Commission publishes "Passing-on Guidelines" for national courts

On 1 July 2019, the European Commission ("Commission") published guidelines for national courts, outlining how to estimate the extent to which price increases set by a cartel may have been passed down the supply chain. The "Passing-on Guidelines" include an overview of the theory of passing-on, techniques for assessing the extent of pass-on, as well as examples drawn from cases around Europe.

Anyone harmed by an infringement of EU competition law has the right to obtain compensation for such harm. In 2013, the European Commission published a Communication on quantifying harm in antitrust damages actions, as well as a Practical Guide on the methods and techniques available to quantify the types of harm normally caused by anticompetitive practices. The Passing-on Guidelines published on 1 July 2019 focus specifically on how to estimate the share of the overcharge resulting from anti-competitive conduct that was passed on to indirect purchasers.

Infringements of Article 101 often result in higher prices for the customers (the direct purchaser) of the infringing undertakings. However, direct purchasers may, as a result of facing higher costs, fully or partially pass-on the price increase to their downstream customers (indirect purchasers). In actions for damages, passing-on can play different roles. First, passing-on may be used as a 'shield' by the infringer to argue that the claimant (either the direct or indirect purchaser) passed-on the overcharge to their customers and that their loss was therefore lower. Second, passing-on may be used as a 'sword' by indirect purchasers to argue that they paid higher prices as a result of the infringement and are therefore entitled to damages.

According to economic theory a range of factors will determine the degree of pass-on by a direct purchaser including:

• the nature of input costs subject to an overcharge;
• the product demand faced by the direct purchaser; and
• the intensity of competition in the market in which the direct purchaser is active.

The Passing-on Guidelines provide an overview of the techniques that can be used to quantify passing-on related price effects:

• Comparator based models compare prices set by the purchaser during the infringement period with prices in a comparator market(s). The comparator market could be a different time period (the before-during-after approach), a separate product or geographic market not affected by the infringement (the cross sectional approach), or a combination of both approaches (the difference-in-differences approach).
• The passing-on rate approach involves analysing how previous changes in a firm’s costs have affected its prices before or after the infringement period. This passing-on rate is then combined with information on the overcharge and sales.
• The simulation approach develops an economic model of competition at the stage of the distribution chain where the claimant is active, and simulates the effect of the relevant overcharge on the claimant’s profit during the infringement period.

All of the above approaches require significant information from both the defendants and the claimants and also usually involve regression analysis. The Passing-on Guidelines note that it is therefore important that the extent of disclosure required to gather this information is proportionate to the overall damages claim.

When there is a passing-on price effect there is the possibility of a volume effect. The volume effect refers to the loss of profit due to reduced sales that result from passing-on, i.e. less volume sold because of higher prices. The size of the volume effect depends on: (i) the difference between actual sales and sales in the counterfactual (i.e. absent the infringement); and (ii) the price-cost margin that would have been achieved in the absence of the infringement. The volume effect can be estimated using:

• comparator based methods (e.g. comparing volumes and margins in a separate geographic market); or
• by combining the price increase estimated as a result of the passing-on price effect with an estimate of the claimants' price sensitivity (elasticity of demand).

Although the volume effect has only been estimated by national courts in a limited number of cases, it is important that it is not forgotten. As the Passing-on Guidelines note: "if the price effect is taken into account without the volume effect, this can underestimate the true harm. Hence, in order to avoid over- or under-compensation, the estimation of the volume effect is as essential as the estimation of the passing-on related price effect".