Passing-on

 

Author Definition

 

Definition

Passing on, a concept well-accepted in economic theory, refers to the situation where an injured party passes on its actual loss resulting from an antitrust infringement (’overcharge’) to the next level of the supply chain, by increasing the price of its products or services sold to its own customers at the downstream market-level (’indirect purchasers’). Therefore, pass-on can serve as a ’sword’, where an indirect purchaser alleges that the overcharge has caused it harm because of upstream pass-on. It can also be used as a ’shield’, where an infringer invokes as a defence that downstream pass-on by the claimant had reduced the actual harm the latter has suffered.

 

Commentary

Any person harmed by an antitrust infringement (e.g. price fixing cartel, abuse of a dominant market position) may claim full compensation for its harm. Regarding passing on, three legal and economical elements of that harm are relevant: firstly, actual loss occurred due to an overcharge resulting from the price difference between the actual transaction price and the ‘but-for’ price in the absence of the infringement; secondly, the passing-on effect by which the claimant may have, fully or partially, passed on this overcharge to its own customers, by adjusting its own prices to the cost increase; thirdly, the compensation for lost profits which the direct purchaser may claim if, due to the price increase to its own customers, it has suffered a reduction in sales volumes (‘volume effect’).

The compensatory principle requires that direct as well as indirect purchasers are put in the situation they would have been in but for the infringement, to avoid both over- and under-compensation, and to ensure that the infringer does not pay damages for the same wrong twice. It is therefore appropriate that the indirect purchaser to whom the overcharge is passed on is entitled to claim compensation from the infringer (‘sword’ scenario), while the infringer may rely on passing-on to object to a damage claim brought by the direct or any other upstream purchaser (‘shield’ scenario). The burden of proof lies with the party that relies on the passing-on argument, i.e. the claimant in the ‘sword’ scenario and the defendant in the ‘shield’ scenario.

According to economic theory, the existence and the scope of passing-on effects, i.e. the associated price and volume effects, are determined by a large range of factors, including: the nature and intensity of competition in the markets where the direct or indirect purchasers are active (e.g., imperfect competition and differentiated goods are supposed to result in lower pass-on rates for industrywide overcharges), the nature of input costs subject to an overcharge (whether these costs are fixed or variable, whether the overcharge is industrywide or firm-specific), the nature of the product demand that the direct or indirect purchasers face (especially the link between the demand and price level), other elements, such as price adjustment costs, the proportion of a firm’s costs affected by the overcharge, buyer power, vertical integration of direct and indirect purchasers, price regulation or the timing of the pricing decisions undertaken at the various levels of the supply chain. The impact of these factors is case-specific, and the results may be mixed. In addition, in the legal assessment of damages, any benefit taken into account must bear some relation to the damage suffered by the claimant as a result of the infringement (causation).

Due to the difficulty of determining pass-on effects, the US Supreme Court rejected the passing-on defence and allowed the claimant to use the full overcharge as the basis of its claim (Hanover Shoe). It further held that only direct purchasers may sue for damages under federal law to prevent the risk of multiple liability for the antitrust infringement (Illinois Brick). Both rulings are highly controversial. They also compete with many state antitrust laws in the US that allow indirect, as well as direct, purchasers to recover damages.

For an infringement of competition law in the EU, in contrast, both the standing of indirect purchasers and the passing-on defence is recognised, at least since the implementation of Directive 2014/104/EU (Chapter IV), in some member states even before (e.g., for Germany, the pre-Brexit UK and the Netherlands, see ORWI, Sainsbury’s and TenneT v ABB). The scope of the passing-on defence is generally interpreted narrowly. The infringer bears the burden to plead and prove the existence and extent of the passing-on of overcharges. It cannot rely on any legal presumption in this regard. It remains open yet whether the infringer even must show the non-existence of the volume effect for a successful passing-on defence, or whether that effect is exclusively to be substantiated by the claimant. The infringer bearing the burden of proof of the passing-on defence has a right to disclosure of evidence, also against third parties. In case of a damage action by an indirect purchaser the Directive provides a (rebuttable) presumption of the existence of pass-on to the benefit of the indirect purchaser. Further, the courts are empowered to estimate all passing-on effects, on prices and volumes, in both shield and sword scenarios, based on the information reasonably available.

