Should cartelists be liable for umbrella pricing?
by Martin Kwan
‘Umbrella pricing’ is a vital concept in competition law. It occurs when a cartel raises the price of a product:as the price is increased, non-cartelists (ie competitors who do not participate in the cartel) may also raise the priceof the product to the same level as that of the product sold by cartelists. This is because doing so would result in a higher profit margin(therefore,it is increased ‘under the umbrella of the cartel’).Usually, non-cartelists are not aware of the cartel’s existence: theysimply follow the upward pricing trend in the market caused by the cartelists. As a result, purchasers, who bought products from non-cartelists, have, in effect, paid more than the competitive price in the absence of a cartel. The crucial issue is whether an umbrella purchaser could bring claims for losses or price differences against the cartelists. In other words, the issue examined by this piece is whether cartelists should be held accountable for the price increase by non-cartelists.
The question of accountability for umbrella pricing was considered by the Supreme Court of Canada in Pioneer Corp v Godfrey. The Courtheld that umbrella purchasers could make a claim against the cartelists. The particular decision in Pioneeris a controversial oneand Courts in the EU and UShave taken different stanceson the matter, with the former allowing this claim. The Canadian case, however, is important because it provides insight on why an umbrella claim should be allowed. By taking the same stance as the EU, the Supreme Court of Canada reinforces the validity and the strength of the reasoning of previous EU decisions. However, it also addresses an important concern not considered by the European Court of Justice (‘ECJ’), which is about excessive deterrence and it will be explained in depth below.
While some practitioners have strongly opposed allowing a claimbased on umbrella pricing, this article proposes that Pioneeris welcomed and it rebuts the common arguments against it. This article takes the view that the claim based on umbrella pricing should be allowed because it is in line with the vital objective of competition law to deter cartels. The Canadian Supreme Court has helpfully affirmed this point. It is submitted that the biggest objection raised by the US courts – that it is hard to prove the causal link between the cartel, the umbrella pricing and harm – is not an adequate justification for denying the cause of action.
This blog post aims to serve as a brief introduction to the debate and issues surrounding umbrella pricing. It is not intended to be a comparative study.
- Pioneer Corp v Godfrey
The defendants-cartelists conspired to fix prices of their products, Optical Disc Drives (‘ODD’). The claimant brought a class proceeding on behalf of British Columbia residents who had bought ODD products.The proposed class included direct purchasers, indirect purchasers, and umbrella purchasers.Although a number of legal issueswere examined, this post focuses onwhether an umbrella purchaser could bring a claim against the cartelists.
Section 36(1)(a) of the Canadian Competition Act provides that ‘any person who has suffered loss or damage as a result of’ a cartel as prohibited by s 5 of the Competition Act can have a claim. By conferring a wide interpretation to ‘any person’,the majority held that umbrella purchasers can sue cartelists.
The decision was supported by the suggestion that the umbrella purchasers’ claim was compatible with the four objectives of the competition law regime. In fact, allowing for a claim fulfills two express statutory objectives. This includes (i) maintaining and encouraging competition in Canada, and (ii) providing consumers with ‘competitive prices and product choices’.Additionally, the cause of action based on umbrella pricing is also compatible with the objective of deterrence, as it increases the potential liability of cartelists.Finally, the instigation of the proceeding complies with the objective of compensation by providing a recourse to the umbrella purchaser, who is affected by the cartel.
However, Côté J, in her dissent, believed that although s 36(1)a of the Competition Act is worded broadly by using ‘any person’, it must be given an interpretation that ‘is consistent with the principles of indeterminacy and remoteness that limit the extent of liability.’ Thus, Côté J argued that allowing recovery would open up liability that is too remote and unlimited in scope. The cartelists have no control over the pricing policy of the non-cartelists, and as such, should not be held accountable.
The majority made two points in reply to Côté J. First, they argued cartelists are not exposed to indeterminate liability. In fact, for cartel members to profit from a conspiracy, the entire market price has to increase. The umbrella effect is therefore an intended consequence of the anti-competitive behaviour. Second, the wording of ‘as a result of’ in s 36(1)(a) of the Competition Act would require both factual and legal causal links. This would suggest that the umbrella purchasers can only recover losses that are not remotely caused from the umbrella pricing.
