Actions for Damages in Private Enforcement

Has Devenish Nutrition Limited V Sanofi-Aventis SA [2008] EWCA Civ 1086 Actually Stimulated Actions For Damages In Private Enforcement?

The case of Devenish is primarily an action for damages; however, the case has a much more significant impact than can be comprehended from the judgment alone. The action was before a national court and was brought by Devenish, as a customer of the offending cartel. The area of private enforcement (where private persons such as Devenish, are able to bring enforcement actions against other individuals who have infringed one of the competition prohibitions; as opposed to public bodies which have principally been the enforcement bodies of competition law breaches in the EU) has been an area which has gone through a process of much redevelopment, and this case has appeared on the back of a number of significant changes towards decentralisation. A purpose of decentralisation of enforcement has been to ensure effective redress for business and consumers for breaches of the prohibitions contained in Article 81 and 82 of the EC treaty and this case was significant in the respect of the redress that is available.

Introduction

The case of Devenish can be suggested to have a significant impact upon future private actions for damages, and the availability of reparation in national courts. In determining as a matter of policy that certain damages are unavailable, may have made the pursuit of private competition damages a far less commercially viable and attractive prospect, contrary to the approach outlined by the European Commission (EC); whether this is true will be examined in light of the judgment. It is intended to make an assessment of the judgment in terms of the policy and impact upon private enforcement, by considering the various issues around damages that arose in the case.

It is necessary to outline briefly the facts and the nature of the appeal. Devenish arose from a decision by the EC that various vitamin manufacturers had participated in a cartel supplying vitamins; which was a breach of Article 81, and the EC proceeded to impose (record fines at the time) fines, totalling E855.22m. It is well settled that a Commission or a public enforcement agency’s decision is legally binding and must be followed as a finding of an infringement. Devenish brought a follow on action for damages resulting from the EC finding, as Devenish previously purchased vitamins directly from the defendants. The litigation made its way to the Court of Appeal as the High court rejected relief over and above compensatory damages, specifically, exemplary damages, restitution of unjust enrichment and/or an account of the defendants’ profits. The appeal resulting from the action was on the issue of recovery of restitutionary damages, which was affirmed by the Court of Appeal (the court refused permission to appeal to the House of Lords on this point).

Actions For Damages

Actions for damages subsequent to findings by the public enforcement authorities (a follow on action) have not always been an important part of the enforcement regime of breaches of competition law, and were previously found to be a picture of ‘total underdevelopment.’ Following significant investigations by the European Competition Commission they have finally released an outline of the approach of actions for damages, through the White paper released in April 2008, stating that the ‘right of victims to compensation is guaranteed by Community law, as the European Court of Justice recalled in 2001 and 2006.’

The resounding judgments of Crehan and Manfredi, have clearly acknowledged that within Europe recovery of damages are available to victims of competition breaches. However, long before these judgements the UK courts have accepted that there is a right to damages for breaches of the prohibitions. The White paper states openly that the guiding principle of the paper is ‘full compensation’ and it would suggest that in the future, courts should go to any length to ensure that consumers or businesses receive complete redress, this appears to be called into question through the ruling in Devenish.

There has been two significant legislative changes in the UK which have aimed to significantly improve the availability redress for victims; the Competition Act 1998and the Enterprise Act 2002, which contained provisions aimed at solving a number of barriers that had been found to exist. The aim of the legislation was to promote actions by individuals and Devenish has placed a set back towards the improvements that have been made, will be assessed below through examining the issue of damages.

The Issue Of Damages In Devenish

Devenish’s main argument through the litigation was that it was entitled to greater damages than compensatory alone, asking the court to impose exemplary or punitive damages against the vitamin suppliers. An attempt was made to justify this argument on the grounds that this was required in order to act as a deterrent against other cartelists. The High Court having ruled that the traditional system of compensatory damages are adequate, dismissed the claim for exemplary damages on the grounds that the suppliers had already been fined by the European Commission, and did not deserve to be punished twice. This issue was not specifically appealed to the Court of Appeal, but is significant and will be dealt with below.

Mr Justice Tuckey in the appeal stated that ‘Devenish is entitled to be compensated for any loss it has suffered as a result of the cartel, no more and no less,’ this without doubt follows from the indications made by the White paper of what victims should be able to recover. It was clearly acknowledged by the appeal judges that there has been a significant move by authorities to encourage recovery of damages for those who have suffered damage, however, in this case it was stated that it was not necessary for Devenish to obtain a share in the cartel’s profits in order for justice to be done. Attempt was made by Justice Longmore to find reasoning for justification of imposing damages above those of a compensatory nature, stating that ‘the only real argument in favour of an order for an account of profits is the argument of policy that cartels are a notorious evil and the civil courts should in some way provide an incentive for their eradication by making such an order’ adding that ‘it does not seem to me to be right for the courts to take this step on their own initiative.’ The judgments in Devenish certainly reinforce the requirement for deterrence to be achieved for breaches of competition law, however, it was clear that the court felt that the achievement of deterrence should be achieved by the competition authorities. The Civil Justice Council stated that ‘the case raised important issues of substantive law, procedure and principle as well as matters of political and social policy,’ underestimating the impact of this judgment in the future by claimants is therefore likely to be to their detriment.

