Passing-On Defense and Indirect Purchaser Rule in Compensation Claims Arising from Competition Law
An illegal price increase as a result of a competition law infringement primarily affects direct purchasers. Direct purchasers may then pass this increase on to their purchasers operating in sub-markets, namely, indirect purchasers. In such a case, the infringing undertakings that are subject to compensation claims may argue that direct purchasers have passed their damages on to indirect purchasers (passing-on defense); therefore, they are not harmed by the competition infringement. In this regard, indirect purchasers may wish to bring actions against the infringing undertakings, by claiming that the damage has been passed on to them. The discussions concerning the competition law doctrine with regard to the standing of indirect purchasers are known as the “indirect purchaser rule.”
The right to bring compensation claims arising from competition law is regulated under the Act on the Protection of Competition numbered 4054 (“Competition Act”) Art. 57 et seq. However, the Competition Act does not include any explicit rules with regard to the passing-on defense and the indirect purchaser rule. Furthermore, the Court of Cassation does not have established case law on these issues. Below, we will elaborate on their European Union (“EU”) and Turkish practice.
Goods and services pass through stages of the supply chain until they are offered to end consumers. The undertakings that increase their prices illegally at any stage of this supply chain cause damage to purchasers or end consumers who have bought these goods and services at a higher price. Compensation for this damage is regulated under Art. 57 of the Competition Act. Accordingly, anyone who prevents, distorts, or restricts competition via practices, decisions, contracts or agreements that are contrary to the Competition Act, or abuses his dominant position in a particular market for goods or services, and is obliged to compensate any damages suffered. In this vein, the undertakings faced with lawsuits filed in line with Art. 57 may claim that the claimants actually passed their damages on to their purchasers; in other words, the passing-on defense. Within this possibility, claimants do not have the right to file a lawsuit since they did not suffer any damage. The passing-on defense is only applicable for the infringements that result in price increases, such as agreements or excessive pricing; it is not in question for the anti-competitive practices that result in exclusion from the market, such as refusal to deal or predatory pricing.
If the passing-on defense is deemed acceptable, this raises the question of whether or not the indirect purchasers who suffered the damages may bring an action for compensation. Given that the supply chain is considered as a whole, the group of indirect purchasers expands to include distributers, retailers and end consumers. In these cases, it is considerably difficult to prove how much of, and to whom, the damage is passed on. On the other hand, if such defense is rejected, the compensation claims of direct purchasers who may have been passing on their damages and, therefore, did not suffer any harm, are accepted, this results in the indirect purchasers not being able to claim damages. Therefore, the passing-on defense and indirect purchaser rule are closely connected.
Before the entry into force of the Directive numbered 2014/104/EU 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 (“Directive”), the European Court of Justice (“ECJ”) ruled in Courage and Manfredi that anyone who suffered damages arising from competition law infringements may claim damages. This was interpreted as ECJ’s acceptance of the indirect purchaser rule along with the passing-on defense. However, in both of these rulings, the ECJ left the authority to national authorities to lay out the rules with regard to compensation claims. After the entry into force of the Directive, the passing-on defense that is rejected in the United States of America through the Hannover Shoe decision, has become uniformly regulated in the EU.
The regulation of the passing-on defense under EU law was briefly explained in my Newsletter of November, 2014. In accordance with Art. 17(2) of the directive, it is presumed that the cartels are harmful. In this case, the burden of proof lies with the defendant, rather than the claimant, who must prove that no damage has arisen with regard to the claimant. Moreover, Art. 13 stipulates that the passing-on defense may be brought forward. Accordingly, the defendant may argue that the claimant, the direct purchaser, has passed its damages in whole or in part, on to its customers. Again, the burden of proof lies with the defendant who may reasonably request disclosure from the claimant or from third parties.
There are no explicit provisions under the Competition Act with regard to the passing-on defense. Under these circumstances, the rules regulating the passing-on defense shall be the general provisions of the Turkish Code of Obligations numbered 6098 (“TCO”). Accordingly, in order for the tort liability to arise, the claimant shall prove the (i) illegal act, (ii) fault, (iii) damage, and (iv) causal link. The defendant shall prove the causal link between the increase of the prices of the direct purchaser and anti-competitive practices. Although possible in theory, proving this is argued to be difficult in practice. For the same reason, it is also argued that the passing-on defense involves a complicated economic analysis that may hinder the judicial processes.
Indirect Purchaser Rule
The right of the indirect purchasers to claim for damages is in question when the passing-on is brought forward as an argument, rather than as a defense. In accordance with Art. 58 of the Competition Act, the competitors and the consumers of an undertaking have the right to claim damages arising from competition law infringements. In the same vein, such claim is also said to be brought by potential competitors. However, the consequential (indirect) damages cannot be claimed as they fall out of the scope of competition law. In this case, the link of illegality is not established between the damages suffered and the competition law infringement. It is accepted in the doctrine that the damage suffered by indirect purchasers are not consequential damages.
