When pursuing damages in so called (follow on) cartel damages claims claimants can anticipate fierce resistance from defendants. The resistance is caused by the sheer volume of claims in these kind of cases. Collective claims can mount to several billions of euros (see for instance the claims asserted in Air Cargo[1] and Trucks[2]), sometimes even hundreds of billions, thus triggering defendants to counter with as many arguments (im)possible. Normally, the only way for claimants to survive this legal battle is to combine forces. Let’s tackle the defendants together. This is what is called the bundling of claims. Often litigation is impossible without the bundling of claims. One might argue that jurisdictions that forbid this bundling of claims are in breach of the doctrine of the useful effect. The useful effect doctrine constitutes a specific branch of the EU state action doctrine that serves to prevent Member States from enacting state measures that enable undertakings to escape antitrust accountability.[3] In other words damaged parties must be able to pursue compensation of their damages. We have seen some recent case law of the European Court of Justice (ECJ) in which it applied the useful effect doctrine to the benefit of claimants.[4] We did a comparative law research on the possibility of working together as claimants, thus the bundling of claims in various European jurisdictions.

Germany

Contributed by Konstantin Seifert, Oppolzer | Seifert Kartellrecht

In Germany, there is no specific regulation concerning the bundling of claims in cartel damage cases. As a result, there are no clear rules allowing or prohibiting the purchase or assignment of such claims and there are also no provisions allowing for a genuine opt-out antitrust class action. Thus, claimants (or “class action” organizers) that want to enforce damage claims of various injured parties in one and the same legal proceeding currently have to choose one of mainly three options under “regular” German civil law, civil procedure and – in one case – the general regulations concerning legal service providers:

Option 1 is going to court as a “joinder of parties” (“Streitgenossenschaft”), which means that every and all injured parties participating in the proceedings will be claimants next to each other. While this is undoubtedly permissible, the group of claimants (and the organizer/litigation funder behind them) face two challenges: The first one is that being a party to the proceedings every individual claimant can – in theory – take an active role in the trial, thus undermining the intended efficiencies of the “class” proceedings and potentially breaking up the united front of the claimants. Therefore, an elaborate contractual design may be needed in order to keep everyone aligned without overly imposing on the individual claimants (and risking an invalidity of the entire construct). The second challenge is that the court might simply decide to break up the proceedings into smaller pieces (up to one case per claimant), so that the claimants (and the claim organizer/funder) end up with dozens or hundreds of individual proceedings (each with their own – in Germany quite substantial – costs and cost risks). This has not been tested much, so the risk of a split-up is hard to gauge. However, the risk appears to be lower for smaller (still manageable) or very large groups of claimants (which would cause thousands of separate trials if split up, thus swamping the court) than for a mid-size group of claimants.

Option 2 is the assignment model, in which the injured parties assign their claims to a claim vehicle which then goes to court as sole claimant. The injured parties in turn bear no cost risk whatsoever and receive the lion’s share of the recovery (usually around 70%) whereas the rest goes to the claim vehicle/funder. While this is a very practical construct for all parties involved, it has had some teething problems and has – initially- been met with opposition on district court level. Multiple courts have found the assignments (i.e. the transfer of the claims to the claim vehicle) to be invalid due to either (i) insufficient financial resources of the claim vehicle or (ii) a violation of Germany’s Legal Services Act (“Rechtsdienstleistungsgesetz”). As a consequence, the trials inevitably ended in a fiasco (because the claim vehicle never possessed any claims it could enforce in court).

The first issue, however, practically arises only in special circumstances and can also be solved quite simply legally (but not cheaply). There has only been one landmark case in which the courts (in Düsseldorf) have held the assignments to be invalid due to insufficient funding of the claim vehicle.[5] That case was particular in that the claim vehicle itself had publicly communicated its sparse funding before the assignments were made so that the injured parties (i.e. the assignors) were aware or at least had to have known about the lack of funding, which under law is a prerequisite for the invalidity of the assignments.[6] Naturally, this will very rarely happen in other cases where clients simply have no reason to doubt the claim vehicles’ funding. Also, any (residual) risk can be excluded by providing sufficient financial resources to the claim vehicle to cover all costs reasonably expected in the proceedings (including, in particular, any potential cost reimbursements for defendant’s counsel). Because then, the defendant(s) would not be exposed to the undue risk of being unable to recover its costs for legal defense in case it won the case. As stated above this is simple in a practical sense, but it might be costly, because Germany has embedded the so-called loser pay principle in its procedural law, so counsels’ statutory fees and court fees might mount up to appr. 2 million euros. However, based on the Düsseldorf decisions, one can assume that taking out ATE (“after-the-event”) insurance (covering any adverse costs if the proceedings are lost) will also be sufficient and much more economical than depositing funds for all potential adverse costs in the claim vehicle’s bank account.

The second issue is that the German Legal Services Act (“Rechtsdienstleistungsgesetz”) considers the enforcement of claims for the account of a third party to be a legal service, which may only be rendered by companies with a debt collection license. It is not impossible to obtain such a license, but even then, several district courts had held that the license would not cover a business model directly aimed at legal proceedings in court (as opposed to out-of-court).[7] This, however, has recently been overturned by a landmark ruling of the Federal Supreme Court.[8] The FSC has also further clarified another contested issue, which is the conflict of interests provision in the Legal Services Act. Some district courts saw a violation of that provision in the fact that (i) the interests of different (groups of) injured parties might not be aligned (so the claim vehicle or the settlement could favor some injured parties at the expense of others) and (ii) the interests of the injured parties on the one hand and the claim vehicle on the other hand might also not be aligned (since the claim vehicle bears all cost risks and thus might be inclined to accept a settlement sooner than the injured parties would for themselves).[9] The FSC, by contrast, held that when designed properly (and particularly, if the claims are sufficiently homogeneous), these issues could be overcome.[10] This should also hold true with regard to a potential conflict of interests between the injured parties and a third party funder (providing the resources to the claim vehicle), at least if the funder’s influence in the proceedings (i.e. on the claim vehicle) is limited (and/or if any settlement can be revoked by the injured parties). The latter point (influence of the funder) has even been picked up by the legislator who has adopted a corresponding change in the relevant provision (§ 4, 1) of the Legal Service Act, which entered into force on 1 October 2021. There are several appeal proceedings pending in those cases, where a violation of the Legal Services Act had been ruled on District Court level. In those proceedings, a number of higher regional courts (in Munich,[11] Stuttgart,[12] Schleswig,[13] and Braunschweig[14])– even though they have not handed down final judgments – have issued orders and/or given opinions in oral hearings that strongly indicate they will overturn the first instance decisions and restore the validity of the assignments.

Given these developments, we can expect to see a renaissance of the assignment model in Germany. The extent of it will also depend on the outcome of an appeal case in the trucks cartel pending at the higher regional court of Munich[15] which is much anticipated (and which will probably go up to the FSC to finally settle the matter and provide even more guidance for future permissible designs of the assignment model).

Finally, it should be borne in mind that the German Legal Services Act will not apply to foreign injured parties assigning their claims to a foreign claim vehicle which then brings the case to court in Germany (against, for example, a German defendant).

Option 3 is the purchase of claims, which then are also assigned to a claim vehicle. Since there is a fix purchase price and therefore the injured parties have no further interest in what becomes of “their” claims, the claim vehicle then goes to court entirely for its own benefit. Therefore, there is no question of rendering a legal service to someone else and consequently no issue with the Legal Services Act. However, there are practical disadvantages: the claim vehicle/funder requires significantly more financing in order to be able to purchase the injured parties’ claims up-front – assuming even more risk than in the assignment model (Option 2) or in the financing of a joinder of parties (Option 1). Inversely, the injured parties usually get only a fraction of what they would have received had they chosen for option 2 with a favorable outcome.

The Netherlands

Dutch civil procedural law allows special claim vehicles to act as a plaintiff in proceedings. Dutch law provides the following options to enable a special purpose vehicle (SPV) to engage in proceedings.

Option 1 is that the injured parties can assign their claims to the SPV, which subsequently litigates these claims. The injured parties and the SPV can also enter into a contract of mandate which will entitle the SPV to litigate the concerned claim. The SPV can subsequently litigate these claims either in its own name, or in the name of the injured parties. This is what we call the “opt-in route”. Any participating party has to actively decide for themselves to join this collective action.

In various judgments in cartel follow-on cases in connection to the Air Cargo cartel, the Amsterdam District Court and Court of Appeal held that the assignment by individually injured parties of claims to a claim vehicle is in principle valid under Dutch law.

The burden of proof regarding the legal validity of the assignment of the claims lies with the claim vehicle, the Amsterdam District Court ruled. In a damages action initiated by claim vehicle Stichting Cartel Compensation (SCC), the court clarified that claimants will fulfil their obligation to furnish facts by submitting an extract of the deed of assignment and the title:[16]

“4.14. The District Court starts from the premise that if the documentation brought into the proceedings contains per shipper: (i) the assignment agreement (title) and (ii) the deed of assignment and (iii) it is clear that these were signed/issued by the assignor, it is sufficiently established that SCC is the party entitled to the claims, unless there are concrete indications, to be put forward by the airlines, that a legally valid assignment has not taken place in spite of this.”

“The court assumes that if the documentation per shipper submitted to the proceedings contains: (i) the assignment agreement (title) and (ii) the deed of assignment, and (iii) that it is clear that these have been signed/furnished by the assignor, then it is established to a sufficient degree that SCC is the entitled party to the claims, unless there is concrete evidence, to be submitted by the airline companies, showing that nonetheless, no legally valid assignment has taken place. It is important in this respect that the assigned debtor (and the court) can establish on the basis of the documentation that the assignor and assignee did actually intend to assign the claim In this case, the Amsterdam court held (on the basis of the assignment documents provided by SCC) that the assigned claims were described in a sufficiently clear and precise manner:[17]

“4.21. The court finds that it is sufficiently clear from the aforesaid assignment documentation and bailiff’s notifications that this concerns claims from the shippers for compensation for all damages resulting from the cartel, including overcharge, interest, lost profit and costs. […] It has also been taken into account that this concerns claims arising from tort by virtue of a cartel (the size and duration of which was apparent to the cartel members but not to the shippers). The position of the airline companies basically boils down to the fact that the shippers did not wish to assign their entire claim for damages arising from the cartel but excluded parts of it which, in the absence of evidence to support this, seems to the court to be implausible. It is furthermore clear that this concerns claims from all the members of the cartel referred to in the decision (as debtors of the claims). The deeds of assignment (due in part to the reference to the assignment agreements) accordingly contain sufficient details to be able to determine which claims are concerned. Contrary to what the airline companies have argued, it is not necessary for the determinability of the assigned claims, namely the claims for damages that are based on tort (participation in the cartel), that it can be established (now already) which shippers purchased which flights (which routes).

4.32. Based on all of the preceding, the conclusion is that the assignments that are governed by Dutch law are legally valid. This implies that the defence of the airline companies that the litigation assignments are not valid does not need to be discussed.”

This criterion was applied in another likewise judgement of the District Court of Amsterdam[18] and later confirmed in appeal, by the Amsterdam Court of Appeal (2020);[19] if the claim vehicle has fulfilled its above mentioned burden of proof, it is then up to the airlines to argue, in the context of substantiating their defence, how and why the validity of the assignment should be questioned on reasonable grounds, the appeal court ruled. The appeal court added that the debtors had a limited right to information and that they could not claim additional documents, referring to the parliamentary history of Article 3:94(4) DCC, which provision provides that the person against whom the debt-claim is to be exercised may demand that a written summary of the notarial or private deed and of its legal basis are handed over to them.[20]

The appeal court further added that at (this stage of) these proceedings it is, under Dutch law, not necessary to establish whether or not the assignment of the claims was validly made, since that is not necessarily important in the relationship between assignee (claim vehicle) and debtor (cartelists). The important thing is whether the debtor has to accept the effectiveness of the assignment against him. If the debtor subsequently were to pay to a party who was not authorised to receive the payment, the debtor can object to the party to which the payment was to be made that he paid in full, if he reasonably assumed that the payment was made to the recipient.[21]

This means that cartelists’ defenses in cartel cases, seeking access to all the underlying documents, will thus be brushed aside at first instance. The documents in question may become relevant if there are reasonable grounds to doubt the validity of the assignment, but such discussions often focus on one or a few assignment agreements rather than on all assignment agreements submitted by the claimant. Overall, the abovementioned judgements have substantially reduced the possibilities of cartelists to call into question the validity of assignments when governed by Dutch law.

