficiaries. All members of the board must possess appropriate qualifications and experience to carry out their functions effectively, and be free from any conflict of interest.
The chair may also appoint any other suitable person – for example, an accountant or a market expert – where specialised knowledge of a particular sector or consumer demographic is required beyond that provided by the industry representatives.
The CMA will be entitled to suggest any changes to the proposed scheme before finally providing its approval. As an incentive to encourage such schemes, the CMA has said it will consider if it is appropriate to make a penalty reduction in light of the infringing party’s voluntary provision of redress. This is likely to be up to a maximum of 10% of the penalty otherwiseimposed.
In introducing the capability of setting up these voluntary redress schemes, the CMA is making a noble attempt to improve the access to justice for consumers and SMEs who have suffered due to the anticompetitive behaviour of dominant undertakings and who otherwise may not have the opportunity to receive effective compensation.
Additionally, the CMA is also trying to incentivise infringers into opting for an officially authorised voluntary redress system that it hopes will be more practical and cost-effective (with the added possibility of a reduced fine) than any other settlement schemes the infringers may be considering with their major customers.
In drafting its guidance, the CMA has probably been influenced by the recent experience of similar redress schemes in the financial services sector in the UK to deal with the misselling of various financial products such as payment protection insurance and interest rate hedging products. In these instances, redress schemes have been initiated under specific financial services legislation, where the misselling institution is obliged to set up a structured process to provide adequate compensation to its customers, while under the constant review of an independent “skilled person” who reports directly to the regulator.
It is this envisaged need to subject the scheme to skilled independent scrutiny that is probably behind the requirement to set up a board to determine the correct amount of compensation to be paid under the CMA’s scheme. There are also similarities with the monitoring trustee regime in the merger clearance process as a means of allowing proposed mergers subject to commitments to fix potential anticompetitive issues beforehand. The insertion of independent third parties to oversee the process may have a dual purpose – to give the appearance of independent approval for the scheme separate from the interests of the CMA, and to free the CMA from the potentially time- consuming role of actively managing the process.
The need for the board
It is in the requirement for a board, though, that the CMA creates one of the biggest hurdles that is likely to discourage infringers from signing up for a CMA-approved scheme. The extensive requirement to engage several professionals who have specific qualifications and experience is likely to be both costly and time-consuming, even before they are put to the CMA for final approval.
One can understand why the CMA feels the need to impose this board onto every voluntary redress scheme: it will imbue the process with the requisite integrity and objectivity that would enable the CMA to justify both its approval and its hands-off approach in managing individual schemes. However, the appointment of appropriate members of the board is a lot easier in theory than practice.
For example, it is uncertain how easily an independent senior judge or lawyer can be found who is able to devote the requisite time as the chair. It could be just as difficult to find a chair or an economist who has not had a history of acting predominantly for claimants or defendants, as these roles may be becoming increasingly polarised with increasing litigation in this area, just as they have been in the US. If the case involves a large cartel that covers the whole of a particular industry, it will also be difficult to find an industry figure with the requisite experience who has not been involved in some way with any one of the cartel members in the past. Once this board has been appointed and approved, the need for the infringer to remunerate these individuals will be an ongoing commitment throughout the period that the voluntary scheme is in operation.
When deciding on the need for the independent board to oversee the voluntary process, the CMA may have had in mind the role of the “skilled person” to oversee the redress process in the financial products misselling cases referred to above. However, the calculation of the likely redress in the latter cases is somewhat more straightforward, based on a consideration of the alternative product that may have been sold to the customer if the misselling had not occurred. Therefore, the process lends itself well to a high-volume calculation of similar redress to a large number of bank customers who have been affected in the same way, without the need for overly complex legal and economic considerations. This role is often undertaken by a large consultancy such as one of the big four accountancy firms, which can provide all the required services from a single source.
By contrast, the CMA recognises that the calculation of the overcharge which forms the basis of competition damages claims can be more complicated, hence the requirement for board members with particular qualifications that are not drawn from the same source. This inherently makes the selection and approval of the board a more complex process, with the value of the expected payout being not necessarily much higher than the cost of the process itself. This is in contrast to the financial misselling cases, where the amounts anticipated to be paid out can be significantly higher than the expected cost of running the redress process.
