COMMUNICATION FROM THE COMMISSION

Guidelines for national courts on how to estimate the share of overcharge which was passed on to the indirect purchaser

(2019/C 267/07)

TABLE OF CONTENT

1. INTRODUCTION 7

1.1. Purpose, scope and structure of these guidelines 7

1.2. What is passing-on of overcharges? 8

2. THE LEGAL CONTEXT 9

2.1. Passing-on of overcharges and the right to full compensation 9

2.2. Scenarios in which national courts may face passing-on issues 11

2.3. The court's power to estimate passing-on 13

2.4. The role of evidence 14

3. THE ECONOMIC THEORY OF PASSING-ON 16

3.1. Overview 16

3.2. Examples 19

4. THE QUANTIFICATION OF PASSING-ON AND VOLUME EFFECTS — GENERAL ASPECTS 21

4.1. Data and information needed when quantifying the passing-on effects 22

4.2. The use of economic experts 23

5. THE QUANTIFICATION AND ESTIMATION OF PASSING-ON RELATED PRICE EFFECTS 24

5.1. Comparator-based methods 24

5.1.1. Approaches 25

5.1.1.1. The before-during-after approach 25

5.1.1.2. The cross-sectional approach 26

5.1.1.3. The difference-in-differences approach 26

5.1.2. Implementing comparator-based approaches in practice 28

5.1.3. Challenges 30

5.2. Other methods 31

5.2.1. The passing-on rate approach 31

5.2.2. Implementing the passing-on rate approach in practice 32

5.2.3. The simulation approach 33

6. THE QUANTIFICATION AND ESTIMATION OF VOLUME EFFECTS 33

6.1. Introduction 33

6.2. Comparator-based approach 35

6.2.1. Information needed 35

6.2.2. Methods and challenges 35

6.3. Elasticity approach 35

6.3.1. Methods and information needed 35

6.3.2. Challenges 36

7. CHOICE OF METHOD 36

8. ANNEX 1 — ECONOMIC THEORY 37

8.1. Introduction 37

8.2. Input costs and their effect on pricing decisions 37

8.3. Characteristics of demand and links to prices 38

8.4. A firm's pricing decision 40

8.5. Intensity of competition and links to passing-on 40

8.5.1. Continuum of competitiveness of markets 40

8.5.2. Industry-wide vs. firm-specific overcharge and passing-on 41

8.6. Some further factors impacting passing-on 41

9. ANNEX 2 — GLOSSARY 43

TABLE OF BOXES

Box 1: Passing-on of a price increase for copper (hypothetical example) 8

Box 2: The two typical scenarios of passing-on 11

Box 3: Example of a case involving evidence provided by economic experts 23

Box 4: Example of a case in which the court appoints an economic expert 23

Box 5: Illustrated example of a before-during-after approach 25

Box 6: Illustrated example of a cross-sectional approach 26

Box 7: Illustration of the difference-in-differences approach 27

Box 8: The German car glass case 28

Box 9: Estimating passing-on based on qualitative evidence – Cheminova (2015) 29

Box 10: Estimating passing-on based on qualitative evidence – DOUX Aliments (2014) 29

Box 11: The volume effect 34

Box 12: Estimation of volume effects – Cheminova (2015) 34

Box 13: Examples of marginal and fixed costs 37

Box 14: The standard demand curve – price and volume effects 38

Box 15: Other curvatures of demand 39

Box 16: Trade-off between price increase and lost sales 40

1. INTRODUCTION

1.1. Purpose, scope and structure of these guidelines

(1) These guidelines intend to provide national courts, judges and other stakeholders in damages actions for infringements of Articles 101 and 102 of the Treaty on the Functioning of the European Union (‘TFEU’) with practical guidance on how to estimate the passing-on of overcharges. In particular, they set out the economic principles, methods and terminology concerning passing-on inter alia by reference to a number of examples. Further, these guidelines are designed to help determine the sources of relevant evidence, whether a disclosure request is proportionate, and assessing the statements of the parties on passing-on and any economic expert opinion that may be presented to the court.

(2) The legal basis for the guidelines is Article 16 of the Damages Directive ( 1 ) . They are non-binding and do not alter existing rules under EU law or the laws of the Member States. Accordingly, there is no obligation on a national court to follow them. The guidelines are also without prejudice to the jurisprudence of the Court of Justice of the European Union (‘CJEU’). They refer to the harmonised rules set out in the Damages Directive noting that in practice national courts will apply national rules, including those transposing the Damages Directive.

(3) As a reference source for good practices, the guidelines give indications on the relevant parameters that can be taken into account when dealing with economic evidence relevant for assessing the passing-on of overcharges. They build upon relevant economic studies gathered by the Commission and complement the Practical Guide on quantifying harm in actions for damages based on breaches of Article 101 or 102 TFEU (‘Practical Guide’) ( 2 ) accompanying the Communication from the Commission on quantifying antitrust harm in a damages action ( 3 ) . While the Practical Guide focuses on the overcharge, these guidelines specifically address in more detail the passing-on of such overcharges ( 4 ) . The Practical Guide and these guidelines should be read together ( 5 )

(4) As explained in paragraphs 17-19 below, these guidelines may be useful when an infringer invokes passing-on in its defence against a damages claim (‘shield’) or when an indirect purchaser claims damages from the infringer alleging passing-on of an overcharge (‘sword’). However, as in any damages action, the degree to which the court has to consider the facts of a case will depend on the way the action is brought by the claimant and the nature of the defence raised by the defendant. For example, in some cases a claimant may not claim for loss of profit as a result of the volume effect because of the additional complexity this may involve ( 6 ) . However, a claim by an indirect purchaser against an infringer will typically involve consideration of passing-on, since that is essential to the claim.

(5) Similarly, the manner in which a national court would wish to approach the assessment and estimation of passing-on is likely to be influenced by the nature and size of the claim, the merits of the submission and the availability of data. When assessing the proportionality of an order to disclose information, such a court could take into account the choice of economic method and approach from among the different options explained in the guidelines. What may be appropriate in terms of the scope of data required and cost of expert analysis for a claim of EUR 20 million may not be proportionate for a claim of EUR 200 000.

(6) By reference to legal principles, established jurisprudence and the provisions in the Damages Directive, these guidelines set out the legal context of passing-on. A short legal section summarises the procedural rules and instruments according to which national courts may take into account the passing-on of overcharges in damages actions. The legal context relates to EU law, national law and the respective practice. In this context, judges need to pay particular attention to the principles of effectiveness and equivalence ( 7 ) . Firstly, this means that they must apply national rules in such a way that the application does not render practically impossible or excessively difficult the exercise of the right to full compensation for harm caused by an infringement of EU competition law (principle of effectiveness) ( 8 ) . Secondly, judges must bear in mind that national rules and procedures relating to actions for damages resulting from infringements of Article 101 or 102 TFEU must not be less favourable to the alleged injured parties than those governing similar actions for damages resulting from infringements of national competition law (principle of equivalence).

(7) The main section of these guidelines deals with the economics of passing-on, namely the economic theory and quantification methods relevant for the purpose of estimating passing-on. The part on the economic theory focuses on the theoretical concepts underlying passing-on and sets out factors that can have an impact on it. In the part on economic quantification, different approaches and methods to quantify the passing-on effects are presented.

1.2. What is passing-on of overcharges?

(8) The passing-on of overcharges may occur at different levels of the supply chain. It is illustrated in Box 1 below by reference to a hypothetical example. For illustration purposes, and as a starting point for variations to further explain passing-on, the example in Box 1 sets out a relatively simple case of fixed prices for copper and the passing-on of the respective price increase in the automotive industry. In practice, passing-on can occur in even more complex supply chains, the cartelised product or service may constitute an even smaller input and the end product could be affected by more than one anti-competitive practice.

Box 1

Passing-on of a price increase for copper (hypothetical example)

Undertaking A is a manufacturer of copper and formed a cartel by agreeing with its competitors to fix sales prices for copper in violation of Article 101 TFEU. The agreement allowed A to charge its customers, including undertaking B, higher prices for copper. The price difference between the price actually paid and the price that would otherwise have prevailed in the absence of the infringement of EU competition law is referred to as the overcharge (9). Undertaking B is a supplier of automotive parts and used the copper it purchased from A to produce wire harnesses which it sold to car manufacturer C. After the cartel-related price increase for copper, B also increased its sales price for the wire harnesses it supplied to C. This behaviour constitutes passing-on of overcharges, in this case from B to C. Based on the definitions in the Damages Directive, A can be referred to as infringer, B as direct purchaser and C as indirect purchaser (10).

(9) Again, there are more complicated examples of passing-on. Some of them are referred to in additional boxes below. The purpose of these boxes is to highlight certain aspects of passing-on and how national courts have previously approached estimating the share of overcharge which was passed on to the indirect purchaser.

(10) When the direct purchaser, fully or partially, passes on the overcharge to the indirect purchaser, the latter will not only face a price effect but in many cases also reduce its demand, so that the direct purchaser sells less. The value of the sale that is lost can be referred to as the volume effect of passing-on. Its legal and economic implications are discussed in more detail below.