Option 2 is that the SPV can bring a so-called “collective action” on the basis of article 3:305(a) of the Dutch Civil Code (DCC), either old legislation, or new legislation, depending on whether the events that are subject to the action occurred prior or after 15 November 2016. Article 3:305(a) DCC, old legislation, enables the SPV to demand declaratory relief with regard to liability and causal relationship, for the benefit of groups of injured parties as far as their claims are sufficiently similar and insofar as the claim vehicle promotes these interests pursuant to its articles of association. The options under the old regime are limited to declaratory decisions only, however, these collective actions can provide the momentum necessary to force the injuring party to accept a collective settlement. A SPV can commence a collective action under Article 3:305(a) DCC (old) without the cooperation of the injured parties, but is subject to other limitations. This is the “opt-out” route. All injured parties are included, when finally a settlement has been reached, parties can opt out of this settlement and pursue their own goal. More strict rules with regards to corporate governance apply in the “opt-out” system, naturally because damaged parties can be drawn into this kind of litigation without prior consent. The old Article 3:305(a) DCC only remains available when the relevant events took place before 15 November 2016.

Recently the Dutch legislator updated the collective action regime, with the amendment of the Act on the Resolution of Mass Claims in Collective Action (Wet afwikkeling massaschade in collectieve actie, “WAMCA”),^[22] and has introduced a mechanism to claim payment of damages in collective actions on behalf of the injured parties, as well as a lead plaintiff system. The legislator further added a number of additional safeguards and requirements for claim vehicles to constitute a viable representative claim as is required under Article 3:305(a) DCC to ensure the standing of the claim vehicle. For example, the SPV has to be sufficiently representative, has to have sufficient experience and expertise to commence and conduct the action and has to have a supervisory body. The merits of a case will only be assessed after the court has established that the claim is admissible under Article 3:305(a) DCC and the plaintiff has made it sufficiently plausible that pursuing the collective action is more efficient than individual claims (Article 1018(c) par 5 sub b Dutch Code of Civil Procedure).

If it has been established that a claim is admissible and successful, the court is also allowed to determine the amount of damages and the way in which the damages will be paid.[23] As the WAMCA rather new, there is no case law yet that gives guidance on how the courts will in practice deal with these competencies as there are no cases yet that have reached this phase.

The “opt-out route” is also an option for collective actions for damages under the WAMCA. If the collective action is on an opt-out basis, a court decision granting or dismissing the collective action will be binding on all injured parties who are member of the class, who reside in the Netherlands and who did not opt out.[24] The court decision will also be binding on members who reside abroad but in principle only if these parties opt in within a time period to be set by the court after the lead plaintiff has been appointed and announced, although the court is allowed to rule otherwise at the request of the plaintiff.[25] The WAMCA regime is limited to claims concerning events that took place after 15 November 2016.

Option 1 and 2 can be combined. Collective actions, option 2, can only be brought by a Dutch foundation or association and claims as described above under option 1 can also be brought by other vehicles than Dutch foundations and associations, provided the plaintiff’s law of incorporation empowers it to bring legal actions (article 10:119 (a) DCC).

The UK

In the UK, the ancient rules against “trafficking” of litigation: the law of ‘maintenance and champerty’, still has effects on the possibility to bundle claims.

Law of maintenance and champerty

Historically, English law did not recognize and enforce arrangements which qualified as ‘maintenance’ and/or ‘champerty’. ‘Maintenance’ entails the support of litigation in which the supporter has no legitimate concern without just cause or excuse. ‘Champerty’ is an aggravated form of maintenance in which the party who maintains the litigation funds the litigation and in return receives a share of the proceeds of a successful claim. The conclusion of such agreements was punishable under criminal law and constituted a tort.

Meanwhile, English law and UK courts have become more flexible and have adopted in principle a favorable perception towards the funding of litigation. Maintenance and champerty have been abolished as crimes and torts for a few decades, but the general rule has been left in place that a contract that breaches the rule against maintenance and champerty is considered to be contrary to be public policy and therefore unenforceable (section 14(2) of the CLA).

UK case law

Recent case law of the UK courts clarified that this rule does not necessarily invalidate a third party litigation funding agreement, unless there is some other element that is contrary to public policy. That might be for example, when the funder has undue control over litigation and/or when the funder receives a disproportionate share in the proceeds as opposed to the claimant(s).

The UK Courts have however shown to be less tolerant when claims are assigned to a third party which pursues the claim in its own name, as opposed to third party litigation funding. Assignment agreements may still be labeled as ‘champerty’ or ‘maintenance’ in particular when the assignee has no legitimate personal interest in pursuit of the assigned claims.

Leading cases regarding the assignment of claims have been for a long time Trendtex Trading Corp v Credit Suisse (1982)[26] and Jennifer Simpson (as assignee of Alan Catchpole) v Norfolk & Norwich University Hospital NHS Trust (2011)[27]:

• The Trendtex case established that the assignment of a bare right of action is considered to be against public policy where the assignee does not have a “sufficient interest” to justify pursuit of the proceedings for his own benefit. The court considered that the aim to profit from the litigation does not amount to a “sufficient interest”, and neither does the pursuit of litigation as part of a personal campaign.
• The court applied the principles from Trendtex also in the Simpson The cause of action assigned in this case concerned a cause of action in tort for personal injury. The claim was pursued by Mrs Simpson against the hospital where her husband had been a patient. While a patient at the hospital, her husband had contracted an infection called ‘MRSA’. Another patient at the hospital had also contracted the infection while treated in the hospital. The other patient assigned her claim to Mrs Simpson for the consideration of £1, and she pursued the claim in her own name and for her own benefit. The court considered that the assignment of a bare cause of action in tort for personal injury remains unlawful and void (para 24), stating that even though Mrs Simpson might have had ‘honorable motives’ in pursuing the claim, to demand attention for the (supposed) failing of the hospital, this was not the sort of interest the law recognized as “sufficient” as required by section 14(2) CLA. According to the court, the assignment in this case amounted to champerty, because it involved the purchase of a claim which, if it would be successful, would lead to Mrs Simpson recovering damages in respect of an injury she had not suffered. In the view of the court, that is an assignment of a bare right of action, in the sense the assignee has no legitimate interest, and is therefore void (para 28).

This case law makes clear that it is not so easy for a third party to pursue claims in its own name, when there’s no ‘legitimate’ personal interest and profit is the only goal.

There are however some recent cases which might suggest that there might be a development towards a more liberal approach by the UK courts with regards to the assignment of claims:

• In the case of JEB Recoveries LLP v Binstock (2015)[28], claims that were assigned to a special purpose vehicle ‘JEB Recoveries’, were accepted by the UK High Court. The original claim concerned was a debt due from defendant under a contract between the defendant an Mr Wilson. Mr Wilson assigned his claim to the claimant SPV, which was established by him and two others. The court held that although the assignment of a bare cause of action had long been recognized as champertous and that, without more, assignment of the claim of a nominal sum would be likely to offend public policy, in this particular case there was more: the assigned claims were not a bare right of action but included debts, and also a connection remained between the assignor and the SPV pursuing the claims: Mr. Wilson had a one-third interest in JEB Recoveries and also assisted in the pursuit of the claims. This was different in the Simpson case, in which Mrs Simpson only pursued the claim in order to pursue a separate (personal) campaign. The court also cited the court in Simpson, which had held that the law on maintenance and champerty is open to further development as perceptions of public interest change, with reference to, inter alita, new statutory regulation since the Simpson case allowing certain damages-based agreements.
• Two years later, in the case of Casehub Ltd v Wolf Cola Ltd (2017)[29], the UK High Court also allowed the bundling of claims by claim purchase agreements. The claims assigned were claims of customers against the defendant, who operated a software business, to be refunded the cancellation fees paid by them on the ground that the cancellation fee provisions in the terms and conditions of the defendant, were unlawful. The claims were assigned either in return for a percentage of the proceeds, or in return for a fixed amount. The court considered that in this case, the assigned claims did not amount to a bare cause of action because the assigned claims qualified as the right to the sum in question and the assignment of the right to bring a restitutionary claim to recover the sum, which would be incidental and subsidiary to that right (para 25).

Consequently, the question remained whether the claimant had a legitimate interest in the pursuit of the claims and whether there was a risk the integrity of the legal process would be impugned in some way (para 27). The court concluded that there were no public policy grounds which would lead to the conclusion that the assignment is invalid, to the contrary, the court held that there were strong public policy grounds in favour of upholding the agreement. In brief, because the assignments enhanced access to justice for the customers, while the court did not see a risk in this case of the litigation process being abused. The court also recognized that the claimant had a legitimate commercial interest in being able to pursue the claims assigned to it in order to protect the liquidates sums it acquired (para 28).

While these cases might suggest a shift in the UK courts perception towards the assignment of claims, it remains uncertain whether these cases will be upheld in all situations of assignment of claims. The acceptance by the courts of the assignment agreements in JEB Recoveries and Casehub was very case and fact specific, while the courts also made clear that the Simpson and Trendtex cases remain leading cases regarding this subject matter.

Therefore caution is still in order when it comes to the assignment of claims under UK law, as it will have far reaching consequences when a court will hold that an assignment is in breach of the law of maintenance and champerty: the assignment will be void and the claims cannot be pursued.

Italy

Contributed by Giovanni Scoccini, Scoccini & Associati

Italian law allows to bundle claims from different claimants in one lawsuit provided that these claims have the same causa petendi. This is the case with cartel damages claims, which stem from a single unlawful behaviour. Where the causa petendi is the same it is possible to file either a joint action under Article 103 of the code of civil procedure (c.c.p.) or a class action under the recently introduced Article 840 bis c.c.p

Option 1. The joinder of parties under Article 103 c.c.p is the traditional procedural instrument to realize economies of scale in the legal proceedings. It allows to bundle claims from claimants irrespective from where they are located (in Italy or abroad), provided that the lawsuit is filed with the court of the defendant’s domicile. On the other hand, if the lawsuit is filed with the court of the place where the harmful event occurred, the joinder of only the parties that are in the same jurisdictional district is possible. This could limit the use of the joinder of the parties if the defendant is not domiciled in Italy. However, the possibility that there are no defendants domiciled in Italy appears rare following the judgment of the Court of Justice in the Sumal case (C-882/19) in which judgement the Court established the liability of the local subsidiaries of the parent company which is the addressee of the infringement decision. Likewise in Germany, the Court may decide to break up the proceedings of the bundled claim either if it is requested by all the parties or if the joint management of the case may delay the proceedings or it may be too burdensome. In the truck cartel litigation, the court decided to break up the claims concerning the Scania vehicles from the other claims because the pending appeal of Scania against the Commission decision may result in a stay of the proceedings. The joinder of parties allows savings in the court fees and of the other costs of the proceedings.

Option 2. The new class action regime in Italy has been introduced by Law n. 31/2019 and is applicable to unlawful conducts that have taken place after November 19^th 2020. The new class action regime is open both to consumers and undertakings directly or through an association. The proceedings is divided in three phases: 1) admissibility of the action; 2) judgment on the merit of the case 3) in case of success, payment phase of the compensation to members.

The class action can be filed by a single plaintiff which can also be an association provided that it is enrolled in the list kept by Ministry of Justice. In the first phase the Court will decide on the admissibility of the action. The action shall be declared inadmissible if it is blatantly ungrounded, the claims are not homogeneous (i.e. different causa petendi), there is conflict of interest between the plaintiff and the defendant or the applicant does not have the resources to adequately pursue the claim.

If the Court established that the action is admissible, the interested parties that have homogeneous claims can join the action and the case will go to trial. The Court shall not apply the formal rules of the code of civil procedure. It can ascertain the liability of the defendants taking into account statistical data and simple presumptions. The cost of the technical assessment shall be paid temporarily  by the defendant.

In case of success the Court awards compensation to the plaintiff, that kicked off the class action, establishes which are the injured parties, opens the possibility again to new members to file an application to join the class action, appoints the judge in charge of the payment procedure and a representative of the members of the class action.