Above, it is explained that the passing-on defense, which is rejected under American law, was accepted under EU legislation. Accordingly, although not accepted in the USA in line with the Illinois Brick decision, the Directive acknowledges the right of the indirect purchasers to claim damages, namely, the indirect purchaser rule. In accordance with Art. 14 of the Directive, it shall be ensured that whether, or to what degree, an overcharge was passed on to the claimant, taking into account the commercial practice under which the price increases are passed on through the supply chain. Different from the passing-on defense, the burden of proof rests with the claimant. Pursuant to the second paragraph of the same provision, the claimant shall prove:
- the defendant has committed an infringement of competition law;
- the infringement of competition law has resulted in an overcharge for the direct purchaser of the defendant; and
- the indirect purchaser has purchased the goods or services that were the object of the infringement of competition law, or has purchased goods or services derived from or containing them.
However, this provision shall not apply where the defendant can demonstrate credibly to the satisfaction of the court that the overcharge was not, or was not entirely, passed on to the indirect purchaser. In such a case, the indirect purchasers cannot claim damages.
There are different views in Turkish doctrine with regard to the standing of indirect purchasers. The one that accepts the indirect purchaser rule argues that the Competition Act does not exclusively list the ones which may claim for damages, and that this is in line with the rationale behind the norm. The opposing view argues that even though indirect purchasers have suffered damages, it is nearly impossible to determine whether, to what degree, and to whom the damages were passed on. Moreover, granting the right to claim damages to the end consumers, themselves also being indirect purchasers, results in a case overload, which may result in the risk of multiple claims for the same damage.
Indeed, the Competition Act does not employ the numerus clausus principle for those who may claim damages. However, under any circumstances, as per Art. 49 of the TCO, the claimant shall prove its damages and the causal link between the damage and anti-competitive practices. In this case, the indirect purchasers must prove that they were overcharged for the goods and services they purchased as a result of the competition law infringement, as well as other conditions for tort liability. Such proof is difficult and requires complex economic analysis. However, the fact that the damages cannot be proven exactly does not prevent tort liability from arising. In this case, pursuant to Art. 50 of the TCO, the judge shall determine the amount based on equitable terms, taking into consideration the flow of the events, and the precautions taken by the aggrieved party.
The passing-on defense and the indirect purchaser rule are important issues to be discussed with regard to the private enforcement of competition law. After the entry into force of the Directive, such discussions seem to be brought to an end in the EU. In accordance with the Directive, the passing-on defense and the indirect purchaser rule are accepted. The burden of proof rests with the defendant for the former, and with the claimant for the latter. These issues are neither explicitly regulated under Turkish legislation, nor they are resolved by the Court of Cassation case-law. The doctrine predominantly argues that even though the proof thereof is very difficult, even almost impossible, the passing-on defense and the indirect purchaser rule are acceptable under Turkish law. Similar to the uniformity brought by the Directive in the EU, it can be said that a uniform regulation is needed for these issues.
 Murat Şahin. Rekabet Hukukunda Tazminat Talepleri, April 2013, Istanbul, p. 32.
 Richard Whish/David Bailey. Competition Law, 7. Edition, 2012, p. 300.
 C-453/99 Courage Ltd. v Bernard Crehan, ECR  I-6927
 C-295/04 Vincenzo Manfredi v Lloyd Adriatico Assicurazioni SpA, ECR  I-06619
 Kadir Baş, Türk Hukukunda Rekabet İhlallerine İlişkin Tazminat Davalarında Passing-On Savunması ve Dolaylı Alıcı Kuralının Uygulanması: ABD ve AB Uygulamaları Işığında Değerlendirme ve Öneriler, Competition Journal, Volume 12, No: 4, October, 2011, p. 34.
 Baş, p. 35.
 Hannover Shoe, v. United Shoe Machinery Corp., 392 U.S. 481, (1968).
 For the full text please see: http://www.erdem-erdem.av.tr/publications/law-post/the-implications-of-the-directive-on-certain-rules-governing-antitrust-damages-lawsuits-on-turkish-law/ (date of access: 27.12.2016).
 Baş, p. 48.
 Süleyman Parlak, Rekabet Hukuku İhlallerinin Özel Hukuk Yansımaları, TÜSİAD Competition Law Workshop Transcript, June, 2016, p. 17.
 İlhan Yiğit, Rekabet İhlallerinden Doğan Tazminat Sorumluluğu, Istanbul 2013, p. 296.
 Şahin, s. 174; Kerem Cem Sanlı, Haksız Fiil Hukukunun Ekonomik Analizi, İstanbul 2003, p. 240; Orhan Sekmen, Rekabet Hukukunda Tazminat Sorumluluğu, Ankara, 2013, p. 98.
 Sekmen, p. 98. Şahin accepts that these are not consequential damages with a different reasoning. Accordingly, since the damages suffered by indirect purchasers are directly linked to the damages of direct purchasers, these are not considered to be consequential damages, p. 175.
 Illinois Brick Co. v. Illinois, 431 US 720 (1977).
 Yiğit, p. 298.
 Yiğit, p. 299.
 Erdem Büyüksağış/Tuğba Koyuncu, Rekabet İhlallerinden Kaynaklanan Tazminat Davalarına İlişkin AB Yönergesi’nde Yer Alan Aktarma (Passing-On) Savunması ve Toplu Dava Hakkı, Banka ve Ticaret Hukuku Dergisi, Volume XXXII, No: 1, March, 2016, p. 161.