Umbrella Effect within the Framework of Private Competition Enforcement
Undertakings in various levels of the chain of distribution, as well as with end-consumers, may incur damages from anti-competitive conduct by other undertakings. The concept of private enforcement of competition laws is aimed at recovery of such damages, along with losses of profit and accrued interest as regulated under Art. 57, et seq, of the Act on the Protection Competition numbered 4054 (“Competition Act”). The corresponding piece of legislation in the European Union’s acquis communautaire is Directive 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 damages caused by a certain, anti-competitive conduct that results in artificial price increases are often discussed within the vertical chain or from the viewpoint of the competitors; whereas, the concept of umbrella effect concerns the damages beyond these categories. In other words, it entails the liability of members of a cartel for the price increases they have caused in the general market – more specifically, the purchasers of their competitors. Although neither the Competition Act, nor the Directive, include any explicit provisions with regard to the so-called “umbrella effect,” it was discussed by the European Court of Justice (“ECJ”) in its Kone decision, and in several decisions of the US courts, which we will elaborate on further, below.
The damages resulting from a competition law infringement are often, and more traditionally, incurred by competitors, suppliers, and purchasers of the infringing undertakings. The widespread harm caused by the anti-competitive conduct also affects another category: the purchasers of the competitors of the infringers. This last group of purchasers is called “umbrella purchasers.” In other words, when its competitors form a cartel to illegally set higher prices, the undertakings that originally do not participate in such cartel tend to maximize their profits by responding with increased prices (also known as “umbrella pricing”), which eventually cause harm to their purchasers.
It has been pointed out that when an undertaking is faced with increased prices as a result of anti-competitive conduct in the market, it is expected to employ one of two strategies. Such undertaking may either leave its price below the cartel price, or it may adapt to such price by increasing its own price. The second and more preferred strategy is more frequently observed when the cartel’s market share is larger, the product homogeneity is higher, and the supply elasticity of the non-infringing undertaking is lower. However, even though it conforms to the higher “umbrella” price, such undertaking may or may not be aware of a cartel that is present in the relevant market. In this instance, the non-infringing undertaking simply benefits from the umbrella that has been opened by the cartelists; however, it does not participate in the anti-competitive conduct, itself. It needs to be emphasized that the competitors of the cartel members do not violate competition laws by adapting their prices unless their conduct amounts to tacit collusion. In order for the adaptation to market conditions to be considered a tacit collusion, an exchange of price information must exist that will enable the price-increasing undertakings to coordinate their behavior beyond legal market conduct.
By way of umbrella pricing, the competition law infringements gain impact beyond the direct or indirect purchasers of the cartel members; they also cause harm to the purchasers of other players in the market. Hence, as far as the incurred damage is concerned, the purchasers of the non-infringing undertakings are not in a different position than that of cartel members. This is also the case for the purchasers of substitute products, since any price increase in the cartelized goods or services results in increased demand for their substitutes.
Within the framework of private competition law enforcement, the umbrella effect becomes relevant when the purchasers of the non-cartelized undertakings who were overcharged because of umbrella pricing claim their damages from the members of the cartel. There are certain conditions for the umbrella effect to be a basis for a claim for damages. Firstly, the umbrella effect only occurs when the anti-competitive behavior entails an increase in prices in the market; therefore, mere exclusionary conduct does not give way to umbrella effect, as it would not result in increased prices in the market to which other competitors may adapt. Secondly, the second-stage price must be a result of the cartel prices applied by cartel members, in other words, no other factor must be present, but for the umbrella effect that would result in the price increases. Lastly, the claim of damages must be directed towards the cartel members. It must be emphasized that the claimants of this suit are the purchasers of the competitors of the cartelists, and not the competitors themselves.
Application in the EU and the US
The applicability of the umbrella effect has been widely discussed by the EU and US doctrines, and opposing views are adopted by the case law in each jurisprudence. The ECJ seem to accept the claim for damages resulting from umbrella pricing; whereas, the US courts do not favor them. The position taken by the EU courts is specifically important as the Directive, in contrast with its explicit regulations on the passing-on defense and indirect purchaser rule –other highly debated issues of private competition enforcement- does not regulate the issue of the umbrella effect.
The first thorough elaboration on the umbrella effect by the EU courts happened when the matter was referred to the ECJ as a preliminary question in Case C-557/12, Kone and others v ÖBB-Infrastruktur AG. In 2007, several undertakings were imposed monetary fines by the European Commission and the Austrian Kartellgericht for forming a cartel in the installation and maintenance of the elevators and escalators market. Later on, ÖBB Infrastruktur Aktiengesellschaft, a subsidiary of the Austrian Federal Railways, brought a follow-on action against the cartel members seeking compensation for its elevator purchases.
