Private and Public Enforcement: Complements or Substitutes ?

1
Private and Public Enforcement Complements or
Substitutes ?

• Frederic Jenny
• Professor of economics ESSEC
• Judge , Cour de Cassation

3rd LEAR Conference on the Economics of
Competition Law What Makes Policy Work ? Rome
June 25-26 2009
2
I) Deterrence
3
A Simple Economic Model
Damage Df(O(ps)) Enforcement
cost C C( O(P,S)P) Cost of sanction
bpsO(P,S) Supply of offences O
O(P,S) Policy objective Minimize social cost
of violation Df(O(ps)) C( O(P,S)P)
bpsO(P,S) 1st Condition of optimality P and S
must be chosen in such a way that  crime does
not pay  (only risk seekers will commit
crime) 2nd Condition of optimality the
marginal cost of enforcement and sanctions must
be equal to the marginal revenue
4
Optimal sanctions for antitrust violation
For crime not to pay, the expected gain from
the violation must be equal to zero or
negative. In a competitive environment monopoly
profits are equal to 0. Assume p(ac) profits
from the anticompetitive practice
p probability of getting caught
f sanction To discourage a risk averse or risk
neutral firm from engaging in an anticompetitive
activity we must have p ( p(ac) f ) ( 1 p
) ( p(ac) ) lt 0 which gives p f gt p(ac) Or
f gtp(ac) /p Taking the total reduction in
consumer surplus (greater than the extra-profit
of the violators) and multiplying it by the
inverse of the probability of detection and
punishment would lead to an economically
efficient sanction.
5
Insights from the model of optimal sanctions

• The model assumes that competition authorities or
  judicial authorities do not make
• mistakes. If there is a possibility of mistakes
  (particularly false positive) large sanctions
• may entail substantial costs to society and the
  optimal amount of sanctions should be
• reduced.
• Note ENRICO LEONARDO CAMILLI  OPTIMAL AND
  ACTUAL FINES IN
• CARTEL CASES THE EUROPEAN CHALLENGE 
• In a environment characterised by asymmetric
  information, judicial
• errors, particularly of type II (innocents are
  convicted) can be socially more
• harmful with very high fine settings

6
Insights from the economic model
2) To have a deterrent effect, a system of
antitrust law enforcement, needs to be
predictable (to allow a calculation of the
benefits and costs of the violation). Hence the
degree of discretion of competition authorities
or courts in sanctioning anticompetitive
practices should be limited. Their decisions
should be transparent and consistent over time
and over analytically similar cases. Note
ENRICO LEONARDO CAMILLI  OPTIMAL AND ACTUAL
FINES IN CARTEL CASES THE EUROPEAN
CHALLENGE  the transparency of the criteria
applied in the determination of the sanction, and
their publicity, are fundamental, in order to
strengthen the deterrent effect on the rational
criminals cost-benefit analysis. The
surprise-effect is not a valuable good, rather
uncertainty leads just to underweight the real
amount of the fine at the crucial moment of the
cost-benefit analysis about engaging on the
cartel or applying for the leniency Note
Damien Geradin and David Henry The EC fining
policy for violations of competition law An
empirical review of the Commission decisional
practice and the Community courts Judgments,
Paper prepared for the conference Remedies and
Sanctions in Competition Policy Economic and
Legal Implications of the Tendency to Criminalize
Antitrust Enforcement in the EU Member States
(February 17-18, 2005) it is often difficult to
understand the logic of the fines imposed by the
Commission. Identical factual scenarios will be
treated differently, while different factual
scenarios will be offered the same treatment  .
7
Insights from the economic model
3) The deterrent effect of an enforcement system
depends on several, partly interdependent,
variables. Furthermore, economic agents respond
to incentives. Therefore any innovation leading
to the modification of a variable in an
enforcement system is likely to lead to responses
by economic agents which will affect other
variables. Those interdependences have to be
studied carefully. ENRICO LEONARDO CAMILLI
 OPTIMAL AND ACTUAL FINES IN CARTEL CASES THE
EUROPEAN CHALLENGE  the coherence of the entire
sanctioning system is of paramount importance,
since all the elements are closely interrelated,
and the change of one parameter is likely to have
effect on all the setting. For that reason
matters like the private damages and the standing
to claim them, the international or domestic
feature of the infringement, the type and
quantity of investigative tool, the availability
of criminal sanctions are to be taken into
account when the question on the optimal fine is
addressed.
8
Insights from the economic model
4) Decreasing the cost of enforcement ( ceteris
paribus) is an important goal (hence the
necessity to assess whether leniency programs
actually achieve this goal and to eliminate
perverse effects that they may have) Evguenia
Motchenkova Effects of leniency programs on
cartel stability We find that in most cases
leniency reduces duration of cartel agreements
but this result is not unambiguous. In case
leniency programs are not too strict and fines
are proportional to the accumulated illegal gains
from price-fixing the result is as follows. Under
strict antitrust enforcement, the possibility to
self-report and be exempted from the fine
increases the incentives for the firms to stop
cartel formation, and, hence, reduces the
duration of cartels. However, when penalties and
rate of law enforcement are low, introduction of
leniency programs may, on the contrary,
facilitate collusion.
9
Insights from the optimal sanctions model
5) Optimal sanctions by the competition
authorities may not always be feasible for a
variety of reasons - The social cost of errors
may be high - When firms cannot pay bankrupcy
may entail a social cost - Optimal sanctions
may violate the proportionality principle -
High fines are likely to give an added incentive
to offenders to avoid detection (an effect
which is not factored into the analysis)
According to Werden and Simon (1987), firms
would need assets six times higher than annual
sales for a firm to pay the optimal fine. As a
consequence, they conclude that most price fixers
should go to prison. Craycraft, Craycraft and
Gallo (1997) analyze the effect of the firm's
ability to pay the fine levied and find that all
firms in their sample of 262 price-fixing firms
between 1955 and 1993 were able to pay the actual
fine imposed. However, only 47, or 18 of the
sampled firms were able to pay the optimal
fine. All 262 firms were able to pay the fine
actually levied as well as the maximum fine out
of cash on hand, defined as cash immediately
available, and short-term investments, i.e.
treasury bills. Paying the fine out of cash on
hand and short-term investments denies
stockholders payment of a cash dividend and also
affects payment to short term creditors.
10
Insights from the economic model
6) It is the overall level of sanctions
(together with the probability of detection and
conviction) which determines the deterrent
effect of an enforcement system. It make no
difference whether payments are made to the
government budget or to consumers. But we must
remember that different types of sanctions may
entail different costs and that competition
authorities have some control over administrative
sanctions but not over private suits. Note In
the worldwide Vitamins cartel, the amount of
fines and private damages paid in the US was
roughly US 2 billion vis à vis the 855 million
Euros paid to the Commission in the European
case, not to mention the imprisonment of nine
executives. In the worldwide Graphite
electrodes case even if the estimates of the
affected market are similar (more than two
billion Euros in the EU, US 2 billion in the US
), the EU fine represents only 11 of the
affected market, while the US fine represents
more than 24, without taking into account jail
sentence for two executives.
11
Summary of the insights from the economic model

