Brussels flexes its muscles and stalls draft directive on competition law

The European Commission has withdrawn a new directive on competition law that would have paved the way for a flood of US-style class actions in the UK.

The changes have caused ­controversy since they were first mooted several years ago, but the Commission’s U-turn was nonetheless ­unexpected.

“There was no indication that it would be pulled. It did come as a bit of a shock,” says Norton Rose competition partner Peter Scott.

“It’s been on the agenda for quite some time. This year it looked like it was really going to happen,” adds Clifford Chance partner Luke Tolaini.

The draft directive was intended to make it easier for victims of price-fixing or competition abuses to seek compensation en masse.

Crucially for competition lawyers, it would have meant that anyone affected by cartel activity could be included in a law suit unless they specifically asked not to be – the so-called ‘opt-out clause’. It would only take one ­representative claimant, rather than hundreds, to make a case. This would have had huge implications for the UK courts, raising the spectre of the multimillion-­dollar class actions seen in the US.

Tolaini uses the example of a milk cartel. Under the proposed rules, anyone who had bought a pint of milk that was unfairly priced could potentially launch an action on behalf of everyone who was affected.

The legislation is part of a wider crackdown by the Commission on competition abuses. Text from the directive, which was leaked this month, shows that the Commission was keen to put the wind up large corporations.

“Although there have recently been some signs of improvement in members states, to date victims of infringements of the European Commission rules in practice only rarely obtain compensation for the harm suffered,” it read. “It is ­estimated these victims forego ­several billions of euros each year in compensation.”

So why derail the initiative at the eleventh hour? According to competition experts, taking the legislation off the agenda was not intended to kill it off. Instead, it will be delayed until there is more support from member states.

Insiders talk of ongoing political machinations. Commission president Jose Manuel Barroso was reported to have intervened personally to withdraw the directive.

“It was always going to be a ­controversial directive,” says ­Tolaini. “It appears to have been pulled to get more agreement from member states.”

The objections to the directive were numerous – even within the legal community opinion was split. There are many who are reluctant to see US-style class actions take place in the UK.
“What we want to avoid is a ­situation where someone decides to bring a suit against McDonald’s for selling unhealthy food and then everyone who has ever eaten one bringing a claim,” comments Slaughter and May partner Richard Swallow. “In the US they have a constitutional right to bring actions and they want the little guy to take on big businesses, but here we want to achieve a balance between consumer protection and frivolous claims.”

There is also the age-old argument that the Commission has no right to meddle in the application of justice in member states.
“There are member states ­saying: ‘It’s not for the Commission to get involved in interfering with our court processes’,” says Tolaini.
But it is clear that something has to change. There is a general consensus that the current system provides an inadequate deterrent to companies thinking of engaging in anti-competitive behaviour.
One of the few class-action competition suits brought in the UK was the case against JJB Sports in 2007. It was brought by consumer group Which?, the only body in the UK that has the right to
bring collective actions against companies that have breached competition law.

In January 2008 JJB agreed to pay out more than £18,000 to those who had bought overpriced replica football shirts. But the case was fraught with problems such as poor take-up: only 500 ­individuals came forward, despite a front-page piece in The Sun.

The low value of payouts, some £20 per consumer, provided little incentive to take part in a time-consuming legal action. Which? head of legal Deborah Prince has since told The Lawyer: “It’s not looking likely we would do it again.”

That said, class-action specialist David Greene, a partner at Edwin Coe, says he was disappointed to see the draft directive pulled from the agenda.

“The ultimate victims of cartels and the real losers have little or no access to the justice process to recover the money unlawfully taken from them,” he explains. “We saw these difficulties with the claim in relation to football replica kits. It seems ironic that the draft directive was pulled because of the business lobby, but all that’s secured is further protection for the fraudsters.”

But antitrust lawyers can take heart from the fact that many experts believe the directive will re-emerge. Commissioner Neelie Kroes appears to have set her sights on securing the legislation before the end of her term.
“Clearly there’s a bit of horse-trading going on behind the scenes. I think it’s unlikely that this will wither on the vine. It’s gone too far,” says Norton Rose’s Scott.

However, Kroes’ term is due to end next year, and if the new rules are not in place by then there is likely to be more uncertainty and more delays.

In the meantime, all eyes will be on Brussels where, behind closed doors, a new version of the directive is being drafted.