German Federal Supreme Court allows 15% lump sum damages clauses in private follow on damages actions

Background

Over the past few years, the German Federal Supreme Court (FSC) has clarified several important questions with regard to private antitrust enforcement. The most prominent series of decisions in this regard relates to a price-fixing cartel set up by German rail producers. On 10 February 2021, the FSC issued Schienenkartell VI, its sixth decision in relation to this cartel, which was finally published last week (German link).

The decision deals with the hotly debated issue of whether so-called "lump-sum damage" clauses in terms and conditions (T&C) are permissible under German civil law. These clauses essentially shift the burden of proof by stipulating that, should the supplier infringe antitrust law, damages shall amount to a certain percentage of the purchase price of the ordered goods (5% in the case at hand), unless a different amount of harm is proven.

The decision

The FSC held that such lump sum clauses are valid. Although the case in hand concerned a clause setting a lump sum at only 5% of the purchase price, the court stated that up to 15% would be permissible.

In arriving at this conclusion, the court took the following considerations into account: The starting point for the assessment is the observation that, in order to be valid, such clauses must not be unfair to suppliers. In particular, such clauses must not exceed the harm that arises in the usual course of events, and the supplier must have the opportunity to show that the actual damage is lower. To determine fairness in this regard, the FSC relied on a weighing and balancing of interests.

Firstly, the FSC found that such clauses could not be considered unfair in general. The customers are in a difficult position, as they are typically unable to precisely estimate the harm caused by cartels. Further, the suppliers' interests weigh less, as their infringement triggered the need to estimate damages. Therefore, and taking into account the public interest in effective enforcement of Art. 101 TFEU, the FSC concluded that such a lump-sum clauses cannot be considered unfair as such.

Secondly, the FSC assessed whether cartels typically result in a certain degree of price overcharge. According to the court, it is – in the absence of available market specific information on potential harmful effects of cartels – permissible to rely on meta studies, in particular the well-known Oxera study or the Connor database. The FSC concluded that the meta studies suggested that a price increase of 5% does not exceed the typical damage arising from price-fixing cartels. In an obiter dictum, the FSC went even so far as to state that it would accept lump sum clauses of up to 15%. However, it also clarified that the defendant must have the opportunity to prove that the actual loss suffered is lower, or even that no damage has occurred at all.

Take aways

The FSC’s judgement has several take aways:

1. The FSC’s plaintiff-friendly approach is in line with the EU Commission’s objective to promote private damages actions (see DIRECTIVE 2014/104/EU). Accordingly, the judgement also stresses that lump sum damages clauses are in the public interest, as they contribute to an effective enforcement of Art. 101 TFEU. Needless to say, the court could have taken a different position, e.g. by pointing to the EU damages directive’s statements that no overcompensation and presumption on quantum should be introduced (see Rec. 47 and Art. 3 (3)).
2. The judgement appears to be at odds with an earlier, defendant-friendly ruling, where the FSC dismissed a possible prima facie evidence rule according to which hard-core cartels cause damages (case KZR 26/17, Rec. 50ff). Although the private damages directive called for such a rebuttable presumption (see Art. 17 No. 2), the court rejected it. In doing so, it explicitly stated that the effects of cartels are too manifold to allow such general conclusions and merely introduced a factual presumption, which is subject to further conditions.
3. The judgement is a clear example of judicial activism. The clause in question only related to lump-sum damages amounting to 5% of the total purchase price. In an obiter dictum, however, the FSC made clear that it would also accept lump-sum clauses of up to 15%. In doing so, the court sent a clear message. Potential plaintiffs must feel invited to revise their current lump-sum damages clauses.
4. In its reasoning, the court relied on certain meta-studies on the price effects of hard-core cartels, in particular the Oxera Study for the EU Commission from 2009. The relevance of these studies has been subject to intense debate in civil courts. The FSC appears now to side with plaintiffs, who always cited these studies as a reliable source. This may become relevant in the majority of cases where no lump sum damages clauses exist. According to German civil procedure, courts can estimate damages. While the majority of courts have so far required an estimation from an expert (mostly regression analysis done by specialised economists), a first instance court (Regional Court of Dortmund, case 8 O 115/14) recently awarded damages based on its own free estimation. Other courts may now be tempted to follow this example.
5. Germany is already among the most popular jurisdictions in Europe for bringing private damages claims. It has seen a sharp increase in private damages actions over the last five years (see: Rengier, JECLAP 2020, pp. 72-81), among them major follow-on cases such as the trucks cartel. This judgement will make Germany even more attractive for plaintiffs. Especially in international cartels, plaintiffs can choose between several forums, as the Brussels regulation (No 1215/2012) provides ample options. If defendants have agreed on a lump-sum damages clause, plaintiffs now have the comfort that the clause is very likely to hold before German courts.
6. The judgement may also have an impact on courts in other jurisdictions. Germany has a reputation as a front-runner in private damages cases, and many courts within the EU closely follow developments here. Further, plaintiffs who bring cases in other jurisdictions will point to this ‘landmark’ ruling.
7. Whether the ruling will be helpful for potential plaintiffs in practice remains to be seen. To take advantage of lump-sum damages clauses, a customer needs to be able to convince its supplier to accept it. Typically, only major customers with a considerable degree of buyer power will be able to do so. Given their importance, suppliers are typically inclined to make substantial payments even in the absence of lump-sum clauses, simply because they wish to avoid losing these customers. Smaller customers, however, will most likely not be able to convince their suppliers to agree to a lump-sum damages clause in the first place. Therefore, they would only benefit from the judgement if courts were to read it more broadly and try to use it for a court-based damages estimation (see section 4 above). In any event, the judgement will mean more work for legal departments. As lump-sum clauses are, in principle, permissible, customers may increasingly want to include them in their terms and conditions. Given the considerable risk for suppliers, they are likely to reject such clauses. This may result in lengthy discussions between legal counsel of customers and suppliers, which will in turn generate additional effort and costs.