The court was somewhat hesitant to reject damages above those of a compensatory nature, but was found to be bound by community and domestic rules and it follows that the implementation of the recommendations in the White Paper, which will create a level of minimum harmonisation is likely to be welcomed in light of this judgment, which raises a number of issues that demonstrate there is conflict between domestic and community rules. To ensure that private enforcement becomes a more significant part of the enforcement regime, there is the requirement for certainty to exist within the structure of private enforcement.

Restitutionary Damages And Their Significance

Both restitutionary relief and an account of profits were refused on the basis that compensatory damages were available and would constitute an adequate remedy for Devenish. The Office of Fair Trading (OFT) has previously stated that in some cases restitutionary awards should be available, and in the recent White paper it is recommended that ‘loss of profit’ should be available but will be dependent upon the circumstances of each individual case. A inconsequential barrier against a restitutionary award in this case, was the fact that such an award may have provided Devenish with an additional award, as it had passed on any overcharge to indirect purchasers. The ‘passing on defence’ was to some extent insignificant in this case in denying the recovery of restitutionary damages, a greater emphasis was placed on the inability of the court to proceed to give these damages as a basis of domestic law, but the impact of this defence is likely to prevent rather than promote actions for damages.

Where the defence is employed, especially where the victim is near the bottom of the supply chain, this is likely to limit the available damages that could be recovered and deter claims on the basis of only small possible gains. In order to avoid the deterring of such proceedings being brought, other forms of relief such as restitutionary awards are a vital incentive to ensure that victims can receive more than minimal redress. Though group actions are available in the UK, a comprehensive system such as that found in the US does not appear to exist. There has been legislative change which aims to promote this form of action, but this area is still under much development. Ensuring that there is a level of damages which is beneficial to a claimant increases the level of deterrence and creates an incentive; both are key for the success of private actions, due to the lack of group actions.

As mentioned above, compensatory damages have been available for a long time, but do not seem to have encouraged potential claimants, and a prospective reason for the lack of private enforcement actions in the past. The availability of a restitutionary award may have been a significant change towards incentivising more claimants, leading to an increase in individual and group actions. However, as the appeal failed, restitutionary damages are not available in follow-on-actions from cartel cases. Even though restitutionary damages were extended in Attorney General v Blake to breaches of contract cases in exceptional circumstances; restitutionary remedies are only available for non-proprietary torts, precluding private actions for damages based on breaches of statutory duty in cartel cases. The court was not convinced that EU law required for such damages to be available. The availability of restitutionary damages cannot be stated to be final until the House of Lords has the prospect of considering the matter of remedies in cases concerning breaches of competition law, however, following the white paper, there appears to be a significant case for legislative change at national or EC level.

From the above discussion, it follows that the case is likely to have important ramifications for individuals and collective redress in the UK. Availability of ‘restitution damages would have been likely to fulfil the policy objectives’ of the competition authorities, providing greater encouragement of private actions and increasing the deterrent effect of such actions, as a higher award could be given by the court, making any gains through cartelist activities equivalent to zero or at least very minimal. Where a claimant’s loss has occurred towards the end of the supply chain, the loss suffered is likely to be negligible, leaving little incentive to seek redress. The availability of restitutionary damages may have allowed for a greater balance to be struck in the arena of damages as history suggests compensatory damages are in some senses a small for justification for bringing or joining a group action.

Exemplary Damages In The High Court

The reasoning for refusal of exemplary damages was that this would infringe the principle that prohibits the same person from being sanctioned more than once for the same unlawful conduct (principle of ne bis in idem), and this form of damages also has the same intention as the Commission’s fines; deterrence and punishment. It follows therefore, that the award of exemplary damages would essentially be concluding that the Commission’s fines were inadequate and this is not permitted. The conclusion reached by the court can be summarised in the fact that they have found rules in Community law which prevent the award of exemplary damages by a national court. However, English law would be cautious in allowing a defendant to be fined for the same cause, and would be a significant factor against the award of exemplary damages. There are difficulties in allocating exemplary damages among potentially numerous claimants, and suggests that in the circumstances, an action such as this would be unlikely to succeed as a matter of English law.

Lord Devlin in Rookes v Barnard has provided situations where it is possible for exemplary damages to be claimed, stating that ‘where a defendant with cynical disregard for a plaintiff’s rights has calculated that the money to be made out of his wrongdoing will probably exceed the damages at risk, it is necessary for the law to show that it cannot be broken with impunity,’ and therefore it can be suggested that this should be thought to cover situations of competition law breaches and be equivalent to ensuring that there is a level of deterrence.

