PITFALLS IN CASE OF NON-PROSECUTION OF CARTEL DAMAGES CLAIMS – CONSIDERATIONS UPON THE NINTH AMENDMENT TO THE ACT AGAINST RESTRAINTS OF COMPETITION
Clearly, cartel damages claims brought by companies against companies are a complex matter which, in almost all cases, requires consultation with external advisers who have acquired experience in handling proceedings of this kind. Practice shows that this effort can pay off. The fact, however, that the non-prosecution of cartel damages claims, too, may involve legal risk, which should be beard in mind, is less obvious. This topic is addressed in the following article due to recent amendments of the German cartel law which are aimed to further ease the enforcement of cartel damages claims.
I. Further facilitation of the prosecution of cartel damages claims as a result of the Ninth Amendment to the Act against Restraints of Competition
At the beginning of March the German Bundestag passed the Ninth Amendment of the Act against Restraints of Competition (GWB). As a result, the German cartel law is experiencing significant changes. One of the central issues of the amendment is the facilitation of the legal enforcement of claims for damages by cartel victims. Briefly summarised, the Amendment provides for the following changes in this respect:
- It is assumed that one cartel caused damage. This does not only include damages in the price fixing and quota cartel, but also in the distribution of markets and customers. It is possible to disprove this assumption; however, this is the cartel member’s duty during the damage proceedings.
- The procedural situation for customers on downstream markets who are not directly affected by a cartel agreement (so-called indirect customers) is also being strengthened. It is assumed – in their favour – that they had to bear the cartel‘s surcharges.
- The procurement of information to establish a (potential) damage claim is being facilitated by a new disclosure regime, which is unprecedented in German law. Under the new regime, the party alleging injury by the cartel can – even before filing a damage claim – request the delivery of evidence or the supply of information which is necessary for filing a claim for damages. To a certain extent, this resembles the “pre-trial discovery” rules under US law. The claim is not only directed against cartel members, but also against third parties who are in possession of relevant information. The disclosure obligation is limited by several – partly unclear – exemptions, e. g. in order to protect key whistleblowers and for the event that the disclosure may prove “disproportionate” in the course of balancing the interests regarding the protection of company secrets.
- The regular limitation period of claims for damages is being prolonged from three years to five years. The absolute limitation period remains ten years. Both periods do from now on not start at the point of termination of the cartel law violation which in particular in cases of long-term cartel law violations such as price fixing agreements makes claims for damages from the early days of the cartel enforceable for a considerably longer time.
The changes entered into force after the promulgation of the Amendment in the Bundesgesetzblatt (German Law Gazette) on 9 June 2017. The new limitation period applies in particular to claims that were unexpired up to now and that arose before the GWB amendment came into force.
II. Legal risks of the non-prosecution of cartel damages claims
Even though the number of cartel damages claims has significantly increased over the past few years and Deutsche Bahn AG is known for running its division for the enforcement of cartel damages claims as own „profit centre“, by far not all direct and indirect cartel victims decide to take up (possible) claims for damages. One might think: No action required if claims shall not be pursued. Under company law, however, it is not that simple: After all, the decision at issue concerns potential payment claims of the company that may add up to substantial sums, depending on the individual case. In general, members of the management body of a company (“managers” or “management”) have to ensure that the company’s claims against third parties are being enforced. Managers should neither let these claims expire nor waive them. The situation is different if there are reasonable grounds for abstaining from the prosecution of the claims in a specific case. Hence, the non-enforcement of (possible) cartel damages claims in any case requires justification. Otherwise the management exposes itself to the risk of personal liability for acting against the company’s interests and violating its duty of care. Such accusations may for example arise if competitors in equivalent positions successfully enforce high damage claims – and possibly not after years of several proceedings through all judicial instances, but after rather quickly achieved settlements which are not uncommon when it comes to cartel damages claims. Also, damages might be claimed from managers in connection with disputes among the shareholders if the managers are themselves involved or caught in the crossfire. If – for any reason – such dispute occurs, an assumed consensus on the non-prosecution of (possible) cartel damages claims among shareholders and management may quickly fall into oblivion. That is why the liability risk should be taken seriously even if the company is not a public company and there is a broad consensus between all parties involved that the company‘s claims for damages should not be enforced for certain reasons. A lot may change until the end of the limitation period of any possible liability claims against managers.
III. Recommendations for risk preventions
The liability risk can be countered. Depending on the individual case, there may be different strategies available. Typically, however, the managers will have to take the initiative. In doing so, it is generally advisable to include the following steps:
- Initiate a decision making process: The first important point is to actively make a decision and to initiate the decision making process addressing the question of whether to pursue any claims or not.
- Generate an information base: A proper decision process requires an adequate information base. Accordingly, several questions have to be clarified at least roughly, e.g.: What are the prospects of success in case of filing a cartel damages claim? Which costs will arise? What is the amount of the damage eligible for compensation? What about the opposing party’s solvency? What other impacts have to be taken into consideration in case of pursuing claims (e. g. impacts on business relations)?
- Avoid formal errors: The decision has to be free from formal defects if it is supposed to shield the managers from liability. This means that all applicable requirements have to be observed when it comes to competencies, form and the decision process.
- Document: The managers are well-advised to document the decision making process and its result, so that any judge can understand on which information the decision is based, why the company (if applicable) abstained from deeper elaborating the information base and which arguments amongst all that had to be considered eventually tipped the scale towards the result and why. That, of course, takes a lot of time and effort. However, both are well invested considering the fact that, in doubt, managers will be made liable for any insufficient documentation in a liability claim against them.
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