English Court of Appeal Clarifies Threshold for Raising ‘Off-Setting’ Defences in Competition and Other Breach of Duty Claims | Shearman & Sterling LLP

English Court of Appeal Clarifies Threshold for Raising ‘Off-Setting’ Defences in Competition and Other Breach of Duty Claims

Introduction and Summary

The recent decision of the English Court of Appeal in NTN Corporation v. Stellantis^[1] concerned an appeal against a successful application to strike out an off-setting defence to a competition damages claim. It is an important clarification of the threshold that must be met to raise an off-setting defence, a common, and potentially potent, strategy used by defendants to reduce their damages exposure in competition claims.

The Court dismissed the appeal, on the basis the defendant had failed to meet the threshold and therefore its off-setting defence should be struck out.

The appeal specifically concerned i) whether a supplier who has, in breach of competition law, overcharged a purchaser for supplies, can rely on assertions that the purchaser mitigated the overcharge by off-setting it against increased discounts from other supplies, and ii) whether such a defence can be asserted without actual evidence and merely on the hypothetical basis of an inference that the purchaser would have mitigated its loss in this manner.

These issues arose in a follow-on damages claim in relation to a 2014 European Commission decision against the defendant, NTN, and five others, finding that NTN had engaged in a cartel in supplying bearings for automotive applications to equipment manufacturers, including one of the claimants, FCA.

The judgment confirms that a merely hypothetical ‘off-setting’ defence to a damages claim will not survive strike out. Defendants must be able to point to more than merely arguable evidence of a realistic or plausible causal connection between the loss claimed and the alleged off-setting by the claimant.

This may to some extent discourage the use of off-setting defences in the future. This will be particularly so in more marginal factual settings where a defendant is considering whether to assert a mere inferential, hypothetical off-setting defence because they have no real visibility over the ways in which the claimant manages their costs (or might manage them) as a result of any wrongdoing by the defendant that affects the claimant’s business. NTN has significance particularly for competition damages claims, but also applies to any contractual or tortious breach of duty claim.

Procedural Background

NTN’s primary defence to the claim was that, notwithstanding its involvement in the cartel, FCA had suffered no overcharge. NTN’s secondary position was that, even if FCA had suffered an overcharge, it had mitigated that loss by reducing its input costs elsewhere (i.e. by making lower payments to suppliers other than NTN). This position was purely hypothetical; NTN did not claim to have any actual knowledge or evidence of such off-setting by FCA, but rather asserted that it was entitled to reasonably infer that FCA would seek to off-set any losses in this way.

FCA successfully applied to the Competition Appeal Tribunal (CAT) to have the secondary defence struck out on the basis that in the circumstances of this case it was theoretical, lacked realism and was implausible, and that to permit such a speculative defence would add disproportionately to the burden of the trial.

The Appeal

The Court of Appeal agreed with the CAT’s conclusions and dismissed the appeal.

Clarification of the Applicable Test

With reference to the generally applicable test for whether a defendant has set out a properly arguable defence that survives strike out, the Court of Appeal, relying on judgments of the Supreme Court in Sainsbury’s Supermarkets v. Visa Europe Services.^[2] and the CAT in Royal Mail Group v. DAF Trucks^[3], held that the burden was on the defendant to demonstrate that:

• there is a legal and proximate, causal connection between the overcharge and the act of mitigation;
• the connection is “realistic,” or “plausible,” and carries some “degree of conviction;” and
• the evidence is more than merely arguable.

In doing so, the Court of Appeal rejected NTN’s argument that Sainsbury’s had contemplated mitigation defences based only on inference. The Supreme Court made clear there was a heavy burden on claimants to provide disclosure and evidence as to how they had dealt with the recovery of costs in their business once such a defence had been raised—the court had not considered what was required to first properly ‘raise’ an off-setting defence. Sainsbury’s is not authority for the proposition that the pleading of a ‘bare-bones’ defence of mitigation by off-setting should always be permitted—indeed, NTN makes clear that the opposite is more likely to be true.