• Administrative fines will often be insufficient
  to achieve the optimal level of
• deterrence therefore criminal sanctions and or
  civil sanctions are useful complements
• to admnistrative sanctions
• 2) Civil sanctions should be coordinated with
  administrative sanctions to avoid
• overdeterrence
• 3) Enforcement should be predictable which raises
  the question of the economic
• expertise of courts ( both to establish the
  violation and to assess the damages to
• Particular plaintiffs)
• 4) The protection of the efficiency of the
  leniency programs cannot be a goal
• In itself. is the optimality of the global
  system.

12
II) A plaintiffs model
13
The role of private enforcers in the EU
Private parties are involved in public
enforcement by lodging complaints to the
Competition authorities. In this case private
parties initiate proceedings They can also act
as private enforcers as well by either invoking
EC antitrust prohibitions as a shield in
private litigation (defensive private
enforcement) or as a sword by sueing for
damages and/or injunctive relief (offensive
private enforcement).
14

Private litigations

• litigation brought by competitors of the
  defendants alleging that
• they have been excluded or injured by reason of
  anticompetitive
• actions by the defendant or defendants. This type
  of litigation is
• often suspect because of the concern that the
  plaintiffs are seeking to
• use the antitrust laws to reduce competition, and
  protect themselves,
• rather than increase competition in their market.
• 2)The other main category of private litigation
  consist of the cases
• brought by direct purchasers of products or
  services where
• producers of these items have violated the
  antitrust laws. Typically,
• these law suits involving price fixing and other
  per se violations of
• the antitrust laws and often are brought as class
  actions (cases
• brought on behalf of all persons similarly
  affected by the illegal
• conduct).

