White-collar whodunits tend to be about stolen information, counterfeit products, corrupt managers, blackmail or shady dealings with dictatorships. But this long-running crime story has just a handful of lawyers and economists who meticulously scrutinise files, crunch mountains of numbers and know the details of competition law inside out. Yet the figures involved have lots of zeros, and a single case can net tens or hundreds of millions.
Legal expert Tilman Makatsch and his seven colleagues in the department designated CRK4 have the job of lodging compensation claims on behalf of their employer Deutsche Bahn (DB). They target suppliers who have formed cartels to manipulate prices. There are big gains to be made: in eight years, Makatsch’s tiny department has recouped €400 million (£364 million) in compensation – although that is practically chicken feed, considering that claims in the cases pending run into billions.
As a state-owned business, DB is not seen as fleet of foot but it has taken on a pioneering role in the legal pursuit of its claims. Now other German concerns are taking a lead from CRK4, and several companies listed on the German stock exchange are setting up similar departments.
1. Uncharted territory
Makatsch was hired in 2008 as a consultant on regulatory law. When he started to poke into the cartel issue, he was pretty much out on his own: seeking compensation for damage caused by price-fixing was seen as a complicated and practically hopeless affair. Some years previously German law had made it easier to launch such claims, but “nobody had used it because of the high costs and legal uncertainties,” says Makatsch.
When he was investigating his very first case, he asked DB’s procurement department for all relevant files and invitations to tender going back 15 years. Their reaction was: “Thank you for taking an interest. We will get in touch if we have legal queries and otherwise we would very much like to get on with our job without being disturbed.”
Things were not made any easier by the fact that it was not possible to foresee the economic dimensions of the issue, or the prospects in any lawsuit. “At first we could not estimate how high any possible damages might be. There were neither legal precedents nor relevant court rulings to enable the extent of the harm to be ascertained,” says Makatsch.
It was only when a supplier in a coffee roasting cartel was ordered to pay damages after a hearing that acceptance grew. “It was not a huge amount, but we realised that it could work. That was a key moment. Then we started to take a more fundamental look at it,” the lawyer recalls. It caught the attention of Richard Lutz, then finance director and today chief executive of DB, and he supported Makatsch.
Initially, it wasn’t just colleagues at DB that didn’t take the compensation claims seriously. Makatsch’s first major case concerned elevators and escalators. It was not in dispute that the firms of Thyssen, Otis, Kone and Schindler had formed a cartel and thereby violated competition law. The EU Commission had imposed severe fines on all four companies. Nevertheless, Makatsch says, they still ignored his invitation in 2009 to talk. “One of them wrote back that that there was no truth in it so there was no need to talk. The others did not even reply to our letters. They argued that although there had been a cartel, no damage had been done. And if there had been any, it had now all lapsed owing to the statute of limitations.” That was then. Today none of his letters end up in the wastepaper basket without getting a reply. So far, his department has not lost a case and it has reached a settlement in every lawsuit completed. That has earned them a certain respect.
2. The breakthrough
The stakes are huge. Ulrich Weber, DB’s director for personnel and law, estimates that the railway has suffered “damage running into billions” as a result of cartels. Whether it is buying uniforms, electricity, coffee, nuts and bolts, upholstery, steel or packets of sugar – when the railway goes shopping vast quantities are involved. With a purchasing volume of €25 billion a year and about 40,000 suppliers, DB reckons it is directly or indirectly affected by about a third of the cartel cases in Germany. To date, DB has agreed settlements with 27 firms.
One looming big case is likely to be the truck cartel, which affects Schenker, a DB subsidiary. The many sectors affected suggests that cartels are more the rule than the exception in German industry. Many entrepreneurs seem to have had a lot of practice in discreetly adjusting prices upwards.