(11) An overcharge may be passed on down an entire supply chain and can concern products or services. For example, following the example in Box 1 above, the car manufacturer C may have similarly increased the prices it charged its customer, the independent car retailer D. Subsequently, D may have also increased its end consumer price for the car in which the cartelised copper can be found. C, D and the end consumers are all indirect purchasers within the meaning of the definition of the Damages Directive ( 11 )

2. THE LEGAL CONTEXT

2.1. Passing-on of overcharges and the right to full compensation

(12) Both the CJEU jurisprudence and the Damages Directive are important for the assessment of passing-on. Firstly, it is important to recall that according to established CJEU jurisprudence ‘[a]ny person’ is entitled to claim compensation for the harm suffered where there is a causal relationship between that harm and an infringement of Article 101 or 102 TFEU ( 12 ) . In particular Articles 1(1) and 3(1) and (2) of the Damages Directive make clear that any person having suffered harm caused by an infringement of Article 101 or 102 must be able to effectively exercise the right to claim full compensation ( 13 ) . Secondly, the Damages Directive's rules on the passing-on of overcharges are rooted in the compensatory principle, which underlies the entire Damages Directive and must be understood as requiring that a person entitled to claim compensation for the harm suffered must be placed in the position in which that person would have been had the infringement not been committed.

(13) In the context of the passing-on of overcharges, Article 12(1) of the Damages Directive specifies that ‘any person’ includes direct and indirect purchasers. This means, in the example in Box 1 above, the wire harnesses producer B, as direct purchaser, and the car manufacturer C, as indirect purchaser, may also claim compensation from the copper manufacturer A, as the infringer. Other indirect purchasers further down the supply chain are also entitled to obtain damages from the infringer. As mentioned above in paragraph 11, this would be the independent car retailer D and end consumers in the example in Box 1 above.

(14) suppliers of an infringer. The Damages Directive refers to the situation of a buyer's cartel as an example in which harm could result from a lower price paid by infringers to their suppliers It should be noted that the elements of the compensatory principle, i.e. a person's right to claim full compensation for harm causally linked to an infringement of EU competition law, apply also to direct and indirectof an infringer. The Damages Directive refers to the situation of a buyer's cartel as an example in which harm could result from a lower price paid by infringers to their suppliers ( 14 )

(15) damnum emergens ) and for loss of profit ( lucrum cessans ), plus the payment of interest Full compensation covers compensation for actual loss () and for loss of profit (), plus the payment of interest ( 15 ) . Generally, actual loss refers to a reduction in a person's assets and loss of profit refers to an increase in those assets which would have occurred if the harmful act had not taken place ( 16 ) . In the context of passing-on, the distinction plays a particular role with regard to the characteristic economic effects and their legal classification. The general rule is set out below. — The price effect relates to the overcharge as an increase in the price that a direct or an indirect purchaser had to pay for a product or services due to the infringement of EU competition law (17). It includes umbrella pricing (18). The price effect may be reflected in a direct or indirect purchaser's claim for compensation of actual loss. It is the part of the harm which is referred to as overcharge harm in the Damages Directive (19). However, the direct or indirect purchaser may be able to pass on the overcharge further down the supply chain, either partially or fully. Thus, when national courts estimate the partial or full passing-on of an overcharge in a damages action, they will need to identify the overcharge harm which remains at a given level of the supply chain. Depending on the legal system, the national court may consider such passing-on as a reduction of the actual loss or by reference to other rules or principles, such as compensatio lucri cum damno (20). — The volume effect can be described, more generally, as the harm that is caused by the fact that fewer of the products or services are purchased as a result of the overcharge (21). However, the focus of these guidelines is on the volume effect understood as the profit loss due to reduced sales resulting from passing-on. As mentioned in the Damages Directive, it can be recoverable as loss of profit (22).

(16) While, on the basis of the Damages Directive, one may distinguish between actual loss because of the overcharge, on the one hand, and loss of profit due to reduced sales, on the other hand, there is an inherent link between the underlying price effect and volume effect ( 23 ) . Therefore, if passing-on becomes relevant, both effects and their interaction should be taken into account. The economic methods to do so are set out further below.

2.2. Scenarios in which national courts may face passing-on issues

(17) In actions for damages based on EU competition law infringements national courts typically deal with the passing-on of overcharges in two scenarios.

(18) Firstly, an infringer may invoke the passing-on of overcharges in its defence against damages claims, i.e. arguing that the direct or indirect purchaser has passed on the overcharge, entirely or in part, to its own purchasers ( 24 ) . This situation, in which passing-on can be described as a shield, is illustrated in Box 2 below by reference to a direct purchaser's claim. It has to be noted that the passing-on defence may also be invoked against claims of indirect purchasers further down the supply chain.

(19) Secondly, indirect purchasers may base their damages actions on the argument that the direct purchasers of the infringers have passed on (parts of) the overcharge to them and that they have therefore suffered harm. In such a scenario passing-on can be described as a sword. This scenario is also illustrated in Box 2 below.

Box 2

The two typical scenarios of passing-on

(20) At the outset, it should be noted that Article 17(2) of the Damages Directive establishes the general presumption that cartel infringements cause harm. In addition, Articles 13 and 14 of the Damages Directive include specific rules on the burden of proof in the context of passing-on.

(21) In the first scenario, i.e. when the passing-on of overcharges is used as a defence against an action based on an infringement of EU competition law, the defendant needs to prove that the claimant has passed on the overcharge ( 25 ) . This burden of proof relates to the existence and extent of the passing-on of the overcharge. If the passing-on defence is fully or partially successful, Article 12(3) of the Damages Directive requires that, according to national procedural law, taking into account the principle of effectiveness and equivalence, the claimant may still claim compensation for loss of profit ( 26 ) . In this case, the burden of proving such passing-on related volume effect is on the claimant.

(22) The Damages Directive also includes rules applicable in the second scenario, i.e. when an indirect purchaser claims that it suffered harm due to the passing-on of overcharges. In this scenario, the burden of proving the existence and scope of such passing-on rests with the indirect purchaser seeking damages from the infringer.

(23) However, the Damages Directive specifically addresses the difficulties that indirect purchasers face when they seek compensation for the harm resulting from the passing-on of an overcharge ( 27 ) . Firstly, Article 14(1) of the Damages Directive and Recital 41 of the Damages Directive refer to the fact that it can be a commercial practice to pass on price increases down the supply chain. If such a commercial practice has been identified, national courts may rely on prima facie proof of passing-on. Building upon this reference, Article 14(2) of the Damages Directive stipulates a rebuttable presumption pursuant to which a claimant (i.e. the indirect purchaser) is deemed to have proved that a passing-on from the direct purchaser to the indirect purchaser occurred, provided that the claimant can show that the following conditions are fulfilled: (a) the defendant has committed an infringement of EU competition law (28); (b) the infringement of EU competition law has resulted in an overcharge for the direct purchaser of the defendant; and (c) the indirect purchaser has purchased the goods or services that were the object of the infringement of EU competition law, or has purchased goods or services derived from or containing them.

(24) This presumption does not apply if the infringer can credibly demonstrate to the satisfaction of the court that the overcharge was not, or was not entirely, passed on to the indirect purchaser ( 29 )

(25) inter alia by taking due account, as far as this is possible, of any actions for damages that are related to the same infringement of EU competition law, judgments resulting from such damages actions and relevant information in the public domain resulting from the public enforcement of EU competition law in the case at hand As a result of (i) the compensatory principle, (ii) the practice of passing-on of overcharges and (iii) the presumptions, mentioned above, it is possible that there are parallel claims from purchasers at different levels in the supply chain. In such situations, national courts should seek to avoid both over-compensation and under-compensation ( 30 ) . This can be achievedby taking due account, as far as this is possible, of any actions for damages that are related to the same infringement of EU competition law, judgments resulting from such damages actions and relevant information in the public domain resulting from the public enforcement of EU competition law in the case at hand ( 31 ) . It is in the interest of the parties to a damages action to make the national court aware of such actions, judgments or information and explain why they are relevant in the case at hand.

(26) Further, where related actions are pending in the courts of different Member States, national courts may apply Article 30 of Regulation (EU) No 1215/2012 of the European Parliament and of the Council ( 32 ) to which the Damages Directive makes reference ( 33 ) . This article stipulates that national courts other than that first seized may stay proceedings or, under certain circumstances, may decline jurisdiction. The court of a Member State may also use national rules on stays, if they are available under national law.

(27) In the interest of consistency between judgments resulting from related proceedings, national courts should also consider and allow for the use of appropriate procedural means that are at their disposal under national law. By way of example, the Damages Directive refers to the joinder of claims ( 34 ) . It also refers to the possibility that a person may acquire the claim of another person ( 35 ) . The goal of such acquisition may be to bring a joint action which may contribute to ensuring consistency between damages actions that are related to the same competition law infringement ( 36 )

(28) Depending on the national legal system, other instruments may be applied, such as collective redress mechanisms, third-party notices or interventions and rules on stays. For example, a direct purchaser may intervene in the damages action of an indirect purchaser against the infringer. In such a case, both the direct purchaser (the intervening party) and the infringer (defendant) may argue that the overcharge was not, or was not entirely, passed on to the indirect purchaser (claimant).

(29) The availability of such procedural means may also become relevant when a national court rules on the proportionality of a disclosure request. For example, the joinder of a number of smaller claims may increase the total value of the claims pending before a court to an extent that this court considers the amount of data requested for a more costly expert analysis to be proportionate.