Towards a Constructive Public-Private Partnership
to Enforce Competition Law Spencer Weber Waller
15
Follow-on cases
Many of the private treble damage cases follow
government cases or investigations and seek to
take advantage of guilty pleas or convictions in
an earlier criminal case. When a defendant is
convicted or found liable in a government
antitrust case, it is presumed liable for any
subsequent civil cases brought by private
plaintiffs A private plaintiff under these
circumstances need do little more than prove
damages in order to prevail in this scenario. For
example, the guilty pleas and convictions in the
international vitamins case spawned dozens of
private treble damage individual and class action
law suits against the same defendants.
Towards a Constructive Public-Private Partnership
to Enforce Competition Law Spencer Weber Waller
16
A plaintiffs model,
Assume that the prospective costs for a plaintiff
are the opportunity cost of time spent in
litigation (OCt) or settlement (OCs), costs of
access to courts (AC) and depending on the fee
allocation rule chosen legal costs for
litigation (LCt) and settlement (LCs). Expected
rewards are the damages claimed (D), times the
probability of winning at trial (w), and the
expected settlement amount (S), times the
probability to settle the claim before trial (1
p).303 The plaintiff will then sue whenever (1)
pwD (OCt LCt AC) (1 p)S (OCs
LCs) gt 0 where OCs lt OCt LCs lt LCt and S lt
D. In other words, the plaintiffs net expected
reward from filing suit has two main components
the reward from settlement and the reward from
trial. The relative weight of these two
components, of course, depends on the (perceived)
likelihood of settlement and trial.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr.
Alan J. Riley Prof. Barry J. Rodger  Making
antitrust damages actions more effective in the
EU welfare impact and potential scenarios  21
December 2007 , Centre for European Policy
Studies (CEPS)
17
Insights from the plaintiffs model

• Multiple damages increase the incentive to sue
• A reversal of the burden of proof in favour of
  the plaintiff
• increases the incentives to sue, alongside with
  w.
• 3) A one-way fee-shifting rule increases
  incentives to sue, as it
• removes LCt and AC from the equation.
• 4) All the rules that increase the probability of
  victory for the
• plaintiff (w) or increase the prospective cost of
  the defendant, in
• turn, have the effect of increasing the
  probability that the case
• will settle (1 p), and also the settlement
  amount (S).
• 5) All means of funding private litigation
  increase the probability
• that the plaintiff will sue, of course, as they
  would reduce or
• eliminate LCt and AC.

Prof. Andrea Renda , Prof. John Peysner Prof. Dr.
Alan J. Riley Prof. Barry J. Rodger  Making
antitrust damages actions more effective in the
EU welfare impact and potential scenarios  21
December 2007 , Centre for European Policy
Studies (CEPS)
18
QualificationsDo private enforcers have better
information than public enforcers?
A possible advantage of private litigation (
over public litigation) is that the cost of
detecting possible violations and gathering
initial evidence are lower (private enforcers are
better informed about their particular industry)
as Shavell (1984), Brodley (1996), R. Preston
McAfee, Hugo M. Mialon, and Sue H. Mialon (2008)
have suggested . But is this advantage important
in a world in which we have effective leniency
programs and in which private litgants can refer
cases to competition authorities ?
19
Qualifications do plaintiffs accurately predict
the result of litigation ?
The plaintiffs decision to sue depends on her
subjective perception of p, w and S. With
imperfect information, the following cases may
arise 1) The plaintiff overestimates the
probability of winning at trial (w). For example,
if the plaintiff incorrectly interprets the
defendants conduct, she may expect the judge to
award damages however, especially in cases where
a rule of reason applies, the judge may find
redeeming efficiencies and decide in favour of
the defendant 2) The plaintiff mistakenly
estimates the probability of settling the case (1
- p). This can occur, for example, whenever the
plaintiff expects the defendant to agree on the
likelihood of plaintiff victory whereas in
reality, the defendant expects a different
outcome i.e., the parties are both optimistic
on the trial outcome.
20
Qualifications are courts accurate ?
Adding private enforcement to public enforcement
is always socially beneficial if the court is
sufficiently accurate. () In this case, firms
never strategically abuse the laws, only suing
when their competitors have committed an
antitrust infraction, so that private enforcement
only serves to counter antitrust harm. But if
the court is less accurate, adding private
enforcement is beneficial only if the
governments litigation costs, which depend on
its efficiency, are sufficiently high. In this
case, firms always sue when their rivals take
efficient actions, preferring to take a chance
with the courts than suffer a certain loss in
market share. Society benefits from private suits
only if the government is sufficiently
inefficient in litigation and the legitimate
private suits outweigh the strategic suits.
Private v. Public Antitrust Enforcement A
Strategic Analysis R. Preston McAfee, Hugo M.
Mialon, and Sue H. Mialon January 12, 2008
21
Can plaintiffs use litigation strategically ?
In reality, potential private enforcers may have
incentive to behave strategically. This danger is
particularly high in the antitrust field because
the plaintiffs are often competitors or takeover
targets of defendants. They may have an incentive
to employ private enforcement strategically, that
is, to sue even if they know that their
competitors did not violate the antitrust laws.
Private v. Public Antitrust Enforcement A
Strategic Analysis R. Preston McAfee, Hugo M.
Mialon, and Sue H. Mialon January 12, 2008
22
Can private enforcement be used strategically by
private plaintiffs ?

