Will EU Price Fixing Battleplan Open Lawsuit Floodgates?

The European Union is forging a battleplan to ward off employees at companies and banks seeking to manipulate market and product prices for financial gain, by chalking up new rules to allow private individuals to file class action lawsuits.

While the draft legislation, which is pegged to be released next week, paves the way for private individuals to file class action lawsuits against companies that are found to be fixing prices, the raft of recommended safeguards will make it difficult for victims to move their claims to into the courtroom.

Price Fixing Affects Us All But Don't Get Too Excited

The anti-trust regulator's new rules will undoubtedly streamline the process for those who claim to have been made financially worse off as a result of price fixing, as every jurisdiction has different rules in terms of suing.

Libor is the London Interbank Offered Rate, but it isn't as esoteric as it sounds, to the everyday person on the street.

It effectively is the interest rate at which banks lend money to one another but Libor is also linked to trillions of dollars of financial products.

The effect on the general public can be felt on an immediate level because the wholesale rates influence how much homeowners pay on variable rate loans and mortgages.

Some mortgages are influenced by Libor, which mean many homeowners could have been making monthly payments that were tracking rates that were artificially affected.

Even if a homeowner had not been on a variable rate, Libor is what banks use to set interest rates when it comes to charging interest on loans, credit cards and other mortgages. Small to medium enterprises that have loans and swaps attached to the benchmark rate will also be affected.

Same goes for energy prices.

For instance, if a cartel of traders were found to have colluded to manipulate prices up or down the scale, this of course would change how much wholesalers will buy the energy for and then how much it would cost the consumer.

But as any litigator worth their salt knows - this is simply not enough - to file a successful claim.

Putting Your Money Where Your Mouth Is

Suing someone or a company is an expensive activity, but as the European Commission (EC) have so deftly considered, Brussels plans to put a number of cost-effecting stoppers to prevent a re-creation of the US' litigation culture.

While EU Competition Commissioner Joaquin Almunia will unveil draft rules that allow potential victims in sixteen Eurozone countries to sue for damages, it has clearly made sure that it also wants to deter frivolous and abusive lawsuits.

According to impending draft rules, the anti-trust regulator will install a "loser pays principle", which will mean strict regulation on contingency fees.

This means that before you even get sign off to enter a courtroom, you have to prove that you are able to pay the opposite side's fees, should you lose the case.

Even if there are thousands of you, this will only increase your contingency liability.

For example, the RBoS Shareholders Action Group had to rustle up one the UK's largest amounts of litigation liability cover in summer last year, to sue the Royal Bank of Scotland.

The continegency liability was in the region of £20m.

Eventually, the 12,000-strong RBOS Shareholder Action Group filed proceedings in London's High Court against former executives Fred Goodwin, Tom McKillop, Johnny Cameron, and Guy Whittaker and the bank itself in April this year, alleging they were sold shares under false pretences.

Not only will this entail substantial fees and contingency liabilities upfront but the individual could be significantly worse off should they lose the case.

Class Action Lawsuits and Culling Claim Hunters

In the US, lawyers and third party companies can drum up 'business' and seek out potential claimants, even though the individuals may have not even considered suing in the first place.

As an example, BP paid Alabama $500m compensation payouts for 72,000 of the US state's coastal businesses and individuals, following the Gulf of Mexico oil spill.

Alabama Attorney General Luther Strange, though, said it wasn't enough and went on a roadshow and urged state residents should file more claims.

Alabama's court-appointed BP claims administrator Pat Juneau also identified another 9,000 people who are eligible to file a claim and this could add more than another $1bn to the compensation pot.

However, EU draft rules seem to prevent similar actions like this taking place, making it not only harder for mass lawsuits to occur but to also share the costs with others.

Brussels aims to implement safeguards against law firms and third party funders hunting for potential claimants.

It will also include rules against abusive litigation and massive payouts.

While the EC want to only allow state-appointed non-profit bodies or public agencies to act on behalf of the individuals, draft rules will propose an 'opt-in principle'.

This enables the claimants to decide whether they would like to join forces with other victims to file a class action lawsuit.

Finding Financial Evidence

Before even thinking about raising the costs to litigate, for any form of lawsuit, the strongest cases lie in irrefutable financial evidence for losses.

Trying to prove that you are financially worse off as a result of price fixing is a lot harder than you think.

While a class action lawsuit may bring more claimants to the fore, the group litigation would be much stronger if each individual proved that they were financially worse off, as every person's situation is different.

Blanket claims could be invariably thrown out.

A number of banks may have settled with banks for trying to manipulate Libor or colluding with others to rig rates but not even the regulators have determined whether they had been successful in actually moving them at any given time.

The way Libor is calculated makes it automatically difficult to determine whether traders had even managed to move rates, without knowing all the information from all the panels on the rate setting panel.

Last month, Barclays won a US lawsuit dismissal from shareholders that claimed former executives and the bank misled them on activities related to Libor fixing and therefore failed to unveil potential liabilities.

This is even despite the bank settling with US and UK authorities in June 2012 for trying to rig rates.

In February this year in the UK, Unitech's lawsuit against Deutsche Bank, for mis-selling derivatives linked to Libor was thrown out.

Unitech said it wouldn't have agreed to the loan or swap had it known Deutsche Bank was manipulating Libor, making both agreements invalid.

However in Judge Jeremy Cooke rejected the Indian property firm's bid saying that Germany's largest bank didn't imply Libor was honest by linking a $150m loan and interest rate swap to the benchmark rate.

That is not even factoring in any attempts to prove financial loss.

Last year, Guardian Care Homes (GCH) amended its UK High Court case against Barclays to include Libor fixing.

However, as I detailed at length, GCH may have actually hurt their legal case by doing so.

Meanwhile in the energy markets, the landscape for determining market manipulation, is just as, if not more complex than Libor.

From each commodity are several forms of product and of course regional import or export points. Then there are the different dates for the contracts.

For example, you can trade a certain oil product on the spot, day-ahead, or even a full year ahead.

The way energy prices are usually set in the over-the-counter market is by independent price reporting agencies speaking to dozens of traders in the market and creating an average price from the information.

While many people are chomping at the bit to stick another fixing scandal onto companies, the way prices in the market are envisaged, is by traders talking to one another to determine supply and demand.

They therefore come up with a fair market price. It's normal for other traders to interact.

Determining financial loss is really done on a case by case basis. One person's loose claim in your class action lawsuit could, in fact, weaken yours even if it is strong.

Furthermore, with the complexity of market manipulation and without authorities finishing their investigations, you'd have to be very sure that you would be able to survive should you lose your case.