Tribunal awards exemplary damages for competition law breach

The first award of exemplary damages for abuse of dominant position in the Cardiff buses’ war demonstrates the relevance of competition law for smaller businesses, says John Doherty

Many small companies, operating in an increasingly competitive environment, are at the mercy of their larger competitors. Proving breaches of competition law can be hard and expensive; proving that you have sustained damage as a result can be even harder. In July this year, however, the Competition Appeals Tribunal awarded a small company two heads of damages as a result of a competitor’s infringement: loss of profit and exemplary damages (2 Travel Group Plc (In Liquidation) v Cardiff City Transport Services Ltd [2012] CAT 19)

The claimant, 2T, was a small company which operated a no-frills bus and coach service within Cardiff between April and December 2004. Shortly after 2T’s services started, the defendant, trading as Cardiff Bus, also started to run a new no-frills “white” bus service on the same routes and at the same times as 2T’s service. Cardiff Bus set its prices below those of its normal liveried services, which also operated on those routes. More importantly, it was also set below 2T’s service on the majority of the relevant routes. Cardiff Bus made a loss on the white services and they ceased shortly after 2T ceased trading in December 2004.

2T complained to the OFT in November 2004 that Cardiff Bus’s actions amounted to an abuse of its dominant position. The OFT agreed, holding in CA98/01/2008 that, by launching and operating its “white services” with exclusionary intent, Cardiff Bus had “abused its dominant position in the market by engaging in predation” (the “Infringement”), thereby affecting trade within the UK and breaching the Chapter II Prohibition in the Competition Act 1998.

However, as Cardiff Bus’s annual turnover did not exceed £50m, it benefited from the limited immunity from financial penalties for conduct of minor significance set out in section 40 of the Act. The OFT did not, therefore, impose a financial penalty on Cardiff Bus.

Claim for losses

2T made a follow-on claim to the CAT for damages pursuant to section 47A of the Act. It sought damages under six heads: loss of profits; loss of a capital asset; loss of a commercial opportunity; wasted staff and management time; costs of the liquidation and exemplary damages. In total, 2T sought damages of more than £20m. Unsurprisingly, Cardiff Bus disputed liability for such losses, arguing that 2T would have gone into liquidation when it did, even if the infringement had never occurred.

The CAT awarded 2T £33,818.79 in lost profits, based on a finding that the infringement caused 2T to lose 41,255 pass-engers, holding that a loss-making entity can still make a valid claim for loss of profits. It also awarded interest on those profits, albeit not at the high rate that 2T argued was appropriate given the deliberate nature of '¨the infringement.

However, the CAT rejected all of 2T’s other claims in respect of actual losses, finding that it had been exceptionally poorly managed and had provided poor service to its customers. There was no credible evidence that, but for the infringement, 2T would have been saved and £33,818,79 was a “drop in the ocean” rather than a lifeline. Accordingly, the CAT calculated that 2T would have ceased trading in December 2004 in any event.

Exemplary damages

The CAT observed that while the purpose of an award of damages is to compensate a claimant’s loss, the object of exemplary damages is “to punish and deter” (Rookes v Barnard [1964] 1 AC 1129 at 1221). They should, therefore, only be awarded if compensatory damages are insufficient alone to punish the defendant.

2T contended that it was entitled to exemplary damages under two heads: that of oppressive, arbitrary or unconstitutional conduct by “servants of the government”, and conduct calculated by Cardiff Bus to make a profit which may well exceed any compensation it might ultimately be required to pay.

As regards the first head of damages, the CAT concluded that although Cardiff Bus was owned by the local authority, it was operated at arm’s length and therefore no exemplary damages could be awarded.

In relation to the second head, the key question was whether exemplary damages could be awarded at all for a breach of the Chapter II prohibition (abuse of dominant position).

Companies are often unable to predict with certainty whether a proposed measure will amount to an abuse of a dominant position. Many business decisions are therefore taken in the knowledge that there is a risk they may breach competition rules. The CAT considered that it would be wrong to impose an exposure to exemplary damages in all cases where there is a known risk of such an infringement. This might, in fact, deter actions which would have a pro-competitive effect.