The defendant can file a reply to the applications of the members that can be assisted by their lawyers. After the assessment of the applications and of the replies of the defendant, the representative of the members shall draft a payment project to be submitted to the judge that will decide whether to grant the applications or not. The defendants shall pay the legal costs to the original plaintiff, the fees of the representative of the members and the legal costs of the single members. These costs can be significant.

The new class action regime shall be welcomed for its efficiency because it allows to file a pilot case easy to manage by both the court and the lawyer of the claimants and to postpone the heavy work of book building of members, the collection and the assessment of the documents only when and if the pilot case is successful. On the other hand, it can be very burdensome for the defendant that may be found guilty and condemned to pay compensation to an indefinite number of members following a judgment based on statistical data and simple presumptions. In case of defeat the legal costs for the defendant can be significant.

Another option available for bundling the claims is the assignment of the claims. The assignment of receivables is provided by article 1260 of the Italian civil code, and the Supreme Court made it clear that damage claims may be transferred like any other receivables. However, when assigning/purchasing claims under Italian law, there might be another spanner in the works in the form of a potentially required banking authorization pursuant to article 106 of the Consolidated Law on Banking (TUB). This provision may be applicable to (inter alia) the acquisition of cartel damages claims, and even though this is not a clear-and-cut case, this provision deserves consideration as the consequences of violating article 106 TUB might have far-reaching consequences.

Article 106 TUB provides that “the exercise towards the public of the activity of granting loans in any form is reserved for authorized financial intermediaries, registered in a special register held by the Bank of Italy.”.

The activities envisaged by Article 106 TUB require that they are carried out with some degree of professional manner towards third parties (“towards the public”)[30] and one of the examples of what is meant by the “activity of granting loans” is the ‘purchase of receivables for consideration’.[31] This means that receivables, which might cover cartel damages claims of cartel victims, when acquired in a professional manner, might constitute a reserved financial activity within the meaning of article 106 TUB.[32]

When no authorization has been granted, such qualification is a risk because violation of article 106 TUB may have far reaching consequences. Not only will the (unauthorized) transaction(s) be considered invalid, the ‘lender’ may risk criminal sanctions pursuant to Article 132 TUB, which provides for criminal sanctions ranging from pecuniary sanctions to imprisonment.

It is held in case law that for specific financial activities to be considered abusive and therefore criminal, it is necessary that the activity is professionally organized with methods and tools such as to foresee and allow the systematic granting of an indefinite number of loans, addressing a potentially vast number of people.[33]

Even though the scope of article 106 TUB and the abovementioned case law within the specific context of the acquisition of cartel damages claims is not entirely clear (yet), the provision deserves consideration given the potential consequences when it may turn out that the provision does apply to (certain) models by which claims are bundled; being invalidity of the (assigned) claims and possible criminal sanctions pursuant to Article 132 TUB.

France

Contributed by Marc Barennes, bureau Brandeis Paris

In France, there are no specific rules authorizing or prohibiting the bundling of claims in cartel damage cases. However, there are three main mechanisms allowing cartel victims to bring large damages claims.

Option 1 is the joint actions model, whereby cartel victims bring individual (separate) claims at the same time, before the same court, to which they request that these claims be dealt with jointly pursuant to Article 367 of the procedural civil code. Such actions will normally be dealt with jointly as the claims are connected and it is in the best interest of justice that they be decided together. The challenges plaintiffs will face are the same ones as those identified above for the option 1 in Germany. While there is no doubt that joint actions have in fact successfully been brought in other fields than competition law, none of these actions have been brought yet before the French courts in the specific area of cartel damages claims.

Option 2 is the assignment model, in which the injured parties assign their claims to a private entity which acts as claim vehicle. The claim vehicle, rather than the injured parties, brings the case in its own name. There are two potential scenarios. According to a first scenario, the claim vehicle buys the claim for a price which is paid once and for all at the time of the assignment. In such a case, the assignor does not have any financial interest in the outcome of the case which is brought by the assignee in its own name. According to a second scenario, the claim vehicle buys the claim for a price which is totally or partially paid once the damages are recovered only. In this second scenario, the assignor keeps a stake in the outcome of the case brought by the assignee. However, as the assignees have transferred their claims to the assignors who will bring the claim in its own name, they bear no cost nor any risk and normally receive the lion’s share of the recovery (usually around 70%) whereas the rest goes to the claim vehicle/funder.

The French courts have not yet had the opportunity to decide in a cartel damage claim whether either of these two types assignments are valid under French law (let alone EU law). However, pursuant to the principle of contractual freedom (“principe de liberté contractuelle”) and that claims may be validly transferred pursuant to Article 1321 of the Civil Code, no rule prevents such an assignment of cartel damages claims under French law.

Assignors should however be particularly careful in two regards. Firstly, to the extent that the second type of assignment described above could be considered as an activity carried out by a recovery agency pursuant to Articles R124-1 to R124-7 of the civil procedural execution code, the assignee should hold a specific authorization to recover these damages. Secondly, assignees should pay specific attention to the right provided for in Article 1699 of the civil code. Pursuant to this Article, in cases where an assignor transfers a « claim » which is disputed before a court to an assignee, the debtor of the claim may put an end to the dispute by paying to the assignee the price (plus fees and costs) the assignee paid to the assignor to acquire the claim (the so-called « droit de retrait »). In other words, a claim vehicle which would buy a cartel damage claim which was disputed by the debtor before a court may end up being entitled to claim only the price (plus fees and costs) it paid to the assignor for that claim, instead of the full value of the claim.

Option 3 is the fiduciary model (“fiduciaire”), which allows injured parties to assign their claims to a fiduciary entity which sole role is to recover their damages. Unlike the assignment model in which assignors transfer theirs claim to a private company acting as a claim vehicle, injured parties become constituents and beneficiaries of the fiduciary entity which brings the claim in its own name. If the fiduciary entity is funded by a litigation funder, all the costs and risks of bringing the claim may be borne by the fiduciary entity rather than the injured victims. While Articles 2011 to 2030 of the civil code provide for the conditions pursuant to which the fiduciary entity may act, the courts have not yet had the opportunity to decide a case in which a fiduciary entity claims cartel damages. There is however no reason to think that the fiduciary mechanism, which presents some similarities with a US “trust” or Dutch “Stichting”, is not particularly adapted to bringing large cartel damages claims.

Conclusion

All in all we come to the conclusion that in the various member states of the European Union there is a variety in the possibility to ascertain claims by bundling them. Since we feel that it is adamant for claimants to bundle their claims (otherwise they would effectively be excluded from the possibility to pursue damages at all) we are curious whether in any jurisdiction the argument of the useful effect doctrine will be accepted to facilitate the bundling of claims.

Hans Bousie (editor), with contributions from:

Marc Barennes,

Tessel Bossen,

Giovanni Scoccini and

Konstantin Seifert

[1] European Commission decision of 9 October 2010 and 17 March 2017 Case AT.39258 (Airfreight).

[2] European Commission decision of 19 July 2016 Case AT.39824 (Trucks).

[3] ECJ 16 November 1977 case C-13/77, ECLI:EU:C:1977:185 (INNO/ATAB).

[4] ECJ 14 March 2019 case C-724/17, ECLI:EU:C:2019:204 (Skanska); ECJ 28 March 2019 case C-637/17, ECLI:EU:C:2019:263 (Cogeco).

[5] District Court Düsseldorf 17 December 2013 file no 37 O 200/09 (Kart) U; Higher Regional Court Düsseldorf 18 February 2015 file no VI-U (Kart) 3/14.

[6] Higher Regional Court Düsseldorf (fn 3), at rec. 104 seq.

[7] See, e.g., District Court Hannover 4 May 2020 file no 18 O 50/16.

[8] Federal Supreme Court 13 July 2021 file no II ZR 84/20.

[9] See, e.g. District Court Munich 7 February 2020 file no 37 O 18934/17.

[10] Federal Supreme Court 13 July 2021 file no II ZR 84/20, at rec. 55.

[11] File no 21 U 5563/20.

[12] File no 5 U 173/21.

[13] File no 7 U 130/21.

[14] File no 8 U 40/21.

[15] File no 29 U 1319/20.

[16] District Court of Amsterdam 2 August 2017 ECLI:NL:RBAMS:2017:5512, para. 4.14.

[17] District Court of Amsterdam (fn 14), para 4.12 et seq.

[18] District Court of Amsterdam 13 September 2017 ECLI:NL:RBAMS:2017:6607.

[19] Court of Appeal of Amsterdam 10 March 2020 ECLI:NL:GHAMS:2020:714, para. 4.10.5.

[20] Court of Appeal of Amsterdam (fn 17), para. 4.10.2.

[21] Court of Appeal of Amsterdam (fn 17), para. 4.10.3.

[22] The new legislative proposal for the Act on the Resolution of Mass Claims in Collective Action (Wet afwikkeling massaschade in collectieve acties, “WAMCA”) was adopted by the House of Representatives on 29 January 2019 and entered into force on 1 January 2020.

[23] Article 1018(i) par 2 Dutch Code of Civil Procedure.

[24] Article 1018(f) par 1 Dutch Code of Civil Procedure.

[25] Article 1018(f) par 5 Dutch Code of Civil Procedure.

[26] Trendtex Trading Corp v Credit Suisse (1982) AC 679 HL. 

[27] Jennifer Simpson (as assignee of Alan Catchpole) v Norfolk & Norwich University Hospital NHS Trust [2011] EWCA Civ 1149.

[28] JEB Recoveries LLP v Binstock [2015] EWHC 1063 (Ch).

[29] Casehub Ltd v Wolf Cola Ltd [2017] EWHC 1169 (Ch).

[30] The decree of the Ministry of Economy and Finance of 2 April 2015 no. 53 (MD 53), Article 3.

[31] MD 53 (fn 21), Article 2

[32] see Court of Venice 13 February 2013 No. 316; Court of Venice 2 September 2014 No. 1758; GdP of Rom 18 July 2016 No. 24510; GdP of Prato 1 February 2016 No. 80.

[33] Italian Criminal Court Section V No. 18317/2016.

Cartel damages litigation is an increasingly hot topic in Europe. For those who are not familiar with this topic a short explanation. Under normal market conditions, enterprises set their own market prices for their products. Under cartelized conditions, however there is some form of concerted practice (either explicit or tacit) which could lead to an agreement on prices for instance. If competitors agree on a price, this will normally lead to higher prices than under normal circumstances. Competition law prevents competitors this kind of behavior, setting high penalties (potentially in the billions of Euros for world-wide players) when trespassers on the EU competition laws are caught. However, these penalties, severe as they might appear, nevertheless pale into insignificance compared to civil damages claims. The gap between the normal market price and the artificial cartelized price is the so-called cartel damage. In addition, to give you an idea of the enormity of these kind of damages we give as an example the trucks case. Six truck companies were caught red handed by the European Commission in a cartel that lasted (at least) from 1997 to 2011. They were fined 3.8 billion euros. However, estimates are that the total of cartel damages amount to a staggering figure of 200 billion euros. These stakes are high enough to ensure massive court battles. The defendants have no other option than to put forward any possible or impossible argument to prevent the court from a decision that might cause their bankruptcy. For the claimants on the other side it is inevitable to go to court, since their losses have been so high.

Therefore, when stakes are as high as they are, there is no other option than to be very thorough in all the arguments and defenses that are brought to the court. Let alone to be meticulous in the first place as where to litigate.

Several legal topics have drawn special attention over the last few years. In this series of articles, we will shed light on the most hotly debated. Today we discuss the passing on defense. We made a comparative analysis between the Netherlands, France and the United Kingdom. The Netherlands and England (along with Germany) are considered mature jurisdictions in cartel damages litigation, while France (along Spain and Portugal for instance) are on the move to join this lawyer’s paradise.

Passing-on

“Passing-on” in competition cases is where overcharges caused by a cartel, which affect the customers of the cartelists (direct purchasers), are passed-on by these purchasers to buyers further down the supply chain (indirect purchasers). The pass-on argument as a defense may be invoked by a cartel member as a (partial) shield against a claim for damages and by an indirect purchaser as a sword to support the argument that it has suffered damages and/or to evidence cartel collusion.

Legal background

The passing on defence is valid under both EU and national laws.