- Approaches taken in other jurisdictions and divergent views
In the EU, umbrella claims are allowed, and are based on similar reasoning to the Canadian Court decision in Pioneer. For example, the ECJ held in Kone AG and others v ÖBB-Infrastruktur AG that permitting an umbrella purchaser to sue ensured the effectiveness of the regime to deter cartels. In particular, the ECJ laid down two requirements to recover the loss:(i) that ‘the circumstances of the case and, in particular, the specific aspects of the relevant market, [are] liable to have the effect of umbrella pricing being applied by third parties acting independently’; and (ii) ‘that those circumstances and specific aspects could not be ignored by the members of that cartel’.
By contrast, the US disavowed a claim based on umbrella pricing. There are two main reasons for this conclusion. First, cartelists do not receive the profits resulting from the prince increase by non-cartelists. Expanding their liability would, in effect, would be ‘overkill’ for cartelists, who are also subject to ‘potentially ruinous liabilities, well in excess of their illegally earned profit’.Second, it is difficult to assess if the price increase by non-cartelists was caused by the price increase of cartelists.It would be ‘highly conjectural’ to claim that non-cartelists increased the price of their products as a response to the increase in price by cartelists. This is because there could be a number of factors which affect the pricing policy of the non-cartelists.It would transform litigation into an undesirably complex economic proceeding.
It is noteworthy that the ECJ decision in Kone was not entirely accepted by some practitioners. Supporting this, two strong arguments were made. First, umbrella claims would increase the civil liability of the cartelists,and as a consequencewould deter them from seeking leniency.Second, the effect of this claim is to hold cartelists accountable for the price increase by non-cartelists.This would provide the former with an incentive to form a cartel with all competitors in the first place. This is because they would not want non-cartelists to benefit by adapting to the price increase caused by the cartel whilst not having any liability.
The objection to this stance may partially be explained from the differences between the jurisdictions. In the US, treble damages could be awarded, which is a contributive factor why the US court thought it would lead to ‘overkill’. Moreover, the US courts, particularly when Mid-West was decided when the courts were most influenced by the Chicago School of antitrust theory, generally believed that the markets will self-correct. This may explain why the action was not allowed.
By contrast, the EU courts are more concerned about false negatives, and this may explain why the ECJ may be more willing to allow the claim. In terms of the underlying philosophy, it should be noted that the EU competition law was seemingly more influenced by ‘sordo-liberalism‘, as opposed to the Chicago School. It should also be noted that private litigation is easier in the US than the EU, where the former has more ‘plaintiff-friendly’ features, such as ‘generous discovery rules’ and contingency fee arrangements.
Furthermore, in Canada, treble damages are not available. It has been suggested that Canada has adopted a more activist approach in terms of enforcement than the US. The Chicago School has limited influence. The Canadian stance is self-evidently reinforced by the statutory purposes, clarified in in s1(1) of the Canadian Competition Act, particularly the subsection on providing ‘consumers with competitive prices and product choices’.
- Supporting the claim against cartelists
Pioneer ought to be welcomed because it usefully addresses an important, yet under-examined, concern of allowing umbrella claims.In particular, the ECJ did not deal with the counter-argument on excessive deterrence, which was the main argument raised in the US jurisdiction.This issue was dealt with by the Canadian Supreme Court, which suggested that, given price increase in the market is an intended effect of the cartelists (who can only benefit if there is such), they should be liable for it.
Furthermore, this article supports the Canadian conclusion, as the oppositions raised in the US and by the practitioners can be countered. Regarding the arguments raised in the US court, particularly those of:(i) it is hard to prove the causal link, and (ii) hard to assess losses, they are not sufficient justifications for precluding the claim from being brought at all.Franck supplements this point by suggesting that if such a claim is allowed, it would provide a strong incentive for law firms and claimants to come up with improved and acceptable econometric methodologies and evidence.Thus, the ‘hard to prove’ concerns hould not be over-stated.Moreover, it should be borne in mind that competition law aims to deter cartel. Allowing the claim ensures that cartelists must be responsible for the negative market effect they may have caused. The Court should assist in finding out whether this is the case. If this could be proven, then it is difficult to sustain that ensuring cartelists’ accountability is an overkill.
