European Union: Punitive Damages—German Constitution Might Limit U.S. Antitrust Damages Claims Against German Companies

 On 25 July 2003 the German Federal Constitutional Court ("Court") issued a preliminary injunction ("Injunction") against the service of a U.S. lawsuit claiming $17 billion in damages against Bertelsmann AG ("Bertelsmann"). This article explains the relevance of that injunction in the context of the Rome II proposal of the European Commission of 22 July 2003.

Factual Background

In 2001, a class action brought against Napster, Inc. ("Napster") by the songwriting and music-publishing team of Jerry Leiber and Mike Stoller and another music publisher succeeded in shutting down Napster’s distribution of soft-ware that enabled the unauthorized on-line distribution of copyright-protected recordings. In February 2003, the same lead plaintiffs and another publisher filed another copyright-infringement lawsuit, this time against the German corporation Bertelsmann AG, in the federal District Court in Manhattan. Seeking to represent over 27,000 publishers allegedly damaged by Napster, the plaintiffs charge Bertelsmann with contributory and vicarious copyright infringement, alleging that Bertelsmann’s financial assistance kept Napster in business nearly an additional year. The complaint claims $17 billion in damages, reflecting the maximum statutory penalty of $150,000 for each of the more than 100,000 allegedly infringed copyrighted works. More recently, Universal Music Group and EMI Group have also sued Bertelsmann in the same district court on the same theory. On July 17, Bertelsmann filed motions in the U.S. federal court in New York to have the suits dismissed.

Procedural Background

The service of the lawsuit on the defendant is required by U.S. law, but also for the acknowledgment of the foreign judgment under German civil law. The U.S. plaintiffs applied for service of the lawsuit on Bertelsmann in accordance with the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents in Civil or Commercial Matters ("Convention"). The president of the Higher District Court Düsseldorf—the competent authority for such application—rendered a service order. Bertelsmann then filed a constitutional complaint before the Court, arguing that the lawsuit violated its constitution-ally guaranteed property and profession rights. Bertelsmann also applied for a preliminary injunction against the service order.

Injunction

The Court granted the injunction, prohibiting the president of the Higher District Court Düsseldorf to execute its service order and to transmit the certificate of service for a period of six months, or until the date the Court has decided the main proceeding on the constitutional complaint. The U.S. complaint thus cannot be delivered to Bertelsmann during that time. The injunction is only preliminary; it does not necessarily predetermine the main proceeding’s outcome.

Reasons

Finding Bertelsmann’s application not self-evidently groundless (offensichtlich unbegründet), the Court then considered the balance of harms resulting if (1) the injunction was not issued, but later the service order was deter-mined in the main proceeding to violate constitutional law or (2) the injunction was issued, but later the service order was determined in the main proceeding to be constitution-al. The Court concluded that the balance of interests was in favour of Bertelsmann.

In order to evaluate whether or not the complaint was self-evidently groundless, the Court noted that the Convention aims at facilitating reciprocal judicial assistance. This means that the legal system of the country in which service is sought is generally not the legal standard for evaluating a service. Thus, the Court referred to its previous rulings that, in general, punitive damages under U.S. law do not violate German constitutional law.

However, Article 13(1) of the Convention provides that a State may reject an application for service if the State considers the service capable of putting its sovereign rights or security at risk. The Court noted that those earlier decisions had left open the question whether the service of a lawsuit violates constitutional law if the aim of the lawsuit violates the fundamental structure of the constitutional state. Turning to the present complaint, the Court confirmed that the German constitution mandates respect for foreign legal systems even if such systems are not congruent with the German system. The Court expressed the view that the obligation to respect may not apply, however, where a foreign lawsuit—at least in relation to the amount in dispute—has no substantive basis. The Court stated that if lawsuits in foreign courts are obviously misused to bend a market player to one’s will by way of media pressure and the risk of a court order, service of the complaint could violate the German constitution. The Court stressed that these questions will ultimately be decided in the main proceeding.

