Securities litigation as redress for competition infringements

The Consumer Rights Act 2015 introduced the option for the Competition Appeals Tribunal (CAT) to hear class actions for breaches of competition law on either an opt-out or opt-in basis. The breaches can include cartels, conduct that exploits customers directly (eg, through excessive pricing of their products) and firms that exclude competitors from the market.

For consumers, competition actions provide a means to seek redress for damages suffered as a result of competition infringements. For example, if a cartel has been in place that led to increased prices for consumers, they can seek damages based on the extent to which they have overpaid for cartelized products. These actions can help promote fair and effective competition and act as a deterrent, preventing anti-competitive conduct which may harm consumers and the wider economy.

Securities fraud claims can be pursued through a group litigation order under the Financial Services and Markets Act 2000 (FSMA). Section 90 of FSMA imposes a liability on publicly listed firms and their directors to pay compensation to investors that have acquired a company’s shares and suffered a loss due to untrue or misleading statement in, or omission from a prospectus or listing particulars. It also requires an issuer to compensate investors where they have acquired, continued to hold, or disposed of shares in the company in reliance on public statements, and suffered a loss in respect of those shares because of an untrue or misleading statement, or dishonest omission by the issuer. These actions promote transparency and accountability, protect investors, and contribute to the efficient allocation of capital.

Securities actions derived from competition infringements in the United States

The securities fraud claims brought in the US by Narendra Patel and Manjula Patel v Amazon.com Inc; and Sonny Joyce v Amazon.com Inc, are notable examples of cases that arise from alleged competition law breaches. The claimants in both cases are investors who allege that Amazon’s directors recklessly disregarded the fulfilment network and investment in infrastructure and Amazon’s delivery network during the COVID-19 pandemic. Directors and executives are alleged to have made false and misleading statements with regard to investment in infrastructure.

The claims relate to alleged misrepresentations and omissions made by Amazon about its private-label business and the resulting decrease in the share price following disclosure of misrepresentations. It is claimed that there was a failure to disclose that: Amazon engaged in anticompetitive conduct through its private-label business practices, including giving preference to Amazon products and using third-party sellers’ non-public data to compete with them. It is alleged that these practices exposed Amazon to a heightened risk of regulatory scrutiny and enforcement actions; and Amazon’s revenues were based on this impermissible conduct and as such it was unsustainable. Amazon’s directors are alleged to have failed to act on these findings.

Amazon’s directors and executives allegedly misled the market about its compliance with competition law, which is alleged to have led to artificial inflation in the share price, followed by a decrease once the alleged competition law infringements were disclosed.

Any securities actions derived from competition infringements create potential additional costs to competition law breaches, a risk which firms should be cognizant of. The securities claims provide a further deterrent to non-compliance with competition law and could help to ensure the provision of accurate and timely information to the market.

Could we see similar claims being brought in the UK?

The harm suffered by consumers and investors as a result of competition law breaches are entirely separate from each other, and both groups could be entitled to redress through collective action proceedings in the UK. For example, consumers who have paid higher prices due to cartel activity can seek redress through the competition class action regime, while investors who have suffered losses as a result of false or misleading information relating to the cartel could seek redress through securities claims.

Cases can also be brought in the UK in cases of misrepresentation, for example fraudulent or negligent director behaviour. If a loss were to be suffered due to misrepresentation by a director (regardless of intent), claims can be made unless the director or representor can prove the facts they represented were true. Damages in these cases look to put claimants in the position they would have been absent the contract.

To illustrate damages in these cases, suppose that a widget manufacturer knowingly engaged in a cartel and increased widget prices from £1 to £2. If the cartel is discovered and the manufacturer is subject to an adverse decision from a competition authority, consumers can seek redress for the extra £1 they paid per widget.

Suppose that the cartel started in 2016 with the CEO’s knowledge, that the widget manufacturer made a public announcement denying any involvement in their 2017 annual report, and finally that in 2018 the competition authority announced that the widget manufacturer had engaged in a cartel.

If the share price was trading at 50p between the publication of the 2017 annual report and the 2018 disclosure and then fell to 20p as a result of the disclosure, those who purchased and held shares between the publication of the 2017 annual report and 2018 disclosure can seek redress for the 30p loss per share they experienced as a result of the false disclosure.

Redress for consumers and investors in the case of competition infringements and securities fraud, is pivotal to maintaining competitive markets that work for consumers and for the functioning of financial markets such that they ensure the efficient allocation of capital. However, bringing such FSMA claims may face legal challenges such as demonstrating senior decision-makers’ knowledge of wrongdoing, proving reliance on relevant market statements and the lack of precedent.

Claims driving increased scrutiny of business leaders

In light of the claims against Amazon many investors are putting directors and executives under increased scrutiny; particularly about their actions during the COVID-19 pandemic. This concern is also exacerbated by the increase in ESG claims.

As the collective action regimes continue to mature, securities claims derived from competition infringements could come into sharper focus, ensuring consumers and investors get redress to which they are entitled and bringing the market benefits previously described. The rise of such claims also creates opportunities for third-party litigation funders, lawyers, and independent experts to work on such matters.

For potential expert appointments, advice, or guidance relating to economic matters of relevance to collective competition proceedings and securities litigation get in touch with Schellion Horn or Tom Middleton.