Lonely J ourney : from Economics to Law and Back

1. LonelyJourney : fromEconomics to Law and Back Frederic Jenny Professor of Economics , ESSEC Business School, Paris Former Judge, Cour de cassation, Paris Chair OECD CompetitionCommittee Friday, 5th February 2016 India International Center, New Delhi

2. Issues to bediscussed • 1) A bit of history • Education • Growing importance of understandingeconomics for judges ( civil enforcement, deregulation, tradeliberalization) • 2) Challenges of mixing the economic and the legalapproach • 3) Different solutions to increase the understanding of economics by the judiciary • Institutional solutions : ex creation of specialized courts ( Intellectuproperty, competition) • Procedural solutions : ex hot tub techniques • Substantive solutions : ex DaubertRules

3. Issues to bediscussed • 4) The economist as a judge: a personalexperience • Differentlanguages; differentapproaches • How to create the conditions of a meaningful dialogue • 5) Whatdifferencecan the economist-judgemake: • Six case studies • 6) Whyeconomistsneed to understand the law as much as the judgesneed to undertandeconomics: • the case of damage assessment • Conclusion

4. The Challenge “I speakonly for myself, and I do sowithoutcriticisinganybody, but I have to say, I have neverlistened to evidence in any court for an hour and understoodsolittle of it as I have understoodduring the last hour. It may all be as clear as daylight to mycolleagues. “All I cansayisthatanybodywhoreallywants to make sure that I understand and have the ability to make an evaluation of thiskind of materialthatwe have has a very long way to go in educating me as to how I should deal withit. (….) I willsitherequietly and let it all wash over me for a reasonableamount of time, but I thinkthatthosewho are asking the court to rely on this must beunder no illusions thatat the moment, so far as I amconcerned, thisis all washing over myhead”. • Mr Justice Ferris, UK, 1999 case against the joint selling of television rights by Premier • League football club

5. Economicmethodology

6. How to improve the economic understanding of civil courts ? When courts retain their own expert in antitrust damages proceedings, there is a a need for the court to define the expert’s mission in a relevant way. Such a definition also requires the court to have a sufficient understanding of economics. The question then is how to ensure that courts will have a sufficient level of understanding of economics to enable them to fully grasp the differences between the parties’ experts or to instruct their own experts. This is a challenge in civil law countries where judges (or lawyers) had, until recently, very little exposure to economics during their legal training. There are three types of tools that can be used to increase the level of economic understanding of courts: Institutional tools; Procedural tools; Methodological tools.

7. Institutional solutions to improve the economic understanding of civil courts At the institutional level, some countries have a specialised competition court (such as the Competition Appeal Tribunal in then UK), while other countries have chosen to concentrate all antitrust-related cases in a few jurisdictions where a small set of judges will hear all the cases, such as in France where the Paris Court of Appeals hears all appeals on competition-related cases. Other institutional innovations, such as the use of economists as ad hoc panel members in court proceedings or the recruitment of economists by the judiciary, have been made in some countries.

8. Procedural adjustements to improve the economic understanding of civil courts At the procedural level, different techniques can be used to facilitate the dialogue between the experts of the parties and the courts. For example, pre-trial conferences between the judges and the parties’ experts, during which the court can become acquainted with the arguments of the parties and get a sense of where they agree and where their differences lie, can be useful in helping the court focus on the most relevant issues during the trial. So called ‘hot-tub’ techniques, where the expert of one party testifies in the presence of the expert of the other party, and where each expert can comment on the expert testimony of the other party, can also contribute by encouraging experts to be more realistic and prudent in their claims and by facilitating an understanding by the court of the points of disagreement.

9. Methodological tools to improve the economic understanding of civil courts It is clear that on the one hand judges cannot (unless they sit on a specialised court) become fully knowledgeable about economic methodology but that, on the other hand, having some notions of basic scientific methodologies can help them understand what the experts are saying and help them assess the general ‘quality’ of the expertise with which they are presented. In this respect, the Daubert criteria in the USA that relate to ‘relevance’ and ‘reliability’ to assess the quality of the expertise can be a great help for courts in Europe as well.