Not the only option
It should always be borne in mind, though, that the voluntary scheme proposed by the Competition and Markets Authority is just one of several options that an infringer has in order to meet its potential liabilities to customers and end consumers. Although the CMA says in its guidance that a redress scheme should include a requirement that anyone who receives compensation under it does so in full and final settlement, it acknowledges at the same time that accepting redress for one particular type of loss or only part of the loss suffered should not prevent a beneficiary from pursuing redress for any additional loss not covered by the scheme.
For example, if the scheme covers only the extent of the overcharge, the CMA acknowledges that beneficiaries will still be able to seek redress for any indirect losses they have also suffered through other means. It also accepts that businesses are free to set up redress schemes and make compensatory payments of their own initiative and without CMA approval.
So why then should infringers opt for the CMA voluntary scheme above all other means of meeting their responsibilities? The CMA would like to believe that speed and cost will be two of the major reasons. In its view, a CMA-approved voluntary redress scheme provides a statutory process through which multiple redress offers can be made quickly and easily, at a lower cost alternative to litigation. Although the use of independent economic evidence and experts will be required in setting up and assessing the terms of the scheme, the CMA expects this to be a significantly lower burden than in a contested judicial process.
In choosing how best it would like to approach the issue of providing redress to customers and consumers alike, an infringer would normally have two key factors in mind: cost and control. From its viewpoint, it would like to enter a process that gives it the maximum control possible at the lowest cost. The CMA’s suggested process is unlikely to provide both.
The average infringer may take the view that it is better to negotiate the level of compensation it needs to pay with the class action law firms who represent most of its key purchasers, rather than leave it to an independent board to decide under the CMA’s process, which may involve a higher degree of uncertainty. It may well have to pay its own legal, economic and other advisers to help it manage its negotiations, just as it would the board members in the CMA’s process, but at least it would still retain control over the negotiation process. Even the promise of a possible 10% reduction in the penalties imposed may not prove to be a sufficiently attractive incentive to go down this particular route.
Although there is a risk that negotiations could extend indefinitely at significant cost, recent experience has shown that cartel damages cases at least tend to reach eventual settlement before they are fully drawn out through expensive court processes. The litigation option also provides more flexibility to the infringer to reach a fully final settlement that covers areas of loss beyond just those that are subject to a voluntary redress scheme. So, in the long run, the running of a redress scheme or a negotiation process on one’s own could turn out to be the more cost-effective option.
A leaner scheme?
One way that the CMA can perhaps make its proposed voluntary redress scheme more palatable to infringers is to do away with the requirement for an independent board, but just impose a one-off requirement to have the proposed scheme approved by the CMA.
In this scenario, the infringer could be left to set out its own proposed scheme, including a clear explanation as to how it proposes to calculate the compensation due to various purchasers and consumers, and put this to the CMA for approval. The CMA would then review and approve the scheme (engaging its own experts if required), which will then be put into operation over a defined time period.
Some safeguards could be put in place for this scheme – for example, by allowing the right of complaint by purchasers and consumers to the CMA if they feel they are not getting adequate compensation from the infringer commensurate with their particular circumstances. The CMA could be given the power to order the infringer to increase the compensation if it rules that the infringer has not been following the scheme according to its agreed process.
Hopefully, by removing the cost burden of appointing and maintaining the board, the Competition and Markets Authority would make a voluntary redress scheme more attractive to infringers. To cover any costs, the CMA would itself incur – for example, if it chooses to engage its own experts – it could charge a setting-up fee to the infringer as the price for obtaining its approval for the process.
Such a scheme may encounter several problems in its operation, and may still not be sufficiently attractive when compared to schemes wholly set up and operated by infringers, but it may simplify the operation of a CMA- approved scheme to make it more of a viable alternative to infringers than full-blown litigation.
The CMA’s published guidelines on its proposed voluntary redress schemes to compensate purchasers and consumers is a positive step in the direction of providing a viable option whereby infringers can provide limited redress through an independent process.
However, the envisaged need to appoint an independent board to oversee each process produces an unnecessary layer of complication that renders it cumbersome and uneconomic when compared to other options that an infringer could choose – such as conducting its own negotiations with claimants, for example by engaging with class action law firms.
It remains to be seen how popular the CMA’s process will prove in the long run, though one suspects that unless some other, simpler means of providing voluntary redress is thought up, it will end up only ever existing in theory rather than being put into regular practice.
Issue 20 • 12 May 2015 • Competition Law Insight