2.3. The court's power to estimate passing-on

(30) Article 12(5) Damages Directive specifically requires Member States to ensure that national courts have the power to estimate, in accordance with national procedures, the share of any overcharge that was passed on. Such power must cover all passing-on effects, i.e. price and volume effect. This also follows from Article 17(1) of the Damages Directive which applies more generally to the quantification of harm.

(31) When national courts make use of this power to estimate, they must take into account the rules and principles set out in the Damages Directive and the underlying CJEU jurisprudence. This means that even when courts estimate the harm that is causally linked to an infringement of Article 101 or 102 TFEU, this must be done on the basis of the principle of compensation. In other words, the respective award of damages must nevertheless aim at placing the victim in the position in which it would have been absent the infringement (see paragraph 12 above). To this end, national courts must also use their procedural instruments accordingly. In particular, they must apply the applicable rules on the burden and standard of proof so that the full effectiveness of Article 101 TFEU is not put at risk.

(32) Kone that the victims of umbrella pricing may obtain compensation for the loss caused by an infringement of EU competition law, stating that the full effectiveness of Article 101 TFEU would be put at risk if national law categorically and regardless of the particular circumstances of the case excluded their right to claim compensation for harm suffered. Further, Kone highlights that in damages actions for infringements of EU competition law factual and legal questions of causation may arise. Such questions also arise in the context of passing-on For example, the CJEU held inthat the victims of umbrella pricing may obtain compensation for the loss caused by an infringement of EU competition law, stating that the full effectiveness of Article 101 TFEU would be put at risk if national law categorically and regardless of the particular circumstances of the case excluded their right to claim compensation for harm suffered. Further,highlights that in damages actions for infringements of EU competition law factual and legal questions of causation may arise. Such questions also arise in the context of passing-on ( 37 )

(33) Similarly, when national courts estimate, in accordance with national procedures, the amount of harm and share of any overcharge that was passed on, as foreseen in the Damages Directive, they must observe the abovementioned principles of equivalence and effectiveness. As regards the power to estimate, this means that national courts cannot reject submissions on passing-on merely because a party is unable to precisely quantify the passing-on effects.

(34) Furthermore, the power to estimate, as stipulated in Article 12(5) of the Damages Directive and Article 17(1) of the Damages Directive, requires national courts to, firstly, base their assessment on the information reasonably available and, secondly, strive for an approximation of the amount or share of passing-on which is plausible. This follows from the Damages Directive which stresses the existence of information asymmetries and acknowledges that harm can hardly be quantified with perfect accuracy ( 38 ) . The exercise of estimation is subject to national law. In fact, a number of Member States already had rules in place which correspond to the power to estimate, as foreseen in the Damages Directive ( 39 )

(35) In practice, national courts will often have to rely on assumptions, e.g. in relation to hypothetical prices, sales volumes or profit. They may have broad discretion as to both the figures and the statistical data to be chosen and, above all, as to the way in which they are to be used for the calculation and the assessment of damages ( 40 ) . Moreover, assumptions are typically important when building a counterfactual for the purpose of quantifying passing-on and volume effects, as described in section 4 below. Due to this importance, it may be advisable to ask that in any type of submission to the court the assumptions are carefully laid out and the sensitivity of predictions to changes to the assumptions are made explicit, as the Directorate-General for Competition of the Commission requires in its ‘Best practices for the submission of economic evidence and data collection in cases concerning the application of Article 101 and 102 TFEU and in merger cases’ (‘Best Practices’) ( 41 )

2.4. The role of evidence

(36) The legal assessment of passing-on typically requires a complex factual and economic analysis. While the taking of necessary evidence generally forms an important element in every action for damages resulting from infringements of Article 101 or 102 TFEU, the role of evidence on passing-on varies depending on the two scenarios mentioned above and the extent to which a presumption applies ( 42 ) . In any case, the facts that are actually relevant and available may determine the taking of evidence and ultimately the assessment of passing-on.

(37) The type of evidence necessary to show and quantify passing-on will depend on which of the economic methods, described in sections 5 and 6 below, is used. Evidence may be categorised in different ways but it is typically divided into qualitative and quantitative evidence. The Damages Directive itself makes clear that ‘evidence’ means all types of means of proof admissible before the national court ( 43 ) . This could include the following: — qualitative evidence to understand a firm's business behaviour or pricing strategies comprising e.g. (i) contracts, (ii) internal documents, (iii) financial and accounting reports, (iv) witness statements, (v) expert opinions as well as (vi) industry reports and market studies; or — quantitative evidence relating particularly to data for the use of econometric techniques (44), such as (i) sales prices, retail and end consumer prices of the product or service in question, and of comparable products or services, (ii) financial reports, (iii) expert opinions (iv) prices set by regulation, (v) volume sales, (vi) rebates as well as (vii) other input costs and cost elements. As can be drawn from the non-exhaustive lists immediately above, certain types of evidence may qualify as both qualitative and quantitative evidence, e.g. financial reports and expert opinions.

(38) As explained more generally in the Practical Guide, normally, the specificities of the case at hand and the evidence provided are the starting point for establishing if the infringement has in fact harmed the claimant, and, if this is the case, for determining the quantum of that harm ( 45 ) . The relevant evidence may include direct evidence which, at least in the context of passing-on, can be understood as covering documents produced by the direct or indirect purchaser as well as witness statements on whether the overcharge has been passed on. The availability of such evidence may play an important role when a court decides whether any, and if so which, of the methods described below can be used by a party to meet the required standard of proof under the applicable law.

(39) Further, when it comes to the assessment of passing-on, national courts often face economic expert opinions. Depending on the means available under national law, these opinions may be submitted by party-appointed experts, by an expert that the court itself has appointed for the purpose of assistance, or by both party and court-appointed experts. To the extent possible, the national court may wish to guide any of these economic experts, potentially at an early stage of the proceedings when parties request the disclosure of evidence, and ask more concrete questions in relation to the quantification method to be used and the data needed. Such guidance and questions can be relevant for case management purposes but also for the substantive assessment. In particular, as mentioned above, when national courts estimate passing-on effects they may consider whether an economic expert opinion complies with best practices, e.g. whether it carefully lays out the relevant assumptions and the sensitivity of predictions to changes to these assumptions. In the same vein and again subject to national law, national courts may ask economic experts to address alternative explanations for their findings, ensure replicability and let the parties comment.

(40) The Damages Directive aims to ensure the effective exercise of rights and equality of arms by stipulating rules to request the disclosure of evidence. Such rules apply in both passing-on scenarios mentioned above. As regards the scenario in which passing-on is used as a defence, Article 13 of the Damages Directive specifically mentions that the defendant may reasonably require disclosure from the claimant or from third parties. In a scenario in which an indirect purchaser seeks compensation, Article 14(1) of the Damages Directive stipulates that this indirect purchaser may reasonably require disclosure from the defendant or third parties.

(41) These rules of the Damages Directive limit disclosure of evidence in the sense that the party bearing the burden of proving the existence and scope of passing-on may only reasonably require disclosure. In line with the general rules on disclosure stipulated in Article 5 Damages Directive, the national court may require that the requesting party has made a plausible assertion that the overcharge harm has been passed on by the direct purchaser onto the indirect purchaser. The requesting party must also use the facts which are already reasonably available to it. In the context of passing-on, this may include information gathered during the course of business with the other party or information reasonably available from third parties, such as market intelligence providers.

(42) The first sentence of Article 5(3) of the Damages Directive establishes a general principle of proportionality in the sense that it requires national courts to ‘limit the disclosure of evidence to that which is proportionate’. This principle is important for case management in damages actions resulting from infringements of Article 101 or 102 TFEU. As mentioned above, judges apply national procedural rules and must pay particular attention to the principles of effectiveness and equivalence. However, within the scope of these legal rules, national courts may take into account the costs and benefits of ordering the requested disclosure. For example, this means that national courts may come to the conclusion that the evidence presented by the parties already allows them to estimate the share of the overcharge that was passed on instead of gathering further data.

(43) Evidence may be requested from the other party or third parties through and under the strict control of the national court. The request must concern specific items or categories of evidence ( 46 ) . Provided that the national court considers the general principles of proportionality and the protection of legitimate interests, it may even order the disclosure of evidence containing confidential information to the party bearing the burden of proving passing-on effects. For example, this information may include documents or data on revenues, prices or margins. However, when ordering the disclosure of such evidence, it is crucial for the national court to have measures in place to protect the confidential information ( 47 ) . By way of example, the Damages Directive refers to a few measures, such as the possibility of redacting sensitive passages in documents, conducting hearings in camera, restricting the persons allowed to see the evidence, and instructing experts to produce summaries of the information in an aggregated or otherwise non-confidential form ( 48 ) . In accordance with national law, national courts may also consider the measures referred to in the Best Practices, such as a data room procedure ( 49 ) , and in Article 9(2) of the Trade Secrets Directive ( 50 )

(44) Disclosure of evidence included in the file of a competition authority could potentially be relevant for the quantification of the overcharge but is generally less relevant in the context of passing-on (in particular because the passing-on of overcharges deals with the pricing behaviour of the purchasers on which the file of a competition authority typically does not include any information). Further, the public version of the infringement decision may include more general information that can be relevant, such as information on which products or services were subject to the anti-competitive conduct. As Article 6(10) of the Damages Directive provides, disclosure of evidence from a competition authority is only a measure of last resort.