Concerning the arguments made by the practitioners,the possibility of deterring applications for leniency is not convincing because competition law and the claim concerned aim at deterring cartels from happening in the first place. The proper focus should not be misdirected to encouraging the seeking of leniency after a cartel has been made. It has to be pre-emptive in order to protect the market and consumers. The same logic would equally rebut the argument that suggests that cartelists would encourage competitors to join to prevent any windfall to the latter. Again, allowing the claim will deter the formation of a cartel in the first place.
The only valid concern against increased liabilityis that,in the absence ofsufficient guidance, litigation could become very complicated.The Canadian Court has rightly acknowledged such potential complexity. For example, the price increase could be caused by a number of reasons in addition to, or even completely unrelated to, the cartel.Establishing the nexus would be difficult. Similarly, for other cases, the exact extent of similarity/homogeneity between the non-cartelists’ products and the cartelists’ ones is uncertain. Furthermore, quantification of the loss could also reveal to be complicated.
However, it is accepted that umbrella pricing is one of possible economic effects of cartels. Even if a non-cartelist takes into account other factors unrelated to the cartel in increasing price, the cartel nevertheless is still one of the factors. Therefore, the court should not ignore this possibility. It can be further argued that the court’s role is to ascertain (1) whether the cartelists have caused such a depleting effect and (2) hold them accountable.
In conclusion, the ‘hard to prove’ concerns are not adequate justifications for denying the cause of action. Litigationon this matter is limited. With more cases in the future, there will be more guidance, and concerns of this nature will be incrementally clarified. It is noteworthy that academics are also working towards providing more insights on the ways of establishing the causal links and calculating damages. Moreover, it is suggested that this issue of lack of guidance is best resolved collectively by relying on the invaluable experience from different jurisdictions. The occasional, if not even rare, litigation and cases together accumulate into a useful database of analysis and insights from various outstanding judicial minds. This is why Pioneer’s potential importance is not limited to its own jurisdiction. Yet further academic research in the future based on comparative law is also highly desirable, as this area remains underexplored in the literature. Indeed, for in allowing the cause of action, the Canadian Supreme Court was not deterred by these considerations. Instead, the Court paid due regard to, and more emphasis on, the crucial objectives of competition law. On this basis, the Court was justified to approve the claim. Most importantly, this would help uphold market integrity and protect consumers by holding the cartelists accountable for the negative market effect.
 See eg Wouter Devroe, Caroline Cauffman and Ulf Bernitz, ‘Competition Law’, in Arthur Hartkamp, Carla Sieburgh and Wouter Devroe (eds), Cases, Materials and Text on European Law and Private Law(Bloomsbury Publishing, 2017) 23, 130: ‘This new type of “umbrella pricing” damages claim may rapidly gain ground.’; Alina Kaczorowska-Ireland, European Union Law(Routledge, 2016) 1033: ‘The ECJ recognised the existence of the concept of “umbrella pricing” as part of EU competition law.’
 Cartel is defined by the OECD as involving ‘anticompetitive agreements, concerted practices or arrangements by actual or potential competitors to agree on prices, make rigged bids (collusive tenders),establish output restrictions or quotas, or share or divide markets by, for example, allocating customers, suppliers, territories, or lines of commerce’:see OECD, Recommendation of the Council concerning Effective Action against Hard Core Cartels, (2 July 2019) OECD/LEGAL/0452.
 Jens-Uwe Franck, ‘Umbrella pricing and cartel damages under EU competition law’ (2015) European University Institute Working Paper LAW 2015/18, 14: Franck helpfully explains the logic behind this: whilst the non-cartelists‘can either assume the role of the maverick, by leaving [their]price below competition and increasing [their]output, or [they]can silently benefit from the cartel by adapting [their]price to that of the cartel and reducing [their]output accordingly. Which option appears to be preferable depends on the respective market conditions. The larger the market share of the cartelists, the higher the product homogeneity and the lower the elasticity of supply of the undertaking not party to the cartel, the more likely a firm will tend to choose the second strategy’.