• Firms may use the antitrust laws
• to prevent large potential competitors from
  entering their market, as in the classic case of
  Utah Pie Co. v. Continental Baking (386 U.S. 685,
  1967, U.S. Court of Appeals, 1978).
• to prevent their rivals from competing
  vigorously,
• to extort funds from successful rivals,
• To improve contractual conditions,
• To enforce tacit collusive agreements,
• To respond to existing suits, and
• To prevent hostile takeovers.

R. Preston McAfee, Hugo M. Mialon, and Sue H.
Mialon, Private v. Public Antitrust Enforcement
A Strategic Analysis, January 12, 2008
23
Strategic use of civil enforcement
if private enforcement fosters strategic abuse of
antitrust laws, this can lead to increased Type I
errors (false convictions), and thus to
inadequate investment, unmeritorious (strategic)
suits and unmeritorious settlements. This has led
authoritative commentators to argue that private
enforcement is inferior to (effective) public
enforcement and should not be encouraged in
Europe.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr.
Alan J. Riley Prof. Barry J. Rodger  Making
antitrust damages actions more effective in the
EU welfare impact and potential scenarios  21
December 2007 , Centre for European Policy
Studies (CEPS)
24
What will determine the level of private
litigation?
What is the socially optimal level of litigation
given its expense, and how does it compare to the
privately determined level of litigation? The
former and the latter levels of legal activity
generally differ, and the reasons involve two
fundamental types of externality. The first is a
negative externality When a party spends on
litigation, he does not take into account the
litigation costs that he induces others to incur.
The second is a positive externality When a
party engages in litigation, he does not take
into account the effect that this has on
incentives to reduce harm. In consequence, the
privately determined level of litigation can
depart from the socially optimal levelin either
directionand corrective social policy may help
to remedy the divergence.
STEVEN SHAVELL The Level of Litigation Private
Versus Social Optimality of Suit and of
Settlement International Review of Law and
Economics 1999 115, 1999
25
The cost of using the legal system
The fact that the private and the social
incentives to use the legal system are
divergentis likely to be of substantial
empirical significance. A reason for believing
this is that the costs of the legal system are
large The sum of litigation and the related
costs of providing a dollar to a victim through
the legal system appear to be on the order of a
full dollar. Given its roughly 100 transaction
costs, the deterrence benefits of the legal
system must be considerable to justify its use.
One suspects, however, that deterrence is
sometimes not sufficient to make the transaction
costs of the legal system socially advantageous
to bear.
STEVEN SHAVELL The Level of Litigation Private
Versus Social Optimality of Suit and of
Settlement International Review of Law and
Economics 1999 115, 1999
26
Can private enforcement displace public
enforcement ?
We find that the combination of private and
public enforcement tends to lead to a greater
probability of private than public action, as is
observed empirically. In most cases, firms have
sufficient incentive to sue if they learn that
their rivals have actually violated the antitrust
laws. Knowing this, the government has little
reason to sue, since it can expect that most of
the rightful suits are already being initiated
privately. Thus, public enforcement tends to give
way to private enforcement when the two are in
play. This is consistent with the observation
that private antitrust suits have outnumbered
public suits in the U.S. by a 9-to-1 ratio from
1970 to 1995.6
Private v. Public Antitrust Enforcement A
Strategic Analysis R. Preston McAfee, Hugo M.
Mialon, and Sue H. Mialon January 12, 2008
27
Private enforcement as a useful complement to
public enforcement

• Numerous important private cases in the US where
  the government believed that it would not be
  successful or that the case otherwise was not
  worth bringing. These include challenging
• -a boycott of the US insurance market organized
  by British firms (Hartford Fire Ins. Co. v.
  California, 509 U.S. 764 (1993)
• a separate price fixing conspiracy in the food
  additive industry from the group of cases brought
  by the government (In re High Fructose Corn Syrup
  Antitrust Litig., 295 F.3d 651 (7th Cir. 2002),
  cert. denied, 537 U.S. 1188 (2003)(subsequently
  settled for 525 million).
• the structure and operation of the United States
  credit card market.(In re Visa Check/Master Card
  Antitrust Litig., 280 F.3d 124 (2d Cir. 2001),
  cert. denied, 536 U.S. 917 (2002).