(45) Finally, as indicated in Article 15(1) of the Damages Directive, actions for damages related to the same infringement of EU competition law and related judgments may also form a source of information relevant for the quantification of passing-on.

3. THE ECONOMIC THEORY OF PASSING-ON

3.1. Overview

(46) The passing-on of overcharges and the associated price and volume effects arise because of a firm's incentives to respond to increases in its costs by raising prices ( 51 ) . The initial overcharge may be understood as an increase in the input costs for the direct purchaser. To estimate the passing-on effects, the court would typically need to consider how such a cost increase would affect 1) prices set by the direct purchaser in the downstream market and 2) the value of the lost sales supplied by the direct purchaser.

(47) National courts estimate passing-on based on the circumstances of the specific case. However, a general understanding of the economic theory of passing-on and the associated effects may be important for the court for several reasons. Firstly, predictions from economic theory may serve as one of several factors relevant for assessing whether the required standard of proof is met in a specific case. For instance, economic theory provides the court with a framework within which quantitative and qualitative evidence could be evaluated ( 52 ) . Secondly, particularly at an early stage of the litigation, economic theory may assist judges when making decisions in relation to the disclosure of data or information by assessing its relevance. Finally, theoretical or conceptual considerations can also form a basis for discerning the credibility and reliability of different economic explanations underpinning the link between overcharge and passing-on put forward by the parties.

(48) The Damages Directive does not distinguish between harm resulting from 1) increased prices (price effects) and the passing-on of overcharges including the volume effect and 2) other effects, such as reduced quality of products or hampered innovation (non-price effects) which may arise. These guidelines focus on the passing-on of price increases and the related volume effects ( 53 )

(49) According to economic theory, the existence and the magnitude of the passing-on effects, i.e. the associated price and volume effects, are determined by a range of factors ( 54 ) . These factors affect the outcome of a passing-on scenario simultaneously, and their interdependency should be taken into account.

(50) Further, the relative importance of each factor might vary from case to case. Thus, it may be relevant for the judge to understand which factors are likely to affect the degree of passing-on in a particular case. For this, depending on national law, the judge may refer to explanations from the parties' economic experts or its own court-appointed economic expert. Moreover, in practice, a firm may not always take pricing decisions that are entirely consistent with the predictions on the basis of economic theory. It is therefore important to also assess the insights from economic theory in the light of the factual evidence available in the case at hand. Such evidence may be of both qualitative and quantitative nature, such as internal documents describing the degree of passing-on and the quantitative methods explained in section 4 below.

(51) As set out in further detail in Annex 1, according to economic theory, the most important factors affecting the existence and magnitude of the passing-on effects include: (i) the nature of input costs (55) subject to an overcharge (whether these costs are fixed or variable, whether the infringement leads to increases of these costs only to one customer or to all or the vast majority of customers on a given market); (ii) the nature of the product demand that the direct or indirect customers face (in particular, the link between the demand and price level); (iii) the strength and intensity of competition in the markets where the direct or indirect customers are active; and (iv) other elements, such as price adjustment costs, the proportion of a firm's costs affected by the overcharge, buyer power, vertical integration of direct and indirect customers, price regulation or the timing of the pricing decisions undertaken at the various levels of the supply chain.

(52) Firstly, the nature of the input costs subject to an overcharge affects whether and to what extent this overcharge can be passed on. When the overcharge impacts the direct purchaser's costs which do not vary according to the input quantity (i.e. fixed costs), it is less likely to be passed on because such costs typically do not affect the direct purchaser's price setting, at least not in the short run. However, in the long run, fixed costs may affect a firm's strategic decision analysis, too, e.g. the production capacity, which, in turn, might impact the subsequent (short run) price formation mechanism. In such a scenario, fixed costs may also be passed on. By contrast, when the overcharge impacts the direct purchaser's costs which actually vary according to the input quantity (i.e. variable costs), it will generally be more likely to be passed on, at least to some extent. This is because marginal costs (a subcategory of variable costs that can be defined as the cost increment incurred when purchasing one additional input) ( 56 ) typically affect the direct purchaser's price-setting decisions ( 57 )

(53) Secondly, the product demand that the direct customer faces affects the level of passing-on. A standard price formation mechanism builds on the fact that the demand a firm faces (i.e. the quantity it sells) decreases when it raises its price. The extent to which a direct purchaser raises its own price when facing an overcharge depends on whether the demand reacts strongly to such a price change or not. For instance, if the direct purchaser is a monopolist and the demand that it faces is equally sensitive to a change in prices for all price levels and the direct purchaser is facing constant marginal costs, economic theory suggests that half of the overcharge will be passed on. If the demand the monopolist faces drops ‘more and more’ (i.e. at an increasing rate) when price increases, it is less likely that the overcharge will be passed on as compared to a situation in which the demand that such a monopolist faces drops ‘less and less’ (i.e. at a decreasing rate) as the price increases, all else being equal ( 58 )

(54) Thirdly, the nature and intensity of the competitive interaction between the firms on the market on which the direct purchasers are active also affects the level of passing-on. It is important to keep in mind that the effect that increased competition can have on the degree of passing-on depends on whether the initial overcharge affects only the direct customer (i.e. firm-specific overcharge) or also the competitors of the direct customer (i.e. industry-wide overcharge). If the overcharge affects only one direct purchaser, fiercely competing with other direct purchasers, passing-on is less likely compared to a situation where the only affected direct purchaser faces weak competition. However, if there is an industry-wide overcharge, a large number of fiercely competing direct purchasers will generally favour a higher passing-on of that overcharge compared to a situation where there is weaker competition among these direct purchasers ( 59 )

(55) A number of judgments from national courts in damages actions have underlined the importance of considering how demand reacts to changes in prices, the intensity of competition and whether or not the direct purchaser's competitors are affected by the overcharge ( 60 )

(56) Fourthly, as mentioned in paragraph 51 and in Annex 1, other elements may, under certain circumstances, play a crucial role in the direct purchaser's price formation mechanism, and, hence, for passing-on of the overcharge by the direct purchaser. For instance, one element which might be important in order to quantify passing-on is whether the input affected by the overcharge represents a large or small share of the direct purchaser's variable costs. A direct purchaser may face costs when changing its prices, so-called ‘price adjustment costs’. If the overcharge only represents a small share of the variable costs, the direct purchaser may not find it profitable to pass on such overcharge due to the price adjustment costs. Further, other aspects that may also affect the degree of passing-on are the degree of buyer power or the timing of the pricing decisions undertaken at the various levels of the supply chain, for instance. Some of the factors mentioned in paragraph 51 have also been considered by national courts in cases involving passing-on ( 61 )

(57) The existence and extent of passing-on are linked to the loss of sales that generally will accompany any increase in prices. As described above, this loss of sales may be characterised as the volume effect, which a purchaser may claim for as loss of profit. The volume effect arises because the purchaser usually faces a downward sloping demand curve. If the initial overcharge is passed on down the supply chain, a volume effect will arise at all levels of the vertical chain. Hence, when the claim includes damages for volume effects, courts may have to estimate such an effect as well.

(58) As mentioned above, any victim of an infringement of EU competition law has the right to seek full compensation for the harm suffered causally linked to the infringement. When passing-on is invoked, an assessment of the volume effect may become important to quantify the overcharge harm in a damages action. In such a case, however, it should be noted that an estimation of the total harm by simply subtracting the passing-on related price effect from the overcharge effect would lead to an underestimation of the harm suffered by the direct or indirect customer if the volume effect is not taken into account.

(59) The lost volume stemming from an overcharge is influenced by the sensitivity of demand that the purchaser faces and how the purchaser's competitors react to the overcharge. For example, if the purchaser faces an inelastic demand, i.e. its customers are only to a small extent sensitive to increases in price, the price increase leads to a relatively small decrease in the volume sold. This will, everything else being equal, lead to a smaller volume effect than in the case of a more elastic demand. At the same time, if the purchaser's competitors also increase their prices after an overcharge, this might also reduce the impact of the purchaser's own price increase on its sales ( 62 )

3.2. Examples

(60) The hypothetical examples below intend to illustrate the relevance of the insights from economic theory explained in this section and in Annex 1.

(61) Example 1 describes firm-specific overcharges in a market with strong competition.

Example 1 Situation: There are 10 producers of apple juice in the same relevant market. One of the producers sources apples from a supplier involved in a price fixing cartel. This apple juice producer claims damages as compensation for an overcharge. However, the defendant (the supplier of apples) raises the passing-on defence and argues that the apple juice producer has passed on the entire overcharge to the indirect purchasers. Analysis: The apple juice producer facing the overcharge is in strong competition with nine other companies for the production and supply of apple juice. All products sold by the ten companies are rather homogeneous to consumers. In so far as the other producers do not obtain apples from the cartel members, but are able to buy them at a lower price elsewhere, the producer having to buy from the cartel is placed at a competitive disadvantage vis-à-vis its competitors. The apple juice producer's ability to pass on the cost increase would hence be constrained due to the fact that it would lose sale (and profit) to its competitors to a very large extent if it passed on the overcharge, even only partially. The stronger the competition between the 10 apple juice producers, the greater the constraint on the ability to pass on the cost increase. Hence, in this scenario, the direct customer will normally not be able to pass on the increase in cost (the overcharge).

(62) Example 2 sets out a situation of industry-wide overcharges and the intensity of competition.