The fact that exemplary damages have not been awarded I would suggest was correctly decided on the basis of the principles established in Courage v Crehan where it was stated national rules should be no ‘less favourable than those governing similar domestic actions (principle of equivalence),’ has been upheld; as a like action under domestic law would be likely to have the same result. The ‘principle of effectiveness’ is also upheld, as was repeated on numerous occasions through the case, that compensatory damages were available and were ‘sufficient for the purpose of safeguarding the rights of private persons’ and this was correctly concluded by L.J. Arden.

The White Paper by the commission appears to have left open the prospect of claiming exemplary damages, however, this would appear to be excluded by the ‘ne bis in idem’ principle, in cases where a fine has been imposed by the commission. The conclusion reached in this case demonstrates the procedural difficulties that exist between public and private enforcement as identified by A. P. Komninos.

The judgment to some extent is a clarification of the potential liability for defendants in actions such as Devenish, before the English courts. In formulating that compensation is an appropriate remedy in most circumstances, there is a clear message that issues such as deterrence and removing illegal gains is the purpose of fines imposed by the competition authorities. Focus upon compensation removes the risk of double liability to direct purchasers. Komninos states one of the enforcement objectives in competition law is ‘restorative or compensatory,’ and follows to say that ‘Private enforcement primarily serves the restorative-compensatory objective, while the role of public enforcement here can only be minimal,’ Devenish certainly reinforces that this is true.

Conclusion

The implications of the Devenish judgment are likely to be felt by all parties in follow-on-actions for damages. The judgment outwardly looks more favourable for defendants, contradicting the enforcement regime outlined by the commission and national competition authorities. The outcome in this case brings into question the effectiveness of proposals put forward by the competition authorities to encourage private enforcement of competition law.

The ruling that Community rules prohibit the granting of exemplary damages, should prevent the award of exemplary damages in other national courts, and it will be interesting to see whether the precedent is persuasive in other courts. Devenish clearly establishes that damages of a compensatory nature are the norm; linked to a claimant’s provable loss. Consequently, recovery in such situations, maybe significantly lower than they might otherwise have been. Returning to the question of whether the commercial viability of pursuing private competition damages is contravened through this ruling, I would suggest that the ruling is certainly likely to make the pursuit of damages a far less attractive prospect.

Bibliography

Books

B.J. Rodger, A. Macculloch, ‘Competition Law and Policy in the EC And UK’ (4th Edt Taylor & Francis Ltd: 2008)

A.P. Komninos, ‘EC PRIVATE ANTITRUST ENFORCEMENT: Decentralised Application of EC Competition Law by National Courts’ (Hart Publishing 2008: Worcester)

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D. Sheehan ‘Case Comment: Competition law meets restitution for wrongs’ (2009) 125, Law Quarterly Review 222

J. Skilbeck ‘Case Comment: Cartel damages: the Court of Appeal rejects a gain-based remedy’ (2009) 30(3) European Competition Law Review 105

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C. Diemer ‘The Green Paper on damages actions for breach of the EC antitrust rules’ (2006) 27(6) European Competition Law Review 309

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B. Rodger ‘Private enforcement and the Enterprise Act: an exemplary system of awarding damages?’ (2003) 24(3) European Competition Law Review 103

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Websites

http://www.legalweek.com/Articles/1097609/EU+and+Competition+The+right+balance.html last visited on the 04/04/2009

http://www.globalcompetitionreview.com/reviews/10/sections/42/chapters/480/uk-private-enforcement last visited on the 04/04/2009

http://business.timesonline.co.uk/tol/business/law/article4942980.ece last visited on the 04/04/2009

http://www.internationallawoffice.com/Newsletters/detail.aspx?g=46c47814-0e81-4b3f-b837-cfdb8c3e52ee last visited on the 04/04/2009

Legal Press

Mayer Brown ‘EU & UK Antitrust/Competition Legal Alert’ October 2008

Freshfields Bruckhaus Deringer ‘Cartel damages actions: The ruling in Devenish and others v Sanofi-Aventis and others’ October 2007

Herbert Smith ‘Competition litigation reform: What next for private enforcement?’ May 2008

Jones Day ‘Commentary: Damages in Private Cartel Actions: The Position in England’ October 2008

Olswang ‘Commercial Dispute Resolution Legal Update’ November 2008

Russell McVeagh ‘Unleashing the Hounds: Where to for Antitrust Damages Regimes?’ Competition Alert May 2008

LeBoeuf, Lamb, Greene & MacRae ‘The Enterprise Act 2002: Competition Provisions’ January 2003

Addleshaw Goddard, ‘Restitutionary damages in cartel cases: is a new approach required for group actions?’ Winter 2008

Publications

OFT Discussion Paper ‘Private actions in competition law: effective redress for consumers and business’ April 2007

‘White Paper On Damages Actions For Breach Of The EC Antitrust Rules’ 2.4.2008 COM(2008) 165 final

‘Green Paper – Damages actions for breach of the EC antitrust rules’ COM(2005) 672, 19.12.2005

Editors, J. Sorabji, M. Napier, R. Musgrove, “Improving Access to Justice through Collective Actions” – Developing a More Efficient and Effective Procedure for Collective Actions Civil Justice Council, November 2008