Spencer Weber Waller Towards a Constructive
Public-Private Partnership to Enforce Competition
Law
28
Private enforcement as a complement to public
enforcement
Private rights of action also provide a safety
net ensuring the viability of theories endorsed
by the legislature and the courts that the
government disfavors at a particular
time. Currently, the federal government rarely,
if ever, enforces the prohibitions against resale
price maintenance, tying, price discrimination,
and brings few if any monopolization or
attempted monopolization cases. The enforcement
of these aspects of the antitrust laws thus falls
almost entirely to private parties and the law
would be in effect repealed by inactivity if left
to the agencies. For example, during the 1980s,
the agencies brought so few merger cases that
enforcement of the law was kept alive by private
parties and the state attorneys generals
bringing these cases in the federal
courts. Spencer Weber Waller Towards a
Constructive Public-Private Partnership to
Enforce Competition Law
29
Summary of the discussion on the plaintiffs model

• Private litigation has a compensatory function
  and a deterrent effect
• The social benefit of private litigation
  depends crucially on whether the courts are
  sufficiently accurate ( which limits the
  possibility of strategic litigation)
• Even without strategic behaviour on the part of
  litgants, private litigation can lead to
  overenforcemnt or under enforcement depending on
  a large number of variables (procedural
  arrengements) because private incentives are not
  aligned on the social benefits
• - Private litigation can be useful complement of
  weak or very costly public enforcement
• Private litigation is a (very) costly process. To
  achieve deterrence, there are usually less costly
  alternatives

30
The OECD Competition Committee discussion of
private litigation
31
OECD principles

• Private antitrust enforcement can substantially
  improve the functioning of a competition regime.
• But more private enforcement is not always
  beneficial. Getting
• the "dosage" right must be a key, objective of
  reforms, in order
• to ensure that private antitrust enforcement will
  encourage
• greater compliance with antitrust norms while
  avoiding litigation
• that is wasteful and could discourage socially
  beneficial conduct.
• (.) virtually all participants also agreed that
  private
• enforcement can have risks and impose unnecessary
  costs on
• society, in particular when poorly designed
  substantive rules
• and/or inadequate procedural rules result in
  excessive litigation
• and discourage pro-competitive conduct.