Example 2 Situation: All of the 10 producers of apple juice in Example 1 source apples from suppliers involved in a price fixing cartel. The members of the cartel claim that any overcharge is passed on to the indirect purchasers. Analysis: The producers of apple juice are similarly exposed to the overcharge and the market is characterised as competitive. Since all of the producers are faced with the overcharge, one firm will not have a competitive disadvantage compared to the other firms. It is therefore more likely that each apple juice producer to a large extent will pass on the overcharge, in contrast to the case detailed in Example 1 (where the overcharge is firm-specific). As an illustration, in a perfectly competitive market, the price equals marginal costs and a rise in the cost of an input will therefore directly lead to an equal rise in the price.

(63) Example 3 describes the issue of the passing-on rate of monopolists facing different demand.

Example 3 Situation: Apple juice producer A is a monopolist in the market for the production of apple juice in Member State 1, while apple juice producer B is a monopolist in the same product market in Member State 2. The cost of producing one additional batch of apple juice is constant and similar for A and B. The two apple juice producers sourced apples from C, a supplier involved in a price fixing cartel. As a consequence, both A and B faced an overcharge of EUR 6 per box of apples because they bought apples from C. A and B faced different demands from the grocery retail chains in each Member State. In Member State 1, demand was equally sensitive to a change in prices for all price levels (the demand was linear, see Box 15). In Member State 2, this was not the case. There, demand dropped ‘less and less’ (at a decreasing rate) when price increased (the demand was convex, see also Box 15). A and B claim compensation from C (the member of the cartel) for the harm resulting from the overcharge. C raises the passing-on defence, claiming that A and B have passed on half of the overcharge. Analysis: The monopolists in Member State 1 and Member State 2 faced different demand from the retail grocery chains in each Member State. Their costs when producing one additional batch of apple juice were constant. The overcharge of EUR 6 per box of apples was considered as an increase in the marginal costs for each of them. Following such a cost increase, the scope to adjust the prices upwards would have depended on how much output each would have had to sacrifice to pass on a certain amount of the cost change, i.e. to have increased prices. This is because, if the volume lost when increasing prices is relatively low, the price increase will be more attractive compared to the situation where the loss of volume is high. The loss of volume when increasing prices is related to the curvature of the demand that a monopolist faces, i.e. whether the demand is linear, convex or concave. This is also further explained in Box 15 below. Regarding the monopolist A in Member State 1, on the basis of economic theory it may be possible to argue that the monopolist has passed on half of the overcharge, i.e. EUR 3. However, as the monopolist B faced a convex demand, the remaining demand would have become less price sensitive as the price went up. Compared to A, who faces a linear demand, B would have lost less volume when increasing prices by EUR 3. This implies that B has had an incentive to pass on more than EUR 3.

(64) Example 4 describes the issue of price adjustment costs and variable vs. fixed costs in the short and long run.

Example 4 Situation: Firms A and B are the only firms owning and leasing out tower cranes in Member State 1. From 2005 to 2015 firms A and B participated in a cartel, agreeing to increase the leasing-price of tower cranes by 80 percent. Firm C is a construction firm operating in cities throughout Member State 1. The company designs, constructs and sells residential apartments in skyscrapers to final customers. The prices of the apartments are advertised in a range of different media and locations, including on the internet, in newspapers and on street-posters. The national competition authority in Member State 1 has found the agreement on prices in the construction sector to be a violation of competition law, and their decision imposing fines on the cartel members was not appealed by firm A or B. Firm C is a direct customer of the cartel. It claims damages from the cartel members A and B. However, firms A and B have raised the passing-on defence, claiming that firm C has passed on the entire overcharge to the indirect purchasers, i.e. the final customers buying apartments in skyscrapers. Analysis: Leasing of tower cranes is one of many input costs that firm C faces when designing and constructing skyscrapers. Examples of other input costs are raw materials such as steel and concrete, labour and financial costs. Hence, it is likely that the leasing of tower cranes only constitutes a small portion of the total costs. Since the prices of the apartments are advertised broadly, firm C may incur significant price adjustment costs. However, since the cartel had a duration of 10 years, the price adjustment costs may be negligible compared to the overcharge after a certain period, eventually giving firm C the incentive to take into account the overcharge when setting prices on apartments. Hence, it may be the case that, due to the price adjustment costs, firm C may not have the incentive to pass on the overcharge in the short run. However, the incentive to pass on the overcharge may change during the infringement period. In order to assess the actual passing-on during the relevant period, the court should therefore estimate the passing-on effect based on the evidence available, for instance by using one of the methods set out in section 4.

4. THE QUANTIFICATION OF PASSING-ON AND VOLUME EFFECTS — GENERAL ASPECTS

(65) Compensation for harm suffered aims at placing the injured party in the position in which it would have been had the infringement not occurred. In order to be able to assess this position, one needs to compare the observed situation, i.e. the situation in which the infringement took place, with a hypothetical situation, i.e. the situation in which the infringement did not take place. This hypothetical situation is referred to as the ‘counterfactual scenario’.

(66) The purpose of building a counterfactual scenario is to isolate the effect of the infringement from other factors affecting the price of a product or service, which would have affected such a price even if the infringement had not taken place ( 63 ) . For instance, an increase in demand would typically lead to a price increase even absent a cartel. Direct or indirect purchasers should not be compensated for that effect. Hence, when constructing a counterfactual scenario, it is necessary to control for factors that are not related to the infringement ( 64 )

(67) As the counterfactual scenario is hypothetical, it cannot be directly observed. As described below, different methods and techniques have been developed in economics and legal practice to establish the counterfactual. These vary in terms of the underlying assumptions and the variety of data needed.

(68) While these methods seek to construct how the market would have evolved absent the infringement, direct evidence available to the parties and the court (e.g. internal documents describing how the direct purchaser has passed on the initial overcharge in a specific situation) may also provide, under applicable national legal rules, important information for assessing damages in a specific case ( 65 )

(69) When dealing with passing-on in a damages action for an infringement of competition law, national courts may have to consider three components that relate to the harm for which a direct or indirect purchaser may claim compensation, namely the overcharge, the passing-on related price effect and the passing-on related volume effect ( 66 ) . National courts and economic experts may choose to estimate these three components sequentially, i.e. in a three-step procedure set out below.

(70) In a first step, the overcharge may be quantified or estimated. A number of different methods can be employed to do this. However, the methods most widely used by parties and courts to estimate the initial overcharge are the so-called comparator-based methods. The different methods for estimating the overcharge are considered in detail in the Practical Guide.

(71) A second step involves estimating the magnitude of the passing-on related price effect. The extent of this effect may be estimated directly by employing the comparator-based methods, i.e. similar methods as when quantifying the overcharge. If certain assumptions are fulfilled, the extent of this effect may also be estimated indirectly by obtaining an estimate of the rate at which the increase in the affected input cost should have been passed on and combining this estimate with information on the overcharge and sales. Sections 5.1 to 5.2 provide an overview of different approaches for the quantification of these effects.

(72) In a third step the passing-on related volume effect is estimated. Similar to the estimation of the passing-on related price effect, the volume effect may be estimated directly or indirectly. Different approaches for quantifying these effects are considered in Sections 6.2 and 6.3.

(73) Other approaches, such as a simulation approach, accounting simultaneously for passing-on related price and volume effects, may also be used to quantify the harm in damages actions before national courts for the infringement of EU competition law. The simulation approach is briefly explained in section 5.2.

4.1. Data and information needed when quantifying the passing-on effects

(74) As explained in section 2.2, the Damages Directive includes rules governing the disclosure of evidence. Data and information in the hands of the parties or third parties are important factors in order to carry out a sound economic analysis of the passing-on effects. Hence, a useful first step when quantifying the passing-on related price effect may be to identify the need for and the availability of data for building the counterfactual.

(75) When deciding which type of data and information is relevant in a specific case, it may be helpful for the judge to take into account the general insights from economic theory explained in section 3. These insights may also be relevant if the judge needs to assess conflicting views of economic experts ( 67 ) . Furthermore, the type of data needed for estimating the passing-on will usually require good knowledge of the industry in question and the prevailing market characteristics in the case at hand. Therefore, it may be useful to initially consider documents which indicate the plausibility of passing-on in the first place, such as existing court decisions, parallel civil proceedings at the same or a different level of the supply chain in the same market, market studies or decisions from competition authorities describing the relevant market dynamics ( 68 )

(76) The court may have to consider evidence of both qualitative and quantitative nature ( 69 ) . Qualitative evidence, such as internal documents on pricing, strategy, contracts and financial reporting, may be analysed in the context of economic theory. They may also give information on whether there is evidence of a link between the downstream pricing and the upstream overcharge that results from the infringement.

(77) However, in order to construct a counterfactual and control for different factors affecting passing-on, quantitative evidence may also be useful in many cases. Such evidence may include data on actual prices, costs or margins as well as external indicators which would influence pricing decisions of firms, e.g. aggregated measures of economic activity (such as GDP growth, inflation and employment rates). In some cases, regional variables of economic activity might be useful to control for different regional tendencies which are not related to the infringement.