The Damages Directive[1] (and implementation laws in the Member States) has set two important presumptions reversing the burden of proof:

– as far as direct purchasers are concerned, it is presumed that they have not passed the overcharge on to their own customers. Thus, it is up to the defendant in the antitrust action for damages to prove that the overcharge has indeed been passed on and that its direct purchasers have not suffered any (or less) damage (Article 13 Damages Directive);

– concerning the indirect purchasers, it is presumed that their supplier has passed on the overcharge. Therefore, the burden of proof is here again placed on the defendant in the action for antitrust damages (Article 14 Damages Directive).

Those in itself contradictory presumptions could potentially apply to all claims. The presumptions in itself apparently are designed to help the (potential) claimants in a case.  Everyone familiar with civil litigation knows that a sentiment of wrongdoing is not the same as proving you were wronged. Therefore, it is extremely important to have the burden of proof shifted to the wrongdoers.  In that regard, national courts have established a common understanding for the enforcement of the passing on defence it is for the defendants to prove passing on and the extent thereof as well as the absence of volume effects.  This outcome is consistent with the acquis communautaire on the burden of proving pass-on (i.e. in line with the EU principle of effectiveness) that has been codified in Article 13 Damages Directive. So how do courts apply these presumptions in practice in their case law? We believe that this would lead to the conclusion that the odds should favour the claimants. However, do courts indeed apply this presumption? We compared the United Kingdom, the Netherlands andFrance.

United Kingdom approach

In two recent landmark cases the UK Supreme Court (SC) and the UK High court rendered decisions on the UK evidential standard in connection to the passing on defense. The Courts emphasized that claimants should be neither undercompensated nor overcompensated and therefore the evidential burden in relation to mitigation of loss on defendants / cartel members should not be ‘unreasonably high’. This is an approach in which no apparent choice seems to be made in favor of the claimants or the defendants.

In June 2020, the SC overturned a decision of the Court of Appeal in which it had decided that it required defendants (cartel members) to prove the (virtually) exact amount of loss mitigated in order to reduce claimed damages.[2] The SC decided that the law does not require such high evidential standard and that the Court of Appeal had erred insofar that it required ‘unreasonable precision’ from the defendants in the proof of the amount of loss that the claimants had passed on to end customers. This decision was rendered in the context of a damages lawsuit brought by several supermarkets against Mastercard, Visa and several other large banks for the use of certain payment card schemes, in particular the multilateral interchange fees (MIFs)[3] applicable in the EEA, which the European Commission found to be anti-competitive in 2007.

Key considerations of the SC regarding the evidential burden of defendants:

• Claimants should not be under-compensated but neither overcompensated when suffering harm from a competition law breach.
• In the UK, pass-on is an element in the quantification of damages that is required by the compensatory principle and required to prevent double recovery through claims in respect of the same overcharge by a direct purchaser and by subsequent purchasers in a chain. Against this background, the SC considered that “justice is not achieved if a claimants receives less or more than its actual loss”. (217)
• A balance is required between the compensatory principle and the principle that disputes should be dealt with ‘at a proportionate cost’. In that light “the court and the parties may have to forego precision, even where it is possible, if the cost of achieving that precision is disproportionate, and rely on estimates”. (217).
• The SC considered that it sees no reason why in assessing compensatory damages there should be a requirement of greater precision in the quantification of the amount of an overcharge which has been passed on to end consumers because there is a legal burden on defendants in relation to mitigation of loss. (219).

The preceding approach does not offend the principle of effectiveness of EU Law, according to the SC:

“As we have said, the relevant requirement of EU law is the principle of effectiveness. The assessment of damages based on the compensatory principle does not offend the principle of effectiveness provided that the court does not require unreasonable precision from the claimant. On the contrary, the Damages Directive is based on the compensatory principle.” (220)

“ As the regime is based in the compensatory principle and envisages claims by direct and indirect purchasers in a chain of supply it is logical that the power to estimate the effects of passing-on applies equally when pass-on is used as a sword by a claimant or as a shield by a defendant.” (224)

On 25 February 2021, the UK High Court rendered a decision in which it validated the approach to pass-on of the SC decision of June 2020.[4] The UK High court referred to several key considerations of the SC in its decision, among which the compensatory principle and the fact that claimants should not be overcompensated for their damages as much as they should not be undercompensated. In addition, the decision implies that the pass-on approach can / should also be applied in complex and a-typical cases of passing on of overcharges, as the underlying case, which would pose a difficult and costly evidential burden on both parties.

This case stems from the foreign exchange cartel and a damages lawsuit filed by Allianz Global Investors and other claimants against several banking groups for their participation in the aforementioned cartel. The case involves investment funds who seek to generate a return for their investors and in so doing make use of the foreign exchange services provided by banks. Pass-on in this case is said to occur when an investor redeems or withdraws his investment from the fund. The High Court made clear that even though this is not a typical pass-on case involving the sale and purchase of goods in a supply chain, the compensatory principle equally applies. Defendants should not be subject to double recovery (12).

Claimants argued that the defendants’ pass-on defense should be stricken out because there was no real prospect of success, mainly because investors would have no cause of action against the banks. They also argued that it would have great impact on the future scope of claims, in terms of disclosure of documents and provision of evidence. The UK High Court did not agree that there would be no real prospect of success. The UK High Court said that the defense was appropriate and therefore it considered it necessary to “investigate precisely how the alleged wrongdoing of the Defendants impacted upon the investment fund (…) and how that affected the sum payable to the investor”, by disclosure and by factual and perhaps expert evidence. The pass-on defense could therefore be advanced to trial.

Our preliminary conclusion is that the UK courts do not favor one party over the other. It seems as if the courts feel that over-compensation is just as bad as under-compensation. In addition, in this argument there seems to be a deviation from the choice for the principle of effectiveness. So how do the Dutch approach this?

The Dutch approach

In Dutch case law the threshold for an effective passing-on defense has been set relatively high, contrary to the standard that has been set in the UK. The principle of effectiveness and the scope of the Cartel Damages Directive have served as normative and guiding principles for Dutch courts in this regard. The landmark judgements stem from a follow-on damages case between electricity transmission operator TenneT and electricity equipment corporation ABB.

On 8 July 2016, the Supreme Court ruled in the cartel damages case between ABB and TenneT that ABB was liable for the damage suffered by TenneT through the cartel on the market of gas-insulated switchgear.[5]

Amongst others, the Dutch Supreme Court considered in this case that even without retroactive effect for material law, the Damages Directive nevertheless has to be taken into account in order to sure the European l’effet utile and the principle of equality (4.3.1 and 4.3.4). In other words, it was clear that the Damages Directive was not applicable in this case but the Supreme Court did consider it. With reference to article 12 (3) of the Damages Directive, the Supreme Court decided that the evidential burden in connection to passing on is in principle on the cartel member. Furthermore, the Supreme Court confirmed that the court is authorized to estimate damages if it is not possible to determine the amount of damages precisely. So with reference to the not applicable Damages Directive the Supreme Court clearly decided in favor of the claimant.

The District Court of Gelderland delivered judgment on 29 March 2017 and ABB was ordered to pay € 23 million in compensation for the damage caused by the cartel.[6] ABB argued against the extent of the damage by invoking the passing-on defense. The District Court did not agree with this and found that the question whether this defence is reasonable, the principle of equality, the principle of effectiveness and the scope of the Damages Directive serve as normative and guiding principles (4.17). The court considered that “the object of the Damages Directive is not that the infringer should be given a hook to get out his liability of damages. The intention is that the compensation to be paid by the infringer should accrue to the direct and indirect customers in the chain to whom the additional costs were charged” (4.18). The court also ruled that the chance of end consumers bringing their own damages actions (and thus the risk of double compensation) was negligible. Once again and even clearer than the Supreme Court the court here argued in favor of the claimant, especially because they took into account the possibility of actual passing on, but that it was unlikely that further down the line any consumer would collect these scattered damages.

The so-called efficiency defense has been paid particular attention to in this context. Nowadays, almost every claimant advances this defence. Parties claim the harm suffered and alternatively claim compensation by invoking the efficiency defence. Briefly stated, the efficiency defence results in the court nevertheless awarding compensation to the claimant even if strictly speaking, the claimant is unable to prove the harm. This is of course a slippery slope from the point of view of legal certainty. However, it does seem to follow the European starting position, which is that the process should not be made too difficult for claimants and which forms the basis for the Damages Directive.It is a means of ensuring that private litigation is not made impossible from the very start.

The French approach

In France, in cases in which Pre-Damages Directive rules apply, the question of the burden of proof regarding the passing on defense is not entirely settled yet.

According to the Circular of 23 March 2017, the new Article L481-4 of the French Commercial Code (including burden of proving passing on) does not apply to damages claims resulting from an infringement, which took place before its entry into force, that is on 11 March 2017.

Prior to the adoption on 9 March 2017 of the rules implementing the Damages Directive in France, there was no specific legal provision on the issue of pass-on of overcharge in cartel damages cases. The general civil law provisions, namely Art, governed the issue. 1315 of Old French Civil Code (Art. 1353 of the New French Civil Code with the exact same wording).

In accordance with  a ruling of the Cour de cassation[7], several French civil and commercial courts of first instance have handed down judgments putting the burden on the claimant to prove the absence of passing on.^[8] While in two cases the Paris Court of Appeal considered that it was for the defendant to prove the passing on after the plaintiff had brought some indicia showing that there was no passing-on^[9], it recently quashed a ruling of the first instance court where it found that the plaintiff which had been granted damages had not provided any evidence that there had not been any passing on.[10] Most recently however, the Paris Administrative Court of Appeal^[11] and the French Court of Cassation^[12] held that, in accordance with EU law and principles, the burden of proof regarding the passing on of the illegal overcharge lies with the defendant. Besides the economic aspects (additional damages in form of loss of profit and the difficult proof of causality), there are therefore strong legal arguments to counter any potential passing-on defence. As the case law stands, it therefore seems highly recommendable to the plaintiffs that they bring as much evidence as possible about the absence of passing-on, allowing then the French Courts to shift the burden of proof on the defendant to establish passing-on.

Therefore, overall it appears that the French courts are slowly marching away from Albion to get closer to the Dutch approach regarding cases in which Pre-Damages Directive rules apply.

On the other hand, with regards to cases where post-Damages Directive rules apply, there is no doubt that the plaintiffs will fully benefit from the presumptions set by the Damages Directive.

Next time we discuss the bundling of claims!

bureau Brandeis, 4 June 2021

Marc Barennes, Tessel Bossen, Hans Bousie & Sarah Subremon

[1] Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union Text with EEA relevance (OJ L 349, 5.12.2014, p. 1–19)

[2] UK Supreme Court 17 June 2020, case references UKSC 2018/0156 Sainsbury’s Supermarkets Ltd and others (Respondents) v MasterCard Incorporated and others (Appellants); UKSC 2018/015 Sainsbury’s Supermarkets Ltd (Respondent) v Visa Europe Services LLC and others (Appellants).

[3] MIFs are charged by a cardholder’s bank (issuer) to a merchant’s bank (the acquirer) for each transaction made to the merchant with a payment card. In practice, the acquiring banks passed these fees on to merchants by charging a merchant services charge (MSC), for which they were seeking damages. The banks however argued that the supermarkets had passed-on the overcharges by the MIFs/MSCs to their end consumers by raising retail prices.

[4] UK High Court 25 February 2021, Case no CL-2018000840.

[5] Supreme Court 8 July 2016, ECLI:NL:HR:2016:1483.

[6] District court of Gelderland 29 March 2017, ECLI:NL:RBGEL:2017:1724.

[7] Cour de cassation, 15 May 2012, Le Gouessant.

[8] Paris Commercial Court, 26 March 2018, Provera; Paris Commercial Court, 20 February 2020, Cora; Rennes High First Instance Court, 7 October 2019, FRSEA.

[9] Paris Court of Appeal, 20 September 2017, JCB; Paris Court of Appeal, 6 February 2019, Doux.

[10] Paris Court of Appeal, 14 April 2021, Johnson & Johnson.

[11] Paris Administrative Court of Appeal, 13 June 2019, SNCF Mobilités.

[12] French Court of Cassation, 12 February 2020, Collectes valorisation énergie déchets. This case does not relate to antitrust damages and may only be referred to by analogy.

This is the second bureau Brandeis quarterly report of 2020 on the developments in the area of cartel damage litigation. You may download our quarterly report here.

Would you like to receive the next edition of our quarterly report by email? Please subscribe to our mailing list by filling in this form or sending us an e-mail through this link.

