Skyscanner: CAT quashes commitments in the online booking sector

In a judgment handed down on Friday, the Competition Appeal Tribunal has quashed the Office of Fair Trading’s decision to accept commitments in the online hotel booking sector. As the first case to consider such commitments, Skyscanner Ltd v CMA [2014] CAT 16 contains some helpful guidance, albeit that Skyscanner’s success actually hinged on a fairly narrow point of regulatory law.

The OFT spent three years investigating the online hotel booking market, concerned about agreements which restricted the ability of online travel agents to discount the price of hotel rooms. Eventually, a couple of online agents and hotel groups offered commitments. Under the commitments, the agents would be allowed to offer limited discounts, but only to customers who had previously booked through that agent and then joined a “closed group” of customers entitled to a discount. The size of the discount would only be visible to members of the closed group.

Under section 31A of the Competition Act 1998, the OFT (now the CMA) may accept commitments to address its competition concerns. When commitments are accepted, the OFT’s investigation comes to an end. A decision to accept commitments can be appealed to the CAT, but only on judicial review grounds.

The CAT heard much debate about how far commitments have to go towards meeting the OFT’s concerns: must they “fully address” the OFT’s concerns, or could the OFT accept commitments which only partially address their concerns? The Tribunal’s answer, at paragraph 119, is that:

commitments will normally be accepted where the competition concerns are readily identifiable and fully addressed by the commitments; and the proposed commitments are capable of being implemented effectively and, if necessary, within a short period of time.

However, this statement of principle needs to be seen in context. On one view, the commitments in this case did not actually “fully address” the OFT’s concerns – – they did not completely remove the restrictions identified in the Statement of Objections. The commitments allow online agents to discount a bit, but do not give them unrestricted freedom to discount. No matter, says the Tribunal: the OFT is entitled to “strike a balance” between its initial position, as set out in the Statement of Objections, and the opposing views of the parties under investigation.

So much for the general principles – now for Skyscanner’s victory, which I (perhaps unfairly) described above as hinging on a narrow point of regulatory law.

Skyscanner is not an online travel agent, and it was not involved in the OFT’s investigation. It is a price comparison website for consumers to compare prices offered by various online agents and hotels. The problem with the commitments, from Skyscanner’s point of view, is that the “discounted” prices would only be visible to members of the agents’ “closed groups”. So, if a consumer were to search for a hotel room on Skyscanner, he would only see the non-discounted prices. If he wanted to know the discounts offered by any online agents, he would need to log in to that agent’s website (assuming he is a member of their group) and see what price they could offer him.

Skyscanner made these points during the statutory consultation which the OFT was required to undertake before accepting the commitments. It argued that the commitments would lead to a lack of transparency, damage price comparison sites, and therefore harm inter-brand competition (i.e. competition between online agents).

The public law duties of regulatory bodies when they consult are well known. Among other things, they must conscientiously take consultation responses into account when they make their ultimate decision. The unusual feature of this case was that the OFT indicated to Skyscanner that it could not take its concerns further without evidence of possible harm, which Skyscanner did not provide. Thus, the OFT said, it did take Skyscanner’s response into account, but in the absence of further evidence, it was given little weight.

The Tribunal held that the OFT’s approach was unfair. It was not right to require Skyscanner to provide further evidence for its concerns. Rather, the Tribunal held at paragraph 90:

If a consultation response raises an important and obvious point of principle, it is for the authority to examine it further. This is particularly so where the authority has not carried out an analysis of the economic effects of the practices which it proposes to address with its commitments decision and where that decision itself may generate its own economic effects within the market.

The matter will now go back to the CMA for reconsideration. Cynical observers of judicial reviews like to emphasise that winning a case on a procedural point is often a pyrrhic victory, as you may end up with a better procedure but the same ultimate decision. In this case, however, Skyscanner may take some comfort from the CAT’s clear sympathy for its concerns. The smart money may be on the commitments being tweaked to make the discounted prices accessible to price comparison sites – or otherwise on the investigation being reopened.

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MasterCard miffed as CJEU dismisses appeal

Yesterday’s CJEU judgment in the MasterCard case is a major defeat for a company which faces a huge number of private damages actions from retailers. The judgment also examines some interesting legal points, including in particular relating to the use of “counterfactuals” in competition cases.

The background is the Commission’s decision of 19 December 2007 holding that the multi-lateral interchange fees (“MIFs”) set by MasterCard unlawfully infringed Article 101 TFEU. MIFs are fees charged in relation to cross-border bank card payments. Specifically, banks which issue cards to their customers (issuing banks) charge MIFs to banks which provide merchants with services enabling them to accept card payments (acquiring banks). MasterCard, formerly owned by banks participating in the MasterCard payment system, is responsible for setting the MIFs.