However, exemplary damages could be awarded where there was an intentional breach of the law. The CAT was also of the view that “recklessness” could form the basis of such a claim. Recklessness involves the knowing disregard of an appreciated and unacceptable risk. The CAT characterised an unacceptable risk as involving a cynical disregard for a claimant’s rights (Rookes) or behaving outrageously or in outrageous disregard of the claimant’s rights (Kuddus v Chief Constable of Leicestershire Constabulary [2002] 1 AC 122). It concluded that “where there is only a small risk that the Chapter II prohibition will be infringed no question of exemplary damages will arise”.

Spectrum of risk and awareness

Adopting Lord Nicholls’ “spectrum of risk” analysis from Royal Brunei Airlines Sdn Bhd v Tan [1995] 1 AC 378, the CAT referred to the following range of “awareness” levels concerning an undertaking’s proposed conduct: (i) clearly lawful, (ii) probably lawful, (iii) possibly lawful, (iv) wholly unclear, (v) probably unlawful or (vi) clearly unlawful.

Only in those cases where the undertaking was aware that its proposed conduct was either probably or clearly unlawful would the risk be classed as unacceptable.

Each case would turn on its facts and weight would be given, in particular, to any expected pro-competitive effects of the conduct, the degree and seriousness of any anti-competitive effects, the undertaking’s motive for acting and whether the same aim could be achieved in an alternative way with less serious anti-competitive effects.

Double jeopardy?

The tribunal then considered the perceived problem of punishment in parallel. In Devenish Nutrition Ltd v Sanofi-Aventis SA [2007] EWHC 2394 (a breach of the cartel offence in Article 101 TFEU), the High Court held that exemplary damages and the imposition of a fine served the same aim: namely to punish and deter anti-competitive behaviour.

It also held that exemplary damages should not be awarded in a case in which the defendants had already been fined by the Commission, even if those fines were reduced or commuted to zero as a result of the Commission’s leniency policy.

Cardiff Bus had escaped a fine under s40 of the Act and the Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000 and there was no question of the CAT not upholding the Commission’s leniency policy for whistle blowing.

The CAT was mindful that punishment and deterrence were matters for the public authorities in the context of competition enforcement, and also acknowledged the limited immunity afforded to small undertakings under the Act. However, no-one would suggest that an award of damages should not follow where a small undertaking had caused loss or damage to a claimant. By extension, the CAT could see no reason why a small undertaking should be immune from a claim for exemplary damages if it had behaved in a cynical or outrageous fashion.

The CAT was firmly of the view that an award of damages was appropriate in the instant case. Cardiff Bus clearly intended to operate the white services: the question was, whether it – via one or more of its servants or agents – knew that this conduct was either probably or clearly unlawful. The CAT had no doubt that the executive directors were the controlling mind of Cardiff Bus, but stressed that it was not permissible to cumulate the knowledge or acts of two innocent persons so as to reach a conclusion that the legal entity had acted dishonestly, intentionally or recklessly.

Although the directors of Cardiff Bus maintained that they only wanted to offer a “differentiated” no-frills service, as an alternative to its liveried service, the CAT rejected that version of events. The CAT noted that “There is something inherently repugnant in a service being commenced by a dominant undertaking for the sole reason of excluding another

Measure of exemplary damages

The CAT refused to assess the level of exemplary damages by reference to the sort of penalty the OFT might impose, as it derived its jurisdiction from a different source to the OFT and the damages were being paid to the claimant not a public authority.

Instead, the CAT used three benchmarks to assess exemplary damages:

1. They should bear some relation to the compensatory damages being awarded;

2. Regard should be had to the economic size of the defendant: a large company would need a proportionally larger deterrent than a small one; and

3. As an entity with an association with a local authority, Cardiff Bus would “no doubt take very full account of the judgment, even if exemplary damages are (in numerical terms) quite low”.

On that basis, 2T was awarded exemplary damages of £60,000. No interest was awarded.

Clear terms

This decision by the CAT is significant, demonstrating at its first opportunity, the CAT’s determination to set out in clear terms how exemplary damages can be claimed. Given 2T were seeking over £20m in damages and were awarded £33,818.79 in compensation and a further £60,000 in exemplary damages, we do not anticipate the floodgates opening. However, this nonetheless represents a significant milestone, which will encourage future claimants.

A number of areas remain to be clarified, such as the double-jeopardy issue and its operation where there are multiple claimants. However, the CAT is to be applauded for attempting to explain thoroughly how the current law of compensation and exemplary damages applies to competition cases. Woe betide those organisations who are intentionally reckless and cynically calculate that any fine for breach of the Act will be less than any profit illicitly generated: the CAT will not give them a free ride.