The European Commission (EC) has proposed new legislation on crypto assets. This is laid down in the draft Markets in Crypto-Assets (MiCA) Regulation and seeks to highly impact the crypto-asset industry. For every business involved in crypto-assets preparation is key.

Just the other day, Ursela von der Leyen, the EC’s President, stressed the importance of a ‘common approach with Member States on cryptocurrencies to ensure we understand how to make the most of the opportunities they create and address the new risks they may pose’. In line with this statement, the draft MiCA of 24 September 2020 sets out an ambitious EU-wide framework that regulates currently unregulated crypto-assets, including stablecoins, which are used as a means of exchange as they maintain a steady value.

The draft MiCA is seen as welcome regulation to the crypto market, which is often troubled by a reputation of being notoriously unregulated, legally opaque and is opposed to frequent encounters of Initial Coin Offering (ICO) scams. This proposal aims to counter many of those negative aspects surrounding crypto-assets, while also providing a more investor friendly framework. To anyone actively providing crypto-asset related services it is of great importance to prepare their businesses for the upcoming regulation.

Why is MiCA introduced?

The draft MiCA is part of the EC’s Digital Finance Package. This package carries a number of legislative proposals to shape the digital transformation of the EU financial sector. It aims to ensure that the EU financial services regulatory framework is suitable for innovating FinTech solutions and applications. One of the main examples is the Distributed Ledger Technology (DLT), a digital system that is shared, replicated and synchronized among the members of a decentralized network and records transactions such as the exchange of assets.

This proposal aspires to fulfill four objectives: (i) to ensure legal certainty by providing a sound legal framework for all crypto-assets, (ii) to support innovation and fair competition in the EU, (iii) to instil levels of consumer and investor protection and market integrity, and (iv) specifically addresses the so-called stablescoins, which might pose a threat to financial stability due to more potential global adoption.

Furthermore, this proposal is expected to provide a fully harmonised regime and are aligned with existing financial services regulatory framework. For instance, crypto-assets service providers will need to prepare to be authorized, comply with market abuse rules and provide a whitepaper similar to a prospectus.

To whom does MiCA apply?

This legislative proposal contains a definition of ‘Crypto-Asset Service Provider’ (CASP), which is derived from the definition of ‘Virtual Asset Service Providers’ of the Financial Actions Task Force’s (FATF), the global money laundering and terrorist financing watchdog. A CASP is any person whose occupation or business is to provide crypto-asset services to third parties on a professional basis. These crypto-asset services include, for example, providing advice on crypto-assets, custody and administration of crypto-assets on behalf of third parties, crypto-fiat exchanges, execution of orders for crypto-assets for third parties. Needless to say, the number of actors on the crypto market that will fall under the MiCA-regulation will be significant.

Additionally, the draft MiCA provides a framework for specific classes of crypto-assets that are currently unregulated. Moreover, this legislative proposal does not apply to crypto-assets that are already regulated as they qualify as, for instance, a financial instrument, e-money, deposits, structured deposits or securitisations.

The draft MiCA regulates three new categories of tokens and contains a catch-all definition:

Electronic money token, or ‘e-money token’, of which the main purpose is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of fiat currency that is legal tender’. This type of crypto-asset is specifically aimed to regulate stablecoins backed by one fiat currency, such as USD Tether, USD Coin and (possibly) Facebook’s Libra.

Asset-referenced token, which is also a type of stablecoin, ‘purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets’. In contrary to the e-money token, this type of crypto-asset could be backed by several underlying assets (other than one fiat currency), while still maintaining a stable value. Examples include DAI (Ether-backed) and Money on Chain (Bitcoin-backed).

Utility token, is a token that ‘is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token’. Utility tokens are often issued through an ICO to be used to access a good or service provided by the issuer. Popular examples of utility tokens are Golem (marketplace for computing power) and Basic Attention Token (advertising platform).

The catch-all-definition of ‘Crypto-asset’ is formulated as ‘a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology’. This definition is broader than the FATF definition of virtual asset as it leaves out the specific functions of a crypto-asset. As a result, any other –perhaps future- crypto-asset is expected to fall under the MiCA regime.

What are the obligations under MiCA?

Similar to the existing prospectus obligations when issuing securities, crypto-assets must be issued to the public (i.a. investors, customers) together with a whitepaper that meets several requirements (e.g. description of the project and token). In the case of asset-referenced tokens and electronic money tokens, the whitepaper needs to be approved by a local regulatory body of the EU Member State. It is not yet certain which Dutch local regulatory body will be assigned these tasks.

The issuance of electronic money tokens are only allowed if the issuer is a recognised credit institution or electronic money institution under the Capital Requirements Directive or the Electronic Money Directive.

CASPs are only allowed to perform crypto-asset services if they are authorised by the relevant national competent authority after filing an application to that end. Consequently, if authorised, it will benefit from the EU Passport regime and will not need physical presence in another EU Member State when providing cross-border services.

Additionally, all crypto-assets that are admitted for trade on exchange platforms are subject to regulation to counter market abuse. These measures include the obligation to disclose insider information as soon as possible and the prohibition of market manipulation. This should safeguard the market integrity and therefore result in a higher level of confidence of investors.

When to be ready?

The aim is to have the entire Digital Finance Package, with MiCA included, into full effect by 2024, though it still needs approval of the European Council and the European Parliament.

As with any FinTech solution and the rise of new applications such as Decentralized Finance (DeFi), an experimental form of peer-to-peer finance, regulation will always be a few steps behind the actual state of play.

However, should your business be involved in crypto-assets, MiCA will definitely have impact. MiCA brings various compliance obligations and infringements of MiCA could mean significant fines.

Therefore, it may be useful to start preparations for the upcoming legislation. This could mean assessing whether your business will qualify as a CASP under MiCA and needs authorisation. Also, when your business is planning to issue asset-referenced tokens, the drafting of a whitepaper could come in handy.

In case you need any advice in doing so, or should you have any other questions concerning the draft MiCA, do not hesitate to contact us; bureau Brandeis – Financial Services Litigation.

This is the first bureau Brandeis quarterly report of 2020 on the developments in the area of cartel damage litigation. You may download our quarterly report here.

Would you like to receive the next edition of our quarterly report by email? Please subscribe to our mailing list by filling in this form or sending us an e-mail through this link.

The so-called interchange fees set by Visa and Mastercard that have to paid by retailers on all card purchases are illegal, the UK Supreme Court said on Wednesday.[1] This means that Visa and Mastercard will now definitely be faced with potential billion pound follow-on damages claims from merchants.

Whenever a customer uses a credit/debit card to make a purchase in a store, the merchant´s bank account must pay a transaction fee to the card-issuing bank of the customer.  These fees are called multilateral interchange fees (MIF). The UK Supreme Court said Wednesday that the MIFs charged within the Visa and Mastercard payment card schemes are illegal.

This decision has major implications for Visa and Mastercard, because numerous damages claims have already been initiated by merchants in the UK and now it is clear that all these procedures can proceed to a trial to decide compensation. According to the lead counsel of J Sainsbury, the potential damages could amount to a billion pounds.

In July 2018, the high court decided already that the interchange fees of the companies were restricting competition and breached UK and European competition rules.[2] This decision has (for the most part) been confirmed by the decision of the Supreme Court.

The Supreme Court confirmed i.a. that Visa and Mastercard had to meet a more onerous evidential standard than that normally applicable in civil litigation with regard to proving that the interchange fee model should be exempt from European competition rules. One of the conditions in order to qualify for an exemption is that the efficiencies and benefits for the consumers (here: the merchants) outweigh the disadvantages they have to bear as a result of the restriction of competition. The Supreme Court said that the adverse effects should be outweighed by the benefits for (in this case) the merchants in so far that they would be fully compensated for the disadvantages. Visa and Mastercard did not succeed in proving that the merchants benefitted of the interchange fee model to that extent.

The procedures stem from a decision of the European Commission of 2007.[3] In that decision, the Commission found that the interchange fees of Mastercard were illegally high for 15 years. The Commission did however not decide whether the interchange fee as such would be illegal. The decision of the UK Supreme Court clarifies that this is the case.

We reported on these proceedings and their background in multiple editions of our Cartel Damages Litigation Quarterly Report in Q (2018-QI, Q3 and 4, and 2017-Q2, Q3 and Q4).

[1] UK Supreme Court 17 June 2020, [2020] UKSC 24.

[2]  Court of Appeal 4 July 2018, 2018 EWCA Civ 1536.

[3]  European Commission decision of 19 December 2007, case COMP/34.579 (Mastercard).

This update highlights some recent decisions from the Dutch courts relating to banking relationships, regulatory obligations and transparency in the financial services sector. Contact us if you have any questions or find out more about bureau Brandeis’ Financial Services Litigation here.

No termination of banking relationship without concrete evidence of AML breach
In this case a bank had blocked a client’s bank accounts based on the Money Laundering and Terrorist Financing Prevention Act (Wet ter voorkoming van witwassen en financiering van terrorisme; Wwft) for not providing sufficient information on its suppliers and customers, whilst the account gave signs of involvement in fraud and money laundering. The bank’s client had moved from trading used car parts to selling small electronics and claimed continuation of the account agreement.

The preliminary relief judge of the Amsterdam Court ordered the bank to continue the relationship in the usual manner. According to the court, a bank cannot terminate its relationship with a client and block its accounts if its Anti-Money Laundering (AML) concerns are not sufficiently demonstrated in the specific case.

The court held that the standards of reasonableness and fairness imply that termination of a banking relationship can only be based on sufficiently compelling grounds in the given circumstances. This requires due consideration of all interests.

In this context, the court attached importance to the bank’s duty of care and the access of account holders to payment transactions. At the same time, it also considered important that account holders enable the bank to comply with its obligations towards regulators and to protect the reputation of the bank and the integrity of the financial system.

On the basis of AML legislation and the related obligation to investigate, a bank cannot require evidence excluding involvement of the client’s customers and suppliers in money laundering. The bank’s AML-obligation to investigate, regards the client and who is behind the client. It does not regard who is behind the client’s customers, said the court.

The full decision can be read here in Dutch: Rechtbank Amsterdam 30 april 2019, ECLI:NL:RBAMS:2019:3157.

Is requesting enforcement a successful way to elicit an administrative ruling?
Anyone can request a regulator to take enforcement measures against a market party in case of non-compliance with laws and regulations. Special about this case is that the enforcement request at hand was submitted by a market party in relation to conduct concerning its own product. This market party was the holder of a portfolio of credit agreements, for which a regulated entity acted as its portfolio manager.

The purpose of requesting enforcement against oneself, was to obtain a judgment from the court on certain policy amendments the AFM had requested from the manager. The AFM sent a letter to the manager in which it requested these amendments, whilst the amendments affected the market party.

The market party itself was not a licensed entity, but an affiliated undertaking of the portfolio manager which did hold an AFM license.

In the court proceedings, the AFM took the position that it does not have power to take enforcement action against the – unlicensed – market party. The court agreed with the AFM and considered that market conduct supervision of affiliated undertakings takes place through the central regulated legal entity. The latter is supposed to exercise control over the affiliated entities’ compliance with the rules and legislation.

In addition, the market party attempted to object and appeal against the AFM’s letter. The court confirmed however that no appeal lies against the AFM’s letter to the portfolio manager. The reason for this was that the letter was just a confirmation of what was discussed, and not a definitive administrative ruling on applicability of a legal provision.

The full decision can be read here in Dutch: Rechtbank Rotterdam 23 april 2019, ECLI:NL:RBROT:2019:3688.

Limited transparency and public access to information at financial regulators
Under the Government Information Public Access Act (Wet openbaarheid van bestuur), anyone can request a government body for information about an administrative matter. The Dutch Central Bank (De Nederlandsche Bank, ‘DNB’) and its regulatory counterpart the Netherlands Authority for the Financial Markter (Autoriteit Financiële Markten) however, are in principle excluded from the applicability of this Act.

The key question in this case was whether or not this exception for the financial regulators merely regards confidential information relating to supervision of individual financial institutions. This in view of the duty of secrecy as laid down in the Netherlands Financial Supervision Act with regard to confidential information obtained pursuant to supervisory powers.

According to the applicant in question, information on the financing of, in this case, DNB and the funding of financial supervision does not fall under the exception and should be made public.