The Commission found that the MIFs were passed on in full by the acquiring banks to their merchants. By setting a MIF, MasterCard had essentially set a minimum charge which acquiring banks would charge merchants. The MIFs therefore distorted competition in the market in which acquiring banks compete for merchants’ business.

MasterCard’s application to annul the Commission’s decision was dismissed by the General Court in its judgment of 24 May 2012. Its appeal to the CJEU, and the cross-appeals of several intervening banks, raised four central points.

First, MasterCard argued that it had not been an association of undertakings since 2006, when it became a publicly listed company and underwent changes to its governance and structure. The CJEU rejected this argument. The General Court had rightly considered that there continued to exist a commonality of interest between MasterCard and the participating banks. MasterCard’s further argument that it could not be regarded as an association of undertakings where it was required to pursue the interests of shareholders and not solely the interests of participating banks was also dismissed. Only a body with regulatory powers which had to have regard to public interest criteria in making decisions could, according to established case-law, fall outside Article 101 TFEU in this way.

Secondly, MasterCard argued that the General Court wrongly determined that the MIF was not objectively necessary to the operation of the card payment scheme. MasterCard claimed (among other things) that the General Court had applied the wrong test: the correct test was that a restriction was objectively necessary if it was impossible or difficult to achieve the end in question without it. The CJEU dismissed that argument, confirming that a restriction is only objectively necessary if the beneficial goal it serves is impossible to achieve without it.

The third central point relates to the use of counterfactuals – in other words, hypothetical scenarios showing what would or could have happened if it were not for the anti-competitive conduct. The CJEU confirms that, when deciding whether a restriction is objectively necessary, a counterfactual simply has to be “realistic” and “economically viable” (paragraph 111).

However, when deciding whether there is a restriction of competition, different considerations arise. The CJEU emphasises that it is important, when addressing that issue, to look at the “actual context” in which competition would apply in the absence of the alleged restriction (paragraph 164). It is not entirely clear what degree of plausibility should be required of a counterfactual for the purposes of assessing whether there is a restriction of competition, but it is clear that it is a higher threshold than that which applies in the context of objective necessity.

Fourthly, Lloyds Banking Group argued in its cross-appeal that the General Court had erred in determining that no exemption under Article 101(3) applied. In particular, it considered only benefits to merchants, and not the benefits of the MasterCard payment system in general. The CJEU again rejected this argument. It was the advantages of the MIF itself which had to be weighed, not those resulting from the MasterCard payment scheme in general. Moreover, the General Court had considered benefits accruing to cardholders and correctly concluded that they were not of such a character as to outweigh the competitive disadvantages in the separate market for acquiring banks.

The determination of the appeal will now allow private actions against MasterCard to proceed in earnest. Time began to run yesterday for follow-on claims in the CAT, and many retailers are already pursuing MasterCard in the High Court. The High Court claims tend to take the Commission’s decision as a starting point, and then apply its reasoning by analogy to cover not only the kinds of cross-border payments in issue in the decision, but also all domestic payments. The only real crumb of comfort for MasterCard may be the thought that, unusually in this type of case, retailers are also seeking to rely on the reasoning in the decision to sue its main competitor, Visa.

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The Cost of Collusion

The Competition Bulletin is pleased to welcome a guest blog from Louise Freeman of King & Wood Mallesons LLP. Louise specialises in (among other things) complex competition litigation. In this blog, she addresses the implications of the recent CJEU decision in Case C‑557/12 Kone AG and others v ÖBB-Infrastruktur AG.

***

Anyone with even a cursory awareness of the existence of competition law will know that engaging in anti-competitive behaviour can be a costly exercise.  If one were to imagine a thoughtful and well-informed potential cartelist weighing up the cost/benefit analysis before deciding whether to pick up the phone to his competitors to kick off a cartel in the European market for widgets, just what would he be weighing up in that analysis and how does the recent Kone decision affect his analysis?

The potential benefits of collusive activity will, of course, be market and infringement-specific but may well include increased selling prices, certainty of market share, and avoiding competitive pressures.  Those anticipated benefits would have to be significant, however, to outweigh the potential downside cost risk if the cartel is uncovered.  Our potential cartelist could be exposing his company not only to the significant fines that could be levied by the relevant competition authority but also to the full and expanding scope of civil liability for his actions (as well as exposing himself to the risk of imprisonment in the UK or potentially elsewhere).

That civil liability will include liability to his customers for the increase in the price charged by his company for the widgets.  In addition, across most of Europe it will also include potential liability for the price increases levied by those competitors to whom he picks up the phone or has a chat over dinner, on the basis of joint and several liability of joint tortfeasors.  Although this remains untested in England, the better view would seem to be that one cartelist can be pursued for loss caused by all cartelists.

