Final Report Summary - UNLAWFUL PROFITS (Combating unlawfully gained profits using Private Law mechanisms in Europe)
It seems to be 'common sense' that unlawful conduct or more specific tort should not pay and that for this reason illegal profits must be avoided. Unfortunately, reality looks very different: Infringements of antitrust law, unfair commercial practices law, capital market law, intellectual property rights or personal rights by mass media etc. are generally highly profitable. Billions and billions of euros of unlawful profits remain with the wrongdoers every year. Thus, in business practice we can find the conviction that tort or in general unlawful conduct always pay.
The question for society is how one should combat unlawful profits and what instruments law offers; thus, what policy decisions must be made to prevent profits resulting from law infringements as far as possible. The original idea in Europe was to rely heavyly on public and criminal law instruments - the main focus was on public enforcement only. For a long time, the possibilities offered by private law have been underestimated in Europa. However, the research has shown that private enforcement is necessary to control markets and to prevent unlawful profits as public enforcement alone is insufficient. So, what is needed is a mixture of private and public law instruments (including criminal law) to use the specific advantages of private and public enforcement and to avoid their drawbacks.
In the recent years, one discussed instrument to prevent unlawfully gained profits resulting from situations of a so-called 'rational apathy' (losses of injured parties are small, they remain indifferent and do not enforce their rights, but the profits of the wrongdoers can be immense) is the introduction of collective actions of the claimants. Especially the European Commission (EC) but also several European Union (EU) Member States (like e.g. the Netherlands of Italy) are trying to build up a system of collective actions and they rely strongly on their functionality. However, the research doubts whether collective actions are the only or at least best way to avoid unlawful profits resulting from rational apathy of the potential claimants (so-called scattered damages). This is because every collective action model has significant drawbacks: while the opt-out model has a stronger preventive effect, the constitutional problems of this solution are serious due to the exclusion of the rights from people outside the collective action. When constructing an opt-in collective actions these constitutional problems do not arise. However, the opt-in models are losing most of the preventive effect regarding unlawful profits of the wrongdoer. They are not as efficient as wished and hoped. So the research comes to the conclusion that besides the introduction of opt-in collective actions a skimming-off procedure 'sui generis' where e.g. a consumer or trade association skims off the profit of the wrongdoer should be supported for avoiding unlawful profits resulting from rational apathy (especially in the field of unfair commercial practices and antitrust law). However, in opposite to e.g. sec. 10 of the German Unfair Competition Act the consumer or trade associations should be able to keep at least a part of the profits themselves and should not be obliged to transfer all the profit to the state or to a foundation. Otherwise they do not have any incentive to even start a procedure and the skimming-off procedure remains inefficient.
The research has furthermore shown that also in other situation private law instruments must be enhanced substantially to combat unlawfully gained profits. For instance, it is still very likely that the unlawfully gained profit remains with the wrongdoer in cases where the expected profits exceed the damage of the claimant. So the wrongdoer is violating the rights of another person intentionally in order to make profits. The worst thing that normally can happen is that the wrongdoer has to pay the damage but that he can keep his profit. Like that everybody is almost 'invited' to violate others' rights - the situation of an efficient breach of law appears. In order to prevent these situations, the researcher proposes the introduction of a general gain-based damage. Such gain-based damages would avoid efficient breaches of law and tort would not pay any more in these situations. Examples for gain-based damages can be found in the acquis communautaire (see e.g. in the field of intellectual property law Article 13 of the Enforcement Directive) and partly also in national legal systems (e.g. in England or in Germany). However, what is needed is a general approach towards gain-based damages and a common understanding to prevent efficient breaches of law.
Another situation where normally unlawful profits remain with the wrongdoer is when the chance that law infringements will be detected is low (e.g. illegal music downloads, insider trading, hard core cartels). Here, the acquis communautaire and the European members states' law have very few private law instruments to combat this situation. Thus, the wrongdoer is acting rationally when violating the rights of others as it is likely that this will pay off for him. A possible private law remedy would be the introduction of damage multipliers not as a general private law instrument, but for some parts of law (e.g. antitrust law and intellectual property law). These kind of damage multipliers are already used quite successfully in the United States of America (USA) (e.g. treble damages in antitrust law). Initially, the EC also wanted to introduce them in the field of antitrust law and intellectual property law. Unfortunately, these ideas have been left aside. Insight the European national law systems damage multipliers are up to now rare as well but not completely unknown (e.g. in German intellectual property law the double damages). In the view of the researcher, a damage multiplier system for some parts of law would help to prevent that unlawful profits remain with the wrongdoer. However, this does mean not the introduction of punitive damages. The damage multiplier should only be determined by the detection rate (up to a constitutional limit) in order to disgorge illegal profits; it should not aim at punishing wrongdoers.
The potential socio-economic impact of the research results can be considered as very high. If all the proposed private law instruments could be combined and implemented, one could combat unlawfully gained profits much more efficiently. Combating unlawful profits purely and only with public law instruments like it is still often supported today is inefficient and ineffective. The research results can help to ensure that unlawful conduct does not pay off and to prevent further law infringements. Following the research approach, private law would finally become a 'real' and efficient partner of public law in law enforcement when it comes to unlawful profits. The relevant target groups for this research are in the first place (European and national) policy makers and the international scientific world (especially in the field of law and in the field of economics), but also the civil society in general.