The Council of State (Raad van State), the highest administrative court for these matters, found that the exception makes no distinction between types of documents. Therefore all documents following from and relating to supervision of financial institutions are excluded from requests to disclose such information.

Also in respect of the requested documents in this case, the Government Information Public Access Act does not apply to DNB. The fact that DNB did provide some information on the topic without being obliged to do so was not considered arbitrary.

The full decision can be read here in Dutch: Afdeling Bestuursrechtspraak van de Raad van State, 17 april 2019, ECLI:NL:RVS:2019:1236

First compulsory transfer of shares following transfer plan of DNB upheld
This case regards the first compulsory transfer of shares of banks or insurers to a new owner ordered by the Dutch Central Bank (De Nederlandsche Bank, ‘DNB’) and discusses the intensity of the court’s assessment thereof. This specific case regards the transfer of assets in a life insurance company that created quite some media attention.

Given developments potentially jeopardizing the assets and solvency of the life insurer, financial regulator DNB intervened and prepared a plan for transfer of the shares in the life insurer, which instrument DNB has to execute the compulsory transfer of an ailing bank or insurer. In the eyes of DNB, the insurer’s board and shareholders failed to take sufficient measures to strengthen the capital position of the life insurer. DNB ultimately requested the Amsterdam Court to approve its transfer plan and pronounce the transfer regulations.

The courts’ decision was only subject to appeal in cassation with the Supreme Court of the Netherlands.

It has confirmed that the court can approve a transfer plan if it summarily appears that there are dangerous developments regarding the assets, solvency, liquidity or technical facilities.

Although there has been a change in legal terminology to bring the relevant criterion of the Financial Supervision Act (Wet op het financieel toezicht, ‘Wft’) in line with the Bankruptcy Act (Faillissementswet, ‘Fw’), this did not change the extent of the review says the Supreme Court. The court still is to perform a cautious review of such situation.

In the Supreme Court’s view this is exactly what happened. The court examined the substantive arguments of both parties and did not perform a more cautious review than the law requires. As a result it’s decision is upheld. The full decision can be read here in Dutch: Hoge Raad 17 mei 2019 ECLI:NL:HR:2019:746

This update highlights some recent decisions from the Dutch courts relating to regulatory investigations and enforcement measures in the financial services sector which we think are worth sharing. Contact us if you have any questions or find out more about bureau Brandeis’ Financial Services Litigation here.

AFM fine annulled due to a violation of the principle of equality

In this case, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, “AFM”) concluded that an investment company (beleggingsonderneming) acted in breach of the Dutch Financial Supervision Act (Wet op het financieel Toezicht, “Wft”) and underlying regulations. In addition to imposing measures against the investment company, the AFM decided to impose measures against two statutory directors and one employee who was also (indirect) shareholder for having actual control (feitelijk leidinggeven) of the company’s prohibited conduct.

The AFM imposed a heavier measure on the employee (i.e. an administrative fine) than it did on the two statutory directors (i.e. an instructive letter, including a warning). After an unsuccessful objection, the employee appealed with the Rotterdam Court that decided that a different role for the persons involved can in principle justify unequal enforcement by the AFM, for example, in terms of the amount of a fine.

In this case, the difference in measures imposed by the AFM was not proportionate in relation to the difference in culpability and financial interest of the alleged offenders. The court considered that the AFM did not present sufficient relevant circumstances to justify imposing very different measures. It only claimed that the acts of the employee were more seriously culpable than those of the statutory directors, because of an alleged financial benefit for the employee. According to the court, this factor was insufficient to justify imposing very different measures, especially given that an administrative fine is more onerous because it is in principle published – which has a defamatory effect.

The fact that the employee might have had financial benefit of the violation could have resulted in a difference in fines, but not in the huge difference in measures that the AFM made. In conclusion, the court held the appeal well-founded and annulled the challenged decision of the AFM due to a breach of the principle of equality (gelijkheidsbeginsel).

The full decision can be read here in Dutch:

Rb. Rotterdam 13 juni 2018, ECLI:NL:RBROT:2018:6261.

Investigation by supervisor? Your employees won’t be cautioned

A bank located and licensed in Malta that is allowed to offer consumer credit in its home state, completed a notification procedure to also offer consumer credit from Malta to the Netherlands based on the so-called European passport for banks. The AFM however found that the bank was offering consumer credit from a branch office (bijkantoor) in the Netherlands, for which it had not followed the correct notification procedure.

The AFM therefore imposed an administrative fine of EUR 1,7 million on the bank for offering consumer credit without the required license. The bank argued in these interim relief proceedings that the AFM had no grounds thereto and that the intended publication of the fine should be suspended. The court however, saw no reason to suspend the AFM’s decision to impose a fine or suspend or alter the publication thereof.

Interesting about this decision is that a significant part of the evidence on the basis of which the AFM imposed a fine is derived from statements of an employee of the bank who was heard by the AFM during the investigation. The bank argued that the AFM could not use these statements as evidence, because the AFM did not read the employee its rights.

Based on recent decisions of the Dutch Council of State (Raad van State), the court decided that, in principle, there is no obligation to caution employees of a legal entity. The regulator only has to caution representatives (i.e. board members) and natural persons involved for having actual control (feitelijk leidinggevenden) who might be imposed a personal fine.

In this case, in addition to the employee’s statements, the AFM based its decision on information obtained from the bank’s Dutch website and the online DNB Register. According to the court, this evidence, when viewed in conjunction with each other, formed sufficient evidence for the AFM to impose an administrative fine on the Maltese bank.

The full decision can be read here in Dutch:

Rb. Rotterdam 20 december 2018, ECLI:NL:RBROT:2018:10909.

Notifying unusual transactions and monitoring client relationships

In two recent cases, the highest appeal court (College van Beroep voor het bedrijfsleven, “CBb”) reviewed administrative fines that were imposed by the Financial Supervision Office (Bureau Financieel Toezicht, “BFT”). These fines were imposed against an accounting firm (boekhouder-fiscalist maatschap) and a tax consultant (fiscalist) respectively for allegedly breaching their obligation to (i) notify the Netherlands Financial Intelligence Unit (FIU) about unusual transactions of their clients and (ii) continuously monitor client relationships.

The court considered that in addition to the relevant law, decrees and available AML guidelines, other factors can also be relevant to determine whether or not a transaction is to be considered unusual. In both cases, the court found that BFT failed to prove that the respective parties wrongfully did not notify the FIU about certain transactions. The respective parties either did not have actual knowledge of the alleged unusual transactions or had a decent explanation on why the transaction could not be considered as unusual.

BFT also accused both parties of failing to properly monitor their client relationships. BFT held it against the tax consultant that she could not immediately provide evidence about a transaction of one of her clients. According to the court, the tax consultant managed to provide a well-founded explanation for the transaction during the course of the investigation and the alleged failure to monitor client relationships was therefore not upheld.

BFT was however successful in proving that the accounting firm failed to successfully monitor its client relationship. So whilst it may have lacked knowledge about certain transactions and could not be fined for failing to notify the FIU about these transactions, the court decided that this lack of knowledge was due to a failure to perform proper client monitoring – which in itself is a violation of the Wwft.
Both judgments can be read here in Dutch:

CBb 5 februari 2019, ECLI:NL:CBB:2019:48. CBb 5 februari 2019, ECLI:NL:CBB:2019:58.

Unrestricted cooperation charge? Not required to provide will-dependent material

The Dutch Central Bank (De Nederlandsche Bank, “DNB”) investigated whether two related companies were providing payment services without the required license and repeatedly requested them to provide information for this investigation. The companies however claimed they had the right to remain silent. DNB informed them that they had a duty to cooperate (Section 5:20 Awb) and imposed a cooperation charges on each of them, subject to a penalty of EUR 15,000.

The companies only partly complied with the cooperation charges and DNB declared the penalties incurred. In addition, DNB established that the companies violated their duty to assist and imposed an administrative fine of EUR 75,000 on each of them.

On appeal against the cooperation charge, the highest appeal court (College van Beroep voor het bedrijfsleven) held that part of the information requested by DNB was material existing dependent on the will of the companies (wilsafhankelijk materiaal).  DNB therefore should have included a restriction in its cooperation charge, stating that it would not use such will-dependent material for the purpose of imposing a fine or prosecution proceedings.

Given the absence of such restriction, the court declared void the cooperation charge and ordered DNB to amend the decisions. DNB then included the restriction in the cooperation charge and reduced the administrative fines from EUR 75,000 to EUR 65,000.

The court rejected the subsequent appeal of the companies against these amended decisions, as it considered that the companies breached their duty to cooperate. They could – but did not – provide the material that was not will-dependent. The court therefore decided that DNB could rightfully impose the administrative fines. The reduction of the administrative fines was considered proportional. The full decision can be read here in Dutch: CBb 16 april 2019, ECLI:NL:CBB:2019:156.

This update highlights some recent decisions from the Dutch courts relating to the financial services sector which we think are worth sharing. Contact us if you have any questions or find out more about bureau Brandeis’ Financial Services Litigation here.

AFM fines both company and director and major shareholder. No double jeopardy.
Where a company breaches the Dutch Financial Supervision Act (Wet op het financieel toezicht, “Wft”), the financial regulators in the Netherlands can also impose a fine on a natural person involved for having actual control of (feitelijk leidinggeven aan) the prohibited conduct of such company.

The highest administrative court in the Netherlands confirms that this is also possible if such person happens to be both the director and major shareholder of the company. In these circumstances the regulator is to verify whether it is proportionate that the two fines effectively punish the same natural person twofold.

In this case, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, “AFM”) fines a company EUR 10,000 for offering investment services (verlenen van beleggingsdiensten) without a license. In addition, its director and major shareholder is fined EUR 200,000 for having actual control of the prohibited conduct.

The director and major shareholder challenges the proportionality of the fine. He also argues that the fine is to be reduced given his financial capacity. Both arguments however are unsuccessful. The two fines are considered proportionate because the fine for the company has already been reduced to EUR 10,000. The director also fails to prove that he has insufficient ability to pay his personal fine of EUR 200,000. Both fines are therefore upheld.

The full decision can be read here in Dutch: CBb, 7 augustus 2018, ECLI:NL:CBB:2018:413.

AFM is to include restrictions in cooperation charge as to use of requested information.
The AFM sends a regulatory information request (inlichtingenvordering) to a company outside the Netherlands in order to determine whether it is offering consumer credit or providing intermediary services on the Dutch market without the required license.

When the AFM does not receive a reaction to two separate requests, it imposes a cooperation charge subject to a penalty (last onder dwangsom). The alleged credit offeror does not provide any information in response to this cooperation charge. According to the AFM the company incurs the penalty payment as a result.

On appeal the company successfully argues that when the AFM is requesting information within control of the company (wilsafhankelijke informatie) by means of a cooperation charge, the AFM can only do so with the explicit restriction that any information within control of the company shall only be used for supervisory purpose and shall not be used for imposing any administrative fines or criminal charges.

Since the cooperation charge in question did not include a restriction on the use of the requested information, the Trade and Industry Appeals Tribunal (College van Beroep voor het bedrijfsleven, “CBb”) annuls it.

The full decision can be read here in Dutch: CBb, 4 september 2018, ECLI:NL:CBB:2018:444.

Custodian, depository and administrator not found liable for Ponzi-scheme damages.
A fund manager managing three off-shore funds appoints a securities trader as sub-investment manager with the power to invest all assets of the three funds. The fund manager also appoints a financial enterprise as its custodian, depository and administrator. In addition, it requires the custodian to appoint the sub-investment manager as sub-custodian.

The sub-investment manager turns out to be deploying a world wide Ponzi-scheme and goes bankrupt when this is discovered. As a consequence, the three funds also go bankrupt.

Investors in the three funds set up a claim foundation and commence legal proceedings against the financial enterprise that acted as custodian, depository and administrator, arguing that the financial enterprise (i) acted in breach of regulatory obligations regarding outsourcing and protection of investor funds, (ii) breached a duty of care towards the investors, (iii) committed a wrongful act (onrechtmatige daad) against the investors and (iv) issued misleading information.

The court disregards the assertions and rejects the investors’ claims. According to the court, there is no proof that the custodian knew or should have known that the sub-investment manager never actually invested the money from the funds and was essentially running a Ponzi-scheme. At the time, the financial enterprise also had no reason to suspect the fraud. Moreover the court considers that the custodian did not choose to appoint the fraudulent sub-custodian but was required to do so by the fund manager.