10. Improving the dialogue betweeneconomists and courts: Drawing on US experience • Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). • Key: relevance and reliability of methodology • General Electric Co. v. Joiner,522 U.S. 136 (1997) • Standard of Review: abuse of discretion • Kumho Tire Co. v. Carmichael, 118 S. Ct. 2339 (1998), and rev’d, 119 S. Ct. 1167 (1999) • Daubert applies to all expert testimony • Criteria of reliability flexible and unique to each area of expertise • District Court as gatekeeper

11. Revised Rule 702 (2000): Relevancy and Reliability A witness “qualified as an expert…may testify …in the form of opinion or otherwise,” if: • (1) testimony is based uponsufficient facts or data, • (2) testimony is the product ofreliable principles and methods, and • (3) witness hasapplied the principles and methods reliably to the factsof the case. In Daubert, the Supreme Court considered the meaning the test of relevancy and reliability in the context of scientific evidence.

12. Daubert v. Merrell Dow Pharms.,Inc., 509 U.S. 579, 590 n.9 (1993). The case The plaintiffs claim that a drug taken by their mothers during pregnancy had caused their birth defects. The evidence: Eight experts for the plaintiffs sought to testify on the basis of in vitro, animal, and epidemiological studies that the drug Bendectin taken by the plaintiffs’ mothers during pregnancy could cause or had caused the plaintiffs’ birth defects.

13. Daubert v. Merrell Dow Pharms.,Inc., 509 U.S. 579, 590 n.9 (1993). • Relevancy • The expert’s theory must be tied sufficiently to the facts of the case. “Rule • 702’s standard requires a valid scientific connection to the pertinent inquiry as a • precondition to admissibility.” • 2) Reliability • To determine whether proffered scientific testimony or • evidence satisfies the standard of evidentiary reliability,a judge must ascertain • whether it is “ground[ed] in the methods and procedures of science.”The Court, sets • out a nonexclusive list of four factors that bear on whether a theory or technique has • been derived by the scientific method. • 3) “Whether [a theory or technique] can be (and has been) tested” is the • “‘methodology [that] distinguishes science from other fields of human inquiry.’” • 2) Has the theory been peer reviewed or published, • 3) Are the known or potential error rates known • 4) Are the standards controlling the technique’s operation accepted by the scientific • community ?

14. Preliminary questions regarding an economic expertise (I) • Is the expert qualified ? • 1) – does he have a degree in economics • 2) – is the expert specialized in a relevant field ( ex: microeconomics, industrial organization, market theory) • 3) – has the expert published in professional journals ? • 2)Is the method used by the expert reliable ? • 4) – Does the expert use economic methods or reasonings to justify his opinions ? • 5) – Are the methods or the models used by the expert described with sufficient precision ? • 6)- Have the methods or models used been used in other similar cases ? • 7) - Have the methods or models used by the expert been published in a refereed • scientific journal or have they been specifically designed for the case ? • 8) - Does the expert justify why he chose a particular model or method for the case? • 9)- If the expert does not use a classical economic approach, does he justify why he departs from traditional economic analysis? • 10) Is there a clear and logical relationship between the assumptions, the reasoning and the conclusion ?

15. Preliminary questions regarding an economic expertise (II) 3)Is the method reliable ? Daubert criteria 11 ) –Can the theory or the technique be empirically tested ? ) –Has the theory or the technique been peer reviewed and/or published ? 12) –Is the error rate of the method known ? ) –Is the methodology generally accepted by the scientific community ? 4) Is the analysis of the expert relevant ? Note: There is a need to distinguish between the analysis of an expert critically Appraising the work of another expert and the analysis of an expert trying to establish A fact or a causal relationship 13)- Does the expert have a particular knowledge of the relevant industry or issue 14)- Could the expert’s analysis equally apply to many other industries or issues ? 15)- Does the expert rely on industry specific data or facts ? 16)- Did the expert gather the data independently or was the data provided by the client ? 17)-Have some important factors relevant to the industry been ignored by the expert ?

