The UK’s Competition Appeal Tribunal (“CAT”) recently published its decision awarding Royal Mail and BT approximately £17.5 million in damages against DAF Trucks, as follow-on damages from the EC’s findings in the Trucks cartel case. The judgment covered a wide range of issues, and we highlight a few key points of interest below.
Overcharge
Experts and the CAT considered several issues in relation to overcharge calculation, such as the period of analysis, data limitations, currency exchange rates, and how to account for the distortions introduced by the Great Financial Crisis.
The latter issue relates to the fact that the conduct coincided (partially) with the crisis, and the experts therefore faced a challenge in disentangling the effect of the conduct from the wider exogenous shock of the crisis. The experts disagreed on the best way to account for this effect, with the estimated overcharge being highly sensitive to the choice of approach. The Court concluded that there were legitimate arguments on both sides, and that the actual answer which more likely reflects the true impact of the crisis may be found between the opposing positions.
This is likely to be an issue that other parties will have to contend with, across both litigations in the Trucks space and more widely, as the crash is likely to have coincided with other infringements. Additionally, we have experienced further significant global economic shocks in recent years, such as the Covid-19 pandemic and the invasion of Ukraine. These are likely to need to be accounted for in similar analyses in the future.
In the end, the Court concluded that there are numerous serious gaps and unresolved issues (including the above example) which taken together made it difficult for the court to distil the experts’ work into a simple definitive figure, or to specify an ‘ideal’ regression equation that could be relied upon. The Court concluded that a ‘broad axe’ approach based on both the evidence from the experts and a wider appreciation of the factual context and evidence was appropriate. In practice, this meant the Court settled on an overcharge estimate in between the two experts’ proposed figures (around 5 per cent).
The decision was driven in part by the nature and length of the conduct, which gave credibility to the effect of the conduct on prices, and therefore informed the approach to quantification taken by the Court. In other cases, where there is more powerful evidence of the lack of effectiveness of the conduct, the Court might take a different approach and conclude the conduct was not likely to have affected prices (for example, as was the case in the Cables decision).
Supply pass-on
A key element of DAF’s defence was the issue of Supply Pass-On. This concerns whether claimants passed on the overcharge to their customers through higher downstream prices, and thus mitigated their losses. The CAT stated that DAF needed to prove a direct causative link between the Overcharge and a price increase by the Claimants, and that it was not sufficient to say that all costs ultimately fed into the budgeting processes of the Claimants.
The majority judgment rejected DAF’s Supply Pass-On defence. The CAT stated that the tiny size of the cost increase attributable to the Overcharge relative to Claimants’ total revenues was a highly significant factor in reaching this decision, as it would not have led to a specific decision by the Claimants to increase prices, and there was no direct association between truck costs and the products sold by the Claimants. They therefore found that DAF had not established a direct causative link between the Claimants’ prices and the Overcharge.
Mr Ridyard submitted a dissenting opinion, disagreeing that a pricing impact being small and hard to measure necessarily implied the lack of a direct causative link. As evidence of a causal link, Mr Ridyard highlighted that regulators had taken trucks costs into account when setting regulated prices.
There is still considerable uncertainty in the treatment of Supply Pass-On, as the two contrasting opinions in Trucks demonstrate. However, it is clear that understanding the internal processes by which prices are set is of key importance, as both the majority judgment and Mr Ridyard agreed that relying solely on economic theory on the cost orientation of prices was insufficient.
Financing losses
Since the CAT found there to be an overcharge arising from the conduct, the claimants were also entitled to recover ‘financing losses’ to compensate them for funding this overcharge during the relevant period. The CAT accepted that the weighted average cost of capital (‘WACC’) is the most appropriate measure of a firm’s cost of capital, usually made up of debt and equity. It also rejected the notion that equity finance should be treated as costless since shareholders have a reasonable expectation of a return on their investment.
Nonetheless, it found that ‘actual losses’ must be measured by reference to ‘actual costs’ incurred in financing the overcharge. The CAT found that using retained earnings to fund the overcharge only caused loss to Royal Mail’s shareholders, rather than to Royal Mail itself. As a result, it rejected the use of WACC, which accounts for the cost of equity finance, and instead based its approach on how the claimants would have used extra funds at the relevant time. For Royal Mail, this amounted to a weighting between cost of debt and short-term investment returns.
The CAT also found that the interest rate should be compounded year by year. Such an approach follows the commercial and economic reality, and the judgment expresses surprise at lawyers’ and judges’ past aversion to this approach and preference for simple interest. Given the duration of the infringement, the CAT’s preferred methodology has a material impact on the size of the damages awarded to Royal Mail in this case. However, it is noteworthy that BT was not awarded interest on a compounded basis as this did not form part of its claim.
Conclusions
We note that on overcharge, supply pass-on and financing losses, the CAT based damages on an understanding of the reality of how businesses make decisions about pricing and raising capital. Additionally, when accounting for complexities in the data, the CAT preferred a ‘broad axe’ approach, considering the wider factual context and evidence, to a more precise approach that they considered would lead to ‘spurious accuracy’.
These points demonstrate the importance of ensuring that the economic evidence, both theoretical and empirical, is consistent with and solidly grounded in the operational reality of business decisions.
