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European Commission publishes study on the passing-on of overcharges

European Commission publishes study on the passing-on of overcharges

European Commission publishes study on the passing-on of overcharges

05.12.2016 EU law

On 25 October 2016, the European Commission published a long-awaited study on the passing-on of overcharges (the "Study"). The Commission commissioned law firm Cuatrecasas, Gonçalves Pereira and economic consultancy firm RBB Economics to conduct the Study. The initiative is part of implementing Article 16 of the Directive on Antitrust Damages Actions (the "Directive"), which requires the Commission to provide national courts with guidelines on "how to estimate the share of the overcharge which was passed on to the indirect purchaser". 

In many antitrust damages cases, pass-on plays a crucial role, either as a "defence" or as substantiation of a claim. According to economic theory, if a purchaser pays an inflated price (an "overcharge"), it will often respond by raising its own prices. The initial 'overcharge' is then 'passed-on' to the next level of the supply chain, which reduces (in part) the (direct) purchaser's initial loss. To quote the Study: "the overcharge effect at one level in the supply chain and the passing-on effect at the previous level are two sides of the same coin. Hence in terms of overall, aggregated damage, these components cancel each other out."   
 
The Study features contemporary views on the issue of pass-on, reviews national and EU case law, as well as insights from the US, and a fairly detailed analysis of relevant economic theory. It also goes into alternative approaches to quantifying the relevant loss (components). In addition, the Study provides a 39 step checklist with practical advice to national courts on issues such as the managing of expert evidence and use of quantification methods, avoidance of inconsistent decisions and application of the disclosure provisions of the Directive, which are to be implemented in national laws of the EU-Member States by 26 December 2016.
 
The Study is intended to assist judges in better understanding the crucial role of pass-on in private antitrust litigation, and to promote economic or factual analysis with an adequate focus from the outset. As an example of such inadequate initial focus, the authors mention a perceived lack of attention for "volume-effects" (i.e. loss incurred as consequence of a decrease in sales volumes, due to the overcharge leading to higher production costs).
 
The Study provides many useful insights from both legal and economic perspectives. For example, one may intuitively assume that a buyer's bargaining power will automatically counter suppliers' attempts to pass-on an overcharge to them. However, whether this (intuitive) restraint on passing-on effectively occurs, depends on several circumstances. Therefore, "a detailed analysis of the characteristics of specific negotiations and the context in which they take place is required to establish pass-on implications."  
 
Further, the Study aims to assist judges in evaluating whether economic experts have followed the (prevailing) opinions regarding the applicable legal and economic principles, i.e. whether the experts' evidence is fit to base a proper judgment on. For example, the Study explains that estimates resulting from any economic quantification exercise should be tested for their sensitivity against the very assumptions they are based on. The Study suggests that "[f]or instance, the expert may evaluate how results vary if plausible adjustments to key assumptions are made". 
 
In future private antitrust litigation, it is expected that parties and judges will seek guidance on the extensive framework provided by the Study.

This article was published in the Competition Law Newsletter of December 2016. Other articles in this newsletter:

1. Legislative Proposal introducing class actions in the Netherlands before House of Representatives 
2. Belgian Competition Authority closes investigation into Most Favoured Nation clauses in Immoweb contracts 

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