The question for society is how one should combat unlawful profits and what instruments law offers; thus, what policy decisions must be made to prevent profits resulting from law infringements as far as possible. The original idea in Europe was to rely heavyly on public and criminal law instruments - the main focus was on public enforcement only. For a long time, the possibilities offered by private law have been underestimated in Europa. However, the research has shown that private enforcement is necessary to control markets and to prevent unlawful profits as public enforcement alone is insufficient. So, what is needed is a mixture of private and public law instruments (including criminal law) to use the specific advantages of private and public enforcement and to avoid their drawbacks.
In the recent years, one discussed instrument to prevent unlawfully gained profits resulting from situations of a so-called 'rational apathy' (losses of injured parties are small, they remain indifferent and do not enforce their rights, but the profits of the wrongdoers can be immense) is the introduction of collective actions of the claimants. Especially the European Commission (EC) but also several European Union (EU) Member States (like e.g. the Netherlands of Italy) are trying to build up a system of collective actions and they rely strongly on their functionality. However, the research doubts whether collective actions are the only or at least best way to avoid unlawful profits resulting from rational apathy of the potential claimants (so-called scattered damages). This is because every collective action model has significant drawbacks: while the opt-out model has a stronger preventive effect, the constitutional problems of this solution are serious due to the exclusion of the rights from people outside the collective action. When constructing an opt-in collective actions these constitutional problems do not arise. However, the opt-in models are losing most of the preventive effect regarding unlawful profits of the wrongdoer. They are not as efficient as wished and hoped. So the research comes to the conclusion that besides the introduction of opt-in collective actions a skimming-off procedure 'sui generis' where e.g. a consumer or trade association skims off the profit of the wrongdoer should be supported for avoiding unlawful profits resulting from rational apathy (especially in the field of unfair commercial practices and antitrust law). However, in opposite to e.g. sec. 10 of the German Unfair Competition Act the consumer or trade associations should be able to keep at least a part of the profits themselves and should not be obliged to transfer all the profit to the state or to a foundation. Otherwise they do not have any incentive to even start a procedure and the skimming-off procedure remains inefficient.
The research has furthermore shown that also in other situation private law instruments must be enhanced substantially to combat unlawfully gained profits. For instance, it is still very likely that the unlawfully gained profit remains with the wrongdoer in cases where the expected profits exceed the damage of the claimant. So the wrongdoer is violating the rights of another person intentionally in order to make profits. The worst thing that normally can happen is that the wrongdoer has to pay the damage but that he can keep his profit. Like that everybody is almost 'invited' to violate others' rights - the situation of an efficient breach of law appears. In order to prevent these situations, the researcher proposes the introduction of a general gain-based damage. Such gain-based damages would avoid efficient breaches of law and tort would not pay any more in these situations. Examples for gain-based damages can be found in the acquis communautaire (see e.g. in the field of intellectual property law Article 13 of the Enforcement Directive) and partly also in national legal systems (e.g. in England or in Germany). However, what is needed is a general approach towards gain-based damages and a common understanding to prevent efficient breaches of law.
Another situation where normally unlawful profits remain with the wrongdoer is when the chance that law infringements will be detected is low (e.g. illegal music downloads, insider trading, hard core cartels). Here, the acquis communautaire and the European members states' law have very few private law instruments to combat this situation. Thus, the wrongdoer is acting rationally when violating the rights of others as it is likely that this will pay off for him. A possible private law remedy would be the introduction of damage multipliers not as a general private law instrument, but for some parts of law (e.g. antitrust law and intellectual property law). These kind of damage multipliers are already used quite successfully in the United States of America (USA) (e.g. treble damages in antitrust law). Initially, the EC also wanted to introduce them in the field of antitrust law and intellectual property law. Unfortunately, these ideas have been left aside. Insight the European national law systems damage multipliers are up to now rare as well but not completely unknown (e.g. in German intellectual property law the double damages). In the view of the researcher, a damage multiplier system for some parts of law would help to prevent that unlawful profits remain with the wrongdoer. However, this does mean not the introduction of punitive damages. The damage multiplier should only be determined by the detection rate (up to a constitutional limit) in order to disgorge illegal profits; it should not aim at punishing wrongdoers.
The potential socio-economic impact of the research results can be considered as very high. If all the proposed private law instruments could be combined and implemented, one could combat unlawfully gained profits much more efficiently. Combating unlawful profits purely and only with public law instruments like it is still often supported today is inefficient and ineffective. The research results can help to ensure that unlawful conduct does not pay off and to prevent further law infringements. Following the research approach, private law would finally become a 'real' and efficient partner of public law in law enforcement when it comes to unlawful profits. The relevant target groups for this research are in the first place (European and national) policy makers and the international scientific world (especially in the field of law and in the field of economics), but also the civil society in general.