16. Preliminary questions regarding an economic expertise (III) 5) Is the analysis of the expert externally consistent? 18)- Are some of the hypothesis or some of the conclusions of the expert in contradiction with known facts about the industry or the market?

17. Somedifferencesbetween the judicial and the economicprespectives Economic perspective Judicial perspective What the Law Says Goal(s) of the law Relevant facts Whathappened Applicability of generallegalprinciple Theory of harm Indirect evidence Direct evidence Correlation Causality Type I / Type II errors Standard of proof Deterrence Proportionality Optimality Predictability Economicharm Legalprejudice Legal jargon Economic jargon

18. Example of cases whereeconomic and legalapproacheswerecomplementary Non bis in idem ( no double jeopardy) and negativelyslopeddemandcurves 2) Exchanges of information : standard of proof of the violation? ( Whenisitanticompetitive) 3) Marginsqueeze and standard of proof: the as efficient competitor test. 4) Exclusivity and bundling : per se rule or rule of reason ?( Exclusive sales of Iphonewith an Orange subscription for 5 years) but othertelephoneoperatormaydistributeother phones 5) Definition of anundertaking for the purpose of competitionlawin the case of a group ( France Telecom)( twodifferent branches establishpricesleading to a price squeeze) 6) What are the elements to takeintoconsideration to assess damages due to an anticompetitive practices

19. Potential damages caused by a cartel

20. General principles of civil law in France Under French law a number of legal principles must be kept in mind. First, there should be no enrichment without cause; second, we apply the principle ‘non bis in idem’ (comparable to ‘no double jeopardy’ in other jurisdictions); third, French civil law includes the principle of ‘integral compensation of harm’, which means that victims should be compensated for the exact value of the damage they have suffered (no more, no less). The first principle (in conjunction with the second) explains why it is held that defendants in antitrust civil cases should be given the opportunity of a passing-on defence. Otherwise, victims (such as distributors or retailers) who have passed on to the final consumers the price overcharge inflicted on them by a cartel or an abusive practice could claim damages for the full overcharge they have been subjected to and enrich themselves without cause, while the real victims (the final consumers) would be denied the possibility of compensatory damages because of the ‘non bis in idem’ rule, since the distributors or retailers would have already been compensated. The possibility of a passing-on defence, combined with the third principle (integral compensation), vastly complicates the economic analysis in damages claims resulting from antitrust violations affecting commercial partners.

21. What economic harm can be compensated? Not all injuries reflecting the anti-competitive effect of a violation can be compensated. For example, in French commercial law, under Civil Code Article 1382 (as in some other European countries), only injuries that are caused by the violation can be compensated, and the harm must be (i) direct ( ie directly related to the violation), (ii) current, and (iii) certain.

22. Direct harm As to the direct relationship, under French law, customers of an excluded competitor by a cartel or a dominant position would not be able to claim damages, even if the exclusion of competitors meant that the intensity of competition in the market was lower than it would have otherwise been. Indeed, in such cases the courts would be likely to find that the harm to consumers is only indirectly related to the violation. Similarly, the suppliers of an input to a product in a cartelised market would not be successful in claiming damages against the cartel members, despite the fact that they may have suffered harm from the cartel (since the restriction in output meant that the cartel members purchased less input than they would have had the market been competitive. Finally in case of a pass-on by the cartel victims to downstream buyers, neither the cartel victims ( because they passed on) not the downstream buyers ( because they are indirect victims) may not be compensated because they did not suffer direct harm in some countries.