Analysis on Appeal

NTN’s defence did not establish a realistic or plausible case of mitigation by off-setting, as it was purely theoretical and based on successive inferences on inferences which, on analysis, could not properly be drawn from the primary facts. NTN’s assertion that the burden was on FCA to show that they did not pass-on any overcharge was also rejected.

Because NTN’s primary case was that there was no overcharge at all, it did not attempt to explain how specific overcharges had or would have been identified by FCA, such that they could then be specifically off-set. The Court considered that it was likely, after seven years of operating the cartel, that NTN would have generated internal documents assessing the success of the cartel, which would have provided some evidence of off-setting by FCA (or that off-setting typically occurred in the industry), if there was a plausible case to be made in that regard. However, NTN failed to advance such evidence.

As such there was a ‘causation gap’ between the impact of the cartel and any off-setting that FCA might have engaged in. In order to fill the gap, NTN based its defence on the fact that FCA had in place systems to control costs, and sought to draw various inferences about the nature and effectiveness of such systems, before concluding that these would have led FCA to mitigate any overcharge.

The Court described this approach as “an inference upon an inference itself based upon inferences.” These inferences did not flow naturally or causally from the facts that NTN was able to properly assert: just because a cost control system was in place, for example, did not mean it was effective at off-setting any alleged overcharge arising from the cartel, nor that it was possible to reduce other input costs at all.

As to the level of evidence that is required in asserting such a defence, the Court cited Royal Mail, in which the tribunal stated while a defendant may not have relevant documents or evidence prior to disclosure proving how the claimant responded to the overcharge, there must at least be some plausible basis in fact for alleging that a claimant would have off-set its overcharge loss in a manner amounting to legal mitigation. This was so even if the evidential burden on a defendant seeking to raise a viable off-setting defence is difficult to overcome, which it may often be.

Factors relevant (but not decisive) to the plausibility of an off-setting defence include whether the claimant knows of the nature and amount of the overcharge (such that it is inherently likely the claimant would have sought to address it), the gross amount of the overcharge as a proportion of the claimant’s business costs, and whether the claimant had renegotiated with other suppliers during the period affected by the overcharge. NTN had failed to plead that any such factors applied in this case.

The Court cited with approval the CAT’s finding that, being a secret cartel, FCA would not have known about the overcharge, and as a result would not have been aware of the proportion of their costs that the overcharge represented and therefore had little reason to seek to off-set it (by contrast to Sainsburys, where the overcharge was known and transparent and retailers therefore had well-established strategies for mitigating the charges).

The Court concluded that, without realistic evidence of a possible defence at the outset, a defendant has no right to go ‘fishing’ in disclosure to see if anything helpful might turn up. A claimant will not be put to the heavy burden that disclosure involves on the question of mitigation if the defendant cannot first establish a properly pleadable starting point.

Conclusion

The Court of Appeal’s decision affirms the approach taken by the CAT at first instance and in Royal Mail and clarifies the scope of the Supreme Court’s decision in Sainsbury’s as regards the issue of mitigation by way of off-setting.

The Court’s reasoning makes clear that the defendant carries the burden of proving its off-setting defence—it is not for a claimant to have to show that its alleged losses had not been off-set. Defendants accused of anti-competitive conduct cannot raise a purely hypothetical off-setting defence based on broad economic theory or whatever costs mitigation a business in the relevant industry might have done, particularly one which rests on a series of inferences. While extensive evidence is not necessary, defendants must demonstrate that there is at least a realistic factual basis for a possible off-setting defence. There is no one-size-fits-all approach: the sufficiency of such evidence may vary from industry to industry and what will suffice in one case may not in another.

The bar for raising an off-setting defence is not high in theory. But as defendants will often have little information regarding claimants’ input costs, cost control mechanisms or relationships with third party suppliers when defendants put forward their defence, NTN may nonetheless present more of a hurdle to running off-setting defences in competition (and other) damages claims in future.

Footnotes