Balancing the interests, the Court found that if the preliminary injunction were granted but in the main proceeding the Court decided service was constitutional, the result would be a delay in the service of the lawsuit. This would not cause irretrievable detriment to the U.S. plaintiffs and would not prejudice the political relationship between Germany and the U.S. However, if the Court denied the preliminary injunction but in the main proceeding decided that service would be unconstitutional, a potential constitutional issue could arise. This is because the U.S. lawsuit would proceed and could lead to Bertelsmann being required to pay as much as the requested $17 billion in damages. This result would be contrary to the German constitution. In addition, even though the judgment would not be enforceable in Germany, Bertelsmann’s assets in the U.S. would not be safeguarded, and the mere fact of service as such could harm Bertelsmann’s business reputation.

Conclusion of the Court’s Injunction

The Court’s Injunction addresses important questions that are also highly relevant for pending and potential antitrust cases, particularly those in the U.S. where initial claims for damages can be very large. The test of obvious groundlessness, and the Court’s reference to the misuse of foreign law-suits to pressure defendants, are both reminiscent of U.S. antitrust law’s own bar on anticompetitive sham litigation. The novel and interesting element is that the Court’s attention to the amount at issue in the lawsuit indicates that it could find the US lawsuit unconstitutional on the basis of what it considered to be an excessive potential penalty. If the court decides in Bertelsmann's favour in the main proceeding, it will have a significant impact on U.S. antitrust litigation against German companies. Outside of the legal issues, the Injunction sends a political message to the U.S. courts to restrict the award of excessive damage claims to the detriment of German companies. Whether this message would be taken on board by claimants and their lawyers is questionable.

Rome II

The message of the Court’s injunction has also to be seen in the context of a proposal to limit the applicability of punitive (antitrust) damages in the EU, namely the proposal for a Regulation on the law applicable to non-contractual obligations (Rome II) of 22 July 2003.

The Rome II proposal is based on the Community’s attempt to harmonize the private international law in civil and commercial matters. Its historical roots go back to 1968 when the European Economic Community concluded a Convention on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters (Brussels Convention). The Convention of Rome 1980 (entry into force on 1 April 1991) on the law applicable to contractual obligations harmonizes the rules of conflict of laws applicable to contracts and complements the Brussels Convention 1968. The latter, which has been replaced by the Brussels I Regulation on 1 March 2002 provides that in certain circumstances the courts of several Member States may have jurisdiction over a case.

The proposed Rome II Regulation will be a further extension of the unification of private international law relating to contractual and non-contractual obligations in civil or commercial matters in the Community. In relation to excessive damages claims, Article 22 and Article 24 of the Rome II proposal is particularly relevant.

Pursuant to Article 22, the mechanism of the public policy exception (ordre public) allows the court to disapply the rules of the foreign law designated by the conflict rule and to replace it by the lex fori (that is, the law applicable at the law in a given case would be contrary to the public policy of the forum.

Article 24 provides that the application of a provision of the law designated by this Regulation which has the effect of causing non-compensatory damages, such as exemplary or punitive damages, to be awarded shall be contrary to Community public policy. Compensatory damages are understood to serve to compensate for damage sustained by the victim or liable to be sustained by him at a future date, whilst non-compensatory damages serve a punitive or deterrent function.

In general, countries in continental Europe do not know the category of damages for punitive reasons. In Germany this rule is set out in Section 40 III No 2 EGBGB, according to which damages that obviously aim at purposes other than a reasonable compensation of the injured person are permitted. However, prevention and deterrence are accepted purposes of damages for the infringement of personal rights in Germany, as well as in France and Italy.

Article 24 of the Rome II proposal could therefore be seen as a response to the concerns many contributors in the consultation process expressed; namely, that the idea of applying the law of a third country providing for damages not calculated to compensate for damage sustained. Whilst indeed some suggested that it would be preferable to adopt a specific rule rather than to apply the public policy exception of the forum (as is the case in Germany), the effect of Article 24 would be that the application of a provision of the law designated by this Regulation which has the effect of causing non-compensatory damages, such as exemplary or punitive damages, to be awarded will be contrary to Community public policy.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

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