23. Certain harm Example: Your are willing to buy a TV for a maximum of 750 €. The competitive price would have been 500€. If competition had prevailed you would have bought a TV and you would have had a consumer surplus of 250€. But because of the cartel, the price of TVs was 1000€ and you did not buy one. Can you be compensated for the loss of 250€ of consumer surplus ? The fact that, in order for compensation to be granted, the harm suffered must be certain ( clearly established) , means that in most cases, it is going to be difficult for courts to compensate consumers who are priced out of a market because of the increased price resulting from an anti-competitive agreement or an exploitative abuse of dominance. Indeed plaintiffs would have a difficult time in court proving that were it not for the increase in price due to the violation they would have certainly purchased more of the product or service considered. Furthermore, courts may have difficulties basing their decisions on estimates about how the market equilibrium was modified by the anticompetitive practice. Indeed, the market equilibrium in the counterfactual is hypothetical rather than certain.

24. Current harm As to the requirement that the harm be ‘current’, this leads to the question of at what point in time the economic harm of an antitrust violation should be assessed. This is a legal question, and the situation is not the same in all countries. Unlike the case of common law countries, French courts assess the harm suffered by the victim at the time of the judgment (usually several years after the violation has ceased) rather than at the time of the violation. This means that the assessment of the damage is not based on the reasonable expectation that the victim could have had at the time of the violation, but on the damage observed ex post. Thus, the influence of random events which have affected the market after the violation but before the judgment (eg, a sudden increase in demand for the product) is not usually eliminated when assessing the harm due to the violation.

25. The causality condition In Spain in the Conduit case, the claim followed a decision of the Telecoms regulator which established both a first refusal to supply data by Telefonica , and a supply of poor quality data afterwards, to Conduit in the telephone directory enquiries business. Conduit, submitted an expert estimate of the damages which included the additional expenses it had had to incur because of the infringement and the profits it could have earned in the absence of that infringement, i.e., the lost profits those costs (were) awarded by the Court. To calculate the lost profits, Conduit estimated the market share the company would have reached in the Spanish market, had Telefónica supplied the correct data in due time. In order to do so, Conduit’s expert submission compared the Spanish market with the British market, where Conduit was also present. But the Courts challenged such assumption arguing that the conditions for Conduit in the British and the Spanish markets were far different (…). Moreover, the judge refused the causality connection between the infringement and the damages. The judge argued that there were other elements, specially advertising costs, which were more important than the quality of the data provided in determining the market share of the entrant. Thus, the judge refused to award any compensation as lost profits.

26. On the limits of economicanalysis in assessinganticompetitive damages It seems important to recall that in any event it is only possible to estimate, not to measure with certainty and full precision, what the hypothetical non-infringement scenario is likely to have looked like. There does not appear to be one method that could be singled out as the one that would in all cases be more appropriate than others. Each method has particular features, strengths and weaknesses that may make them more or less suitable to estimate the harm suffered in a given set of circumstances and a given legal system. In particular, the various methods differ in the degree to which they rely on data that are the outcome of actual market interactions or on assumptions based on economic theory and in the extent to which they control for factors other than the infringement that may have affected the claimant for damages. For instance, the strength of all comparator-based methods seems to lie in the fact that they use real-life data that are actually observed on a market. This means, however, also that comparator-based methods rely on the premise that (i) the comparator market or period can be considered sufficiently representative of the likely non-infringement scenario, and that (ii) the difference between the infringement data and the data chosen as a comparator is due to the infringement.

27. Assessing overcharge(1) Price λ > 0 Time Cartel period 1) Jorge Padilla, « Assessing Damages in Input Price Fixing Cases”, LECG 2011 Presentation at the Concurrences’ “New Frontiers of Economics Conference”, Paris

28. Assessing overcharge (2) Price θ < 0 λ = 0 Time Cartel period 1) Jorge Padilla, « Assessing Damages in Input Price Fixing Cases”, LECG 2011 Presentation at the Concurrences’ “New Frontiers of Economics Conference”, Paris

29. Conclusion