The biggest case so far completed by the DB lawyers was all about rails. They pricked up their ears in 2011 when they heard reports that the offices of rail suppliers were being searched. A year later, when the German federal cartel office fined the rail cartel, the DB lawyers had already compiled all the data they needed. “We approached the companies that were in the cartel and were able to itemise just how much damage had been done to the railway,” says Makatsch. “We were able to conclude very good settlements very quickly with ThyssenKrupp and Voestalpine.” The fact that the rail producers had a keen interest in doing business with Germany’s largest rail purchaser probably influenced their willingness to negotiate. And when €200 million changed hands as a result of the amicable settlements, it must have been clear that cartel damages is no niche topic for oddball lawyers.
Life is now a lot easier for Makatsch and his team because the injured parties no longer have to prove the existence of cartel agreements. The findings of the cartel authorities are binding in civil proceedings. Legal disputes now focus on proving the amount of damage sustained. So Makatsch’s department has to demonstrate how high prices would have been without cartel manipulation. There are guidelines, such as prices in a comparable country or with comparable goods before the cartel formed. “You take the relevant parameters such as wage costs, inflation, price of raw materials, available capacities or the stage of the economic cycle, and devise a curve to see how the market price would have developed without cartel agreements,” explains Hannes Dehn, one of the two economists in Makatsch’s department.
3. Nothing but trouble
How tricky the work is clearly emerges from the dispute with the air freight cartel, which was composed of more than 20 internationally operating firms. The proceedings are entering their seventh year. The necessary data analysis alone was a tall order, says Robert Bäuerle, a lawyer in Makatsch’s department. “In just one of the lawsuits in Germany we submitted an indictment that consisted of more than 18 files. The assessment of economic damage comprises a good 3,000 pages.”
In order to achieve the necessary oversight, the purchasing data of more than 70 of DB’s national subsidiaries was evaluated. A key source was the International Air Transport Association’s cargo account settlement systems (Cass), which records all airfreight traffic. With the help of external competition economists, Makatsch’s team has investigated almost 20 million transactions. “We had to check the plausibility of all this data,” he says. “You can only win a lawsuit or reach a satisfactory settlement if you can outdo the opposition with the data.”
DB’s logistics subsidiary Schenker was especially hard hit, with air freight running into billions. “We knew relatively early on about the cartel,” says Makatsch. “But it was not until penalties were imposed by the EU Commission in 2010 that we learned details about the kind and the extent. It concerned price fixing for freight and fuel and also extra security charges after the terrorist attack of 11th September.” The time scale was 1999 to at least 2006. The extent: all incoming and outgoing flights in the EU and the USA.
Then an obstacle race started to get at the necessary data. For years the DB lawyers knew about the press release but nothing about the EU Commission’s non-public ruling imposing financial penalties. But it was that which contained crucial information, for example about how long the cartel agreements had lasted. They applied to see the files, which was rejected, but then managed to get hold of a non-confidential version with the help of transparency laws. The only snag was that practically everything in it was blacked out, even the names of the firms making up the cartel.
“The authorities had misgivings about making too much information public. At the time there was a huge discussion about what had to be blacked out,” Makatsch remembers. It took four years until he and his colleagues were able to read about the penalties, and the delay had consequences for the risk of overrunning the statute of limitations. In order not to exceed the then three-year (now five-year) time limit, injured parties sometimes had to start proceedings without even knowing how extensive a cartel had been.
The DB launched legal action in 2013, but in December 2015 something happened that even our usually restrained lawyer calls a mega disaster. The European Court of Justice ruled that the fine imposed by the EU Commission on the air freight cartel was invalid because of formal errors. The whole case depended on that fine being valid. “We had lawsuits pending, had spent a huge amount of money and were running a high risk of our costs not being reimbursed,” says Makatsch. “We were suing 10 groups of companies. For each one we were liable for all the legal costs. If the legal action failed, there would be the risk of having to reimburse costs of €20-€30 million.” The tension in the legal department shot up.
In March 2017, the European Commission, as the antitrust authority, issued a new ruling. “Once more we did not know the actual ruling, we only saw the press release,” says Tilman Makatsch, apparently impervious to all shocks. But at least the press statement revealed that although the formal error had been corrected, the facts of the case remained the same. Once more the DB lawyers had a sound basis for their claim.