(78) The court may also take into account more industry or firm-specific factors influencing the price formation. For instance, in the example in Box 1 above, if plastic had also been an essential input for the production of wire harness during the infringement period when copper manufacturer A had agreed with its competitors to fix prices for copper as the other essential input for the wire harness supplier B, it is likely that B would have passed on to its customer also an increase in prices for plastic which was not subject to an infringement of EU competition law. In this case, an estimation of passing-on which fails to take into account the effects related to the increase in prices for plastic could materially overestimate the passing-on of the overcharge by wrongly attributing the entire price increase to the infringement. Similar reasoning applies to potential decreases in other input costs which, if not accounted for and passed on down the supply chain, would artificially decrease the estimated passing-on of the cartel overcharge.

(79) In the examples that follow, the application of the methods focuses on the price. Depending on the availability of data and the circumstances of a given case, the court may also consider the same methods to estimate other economic variables, such as profit margins or the level of costs of an undertaking. The data used to compare the affected market with the counterfactual may relate to the entire market (e.g. the average of the price of wire harnesses for all customers in other product markets or geographic markets) or to certain customers or customer groups.

4.2. The use of economic experts

(80) In many cases where passing-on of overcharges is assessed, economic experts may be involved in damages actions before national courts. The rules on expert evidence vary significantly between the Member States ( 70 ) . In any case, national courts may find it helpful to have guidance on general principles and tools relevant for the involvement of economic experts.

(81) Early in the proceedings, the court may, if the national legislation allows it, facilitate a discussion between experts representing the parties involved. Such discussions may aim at narrowing down areas of agreement and disagreement on issues relevant to the case, including issues related to disclosure requirements. An example of such an approach is provided in Box 3 below.

Box 3

Example of a case involving evidence provided by economic experts (71)

In a case before a UK court, economic experts representing each side (the infringer and the claimant) had proposed their own distinct method for estimating passing-on. The judge expressed concerns about the potential complexity of the expert evidence and requested the parties' experts' to reach an agreement on the proposed approach to economic evidence on passing-on before any disclosure was ordered. If the experts failed to reach an agreement on the approach, the judge would hear submissions on the respective approaches, including an explanation of what each expert proposed, the information required and the cost of the exercise, and then decide which method should be applied.

(82) In some jurisdictions national courts may appoint economic experts who assist the judge when estimating passing-on and they have traditionally taken this approach to estimate the initial overcharge. The court may employ a similar approach when estimating passing-on, e.g. by using the so-called comparator-based methods. The experience from using court-appointed experts when estimating the overcharge may, therefore, also be relevant for the estimation of passing-on. An example of an approach where the court has appointed an economic expert is provided in Box 4 below.

Box 4

Example of a case in which the court appoints an economic expert (72)

In a case before a German court, an economic expert was appointed by the court. The expert's task was to propose a methodology and subsequently quantify the overcharge. As a first step, the expert proposed an empirical method for estimation of the overcharges. The approach suggested by the expert was discussed in written format and in oral hearings before the court decided on which approach to take. In the next step, the chosen method was applied and overcharges were calculated. The underlying data used for the calculations was submitted to the court and to the parties. The third step was a robustness check according to which the parties were given the opportunity to give comments and ask questions. These comments were taken into account in a final assessment delivered to the court. The final assessment also considered the plausibility of the estimated results, the robustness of the estimated effects and the quality of the underlying data.

(83) In a case in which the economic experts representing the parties have conflicting views on which approach to employ in order to estimate passing-on, the national court may also seek advice from the national competition authority on which method to employ ( 73 ) . Moreover, to assess the degree of passing-on, a national court may in principle also rely on information included in a decision issued by a competition authority, e.g. regarding the initial overcharge ( 74 )

5. THE QUANTIFICATION AND ESTIMATION OF PASSING-ON RELATED PRICE EFFECTS

(84) When estimating the passing-on related price effect national courts may rely on different types of economic approaches to quantification, particularly the comparator-based approaches, but also the passing-on rate approach ( 75 ) or the simulation approach. These approaches, as described in this chapter, build on quantitative data to estimate the passing-on effect. In many cases, the court may find it useful to also assess qualitative evidence, such as internal documents or oral evidence from witnesses, when estimating the passing-on effect. The availability of such qualitative evidence may play an important role when deciding whether any, and if so which, of the techniques can be used by a party to meet the required standard of proof under the applicable law ( 76 )

5.1. Comparator-based methods

(85) The passing-on related price effect at various stages in the supply chain may be computed by estimating directly the increase in prices or change in margins that has resulted from the impact of the initial overcharge. When assessing whether an overcharge is passed on from the direct purchaser, this method compares the price set by the direct purchaser during the infringement period with the price set in the comparator market(s).

(86) When estimating the passing-on related price effect, the court may estimate the differences between the observed and the counterfactual prices or margins ( 77 ) using the same comparator-based methods as used to compute the initial overcharge. While the underlying concept of these methods are described in detail in the Practical Guide, further guidance on the implementation of such methods in the context of passing-on is provided in the sections below.

(87) Comparator-based methods have the advantage that they use real-life data observed on the same or a similar market ( 78 ) . They rely on the fact that the comparator scenario can be considered representative of the non-infringement scenario. These methods have also been recognised and employed by competition authorities in Europe in order to undertake analyses of similar character as the estimation of passing-on, e.g. when performing ex-post evaluation of competition policy ( 79 )

(88) When employing the comparator-based method, one would ideally compare the price or margin during the infringement period with the exact same market absent the infringement. However, it is naturally not possible to know exactly how a market would have evolved in the absence of an infringement. For instance, it may be the case that important factors affecting the prices set by the direct purchaser, such as changes in demand or prices of other inputs, will not have a similar impact on prices during the infringement period and in the counterfactual scenario.

(89) These factors are crucial to have in mind when considering whether a given comparator market is suitable as the counterfactual scenario. As further explained in section 5.1.1, various techniques are available to account for differences between the market affected by the infringement and the comparator markets. Whether the level of similarity between the market on which the infringement took place and the comparator markets is considered to be sufficient in order for the results of such comparison to be used to estimate passing-on depends on the national legal systems ( 80 )

5.1.1. Approaches

(90) When the comparator-based method is used to estimate the passing-on effect, the price set by the direct or indirect purchaser during the infringement period is compared to the non-infringement, or counterfactual, scenario. The counterfactual scenario can be established on the basis of ( 81 ) — price or margin data concerning this market before and/or after the infringement, usually referred to as the before-during-after approach; — data concerning the same (product) market but in a different geographical area, or another product market that is considered to evolve in a similar manner to the market where the direct or indirect purchaser operates, usually referred to as the cross-sectional approach; or — a combination of comparisons over time and comparisons across markets, usually referred to as the difference-in-differences approach.

5.1.1.1. The before-during-after approach

(91) An approach frequently used when estimating initial overcharges is to compare prices over time on the same market, i.e. before-during-after comparison (illustrated in Box 5 below) ( 82 ) . When applying this approach to estimate passing-on, the comparator market is the exact same product market as the market on which the direct or indirect purchaser was active when the infringement took place, but analysed at different points in time. Hence, the underlying assumption is that the product market in question in the non-infringement period provides a good approximation of the counterfactual, i.e. the situation that would have prevailed on the product market if no infringement had happened during the period of infringement. This assumption may be wrong because, in a practical sense, there is no comparator market irrespective of geography or product to account for an additional element of isolation in relation to the effect stemming from the infringement.

Box 5

Illustrated example of a before-during-after approach (83)

Price of wireharnesses

(92) In the example illustrated in Box 5 above, it is assumed that the illegal price fixing in the copper-industry had a duration of five years from 2005 to 2010. In this period ( 84 ) the initial overcharge was passed on to the car manufacturer C. When applying this method the price paid by the car manufacturer during the infringement period is compared to the price paid by the car manufacturer in a period not affected by the infringement and the passing-on, e.g. in 2003 and 2004. An example of a case where a claimant applied this approach is given in Box 8 below.

5.1.1.2. The cross-sectional approach

(93) In some cases, it may be challenging to observe price developments over time in the comparator or infringement markets. If this is the case, another comparator-based method could be employed, namely a method which compares different geographical markets. The underlying assumption of this approach is that the other geographical market is similar to the infringement market in all aspects but for the infringement event. Again, this assumption may go too far.

(94) 1 during the infringement period in Member State 1 ( p 1), with the average price paid by similar car manufacturers in Member State 2, i.e. on a separate geographical market which is unaffected by the infringement ( p 2). This method is referred to as cross-market comparison For example, as shown in Box 6 below, a national court may consider the comparison of prices paid by the car manufacturer Cduring the infringement period in Member State 1 (1), with the average price paid by similar car manufacturers in Member State 2, i.e. on a separate geographical market which is unaffected by the infringement (2). This method is referred to as cross-market comparison ( 85 )

Box 6

Illustrated example of a cross-sectional approach

If p1 is found to be higher than p2, this finding indicates a passing-on related price effect from wire harnesses supplier B1 to car Manufacturer C1 in Member State 1. The same type of comparison can be undertaken with regard to any other economic variable, e.g. margins or volumes sold.

5.1.1.3. The difference-in-differences approach

(95) From an economic point of view, the most accurate method of the comparator-based methods is the one that combines the before-during-after approach and the cross-sectional approach. This method is the difference-in-differences approach ( 86 ) . It focuses on the development of the relevant economic variable in the market affected by the passing-on during a certain period (difference over time in the passing-on market) and compares it to the development of the same variable during the same time period in an unaffected comparator market (for instance in another geographical market).