32
OECD principles
(2) It is a widely held view that private
antitrust enforcement, like public enforcement,
should in the first place aim to increase
deterrence and compliance with competition
laws. Many concurred that rules concerning
private litigation should in the first place be
designed to increase deterrence and better
compliance with competition rules. Accordingly,
public and private antitrust enforcement should
be viewed as complements that serve the same goal
of deterring anticompetitive conduct that harms
consumer welfare The concept of "optimal
deterrence" suggested that each country should
seek a mix of private and public enforcement that
minimizes the costs of under-deterrence and
overdeterrence. Another view holds, however, that
optimal deterrence should be a concern primarily
for public enforcement.
33
OECD principles
(3) Substantive competition law rules and
procedural rules are interdependent. When
creating procedures to encourage more private
enforcement, the relationship between enforcement
rules and substantive norms should be carefully
considered. Encouraging more private enforcement
would have overall benefits only when substantive
rules were sound. Along the same lines, many
participants recognized that private enforcement
would work best if substantive rules are clear
and well defined. The interdependence between
substantive norms and private enforcement also
means that private litigation is not uniformly
desirable across all areas of antitrust law. Many
participants opined that private enforcement was
most effective in areas with clear standards of
liability and a general consensus on what
constitutes unlawful conduct.
34
OECD principles
(4) Competition policy and competition law
enforcement, including private enforcement,
should be viewed as an integrated policy system
in which a number of factors contribute to the
goals of deterrence and compensation. Several
speakers highlighted during the discussion that
the effectiveness of private litigation
instrengthening the goals of deterrence and
compensation depended on a number of factors
which formed an "organic" competition policy
system. In particular Professor Gavil noted that
substantive competition rules, evidentiary rules,
and procedural rules, including rules for the
compensation of attorneys, would work together as
parts of a broader mix to create deterrence and
ensure compensation. He emphasized that these
factors were interdependent and changing one
without taking account of the others would be
difficult and could be ineffective.
35
OECD principles
(5) As private antitrust litigation increases,
competition authorities no longer have a monopoly
over the development of competition law and
economics, and the setting of enforcement
priorities. Courts can contribute to the
development of better substantive rules but
there is also a risk that the outcomes of private
cases will deviate from what is generally
accepted as sound competition policy.
Institutional measures can be taken to achieve
greater consistency between public and private
enforcement. The discussion addressed various
measures that can contribute to greater
consistency between private and public
enforcement and a more uniform set of policy
goals. These include efforts by competition
authorities to develop clear substantive norms
participation of competition authorities in
private litigation as amicus curiae and
procedural rules that either allowed or obliged
courts to seek the opinion of the competition
authority before deciding on an infringement of
competition laws.
36
OECD principles
(6) The growing importance of competition
economics across all jurisdictions increases the
role of economic experts in private litigation,
whether they serve as court appointed experts or
experts for the parties. Rules that encourage
economic experts retained by the opposing parties
to meet early in the process and identify items
on which they agree can help the court to better
manage a trial.
37
OECD principles
(7) As plaintiffs in private actions for damages
frequently will have insufficient evidence to
support their claims, rules that facilitate their
access to evidence in the defendants possession
can be an important component of a
well-functioning private enforcement system.
However, rules allowing for discovery must be
carefully designed to avoid excessive costs and
abusive litigation strategies. In addition,
active case management by courts appears critical
to limit the risk that parties abuse the
discovery process.
38
OECD principles
(8) As violations of competition laws may harm
different groups of market participants,
including direct and indirect customers, a
private enforcement regime must decide which
groups should be allowed to bring actions for
damages. Although this issue has received
enormous attention in the public debate and
academic literature, no consensus exists on the
most appropriate rules on standing. There is also
very little empirical evidence available that
could illuminate the debate. Some believe that
the goal of optimal deterrence can be served most
effectively when only direct purchasers are
allowed to sue for damages or at least are given
a preferred role in private enforcement others
believe that actions by indirect purchasers can
be an important component of an effective
enforcement regime and should not be restricted
39
OECD principles
(9) If an enforcement regime allows indirect
purchasers to sue for damages, rules should be in
place to coordinate multiple law suits in
addition, indirect purchaser suits typically will
be meaningful only if rules exist that make it
possible to aggregate a large number of
individual claims.
40
OECD principles
(10) The theory of optimal deterrence suggests
that damage awards in competition cases should
reflect the net harm caused to consumers plus
social cost, with a multiplier in the case of
concealed offenses such as cartels to reflect the
likelihood that the offence would be detected.
The multiplier could either be a fixed
multiplier, such as treble damage awards in the
United States, or other mechanisms to ensure that
damage awards exceed pure compensation, such as
the award of pre-judgment interest or exemplary
damages that can be awarded in the discretion of
the court. Although concerns are frequently
raised in the public debate about excessive
damage awards in competition cases, there is no
empirical evidence that damage awards, even in
combination with public fines, have reached a
level where they would be considered an optimal
deterrent.
41
OECD principles
(11) Class actions, collective actions, or other
forms of actions that allow the aggregation of a
large number of small claims for damages can be
an important element in a competition regime that
seeks to effectively deter anticompetitive
conduct. They can be a useful form of deterrence
in particular with respect to hard core cartels.
Although to date very few countries outside the
United States and Canada have much experience
with class actions/collective actions in
competition cases, many members and observes are
interested in developing rules and incentives to
establish them as part of their enforcement