However, the claimant also claimed damages for its purchases outside the cartel, and a preliminary question was referred to the ECJ, solely, for this part of the whole claim. According to the respondents, there was no adequate causal link between the damage and the anti-competitive conduct, and such claim fell outside of the protective scope of the norm. Upon such referral, the Advocate General Kokott stated in her opinion delivered on January 30, 2014 that in fact, there was an adequate causal link present in the case at hand, so that the damages claimed were foreseeable by the cartel members, and that it runs counter to the practical effectiveness of competition laws if the national laws categorically deny seeking compensation for damages resulting from umbrella pricing.
The judgment followed AG Kokott’s reasoning, by recalling the principles governing the right of any person to claim damages for the harm caused by a contract, or conduct liable to restrict or distort competition. The ECJ also discusses its decisions Courage and Manfredi, wherein it confirmed that the EU competition laws produce a direct effect in the relations between individuals and creates rights “which the national courts must safeguard.” In sum, the ECJ ruled that even though pricing behavior would seem purely autonomous, based on economical rationality, a causal link between the cartel and umbrella pricing cannot be excluded. In other words, the ECJ confirmed AG Kokott’s view that the umbrella effect was not to be categorically denied.
On the other hand, the US courts employed a completely different solution with regard to the umbrella effect. In general, the US implementation of private competition enforcement requires the claim to be directly linked to the competition violation, as well as being clearly observable. Thus, the claims resulting from umbrella effect have not yet been upheld by the federal courts. To be more precise, in its decision, Mid-West Paper Products Co v Continental Group, the US Court of Appeals ruled that benefits arising from an umbrella transaction caused by a cartel do not flow to the cartel members, but to the non-infringing competitors of the cartel members. The Court viewed that when thought along with the possibility of treble damages, the broadening of the scope of the claimants would lead to ruinous liability by stressing that multiple treble compensations would be a form of “overkill recovery.” Similar to the Mid-West Paper Products decision, the In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation decision, the Court stated that the umbrella effect would lead to complexities in quantification and distribution of damages, and result in an increased risk of duplicative recoveries. In the light of the foregoing, it can conclusively be said that the recovery of damages resulting from umbrella pricing is not permitted under US law.
Application under Turkish Law
The Competition Act does not include an explicit provision with regard to umbrella pricing, and the Court of Cassation is yet to form a jurisprudence that would shed light on the applicability of such concept under Turkish law. However, it must be borne in mind that the causal link is one of the conditions for tort liability to arise, which shall be proven by the claimant. Therefore, the adequate chain of causality as proven by the purchasers of non-cartelized competitors needs to put forward that the price increase in the market is a consequence of anti-competitive behavior. Looking at the EU counterpart as an example for future implementation of the umbrella effect, it may be concluded that such recoveries may be allowed given that the causal link and the damage is proven through conclusive evidence. Further, the existence of claiming treble damages as observed in the US sets the Turkish competition law apart from that of the EU, which should be taken into consideration in order to determine the protective scope of the competition rules.
The umbrella effect has been the center of scholarly debates due to it raising serious concerns with regard to the condition of causal link for tort liability and the notion of foreseeability it entails. Lately, the damages claims on umbrella effect grounds are seemingly favored in the EU, although they have long been rejected in the US. As Turkish private competition enforcement is a hybrid system which was drafted based on the EU law example, despite allowing treble damages, the question of umbrella damages remains a matter to be resolved either by a legislative initiative or jurisprudential interpretation.
 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.
 It must be added that the umbrella effect would similarly be the case of instances of decreased output, instead of increased prices.
 Franck, Jens-Uve. Umbrella Pricing and Cartel Damages under EU Competition Law, European Competition Journal, Vol. 11 No 1, p. 136.
 Maier-Rigaud, Frank. Umbrella Effects and the Ubiquity of Damage Resulting From Competition Law Violations, Journal of Competition Law & Practice, 2014, Vol. 5 No. 4, p. 249.
 Franck, p. 138.
 Şahin, Eda. Şemsiye Etkisi Nedeniyle Zarar Görenlerin Tazminat Taleplerinin Avrupa Birliği Rekabet Hukuku Bakımından Değerlendirilmesi: Kone Kararının Yansımaları, Rekabet Dergisi 2014, 15(2), p. 92.
 Şahin, p. 93.
 Opinion of Advocate General Kokott, para. 83.
 Case C-557/12, Kone AG and others dated June 5th, 2014.
 Case C-453/999 Courage Ltd v Bernard Crehan and Bernard Crehan v Courage Ltd and others.
 Case C-295/04 to C-298/04 Vincenzo Manfredi and others.
 Schreiber/Savov, Kone v. Commission, Umbrella Damages Claims, Journal of European Competition Law & Practice, 2014, Vol. 5 No. 8, p. 549.
 Schreiber/Savov, p. 550.
 The US Court of Appeals, Third Circuit, March 29th, 1979, Mid-West Paper Products Co v Continental Group.
 Franck, p. 142.
 691 F2d 1335 (9th Cir. 1982).
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