The article by Carlo Edoardo Cazzato, Avvocato, Senior Partner at Orsingher Ortu – Avvocati Associati, Adjunct Professor of Competition Law at Università Mercatorum, Ph.D., LL.M., and Gian Marco Solas, Avvocato, Leading Expert at BRICS Competition Law & Policy Centre (Higher School of Economics, Moscow), Ph.D., LL.M., describes a new way to hedge the full competition liability risk.
The insurance for private enforcement contingent liability risk allows a cartelist to file for leniency knowing that an insurance provider will cover substantial part of his private enforcement liability. The instrument presents an opportunity to remove one of the main – if not the main – barriers to the ultimate affirmation of leniency. In light of the above, it may make cartel detection easier and, more generally, improve competition policy and enforcement.
Introduction. Leniency in the US and the EU. The Italian experience with leniency. Leniency in the BRICS. Brief comparative analysis. Hedging the private enforcement liability risk. Conclusions.
Introduction
Cartel enforcement, while being a key priority for competition policy, remains one of the areas where the secrecy of the agreements, the overall incentives scheme and procedural hurdles in practice limit competition authorities’ mission. In this context, legislators across the globe have considered implementing leniency programs to exempt cartelists in whole or in part from public enforcement liability for leniency applicants that decide to ‘blow the whistle’, report the cartel and cooperate with competition authorities.
Leniency in the US and EU
Leniency was first introduced in the United States in 1978 to reduce or eliminate the liability of cartel participants, provided certain conditions are met. Several other jurisdictions, including the European Union and Italy, respectively in 1996 and 2006, have since adopted their own Leniency Programs.
The primary purpose of these leniency programs is to encourage the discovery and eradication of conduct that restricts competition, aligning closely with the objectives of antitrust sanctions. Furthermore, leniency is based on the belief that antitrust law should not only serve a punitive role but also help shape the behaviour of businesses. This ensures that the competitive landscape is restored when economic entities engage in anti-competitive practices. Consequently, waiving penalties for cartel participants who cooperate with antitrust authorities is justified, as the conditions for qualifying for leniency promote fair behaviour from the organizations involved. However, the tangible outcomes achieved through leniency programs have been disappointing.
The Italian experience with leniency
The Italian experience with leniency serves as a notable example for the said underdevelopment of the instrument. As of December 2024, investigations show that the leniency mechanism remains underutilized, as evidenced by the data presented in the tables below and recently highlighted by the main doctrine (see Iossa, Declining Trend in Leniency? Causes and Responses, December 19, 2024, available at https://www.pymnts.com/cpi-posts/declining-trend-i... ).
Leniency in the BRICS
In the BRICS context, a leniency program has been implemented in all of the five (founding) members: Brazil, Russia, India, China and South Africa. Given the cross-border nature of many such agreements, such programs present similar features and purport to be one of the pivotal instruments for effective cooperation within the BRICS platform. Leniency has been the object of comparative study in the recent Review of Leniency Programs in the BRICS Countries (2023). The purpose of the study was to share legislation and best practices and to facilitate future cooperation. According to the study, leniency programs have successfully been applied in several cases in the BRICS, from pre-cast concrete to bread manufacturing, construction, etc.
Brief comparative analysis
Overall, the BRICS leniency regimes present multiple similarities and some minor differences. All five BRICS founders provide for the possibility of full liability for the first leniency applicant and partial liability for subsequent applicants; all of them provide for administrative liability, and some of them (Brazil, Russia, and South Africa) also provide for criminal liability. Moreover, they protect confidential information and provide different sanctions for their disclosure. At the same time, none offers an exemption from private enforcement liability in subsequent litigation, which limits the instrument’s potential. The above is an aspect that distinguishes BRICS leniency programs from European ones. While confidentiality remains a crucial aspect even for Member States, in the European context, one of the main advantages of the instrument under consideration is that an immunity recipient is only jointly and severally liable to its direct and indirect customers and other cartel victims only if full compensation cannot be obtained from the other cartelists.
Hedging the private enforcement liability risk
Overall, cartelists are wary of applying to leniency programs as, in any case for BRICS, while under the limits above for Member States, they also suffer from private enforcement liability. To potentially address this inefficiency, this short article presents the possibility for cartel participants to enter into contingent risk insurance for private enforcement liability risk before filing for leniency. That means that a cartelist, knowing of both his public and private enforcement liability risk, can decide to insure the latter, pay a premium and file for leniency as potentially the first applicant, knowing his litigation costs and liability will be covered in full or in part by the insurance provider, and of course that it will not suffer public enforcement liability. It is possible to illustrate a simple case study based on the relatively shorter experience of the BRICS framework.
Consider four companies part of a secret cartel, each having a – say, for simplicity – up to 5,000,000 EUR liability from private enforcement and up to 2,500,000 EUR from public one. The first cartelist (A) can insure the private enforcement liability risk pre-leniency and eliminate both private and public liability, as most, if not all, jurisdictions offer, in principle, full liability exemption from public enforcement. The second (B) and third (C) applicants can benefit from a reduction in administrative fine yet, in principle, remain liable for private enforcement; it is not excluded, however, that they can enter into an arrangement for post-facto legal expenses’ insurance. The fourth (D) non-applicant will be fully liable for public and private enforcement liability.
*: percentage is indicative based on approximation of average actual ones. The analysis for simplicity does not consider legal costs.
In terms of pricing, given the heterogeneous nature of cartels and the complexity of the calculation of damage theory at an early stage, it is difficult to provide precise estimations. It is likely that such an instrument will require not only ad hoc case and risk analysis but also bespoke legal structuring, at least at an early stage of its application. However, it is possible to provide an indicative idea based on discussions with brokers considering insurances for similar risks. Assume in the case above that experts determine that the probability of private enforcement liability to materialize is 60 %. That means that the claim value is priced by experts 3.000.000 (currency). It is possible to hypothesize that A would pay something like 100.000 (currency) as premium to cover anything above 3,000,000 (currency). That means that, pre-leniency, A would be paying a premium of 5 % of the private enforcement liability risk to hedge the risk of paying up to 2,500,000 (currency) public enforcement liability plus anything between 3,000,000 and 5,000,000 (currency) in private enforcement liability. Of course, similar arrangements can be considered to also include legal costs due for such proceedings, or part of them.
Conclusions
De facto, this instrument, which can be referred to as ‘competition private enforcement contingent liability risk insurance’ or ‘competition damages liability risk insurance’, provides an incentive to cartelists to break the cartel. This, in theory, results in a potential improvement in competition policy, to the extent that the cooperation of market participants can facilitate competition authorities’ activity. In practice, it should result in saving costs and time in investigations while being able to work on empirical data as of time zero of the filing of the first leniency application. However, the key question remains as to how to coordinate proceedings in multiple jurisdictions and to facilitate cooperation amongst authorities of different jurisdictions concerned. One (or more) conflict could arise, for instance, in case two different cartelists of a global or anyway multi-regional cartel apply for leniency before different authorities. In general terms, however, this instrument could fill an important gap in leniency and incentivize its use at the European and BRICS levels.