The non-binding COM Guidelines provide courts and other stakeholders in damages actions for infringements of EU competition law with practical guidance on how to estimate passing-on effects. They describe the theoretical concepts underlying passing-on and set out the factors that can have an impact on it. It also becomes clear that there are different approaches and methods to quantify the overcharge (e.g. by comparator-based methods), the scope of passing-on related price effects (either directly by employing comparator-based methods or indirectly by estimating the rate at which the increase in the affected input cost should have been passed on) and the volume effect. The COM Guidelines also help to determine the sources of relevant (qualitative and quantitative) evidence, whether a disclosure request is proportionate, and assessing the statements of the parties on passing-on and any economic expert opinion that may be presented to the court.

The courts in Europe also consider that the legal concept of damage is distinct from its economic concept. In particular, the passing-on defence has been refused in cases where there is no risk of multiple liability, but rather a risk of absence of liability, because the next market level is characterised by a large number of customers with small-value and dispersed claims. In such a scenario there is little interest in bringing a damage action, so that the infringers would de facto retain the fruits of their illegal activity. This is especially relevant in case of damages of end-consumers. In the interest of an effective competition law, the goal to avoid absence of liability of infringers shall outweigh the potential overcompensation of the claimant.

If, however, several purchasers along the supply chain bring parallel actions for damages relating to the same overcharge, the Directive provides that the courts shall consider, in the interest of compensation and consistency between judgments, all appropriate procedural and substantive means available under EU or national law (e.g. joinder of claims, estimation, staying of proceedings). Direct and indirect purchasers may also assign their respective damages claims to a single plaintiff, for example, so that any passing-on among them does not concern the enforcement of the bundled claims against the infringer but is left to internal agreements between those purchasers.

 

Bibliography

Centre for European Policy Studies, Erasmus University Rotterdam and Luis Guido Carlo, Study on making antitrust damages actions more effective in the EU: welfare impact and potential scenarios (2007), Part II, Chapter 5.

Communication from the European Commission, Guidelines for national courts on how to estimate the share of overcharge which was passed on to the indirect purchaser (’COM Guidelines’), OJ [2019] C267/4.

Pedro Caro de Sousa, ’EU and national approaches to passing on and causation in competition damages cases: A doctrine in search of balance’ (2018) 55 Common Market Law Review 1751.

RBB Economics and Cuartrecasas, Gonçalves Pereira, Study on the Passing-on of Overcharges (2016).

US Antitrust Modernization Commission, Report and Recommendations (2007), Chapter III.B.

This article is being reviewed by the Editors of the Dictionary.

Authors

Quotation

Till Schreiber, Carsten Krüger, Martin Seegers, Passing-on, Global Dictionary of Competition Law, Concurrences, Art. N° 88937

Visites 1094

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

There are three distinct elements that make up the recoverable harm potentially suffered by a claimant. First, there is the increase in the claimant’s costs (“the overcharge”) that may be brought about by the infringement: in legal terms, actual harm or direct loss (damnum emergens). Such harm may arise directly or because of “upstream” pass-on by a direct or indirect purchaser that supplies the claimant. Second, the adverse impact of the overcharge on the claimant may be reduced if it passes on some or all of that overcharge to its own customers, by means of a price increase. This is the “passing-on” effect. Whilst such “downstream” passon reduces the actual harm suffered by the claimant in question, it will do so at the expense of causing harm further downstream. Indeed, the pass-on effect at one level of the supply chain implies an overcharge of the same magnitude at the next level downstream; they are two sides of the same coin. In litigation, pass-on can, therefore, serve as a “sword”, where an indirect purchaser alleges that an overcharge has caused it harm because of upstream pass-on. It can also be used as a “shield”, where a defendant alleges that downstream pass-on by a claimant has reduced the actual harm the latter has suffered. Third, to the extent that a claimant suffers a loss of sales volumes as a consequence of pass-on, it will lose the profit margins associated with those sales. This so-called “volume effect” constitutes recoverable loss of profit (lucrum cessans) in legal terms and forms part of the overall damage calculation. Whenever a firm increases its prices, it will almost invariably suffer such a loss of sales volumes. It is the extent of this prospective loss, which hinges on the sensitivity (or elasticity) of a firm’s demand to price increases, that tempers the extent of passing-on in the first place (Study on the Passing-on of Overcharges, Final Report, RBB Economics and Cuatrecasas, Goncalves Pereira, 2016).

On this topic see the e-Competitions special issue "Economic assessment of damages actions in competition law: An overview of EU and national case law"

 
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