 Marc Veenbrink and Catalin Rusu, ‘Case Comment – Case C-557/12 Kone AG and Others v ÖBB Infrastruktur AG’ (2014) 10(1) The Competition Law Review107, 114: ‘If the non-cartelist is not aware of the cartel’s existence, it will adjust its prices according to the existing market conditions (albeit they are distorted)’.
 It refers to a customer who has purchased products from non-cartelists at an increased price as influenced by the cartel.
 ibid .
 For the EU, see ECJ, 5.6.2014, Case C-557/12 Kone AG and others v ÖBB-Infrastruktur AG.For the US, see Mid-West Paper Products Co v Continental Group, 596 F.2d 573. See also Franck (n 3) 9, 16.
 See eg Paul Hughes and Kenneth P Ewing, ‘EU endorses umbrella pricing theories in cartel damage claims’ (Lexology, 11 June 2014) <www.lexology.com/library/detail.aspx?g=823ec29e-53a8-40c7-94d0-377de34dedb5> accessed 9 January 2020.
 Pioneer (n 6) . In the EU, it has been made clear in art 101 of the Treaty on the Functioning of the European Union (‘TFEU’) that cartel is ‘incompatible with the internal market’ and is prohibited. Some member states have even made it into a criminal offence, which reinforces the determination to deter cartel. For example, in the UK, cartel is a criminal offence under s188 of the Enterprise Act 2002; See also eg Peter Whelan, The Criminalization of European Cartel Enforcement: Theoretical, Legal, and Practical Challenges(OUP, 2014). In the US, cartel has been described as the ‘supreme evil of antitrust’; See Verizon Communications v Law Offices of Curtis V Trinko540 US 398 (2004), 408.
 Mid-West Paper Products Co(n 9)583-4.
 Pioneer (n 6).
 ibid .
 Competition Act, RSC 1985, c C-34.
 The majority judgement of Wagner CJ, Abella, Moldaver, Karakatsanis, Gascon, Brown, Rowe and Martin JJ was delivered by Brown J.
 Pioneer (n 6) .
 ibid -.
 Competition Act, RSC 1985, c C-34, s 1(1); Pioneer(n 6) .
 Pioneer (n 6) .
 ibid .
 ibid .
 ibid -.
 ibid .
 Kone (n 9). Notably, Kone was also cited in Pioneer(n 6) at .
 ibid ; See also ECJ, 20.9.2001, Case C-453/99 Courage v Crehan  ECR I-6323, .
 ibid .
 Mid-West Paper Products Co(n 9)584-87.
 ibid 584: ‘The defendants secured no illegal benefit at Murray’s expense; their tainted gains were reaped from those firms to which the actually sold their products; and Murray’s added costs, if any, were pocketed by defendants’ competitors.’.
 ibid 586-7.
 ibid 583-4.
 ibid 584.
 ibid 585.
Hughes and Ewing (n 10).
 ibid. See also Kone(n 9) .
 Mid-West (n 9) 586-7; 15 USC s 15.
 For our present purpose, it is inappropriate to dwell on the details of the Chicago School. It is sufficient to note that ‘[f]rom a competition policy point of view, the Chicago School believed that markets would be self-correcting and intervention should be in exceptional circumstances only’: Liza Lovdahl Gormsen, A Principled Approach to Abuse of Dominance in European Competition Law(Cambridge University Press, 2010) 36
 ‘As such, the EU is likely to err on the side of making “false positive” decisions, whereas the United States is likely to err on the side of “false negatives”, fearing incorrect interventions’: Anu Bradford, ‘Antitrust law in global markets’, in Einer Elhauge(ed), Research Handbook on the Economics of Antitrust Law(Edward Elgar Publishing, 2012) 283, 292. See also Niamh Dunne, Competition Law and Economic Regulation(Cambridge University Press, 2015) 124; It was note that the US courts assumed that‘a robust competitive market wouldautomatically be efficient’: Eleanor M Fox, ‘US and EU Competition Law: A Comparison’, in Edward M. Graham and J David Richardson (eds.), Global Competition Policy(Institute for International Economics, 1997) 339, 340. The assumption that markets can self-correct was generally held by courts since 1970s (bearing in mind that Mid-West (n 9) was reached in 1979): Gormsen (n 44) 36. There is now more emphasis on consumer welfare: Roger J Van den Bergh, Comparative Competition Law and Economics (Edward Elgar Publishing, 2017) 104-5, 118.