(96) Box 7 illustrates the difference-in-differences approach.

Box 7

Illustration of the difference-in-differences approach

(97) Assuming, in a case on which Box 5 and Box 6 are based, car manufacturer C 1 in Member State 1 (the indirect purchaser) claims damages from the copper manufacturer A 1 (the infringer). As explained in paragraph 8, any harm that C 1 suffers stems from the passing-on of overcharges from the wire harnesses supplier B 1 . Using a difference-in-differences approach would involve an assessment of the development of the price paid by the car manufacturer C 1 in Member State 1 (the market with a passing-on related price effect) during a certain period, and comparing it to the development of the price paid by the car manufacturer C 2 in Member State 2 (unaffected by the infringement and hence with no passing-on related price effects) in the same time period. The comparison shows the difference between these two differences over time. This provides an estimate of the change in the price paid by the car manufacturer, excluding all those factors that affected the markets both in Member State 1 and Member State 2 in the same way. Hence, the method isolates the passing-on related price effect from other influences on the price of wire harnesses common to both markets.

(98) Another variation of the case, which Box 6 and Box 7 are based on, may illustrate the method. Assuming that a before-during-after comparison reveals an increase in the unit price of wire harnesses of EUR 100 in the Member State 1 (where the infringement and passing-on occurred) between 2005 and 2010. An analysis of the unaffected market in Member State 2 over the same period may show that the unit price of wire harnesses has increased by only EUR 10, due to an increase in another input cost, e.g. plastic. Assuming that the higher input cost (of plastic) also concerned Member State 1, and provided that all other conditions are the same, a comparison of the different development of prices on wire harnesses in Member States 1 and 2 would indicate the price increase caused by the passing-on effect. In the example, this would be EUR 90.

(99) Therefore, a significant strength of the difference-in-differences approach is that it can filter out changes unrelated to the passing-on related price effect that occurred during the same period as the passing-on. However, it rests on the assumption that other factors, in the example above the price of plastic, affect the markets similarly. If this is not the case, an econometric implementation of the difference-in-differences technique may be necessary. Implementations of such techniques are described in more detail in section 5.1.2 below.

5.1.2. Implementing comparator-based approaches in practice

(100) Various techniques are available for estimating passing-on related price effects based on the comparator-approach. Certain factors, such as an increase in the raw material costs in the example above, may influence only the comparator market or only the market affected by the passing-on. As explained above, adjustments should be made to the observed data in order to account for such influences. These could be simple adjustments to the data in cases where the influencing factor and the magnitude of its effects can relatively easily be accounted for.

(101) In certain cases, when the availability and quality of the data permit, adjustments of comparator data can be made on the basis of econometric techniques, in particular through the use of regression analysis. Regression analysis is a statistical technique which helps to analyse patterns in the relationship between economic variables.

(102) In a regression analysis, a number of data observations for the variable under consideration and the likely influencing variables are examined. The relationship identified is usually expressed in the form of an equation. This equation makes it possible to estimate the effects of influencing variables on the variable under consideration and to isolate them from the effects of the infringement. Based on a regression analysis, it is possible to estimate how closely the relevant variables are correlated with each other, which may in some instances be suggestive of a causal influence of one variable on the other ( 87 )

(103) The different techniques available for adjustments of comparator data are described in more detail in the Practical Guide ( 88 ) . By reference to examples and illustrations, the Practical Guide provides guidance on the concepts, approaches and conditions for the application of the different techniques. It should serve as the basis for dealing with issues regarding the approaches available to implement the comparator-based methods.

(104) The court should be aware that the use of regression analyses can increase the degree of accuracy of a damages estimate and may thus help in meeting the required standard of proof ( 89 ) . National courts have dealt with the probative value of statistical evidence, such as regression analyses, in cases where damages have been awarded ( 90 )

(105) In general, the probative value of statistical evidence depends on its ability to avoid the risk of so-called type 1 errors, i.e. finding a passing-on effect when none actually exists, and so-called type 2 errors, i.e. failing to find a passing-on effect where there actually is one. In order to deal with these risks, a statistical model may apply the concepts of statistical significance and statistical power. The concept of statistical significance involves setting a high bar for a passing-on effect to be considered existing. An approach widely used is to set a five percent risk for a type 1 error, using a so-called 95 percent confidence interval ( 91 ) . However, regression models may also reduce the risk of type 2 errors ( 92 ) . In a specific case where passing-on is estimated, it is for the court to decide whether a regression-model, that has been presented to it, avoids the risks of type 1 and type 2 errors to such an extent that the model has probative value.

(106) The potential importance of adjusting the comparator data by using quantitative techniques such as regression analyses can be exemplified by reference to a judgment from a German court, illustrated in Box 8.

Box 8

The German car glass case (93)

The claimant in this damages action was an indirect purchaser from the members of a car glass cartel. The members of the cartel infringed Article 101 TFEU and were fined by the European Commission in 2008. The claimants' experts carried out an analysis of the price developments before, during and after the cartel period. No regression or correlation analyses were run, rather, the experts aimed at establishing a link between the price of car glass (the cartelised product) and replacement car glass purely by observing the price patterns. The court however considered that this analysis failed to show any sufficiently direct causal link between the pricing of the two products mentioned above. This was particularly because of the data used in the claimants' expert analysis and the fact that it did not take due account of other effects on prices as well as market trends. The court also took into account the market conditions in the case at hand to dismiss the passing-on arguments.

(107) However, techniques based on econometric analyses may in certain cases entail considerable costs. In such cases, the court may find it sufficient to estimate the passing-on by simultaneously assessing quantitative data without the use of regression analysis and by taking into consideration qualitative evidence. Moreover, the court may in most cases also find it useful to assess qualitative evidence, such as direct evidence on passing-on, also when employing the quantitative methods described in this section.

(108) When estimating passing-on based on qualitative evidence, internal documents describing a firm's pricing policy may be of particular relevance. When assessing internal documents, the court should be aware of the fact that firms in different industries, or even within the same industry, may adopt different pricing policies. In some cases, a firm may have a clear policy or established practice which identifies the price adjustments that will result from specific changes in cost. For example, in some cases purchasers may link price adjustments to changes in certain indices which may not be affected by the infringers' anti-competitive conduct, e.g. consumer price indices. In other cases, purchasers may seek to achieve certain performance objectives, e.g. apply a specific margin to the pricing of the products they supply. In principle, the former policy may speak against the finding of passing-on whereas the later suggests that the purchaser would pass on cost changes.

(109) Moreover, when assessing pricing policies, the court should also take into account whether the pricing policy of the relevant firm has actually been implemented, e.g. by considering price data to determine whether these correspond to the pricing policy in question.

(110) Examples of cases in which national courts have taken into consideration qualitative evidence are given below.

Box 9

Estimating passing-on based on qualitative evidence — Cheminova (2015) (94)

In this judgment, the court found that a producer of pesticide had passed on 50 percent of the initial overcharge to the indirect customers. This finding was based on economic theory. In this case, the court could rely on publicly available market studies characterising the market on which the direct customer was active as a monopoly market. In a report provided by the direct customer, it was argued that the market should in fact be characterised as competitive rather than a monopoly. The direct customer inter alia submitted that a large number of products were competing on the market and that moderate market shares indicated a competitive market. However, due to the facts of the specific case, the court disagreed with this approach.

Box 10

Estimating passing-on based on qualitative evidence — DOUX Aliments (2014) (95)

In this judgment, the court found that the claimant had demonstrated the absence of passing-on. The overcharge in this case concerned lysine, an input into the production of chickens. The court found that lysine only represented one percent of the costs of chicken production. Such a small increase in costs was not sufficient evidence to convince the court that it would also lead to an increase in prices of chicken. The court found that the prices responded to other factors, such as competition with other meat products and buyer power. When concluding that the overcharge was not passed on to the indirect retailers, the court referred to the fact that chickens were sold on an international and competitive market and that grocery retail chains had strong buyer power.

(111) When applying comparator-based methods for the estimation of overcharges, courts have also sometimes applied a so-called safety discount. This means they adjusted an amount that would sufficiently take account of uncertainties in the estimate from the observed data ( 96 ) . If the implementation of econometric analysis is not feasible, such an approach may also be applied for the estimation of passing-on. The objective of such an approach would be to exclude the effects of other possible factors on the variable under consideration, for instance the price offered by the indirect customer.

5.1.3. Challenges

(112) When estimating the passing-on related price effect, the court may particularly consider techniques which, to the largest extent possible, control for factors other than the one stemming from the infringement. The difference-in-differences method is such a technique. It requires information or data from a comparator market (for instance another geographical market) and time-series data from the market affected by the passing-on. However, the court should be aware that there are potential challenges that may affect how valid the comparator-based methods may be.

(113) Ideally, the comparator market is similar to the infringement market, but itself not affected by the infringement. However, the purchasers on each of the markets often use the same input. In such a case, it might be difficult to find an unaffected comparator. In particular, if the scope of the infringement covers a broad geographic area, it is likely that products, similar to the product in question and incorporating the same input, have potentially been affected, as well. This can make it difficult to find a suitable comparator market.