But then there were in-house misgivings about possible retaliatory measures by the air freight firms. To lessen the risk, the railway lawyers resolved to get other aggrieved parties on board, such as Kühne + Nagel, BMW and Bosch. Alongside the lawsuit they held parallel negotiations on possible out-of-court settlements, which have the advantage for all sides that peace is restored faster and firms can once again concentrate on their real business. A long legal action is also unwelcome for the firms involved with the cartel, apart from anything else because they may be temporarily excluded from public invitations to tender.
So far, DB has been able to reach a settlement with one of the smaller airlines running into several million euros. In the USA it has achieved more: according to Makatsch settlements there so far amount to around US$60 million. And following a second ruling by the EU Commission, there is growing readiness to pay up on the part of firms involved in a cartel. For Makatsch and his team, the fact that these firms are now building up financial reserves is a sign that interest in reaching a settlement is growing.
4. New market
Albrecht Bach is one of Germany’s most renowned competition lawyers. In the Oppenländer commercial law firm in Stuttgart he represents both sides in cartel cases to enforce or to reject claims for damages. He says lawsuits that were new legal territory only about 10 years ago are now common practice. “Basically, every cartel exposed by the authorities these days gets the purchasers of the respective products looking to see if they have suffered harm and can lodge claims,” says Bach. Corporation law even demands it. Public companies must investigate possible cartel compensation claims, otherwise the board of directors may become liable for compensating the shareholders.
Apart from the introduction of a leniency policy for whistleblowers, a key turning point was the reform of German competition law in 2005. “That made it much easier to enforce claims for compensation,” say Bach, adding that in the past 10 years it has given rise to a new market for lawyers and consultants. By the multi-million euro settlement the railway agreed with the rail cartel in 2013, big law firms specialising in company law had discovered a lucrative business. In cases like the rail cartel, it was not just the German railway that had suffered harm but also municipal enterprises like the Berlin public transport authority, so now Bach’s firm alone is pursuing more than 50 lawsuits of this kind. He estimates many more law firms are involved in proceedings connected with the subsequent sugar and truck cartel rulings.
According to Bach, the railway “was an important role model for many companies”. Moreover, the increased probability that a cartel would be exposed and the likely sharp rise in the resulting costs had their effect. “Many of the cartels that operated in the past, quite openly and with very little awareness of there being a problem, are today more or less inconceivable. From what I observe, I’d say companies today have become far more cautious.”
Makatsch is not so optimistic. He reckons that even nowadays 90% of buyers still do not seek redress for the harm they have suffered. That would mean the cartel keeps its profit, minus the possible fine. So the collusion proves worthwhile.
5. Big data
Deutsche Bahn is out to prevent that happening. There is considerable scrutiny of the purchase of risky goods, such as homogeneous, interchangeable items, with a limited number of suppliers. From time to time, offers featuring suspiciously similar asking prices are passed on to the law enforcement authorities. In one case, suppliers tendering to provide safety barriers at construction sites formed two consortia. DB employees smelt a rat. “We handed the case over to the federal cartel authorities, who took action and discovered a cartel,” says Tilman Makatsch. A change in DB’s general terms and conditions for business provides clarity: for some years now railway suppliers have had to sign a form accepting that a flat rate of 15% of the invoice will be due if they are in a cartel and cannot prove the actual damage was less.
Makatsch can envisage developing closer cooperation with other companies that have suffered from cartels. By forming alliances, you can share the enormous legal costs and have access to more data. According to Nina Simone, the DB’s head of antitrust advice and compliance, data gathering is key to a major project being planned. Data from previous tenders is to be collected and analysed “to identify striking patterns in the award procedures that we can then take to the law enforcement and cartel authorities”. If suspicions arise, the lawyers and economists in department CRK4 know a lot of work will be heading their way.
Billions at stake
Competition law may be seen as dry and thankless, but it makes a good thriller. We visit the financial detectives at DB German railways, investigating price fixing.