 Bradford (n 45) 292; Csongor István Nagy, EU and US Competition Law: Divided in Unity? The Rule on Restrictive Agreements and Vertical Intra-brand Restraints(Routledge, 2016) 195.
 ‘Ordoliberalism did not regard capitalism (pure economic liberalism) as a self-generating, self-equilibrating and self-correcting system, but rather believed that the state should intervene to cure market failures’: Gormsen (n 44) 44.
 ‘Even today, it remains debatable as to whether EU competition law can be emancipated from this ordoliberal tradition’: Maria Ioannidou, Consumer Involvement in Private EU Competition Law Enforcement(OUP, 2015) 16; Enrique Bravo-Garcia, Competition shaped by EU policy: A voyage into the unknown (Kluwer Competition Law Blog, 6 August 2019) <http://competitionlawblog.kluwercompetitionlaw.com/2019/08/06/competition-shaped-by-eu-policy-a-voyage-into-the-unknown/#_ftnref22>. Cf. ‘The attempts to explain the features of EU competition law by reference to ordoliberalism have often been criticised for their lack of rigour in the explanation of the fundamental tenets of this school of thought’: Pablo Ibez Colomo, The Shaping of EU Competition Law(CUP, 2018) 280.
 Dunne (n 45) 24.
 Edward M Iacobucci, ‘The International Reach of Canadian Competition Law’, in Andrew T Guzman (ed), Cooperation, Comity, and Competition Policy(OUP, 2011) 45, 52.
 Brian Cheffins, ‘The Development of Competition Policy, 1890-1940: A Re-Evaluation of a Canadian and American Tradition’ (1989) 27(3) Osgoode Hall Law Journal449,449-450.
 ‘If economic theory and analysis are relevant under the Act, then virtually every decision of the Tribunal will reflect the “applied price theory” perspective of the Chicago School to some extent. In my view, however, the present and earlier decisions of the Tribunal in the instant case cannot be described as wholly consistent with that school of antitrust thought.’: Commissioner of Competition v Superior Propane Inc., 2002 CACT 16  (per LP Schwartz, an economist who sat in the tribunal).
 Pioneer (n 6) .
 Franck (n 3) 14: ‘In Kone, the Court refrained from discussing the risks of an excessive deterrent effect due to a liability for umbrella pricing’. ‘Advocate General Kokott thereby essentially denies the risks of over-deterrence with the consideration that undertakings are obliged to comply with competition law and could thereby avoid any liability’.
 Pioneer (n 6) .
 Mid-West Paper Products Co (n 9)583-4.
 Franck (n 3) 19.
 ibid 19.
 See (n 11).
 Mid-West Paper Products Co (n 9) 585; Franck (n 3) 10.
 Pioneer (n 6) .
 Mid-West Paper Products Co (n 9) 584.
 Kone (n 9) -.
 There has been no major development which deviates substantively from Mid-West(n 9) in the US and Kone in the EU. See also Linda Visser and Bridget Moran, ‘Umbrella Purchasers: The Plaintiffs’ Perspective’ (14thNational Symposium on Class Actions, Toronto, April 2017), which pointed out that there were only three main decisions, including Pioneer, in Canada on umbrella pricing.
 For suggestions made from the economic perspective, see eg Roger D Blair and Christine Piette Durrance, Umbrella Damages: Toward a Coherent Antitrust Policy(2018) 36(2) Contemperorary Economic Policy 235; For legal suggestions, see eg Vlatka Butorac Malnar, ‘The Kone Case: A Missed Opportunity to Put the Standard of Causation Under the Umbrella of the EU’, in Vesna Tomljenović et al (eds) EU Competition and State Aid Rules: Public and Private Enforcement(Springer, 2017) 175, 194 (who suggested that the courts ‘could approach causation by first linking the infringement to the distortion of the market and then linking the damage to the market distortion. This approach would facilitate establishing a direct link between the injury and the loss suffered. The assessment of foreseeability should rest fully on economic evidence pertinent to the particular circumstances of the case’).