This is the case even if some or all of those competitors manage to overturn the decision against them in light of the Supreme Court decision in Deutsche Bahn (see the blog here).  In that case, the Supreme Court applied ECJ caselaw that a non-appealing party does not take the benefit of a successful appeal by another addressee and so remains bound by the original decision identifying the scope of and parties to the cartel, regardless of other successful appeals.

Now our potential cartelist should also very seriously consider the risk that his competitors to whom he does not pick up the phone will increase their prices as well, under the protective umbrella of the cartel (an “umbrella effect”), and that customers who buy from those competitors will also look to his company for redress (claiming “umbrella damages”).  This risk is enhanced as a result of the recent decision of the Court of Justice of the European Union in Kone.  The CJEU found that national courts are precluded from excluding liability of cartelists for umbrella effects.  Umbrella damages have long been debated in academic literature but this was the first time that the CJEU has had to tackle them.

The judgment makes it clear that the question of whether umbrella damages are available is a question of fact.  Whilst acknowledging that it is for domestic courts to lay down rules as to the application of the concept of a causal relationship (at paragraph 24 of the judgment), it goes on to find that a “victim of umbrella pricing may obtain compensation for the loss caused by the members of the cartel… where it is established that the cartel in issue was, in the circumstances of the case and, in particular, the specific aspects of the relevant market, liable to have the effect of umbrella pricing being applied by third parties acting independently, and that those circumstances and specific aspects could not be ignored by the members of that cartel” (paragraph 34).

As the Court also found that umbrella damages are “one of the possible effects of the cartel, that the members thereof cannot disregard” (paragraph 30), the decision seems likely to impact the application of national tests of foreseeability.  The decision is an important example of how the EU principle of effectiveness may require national rules to be reconsidered, to ensure that a remedy is available (or could be, depending on the facts) in such circumstances.

Kone therefore gives our potential cartelist even more food for thought and adds an additional weight to the “cost” side of his scales.  Whether this, together with less readily quantifiable effects such as reputational damage and the impact on commercial relationships, would lead our potential cartelist to conclude that the costs outweighed the benefit would no doubt depend on his own and his company’s current situation – as everyone knows, cartels are often borne of difficult economic pressures.  Certainly, for a company uncovering anti-competitive behaviour within its ranks, Kone indicates that the cost of civil liability for collusion may be even higher than many commentators had once believed.

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Dogma in telecoms, cream for the CAT: 08- numbers in the Supreme Court

The Supreme Court yesterday handed down judgment in British Telecommunications plc v Telefónica O2 UK Ltd & Ors [2014] UKSC 42. Reversing the decision of the Court of Appeal (blogged on here by Emily Neill), Lord Sumption for a unanimous Supreme Court held that there had been no basis for Ofcom to disallow BT’s introduction of “ladder pricing” in wholesale termination charges for certain non-geographic telephone numbers (specifically 080, 0845 and 0870, whence the litigation’s popular name among telecoms lawyers: “08- numbers”). Continue reading

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Avoiding the clinch: judicial respect for the rules inherent to sport

In a recent bout in the High Court, the specificity of sporting disputes once again came to the fore. In Bruce Baker v British Boxing Board of Control [2014] EWHC 2074 (QB), 25 June 2014, Sir David Eady was faced with the old chestnut of a request for a court to interfere with a national sporting body’s decision to sanction one of its participants. One interim application later, and the BBBC was still standing.

Bruce Baker is a longstanding manager of boxers and previously held a licence to that effect granted by the British Boxing Board of Control (“BBBC”). Following his participation in two promotions in Bethnal Green, which had not been sanctioned by the BBBC in April and October 2013, the BBBC instituted disciplinary proceedings and found him guilty of misconduct. His licence was withdrawn on 11 February 2014. The events had been sanctioned by a German body known as the GBA, a rival to the German association represented in the European Boxing Union (the BDB).

Mr Baker challenged the withdrawal before an internal appeal body – the “Stewards” – but also applied to the High Court for interim relief requiring the BBBC to restore his licence. The manager alleged that the BBBC had disciplined him because he participated in an event sanctioned by a German boxing body that it did not recognise, contrary to free movement and competition law and procedural unfairness.  The BBBC sought a stay of the action under section 9 of the Arbitration Act 1996.

The Court rejected Mr Baker’s application.