The full judgment can be read here in Dutch:
Rb. Amsterdam 22 maart 2017, ECLI:NL:RBAMS:2017:10601.

Both bank and customer have duty of care towards one another. Access to bank account.
While a company is under investigation of the public prosecutor due to suspicions of money laundering and drug trafficking, the police carry out a raid at its offices and seize its bank accounts. As a consequence, the bank terminates its relationship with the company. The company does not accept the termination and commences interim relief proceedings against the bank.

Between May 2017 and January 2018, parties go to court four times. The company states that in the given circumstances it cannot open a bank account with another bank. It therefore argues that its interest in access to a bank account must weigh heavier than the bank’s interest to terminate the relationship due to potential reputational and AML risks. The court finds that the bank was allowed to terminate the relationship because the company had not taken sufficient compliance measures. This has made it impossible for the bank to comply with requirements of the Dutch Anti Money Laundering Act (Wet ter voorkoming van witwassen en financiering van terrorisme, “Wwft”).

However, new facts come to light and the company starts new interim relief proceedings in order to re-open its bank accounts. And with success.

Given the changed circumstances (i.e. the public prosecutor dropped the investigation and the company took serious measures to strengthen its compliance and reduce AML-risks) the court now rules that the bank should allow access to the bank accounts again. In this latest decision the court emphasizes that both parties have a duty of care (zorgplicht) towards one another, and the fact that the company took serious measures to reduce AML risks shows that it has fulfilled this duty towards the bank.

The full judgment can be read here in Dutch:
Rb. Amsterdam 2 november 2018, ECLI:NL:RBAMS:2018:7931.

Decision to place payment service provider under administration can be published.
The Dutch Central Bank (De Nederlandsche Bank, “DNB”) decides to appoint an administrator (curator) at a payment service provider (betaaldienstverlener, “PSP”) for not complying with the Dutch Financial Supervision Act (Wft), the Dutch Anti Money Laundering Act (Wwft) and the Sanctions Act 1977 (Sanctiewet 1977). DNB also decides to publish this decision, since it is in principle obligated to publish administrative sanctions (bestuurlijke sancties) pursuant to section 1:97 Wft.

The PSP commences interim relief proceedings in an attempt to prevent publication. It argues, among other things, that (i) being placed under administration is not an administrative sanction that is to be published pursuant to section 1:97 Wft and (ii) PSD1, which is implemented in the Wft, does not provide a specific ground for publishing these types of sanctions (i.e. being placed under administration). The PSP’s arguments do not succeed.

Even though the appointment of an administrator in principle has an internal effect and does not necessarily have to be disclosed, the interim relief judge considers the appointment of an administrator at the PSP an administrative sanction within the meaning of section 1:97 Wft that can be made public.

The judge also holds that, although PSD1 does not provide a specific possibility for publishing these types of sanctions, publication is possible under the Wft. PSD1 gives Member States the liberty to enforce the directive in a manner they deem fit, as long as the enforcement measures are effective, proportionate and dissuasive. According to the interim relief judge, this is the case with publishing the decision to place the PSP under administration.

The full decision can be read here in Dutch:
Rb. Rotterdam 18 juli 2018, ECLI:NL:RBROT:2018:8284.

Bank may have certain duty of care vis-à-vis professional third-party investors.
It is settled case law of the Dutch Supreme Court (Hoge Raad, “HR”) that under circumstances banks have a special duty of care not only vis-à-vis its clients but given their social function also vis-à-vis non-expert third parties. The Amsterdam Court of Appeal now rules that banks, to some extent, also have a duty of care towards third parties that are acting in a professional capacity.

The Court of Appeal considers that, although professional parties are expected to be able to make their own investment decisions and ask for advice when needed, a bank may have a duty of care towards third parties acting in a professional capacity when it discovers irregularities on accounts held with the bank. When determining the scope of the bank’s duty of care, the fact that parties are acting in a professional capacity can be taken into account.

In this case, a client of the bank has embezzled money from investors using a main account at the bank. The investors have been invited to deposit money to sub accounts that would be invested via the main account.

The Court of Appeal considers that the irregularities on the accounts in question became known to the bank. It also considers that the bank identified representatives of the investors in person at a local bank office in Brussel when they opened the sub accounts and that it was aware of the investors’ co-signing rights on the sub accounts. The fact that the bank nevertheless has failed to inform the investors when it closed the main account and all sub accounts, is considered a breach of its duty of care towards these third party investors.

Although the bank successfully argued that it could not disclose that it was investigating potential fraud of its client, also given the general prohibition from disclosing (tipping-off) reports of suspicious transactions (ongebruikelijke transacties), it should have neutrally informed the investors that the sub accounts were closed, says the Court of Appeal.

The full judgment can be read here in Dutch:
Hof Den Haag 25 september 2018, ECLI:NL:GHDHA:2018:2417.

December 2018.

Simone Peek & Casper Rooijakkers

On 25 May 2018 the General Data Protection Regulation (“GDPR”) comes into effect. From that date the GDPR will have a direct effect on all EU Member States, and must be complied with. The current Dutch Personal Data Protection Act (“Wbp”) based on the Privacy Directive of 1995 (Directive 95/46/EC) will then cease to apply.

The GDPR radically alters the legal framework for the protection of personal data. It introduces new concepts, contains comprehensive new obligations for business, and strengthens the rights of data subjects (individuals whose data is being processed). Furthermore, the GDPR introduces hefty maximum fines of € 20 million or 4% of an organisation’s global turnover.

The GDPR has implications for virtually every company or organisation not only in the European Union, but also beyond its borders. Given strict regulations combined with high fines, it is prudent for companies to be aware of the content of the GDPR at an early stage, and to prepare themselves accordingly. We will show how our clients and business contacts can prepare for the GDPR as efficiently as possible in twelve steps. bureau Brandeis regularly assists parties with respect to the application of privacy legislation and has plenty of experience with the GDPR. Naturally, we will be happy to assist you with your preparations for the GDPR.

On 7 July 2017 Elliott rang the bell for the second round of its fight with AkzoNobel. The first round ended when the Enterprise Chamber of the Amsterdam Court of Appeals (“Enterprise Chamber”) dismissed Elliott’s request to order AkzoNobel to call an extraordinary general meeting of shareholders (“EGM”), more specifically an EGM to vote on the dismissal of the chairman of the supervisory board (the “Agenda Proposal” and the “Chairman”). In the second round Elliott will request the Interim Relief Court (“IRM”) for authorization to convene such an EGM itself. The Enterprise Chamber explicitly left open this possibility.

Elliott’s new request also sparked a new round of speculation over the outcome in the Dutch media. Here are my thoughts.

The commentary on the Elliott/AkzoNobel-matter reflects a wider Dutch discussion on the right of shareholders to place items on the agenda of the general meeting:

• The old school approach is rather skeptical about this right, particularly if the shareholders challenge the status quo. The adherents of this approach assume that the courts can thoroughly review any request of shareholders to place items on the agenda. They also assume that such a request can be denied on the basis of a weighing of interest, in which they tend to give more weight to continuity than to the wish of shareholders to shake things up. Such views were on offer in a 7 July 2017 article in Financieel Dagblad. A Dutch lawyer was quoted arguing that the dismissal of the Chairman had such far reaching consequences that a vote on this matter should only be allowed for compelling reasons. He even considered it insufficient that that Elliott was dissatisfied by the way AkzoNobel had brushed-off PPG’s € 29 billion take-over bid. This approach echoes the Stork-decision of 17 January 2007 in which the Enterprise Chamber enjoined two hedge fund’s efforts to force Stork to change its strategy by putting the dismissal of the supervisory board on the agenda, because the current strategy was considered successful and the alternative was insufficiently clear.
• Others – including me – argue that this approach is antiquated by the EU Shareholders’ Rights Directive of 11 July 2007 (the “Directive”). Article 6 obliges the EU’s member states to ensure that shareholders have to right to put items on the agenda and to table draft resolutions. Article 6 does not provide any room to limit these rights on the basis of a weighting of interest. The Directive’s preamble explains that “holders of shares carrying voting rights should be able to exercise those rights given that they are reflected in the price that has to be paid at the acquisition of the shares” and that “effective shareholder control is a prerequisite to sound corporate governance and should, therefore, be facilitated and encouraged.” Therefore the pre-existing possibility to deny a request to put an item on the agenda for the reason that there is a serious conflicting interest of the company was deleted from article 2:114a Dutch Civil Code when the Directive was implemented by the Dutch legislator. The Dutch legislator explained that a request to put an item on the agenda could only be refused in case of abuse of rights. This should be understood as a reference to the Court of Justice of the European Union’s case law with regard to abuse of rights conferred by EU law. Such abuse only exists if it is apparent from a combination of objective circumstances that (i), despite formal observance of the conditions laid down by EU rules, the purpose of those rules has not been achieved and (ii) the essential aim of the person invoking the concerned right is to obtain an undue advantage. In this approach there is almost no room to review or deny a request of shareholders to place items on the agenda.

I note, however, that Directive does not provide a explicit right to convene an EGM. The Directive therefore leaves room for the IRM to find that the Agenda Proposal can wait until the next annual general meeting of shareholders in 2018 and that Elliott has insufficient interest to convene an EGM earlier. Yet such a finding would hardly be convincing, considering that the trust of the shareholders or the lack thereof in the Chairman is not a matter that should be allowed to simmer for months.

It should, furthermore, be noted that a quirk of procedural law may have profound consequences for Elliott’s request to the IRM: no judicial remedy is possible against the decision of the IRM in this particular matter¹ (article 2:111 (3) Dutch Civil Code).

• The first consequence is that the IRM needs to consider whether article 267 of the Treaty on the Functioning of the European Union obliges it to ask a preliminary question to the CoJEU. If so the Chairman may well have stepped down before the CoJEU has answered the preliminary question. Since the Chairman reportedly steps down in April 2018 Elliott will need to convince the IRM that there is nothing for the CoJEU to clarify, since it is clear enough how article 6 of the Directive should be interpreted (acte clair) and the CoJEU has already clarified how much room the national courts have to deviate from EU law (acte eclaire).
• The second consequence is that the Dutch State may be liable to Elliott in case the IRM incorrectly applies article 6 of the Directive. That would require that article 6 is intended to confer rights on shareholders; the breach of article 6 is sufficiently serious; and that there is a direct causal link between that breach and the loss or damage sustained by Elliott. In order to determine whether the breach is sufficiently serious, it is necessary to take account of all the factors which characterize the situation brought before the national court, including the degree of clarity and precision of article 6, the scope of the room for assessment that article 6 allows for the IRM, whether the infringement and the damage caused were intentional or involuntary, whether any error of law was excusable or inexcusable, whether the position taken by an EU institution may have contributed to the adoption or maintenance of national measures or practices contrary to EU law, and whether the IRM was under an obligation to make a reference for a preliminary ruling but failed to honor this obligation.

As an aside, I note that the Directive is obviously not to the taste of the Dutch Minister for Economic Affairs who recently made several firm statements about the need to provide more “protection” to Dutch public companies (i.e. protection against shareholder influence). It should, however, be kept in mind that the Directive was recently revised and amended. The revision process was pending during the period that the Netherlands held the rotating Presidency of the Council of the European Union and hence could determine the EU’s agenda. It is striking that the concerned Minister did not use this opportunity to amend the Directive in order to allow for the denial of a request of a shareholder to put an item on the agenda on the basis of a weighting of interest.

There is must more to be said about this matter, but I leave it here for now. For further reading I refer to chapter 7 of my Ph.D.-thesis and the series of articles Frank Peters and I have published on the right to put items on the agenda (‘Vrijheid van meningsuiting – Over de Europeesrechtelijke verplichting om aandeelhouders aan het woord te laten’ in published in Makkink and others, Ik ben niet overtuigd, liber amicorum voor Peter Ingelse ter gelegenheid van zijn afscheid als voorzitter van de Ondernemingskamer; ‘De strijd over het agenderingsrecht tussen Boskalis en Fugro’, published in WPNR, 2015/7061; and ‘De strijd over het agenderingsrecht tussen Elliott en Akzo’, published in WPNR, 2017/156).

¹ Except for cassation in the interest of the law, but the decision in such proceedings can have no consequences for the parties to the proceedings (article 78 (6) of the Dutch Judiciary Organization Act).