regimes.
42
OECD principles
(12) A system that allows actions with an
aggregation of claims has features that are
distinct from other forms of private litigation
the focus shifts from clients to lawyers, from
damages to attorneys fees, and from litigation
to settlements. Specific measures can be
considered to ensure that such a system is
successful and effective. These include, for
example, proper incentives for counsel to
litigate on behalf of a large class of plaintiffs
as well as a series of measures to ensure that
the interests of the class members are protected,
such as active court supervision, rules against
frivolous suits, and procedures to assure
fairness to the class when damage awards are
distributed.
43
OECD principles
(13) As individual damage claims of class members
can be small, other mechanisms to distribute
damage awards in class actions/collective actions
may have to be considered. These might in certain
cases include coupon settlements, even though
this form of compensating plaintiffs should not
generally be favored in competition cases. A cy
pres approach may be an alternative where the
court decides to give the award to a charitable
organization or some other public interest
organization, rather than individual plaintiffs.
44
OECD principles
(14) Competition authorities can facilitate
private actions by making evidence in their
possession available to courts for use in private
litigation. However, any assistance to courts and
private plaintiffs must be carefully weighed
against the risk that the sharing of evidence
could interfere with the competition authoritys
investigation. Because of these concerns, some
competition authorities will as a matter of
policy resist all attempts by private plaintiffs
to obtain documents from them.
45
OECD principles
(15) Concerns exist in particular about the
interaction between private actions for damages
and leniency programs. A number of policies can
be considered to minimize the risk that the
threat of private litigation could undermine
incentives to apply for leniency. This includes,
for example, limiting a leniency applicants
liability in private actions for damages. But
limiting exposure to private damages, if it is in
fact necessary to incentivize leniency
applications, also reduces the deterrent effects
of private enforcement. There is no consensus
about how to best resolve this trade-off.
46
The debate in Europe
47
Ms Kroes 2006 Private enforcement as a complement
to public enforcement
 Competition authorities whether European or
national have to work within certain
constraints. Inevitably, the resources available
are not unlimited. So () priorities have to be
set as to how and where to use enforcement
powers. Consequently, there is huge potential for
public enforcement to be complemented by the
actions of individuals and business who will
naturally make their own cases the top and only
priority! If we can help citizens and businesses
to enforce their rights then potential
offenders will be more likely to think twice
before breaking EC competition rules. And that
objective greater compliance with European
competition law is a key factor in the Green
Paper which the Commission published last
December .
Neelie Kroes The Green Paper on antitrust damages
actions empowering European citizens to enforce
their rights Opening speech at the European
Parliament workshop on damages actions for breach
of the EC antitrust rulesBrussels, 6 June 2006
48
Ms Kroes 2006 Plea for stand alone actions
Secondly, if we are to succeed in creating a
competition culture, we must encourage
stand-alone actions which do not simply
follow-on from public enforcement activity.
Neelie Kroes, The Green Paper on antitrust
damages actions empowering European citizens
ton enforce their rightsOpening speech at the
European Parliament workshop on damages actions
for breach of the EC antitrust rules,Brussels, 6
June 2006
49
W. Wills on the superiority of public enforcement
to private action deterrence and punishment in
follow-on cases
As far as deterrence and punishment are
concerned, public antitrust enforcement is
superior to private actions for damages.
Follow-on actions for damages do have some
additional deterrence effect (). However, if
additional monetary penalties were indeed
required for optimal deterrence, these could be
provided for at less expense and more reliably by
increasing the fines imposed in the public
enforcement proceeding.
50
Can fines imposed in public proceedings be
brought to the optimal level for deterrence ?
Werden and Simon (1987) find that the optimal
fine for the average cartel convicted by the
Department of Justice from 1975 to 1980 was 111
times higher than the fine actually paid Wils
(2005) finds that the optimal fine would reach
150 of affected sales, and within the range of
5.0 to 7.5 times the overcharge Motta (2007)
estimates that the minimum level of fine
(relative to market turnover) necessary to deter
cartel formation (if the competitive mark-up is
50 and the demand elasticity is 0.6) is around
68 per year of the relevant market turnover of
the firm. Combe (2007), under rather
conservative assumptions, calculates the optimal
sanction as being 6.6 times higher than the loss
of consumer surplus, or for a five-year cartel
300 of turnover
51
2008 White paper separate task approach
If public antitrust enforcement is the superior
instrument to pursue the objectives of
clarification and development of the law and of
deterrence and punishment, whereas private
actions for damages are superior for the pursuit
of corrective justice through compensation, then
the optimal antitrust enforcement system would
appear to be a system in which public antitrust
enforcement aims at clarification and development
of the law and at deterrence and punishment,
while private actions for damages aim at
compensation Such a separate-tasks approach,
under which public antitrust enforcement and
private actions for damages are each assigned the
tasks they are best at, appears to be the
approach adopted by the European Commission in
its 2008 White Paper on Damages actions for
breach of the EC antitrust rules.
Wouter P.J. Wils The Relationship between Public
Antitrust Enforcement and Private Actions for
Damages World Competition 32, no. 1 (2009) 3-26.
52
2008 White Paper rejection of the deterrent
approach to private litigation
If the European Commission has adopted in its
2008 White Paper the separate-tasks approach, it
has thus rejected a different approach, which it
had put up for discussion in its 2005 Green Paper
on Damages actions for breach of the EC antitrust
rules under which private actions for damages
serve the same deterrence objective as public
antitrust enforcement (hereafter the deterrence
approach). The deterrence approach is the one
taken by US federal antitrust law, as shown in
particular by the provision of treble damages,
the exclusion of the passing-on defence in
actions brought by direct purchasers and the
denial of standing to indirect purchasers.
Wouter P.J. Wils, The Relationship between Public
Antitrust Enforcement and Private Actions for
Damages, World Competition 32, no. 1 (2009)