(114) 1 purchases copper from the infringer A 1 . Even though the wire harnesses supplier B 2 in the comparator market does not purchase from the infringer A 1 , the wire harnesses suppliers B 2 and B 1 may be competitors on the same geographic downstream markets. This implies that, if the wire harnesses supplier B 1 increases its prices in response to the initial infringement, its competitors may raise their prices, as well. In this case, the price that the wire harnesses supplier B 2 offers may have been indirectly affected by the infringement, and as a result may not provide a suitable comparator In other circumstances, the comparator market may be indirectly affected by the initial overcharge. In the stylised example of the copper cartel in Box 6, the wire harnesses supplier Bpurchases copper from the infringer A. Even though the wire harnesses supplier Bin the comparator market does not purchase from the infringer A, the wire harnesses suppliers Band Bmay be competitors on the same geographic downstream markets. This implies that, if the wire harnesses supplier Bincreases its prices in response to the initial infringement, its competitors may raise their prices, as well. In this case, the price that the wire harnesses supplier Boffers may have been indirectly affected by the infringement, and as a result may not provide a suitable comparator ( 97 )

(115) As regards comparison over time, it may be challenging to identify with sufficient precision the period when the market was affected by a certain infringement. The parties may present a decision issued by a competition authority which mentions an infringement period, i.e. sets out dates at which the infringement started and ended. However, this period may not correspond to the period in which a market was actually affected by the infringement. It is also important to note that determining the dates of either the infringement period or the period in which the market was affected, can have a strong impact on the outcome of the analysis. In reality, the effect of the infringement may not be limited to the period provided in such decision ( 98 ) . On the one hand, the start date identified by the competition authority may post-date the actual start of the infringement, for instance due to lack of reliable evidence ( 99 ) . On the other hand, the end date provided in an infringement decision may pre-date the end of the actual infringement.

(116) The effects of an infringement may also not be limited to the duration of the infringement. It is possible that the infringement will affect the market concerned even after the conduct prohibited under EU competition law has ceased. In particular, this may be the case in oligopolistic markets, if the information gathered during the infringement allows the suppliers of a certain product to adopt, on a sustainable basis after the infringement has ended, a course of action aimed at selling at a higher price than the competitive price, i.e. that would have been charged in the absence of the infringement, without engaging in practices prohibited by EU competition law ( 100 )

(117) The possibility that purchasers at different levels of the supply chain may delay the passing-on of an overcharge can also affect the comparison significantly ( 101 ) . The example in Box 1 above may illustrate this. Suppose the car manufacturer C negotiates prices with the wire harnesses supplier B on an annual basis. The wire harnesses supplier B only adjusts prices once a year after the negotiations with the car manufacturer C have been finalised. If a price fixing cartel in the copper market is established just after the negotiations between the wire harness supplier and the car manufacturer have ended, it is only when the next year's annual negotiations take place that the wire harnesses supplier may have had an opportunity to pass on the copper-price increase in their own price.

(118) Hence, the delay of passing-on down the supply chain may result in difficulties when deciding on the relevant period for comparing prices during and before or during and after the infringement (or both). The court may adjust the analysis by considering the nature of each case, for instance by analysing the pricing policy of the parties and, based on that, introducing a certain time lag when analysing the pricing patterns at different levels of the supply chain.

(119) The use of regression analyses when employing the comparator-based approach may increase the accuracy of the estimated passing-on effect. A judge should be aware that, while these types of regression models offer a direct estimate of the passing-on effect, they do not quantify the extent to which each of the theoretical factors affecting the passing-on, discussed in section 3 above (e.g. nature of input costs and nature of the product demand), contributed to the effect. A strength of using regression analyses is that it is less likely to make assumptions related to economic theory that are wrong. While such a factor-by-factor quantitative breakdown of the estimated passing-on effects is usually not necessary for the estimation of the passing-on effect, it can be noted that the techniques described in section 5.2.3 below might provide a quantitative breakdown of the factors.

5.2. Other methods

5.2.1. The passing-on rate approach

(120) The section above describes methods and techniques for comparator-based approaches to estimate the passing-on related price effect. In general, the comparator-based approach is preferable when it is feasible and proportionate to implement. This is due to the method's clear advantage of allowing for an estimation of passing-on based on the actual prices set by a direct or indirect purchaser during the infringement period. However, it relies inter alia on the availability of data on these prices, in addition to prices in one or several comparator market(s). Such information may be available in many cases. However, if information on actual prices in the infringement market and the comparator market(s) cannot be presented before the court, for instance if the court finds that disclosure of such information is disproportionate to the value of the claim in the case at hand, passing-on may be estimated on the basis of other methods, such as the passing-on rate approach.

(121) This passing-on rate approach can be implemented by analysing how previous changes in a firm's costs have affected its prices before or after the infringement period. For instance, in the example in Box 1 above, the passing-on rate may be estimated by analysing how historical changes in the cost of copper have affected the price of wire harnesses. Put simply, if an increase in the cost of copper by EUR 10 is followed by a price increase of wire harnesses by EUR 5, the passing-on rate is estimated to be 50 percent. To estimate the passing-on during the infringement period, the court could then combine this estimated passing-on rate with information on the overcharge and sales.

(122) However, the passing-on rate approach is not without risks and can even deliver misleading results in some cases. This is because when using this approach to estimate passing-on, the court can neither establish if the overcharge is actually passed on nor can it observe whether changes in the cost of the affected input are reflected in prices in the downstream markets. It is therefore crucial for the court to be aware that the passing-on rate approach relies on the assumption that, during the infringement period, changes in input costs are reflected in prices downstream. If this assumption is incorrect, this approach may produce estimates which are misleading in that they find a passing-on of overcharges where none has actually happened.

(123) When using the passing-on rate approach, the court would typically endeavour to estimate the passing-on based on how changes in the cost of the affected input have previously been reflected in prices downstream. However, if such information is not available, the court may look at the development of other components of the purchaser's marginal cost and analyse how such cost changes affect downstream prices. In the hypothetical case set out in paragraph 8 and further modified and explained in paragraph 78 and 98 above, this means that a court could consider an analysis of the relationship between the price of wire harnesses and the cost of plastic (not affected by the infringement), and estimate a passing-on rate based on the latter relationship.

(124) In most cases the infringement at issue concerns the cost of an input which constitutes just one component of the purchaser's marginal cost. If the input affected by the infringement constitutes only a very small fraction of the marginal cost, even a significant increase in the cost of that input may hardly be detected in the purchaser's price data, even if it is passed on in full. Although an alternative approach may be to estimate the passing-on rate based on changes in costs of more significant inputs and not just the cost of the affected less significant input, such an approach comes at the price of an assumption that may go too far, namely that the marginal cost increases are being passed on at an identical rate irrespective of the source for the cost increase. Moreover, if a comparator-based method, i.e. actual price based estimation, finds no statistically significant passing-on this can be considered as evidence supporting the hypothesis that no passing-on actually happened. In other words, the finding that there was no passing-on on the basis of the comparator-based method is neither a valid nor a sufficient argument, as such, to adopt a passing-on rate method.

(125) As explained in Annex 1, there are also good reasons why firms may not always pass on small changes in their marginal costs, at least not in the short run, even if they would pass on larger cost changes. Hence, it may not be legitimate to assume that the passing-on rate will be similar for different changes in the input cost. One explanation may be that the firm may incur so-called price adjustment costs, and thus prefer waiting until marginal cost increases accumulate beyond a certain threshold before changing its prices.

(126) When assessing the indirect evidence of passing-on based developments of cost components that are not affected by the overcharge, it is advisable to also take into account qualitative evidence that may show that the passing-on of small cost increases is in the specific case in line with the commercial practice of the direct or indirect purchaser.

(127) In certain cases, information on prices set by the direct purchaser during the infringement period, and only for this period, may be available. The passing-on rate approach may deliver misleading results also in such scenarios. This is because it would identify passing-on related price effects on the basis of changes in the costs of the input that has been subject to a competition law infringement. In many cases, it is not unlikely that, during the infringement period, the changes in the costs of the input that has been subject to a competition law infringement are substantially smaller than the cost increase resulting from the infringement. As explained above, small cost increases may not be passed on to the same extent as larger cost increases, and hence looking at relatively small cost and price changes during the infringement period could lead to an imprecise estimate of the passing-on effect.

5.2.2. Implementing the passing-on rate approach in practice

(128) The passing-on rate approach requires information on the initial overcharge and the relevant passing-on rate. If no prior estimation of the overcharge is available, the court may consider the techniques mentioned in the Practical Guide ( 102 )

(129) An advantage of the comparator-based method is that it allows for the construction of a counterfactual. As mentioned in paragraph 66 above, the purpose of this exercise is to isolate the effect of the infringement from other factors also affecting prices. While the passing-on rate method does not allow for such an approach, it is still important to control for factors that are not related to the infringement. One approach may be to use quantitative techniques, for instance regression analysis ( 103 ) . For instance, in the example in Box 1 above, a court may take into account an analysis of the relationship between the prices charged by the wire harnesses supplier and changes in the input costs of wire harnesses. However, other factors may have also affected the price at the downstream level, e.g. fluctuations in the demand of car manufacturers. If the court fails to take into account such additional factors, the estimated passing-on rate will most likely be biased.

(130) A regression analysis typically requires a large amount of data on costs and prices. Thus, for the purpose of estimating the passing-on rate, the court may alternatively consider whether estimates from other sources could provide a reasonable estimate for the passing-on rate. Examples o