Why a protective foundation?

The attraction of wider access to capital may persuade some companies to seek a public listing. Typical for the Dutch market though, is the possibility for the listed company to create a defense mechanism against the influence from substantial shareholders in the form of a protective foundation. The protective foundation is created by or on request of the company itself. It is controlled by persons friendly to the company, and is provided by the company with a call option and a funding line to acquire a blocking or other decisive chunk of (preference) shares (at nominal value) and votes.

This is a common structure in the Netherlands. It is even available to companies whose are and listing are outside the Netherlands, and whose only tie to the Netherlands is its formal corporate seat. In all of these situations, Dutch law applies to the relations with shareholders and the company.

Examples of protective foundations

As per March 2017, for instance the f0llowing Dutch listed companies had a structure of this kind in place:

• Fiat Chrysler (BIT: FCA; NYSE: FCAU), Altice (AMS: ATC), Mylan (NASDAQ: MYL), each of which only has its formal corporate seat in The Netherlands
• ASMI (AMS: ASM), ING Bank (AMS: INGA), ASR (AMS: ASRNL)

Dutch corporate an securities laws relating to protective foundations

From case law of the Dutch Supreme Court and the Enterprise Chamber (a specialized court in Amsterdam), the following (non exhaustive list of) restrictions pertaining to the issuance of preference shares to a foundation as a protective measure may be deduced:

1. In principle, the company is at liberty to pursue as a policy to prevent a shareholder that is not friendly disposed to it from obtaining a dominant or significant degree of control. This means that in principle, protective measures are permissible. However, a protective measure may under specific circumstances fall foul of the Dutch legal standards of reasonableness and fairness and thus be impermissible.[i]
2. The issuance of shares to a foundation may be justified if this is required, amongst other things, in the light of the company’s continuity or that of its policy and the interests of those involved therein.[ii]
3. The issuance of the preference shares must be necessary to achieve and preserve a status quo within the company for the time being.[iii]
4. The space created by the issuance of the preference shares must be used for consultation between the parties involved.[iv] The company must be given the opportunity to investigate the intention of the shareholder(s) in question, to communicate on that matter with him or them and other shareholders and to look for alternatives.[v]
5. The issuance of preference shares must be sufficient and proportional relative to the impending danger.[vi]
6. A shareholder may not forfeit control for a prolonged period of time by reason of the issuance of preference shares. Therefore, the issuance of shares to a foundation for an unlimited period of time, is impermissible.[vii]
7. In principle, the foundation may not use its voting rights for purposes other than those for which the foundation has been granted the option.[viii]
8. The foundation must, independent of the company’s management board and supervisory board, act autonomously, pay proper heed to the various interests involved and ensure that no unacceptable conflict of interest arises.[ix]
9. If the listed company is a financial institution, the protective foundations will require a declaration of non-objection from the Dutch regulator to (acquire the right to) increase its stake to a more than 10% votingright.
10. If the protective foundation acquires a 30% stake after a public offer is made, it is exempt from the mandatory public offer for all shares for two years as of the issuance of the shares to the foundation[x]. If no public offer is made, the foundation will have to stay below 30% so as not to trigger the mandatory public offer requirement.

If you would like to know more about protective foundations, their acceptability under Dutch law and how to deal with them as a minority or activist shareholder, please contact Frank Peters.

NOTES:

[i] Enterprise Chamber 3 March 1999 (Gucci), JOR 1999/87.

[ii] Supreme Court 18 April 2003, (RNA) NJ 2003, 286.

[iii] Asser-Maeijer 2-II, no. 635, p. 802 and Dutch Supreme Court, 18 April 2003 (RNA), NJ 2003, 286.

[iv] Asser-Maeijer 2-II, no. 635, p. 802.

[v] Enterprise Chamber 17 January 2007 (Stork), ARO 2007, 26.

[vi] Asser-Maeijer 2-II, no. 635, p. 803 and Dutch Supreme Court 18 April 2003, (RNA), NJ 2003, 286.

[vii] Supreme Court 18 April 2003 (RNA), NJ 2003, 286.

[viii] Enterprise Chamber 17 January 2007 (Stork), ARO 2007, 26.

[ix] Enterprise Chamber 5 August 2009 (ASMI), ARO 2009, 127.

[x] Art. 5: 71 Wft.

‎Dutch insurance companies must meet certain solvency and capital requirements under a new legal framework ‘Solvency II’. Delta Lloyd’s current right issue affair shows that the matter is relevant not only to the insurance specialists, but also or even in particular to those who are supposed to provide the prime source of capital: the shareholders.

Solvency is financially and legally complex. Here we provide some general and legal background on this framework.

Solvency: IFRS, IGD, Solvency II manners

A company’s solvency ratio may be calculated using balance sheet data and is generally represented as a percentage that portrays the relationship between shareholders’ equity and total equity. The solvency ratio is the relationship between the assets and the debts and indicates the degree to which the company will be able to meet its obligations should its on-going business operations be halted. This is an important figure as it speaks to the financial health of a company.

The regulators impose special solvency requirements on insurers. These requirements are designed to promote the solidity of insurers in order to confer protection on interested parties against the risk of loss arising from insufficient solvency or liquidity.

The solvency of an insurer may be calculated in different ways. Until 2016, Dutch insurers use the solvency ratio prescribed under IFRS (Solvency I) and the statutory requirements (Insurance Group Directive – IGD) for their insurance business. In addition, already in 2015, insurers were obliged to take account of the introduction of new prudential requirements arising from the transposition into national legislation of the Solvency II Directive.

On 25 November 2009 the Solvency II Directive (‘Solvency II’) was adopted by the European legislator. Transposition into national legislation of Solvency II was deferred on several occasions but was finally effected in the Dutch Solvency II Enabling Act that came into force on 1 January 2016.

Solvency II

Solvency II is of great importance in that, as a new regulatory regime, it places on insurers and reinsurers in Europe new and intrusive requirements in respect of the required share capital, risk management and reports. Solvency II provides for the introduction of a new solvency framework, on the basis of mark-to-market valuation, in which context the risks to which an insurance company is exposed is expressed in the share capital it requires.

A substantial section of Solvency II may be subdivided into three pillars: Pillar I specifies rules in respect of the quantitative financial requirements; Pillar II specifies the qualitative requirements and the supervisory process; and Pillar III lays down prescriptions covering the reporting to the regulator and information disclosure.

Pillar I (in particular relevant in the Delta Lloyd matter) specifies the quantitative requirements for insurers. In addition, Pillar I specifies how the balance sheet is to be drawn up in which context insurers and reinsurers must, among other things, calculate a Solvency Capital Requirement (SCR) and a Minimum Capital Requirement (MCR).

The Solvency II balance sheet serves as the basis for the different calculations to be performed under Pillar I. When drawing up the balance sheet under Solvency II insurers and reinsurers are obliged to value their assets and liabilities in line with market value, so resulting in a market value balance sheet. This means that goodwill is always valued at zero while other intangible assets are in principle also valued at zero. Such a Solvency II balance sheet will in general diverge from the insurer’s formal balance sheet, but the accounting principles under Solvency II better align the balance sheet with economic reality than a balance sheet drawn up in line with the the Dutch Financial Supervision Act (Wet op het financieel toezicht, ‘Wft’).

In respect of the solvency requirements under Solvency II a distinction may be drawn between the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR).

The SCR is a solvency capital requirement and is a buffer that must, at the least, be equal in size to the shareholders’ equity. This is therefore dependent on the risks actually present on the balance sheet. This means that insurers with higher risk investments, such as shares, are obliged to retain a higher buffer than insurers with investments in lower risk assets, such as sovereign bonds.

The MCR is a percentage of the SCR and, as a minimum capital requirement, constitutes an important floor in terms of the capital that an insurer must hold. MCR is also referred to as the minimum equity requirement (minimum vereist eigen vermogen).

A Solvency II ratio of 100% means that an insurer has share capital sufficient to ensure that he can continue to meet his obligations after a shock that is only expected to occur once in every 200 years.

Despite this high degree of security where a solvency of 100% is reported under the new solvency rules, insurers generally tend to lay down supplementary buffers so as to be able to absorb unexpected downturns and so not find themselves below the MCR prescribed by law. The insurers themselves determine the size of this buffer, which is not prescribed by law.

Standard formula or (partial) internal model?

Solvency II allows of two ways of calculating the SCR. An insurer may use the ‘standard formula’ (‘SF’) or what is called an ‘Internal Model’ (‘IM’) or a Partial Internal Model’ (‘PIM’). If parts of the SF are used in addition to the IM, then what obtains is a PIM. The level of the SCR thus depends on the risk that an insurer runs.

Insurers must be able to demonstrate the suitability of the SF. When this does not correspond to the specific risks of an insurer the insurer can use a (partial) internal model with parameters specific to his business. This model must be drawn up by the insurer himself and requires the approval of the Dutch Central Bank.

The advantage of a PIM or IM, is that it is more finely grained than SF. That means to say that less capital needs to be retained for demonstrating a good solvency.

Capital retention is costly: because it is risk bearing (it bears more risk than debt) it demands a superior level of returns. In addition the costs of share capital (such as dividends) may not be deducted from the profit subject to corporate income tax, while the costs of debt (such as interest) are indeed deductible. This too makes capital retention unattractive.

Ultimate Forward Rate (‘UFR’)

One factor that is going to be of importance in the future (but is not yet), is the Ultimate Forward Rate (‘UFR”), an artificial rate of interest created by the regulator to assist insurers and pension funds in a low interest climate. The UFR methodology means that the interest rate curve that is used to discount obligations will, for maturities in excess of 20 years, converge to a set level. It is said that at a particular point in time (three years hence is the point in time adopted by most observers) insurers will be obliged to monetise their obligations on the basis of the UFR. The higher the UFR, the lower the current value of the obligations. At this stage the level of the UFR at the time of the introduction is not known, nor exactly when it will be introduced. The impact on the value of the obligations, and hence on the solvency, is likely to be in the 5 to 15% range.

The UFR also contributes to the stability of the solvency calculation. The difference between the UFR that has been set and the current low interest rates has nevertheless slowly widened over the past years.

The European Insurance and Occupational Pensions Authority (EIOPA) has announced it will review the UFR methodology in 2016 under Solvency II. The methodology will in any case not be changed before the end of 2016. The difference between the set UFR and the rate of interest in the market is expected to continue for the time being.

Proposals for an IM or PIM had to be laid before the Dutch Central Bank, or DNB, for approval by no later than the end of June 2015 if the applicant was looking for DNB approval in time for the introduction of Solvency II in 2016. It is possible to submit proposals for IM and PIM after that, and now as well, albeit that they will come into force later and not as of 1 January 2016

Switch from IGD (Solvency I) to Solvency II by 1 January 2016

Solvency II therefore provides a framework for prudential regulation and supervision of insurers that came into force on 1 January 2016. Solvency II is the result of a prolonged process of international negotiation. This new regulatory framework sets out the EU rules for access to, and conduct of, insurance and reinsurance business, regulation and supervision of insurance and reinsurance groups and the rules relating to the cleaning up and liquidation of insurers.

Solvency I was a product of the seventies and was ripe for renewal. The key aspect that was missing in Solvency I was that capital requirements were not tailored to the true risks that insurers run. As a result the incentives for effective risk management were insufficient. In addition Solvency I failed to shed enough light on either the current financial position of insurers or the risk sensitivity of their financial position. This meant that it was unclear whether insurers would be able to meet their undertakings. Furthermore, from a European perspective the framework provided an unclear and unequal degree of policy holder protection, supervision in the EU was insufficiently harmonised while there was only limited scope for supervision at the group level.

Solvency had to amount to at least 100% under Solvency I and this is unchanged under Solvency II. However a solvency ratio of 100% under Solvency II means something other than a solvency ratio of 100% under Solvency I. This is because the calculation methodology behind both ratios differs.

Conclusion

Solvency is complex, but it touches the heart of what matters to investors in insurance companies: capital. When investing in a pharmaceutical company, one does not need to be a chemist to be able to make the investment decision. The same goes for insurance companies. Insurance companies, looking to obtain backing from the capital markets, should be pitching their case not as if they were presenting it to a conference of statisticiens and economitricians. Rather, they should communicate about these matters such that the average investor can make an informed decision on whether or not to provide more capital to the company, or take his money elsewhere .