3-26.
53
Consequences of the separate approach
() The European Commission has thus rejected in
its 2008 White Paper on Damages actions for
breach of the EC antitrust rules the
American-inspired options of multiple damages,
exclusion of the passing-on defence and denial of
standing to indirect purchasers, which may make
sense within a deterrence approach, but certainly
do not if the task of deterrence and punishment
is left to public enforcement and the objective
of private actions for damages is to achieve
compensatory justice.
Wouter P.J. Wils, The Relationship between Public
Antitrust Enforcement and Private Actions for
Damages, World Competition 32, no. 1 (2009)
3-26.
54
Consequences of the separate approach
the European Commission stressed in its 2008
White Paper on Damages actions for breach of the
EC antitrust rules that it only wanted to propose
balanced measures, that avoid a situation
where unmeritorious litigation is encouraged or
facilitated. The White Paper indeed commends
single compensatory damages, generally approves
of the loser pays principle, which plays an
important function in filtering out unmeritorious
cases and advocates a system of disclosure of
evidence inter partes based on fact-pleading and
strict judicial control of the plausibility of
the claim and the proportionality of the
disclosure request.
Note does that really eliminate unmeritorious
claims ?
55
Fee allocating schemes uncertainties
To quote Avery Katz (2000), the current state
of economic knowledge does not enable us to
reliably predict whether a move to fuller
indemnification would raise or lower the total
costs of litigation, let alone whether it would
better align those costs with any social benefits
they might generate. The reason for this agnostic
conclusion is straightforward. Legal costs
influence all aspects of the litigation process,
from the decision to file suit to the choice
between settlement and trial to the question
whether to take precautions against a dispute in
the first place ... The combination of all these
external effects are too complicated to be
remedied by a simple rule of loser-pays. Instead,
indemnity of legal fees remedies some
externalities while failing to address and even
exacerbating others.
Prof. Andrea Renda , Prof. John Peysner Prof. Dr.
Alan J. Riley Prof. Barry J. Rodger  Making
antitrust damages actions more effective in the
EU welfare impact and potential scenarios  21
December 2007 , Centre for European Policy
Studies (CEPS)
56
Should competition authorities reward
compensation by offenders ?
 Public antitrust enforcement should in
principle focus on the objectives of
clarification and development of the law, and of
deterrence and punishment, whereas the task of
ensuring compensation for the victims of
antitrust infringements can normally be left to
private actions for damages. Competition
authorities should thus certainly not facilitate
compensation at the expense of deterrence and
punishment.
Wouter P.J. Wils, The Relationship between Public
Antitrust Enforcement and Private Actions for
Damages, World Competition 32, no. 1 (2009)
3-26.
57
Should competition authorities reward
compensation by offenders ?
On the other hand, competition authorities should
also avoid condoning inadequate compensation. It
may be possible to satisfy all these concerns by
having a policy under which a fine reduction (of
an amount well below the amount of compensation
(expected to be) paid) is granted if the offender
has either reached settlements with injured
parties, and/ or has accepted an independent
arbitration system the use of which is optional
and free for damage claimants. Such a policy
could help the victims of the obtain
compensation at lower cost, without undermining
deterrence and without using significant public
enforcement resources.
Wouter P.J. Wils, The Relationship between Public
Antitrust Enforcement and Private Actions for
Damages, World Competition 32, no. 1 (2009)
3-26.
58
Leniency and private enforcement
It is of course true that the incentives to apply
for leniency could be increased by granting
leniency recipients immunity or a reduction in
follow-on liability for damages. This is however
not necessary for the effective functioning of
leniency. If there were a need to enhance the
attractiveness of leniency, this could always be
done by increasing the level of fines or other
public penalties from which leniency recipients
are granted immunity or reductions. In the
absence of any necessity in the public interest,
it would also be unjust to deprive, wholly or
partially, the victims of antitrust infringements
of their subjective right to claim compensation
for the harm caused to them by antitrust
offenders.
Wouter P.J. Wils, The Relationship between Public
Antitrust Enforcement and Private Actions for
Damages, World Competition 32, no. 1 (2009)
3-26.
59
Conclusions
It is likely that public competition law
enforcement in Europe is stronger and more stable
than public competition law enforcement in the
US. As a result, in Europe there is less
necessity to rely on private litigation to remedy
the weaknesses of public enforcement. But it
should be recognized that private litigation
necessarily has an effect on deterrence
(irrespective of the fact that compensation may
be the only objective of private
litigation). The alleged superiority of public
enforcement over private litigation for
deterrence is based on assumptions concerning the
ability of public enforcers to impose sanctions
which will be dissuasive and the idea that
competition authorities are generally better at
discovering and proving antitrust infringements
than private parties. The first assumption is
challenged in US literature. There is a debate
about the second assumption.
60
Conclusions
The reluctance of competition authorities to
reduce the fines of violators that have
compensated their victims reflects a lack of
understanding of the complex relationship between
deterrence and compensation and imposes
unnecessary costs on society. The necessity,
perceived by competition authorities, to prevent
any weakening of the effectiveness of leniency
programs, even if it means limiting the
possibilities of private enforcement, may be
misguided if there is an effective deterrence
effect of private enforcement. The argument that
courts are better placed to evaluate damages in
competition cases than competition authorities is
weak given the cost of using the legal system,
the fact that competition authorities are used to
dealing with microeconomic evidence and the fact
that they have access to a large set of data
concerning markets.
61
Conclusions
Any attempt to promote private litigation in
competition cases in Europe requires a sustained
effort to help courts deal with economic evidence
as often either the decisions of NCAs will not
be binding on NCs or will be nonexistent. There
may be good reasons to allow the passing-on
defence and to give standing to indirect
purchasers in Europe but the cost of retaining
these options may be such as to prevent effective
private litigation, particularly in front of
national courts with little understanding of
economic reasoning.