The application failed, first, because it was premature.  An appeal was pending before the independent Stewards of Appeal, due to be heard in July.  Without it being necessary to decide whether the Stewards constituted an arbitral or a domestic body under the principles set out in England and Wales Cricket Board Limited v Kaneria [2013] EWHC 1074 (Comm) (as to which see Nick de Marco’s post here), the Court decided that the complaint ought to have been brought before them, “so that any such attack can be made on the procedure taken as a whole”, on Calvin v Carr [1980] AC 574 and Modahl v British Athletic Federation [2002] 1 WLR 1192 principles (at [38]).

Second, as to the competition law challenge, the Judge placed an emphasis on the European model of sport, i.e. “[t]here is no legal prohibition on the organisation of any sports under the umbrella of a national governing body” (at [15]), and such a body is “free to stipulate that its members should comply with its rules” (at [18]). He pointed to the “detailed methodology available as to how the [European] Commission will apply competition rules in the sporting context” – i.e. the test in C-519/04 P Meca-Medina and Majcen v European Commission [2006] ECR I-6991 at paras. [42]-[45]. The Court considered it entirely lawful for a sport governing body to have a rule that allowed a party to be disciplined for actions assessed to be inimical to the sport, indeed such a rule was “inherent in the organisation of the sport“ (at [20]). This broad approach is interesting given that Meca-Medina was initially identified as a watershed for the CJEU’s so-called dilution of the ‘sporting exception’ from EU law: “the mere fact that a rule is purely sporting in nature does not have the effect of removing from the scope of the Treaty the person engaging in the activity governed by that rule or the body which has laid it down” (at [27]).

Finally, the judge considered that there was no triable issue. The decision in relation to Mr Baker was plainly based on an assessment of the facts in the case, which a Court “should be slow indeed to substitute its own opinion for” (at [28]). He also concluded that any damage to Mr Baker in the absence of interim relief would not be removed by the temporary restoration of his licence.  Damage flowed from his being found guilty and the concern that if he failed in his appeal in July, he would not have a licence at that point (at [31]).  Moreover, if there were any damage to Mr Baker it was compensable in damages, in contrast to the potential damage to the BBBC’s interests as a sport’s governing body.  The Court also noted that Mr Baker had delayed in seeking this remedy and “remains unrepentant” – the balance of convenience therefore lay against the granting of the relief (at [33]-[34]).

The Court’s approach is a classic illustration of the respect given to sporting rules, and internal processes within a sport to enable national authorities to pursue objectives such as “ensur[ing] that the sport is conducted fairly, including the need to safeguard equal chances for the boxers, boxers’ health, the integrity and objectivity of the sport and the ethical values in the sport” (at [20]). It also reflects the EU position that something more than the inherent organisation of sport in the European model is needed for breaches of EU law to be found.

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The English law of causation and the passing-on defence

One of the big questions of English competition law is whether there is such a thing as a “passing-on defence” – – i.e. whether the damages suffered by a purchaser of a cartelized product are reduced or mitigated if he “passes on” some of the overcharge to his own customers. Two follow-on damages actions were due to be heard this term, arising out of the synthetic rubber cartel and the gas insulated switchgear cartel, both of which raised the question of passing-on but both of which have now settled.

I should perhaps declare an interest: I was junior counsel in the rubber case (Cooper Tire v Dow). Whilst preparing for that case, I was struck by the fact that, whilst there is a mass of published material discussing the policy considerations for and against the passing-on defence, there is very little published analysis of what the English law of damages has to say about the issue. The existence of a passing-on defence has on several occasions been conceded, assumed or endorsed in obiter comments (see, for example, Emerald, Newson and Devenish). But it has never been fully argued.

After some initial skirmishing, the parties in Cooper Tire (which had a few weeks in court before settling) agreed that the availability of the defence should depend on normal English principles of causation and mitigation. It is worth pausing to emphasize the significance of that agreement. If correct, as I explain below, it means that the question of whether damages should be reduced to reflect passing-on depends on the facts of the case. No party was arguing that passing-on is always or never a valid defence.

The question is therefore: in what circumstances do steps taken after the infliction of damage serve to reduce the damage? As it happens, that question was explored in great detail in a shipping case handed down shortly after Cooper Tire settled, namely Fulton Shipping Inc v Globalia Business Travel SAU [2014] EWHC 1547 (Comm). Mr Justice Popplewell noted the uncontroversial starting point that damages are intended to place the innocent party in the same financial position as if the breach had not occurred. But he said at paragraph 17:

“The principle does not, however, mean that a claimant always recovers for the amount of the losses which arise from the breach. Principles of causation mean that his losses may be factually too remote from the breach to be recoverable despite the fact that they would not have been suffered but for the breach. His losses may be too remote in law. Conversely, he may end up better off as a result of the breach than he would otherwise have been, without having to give credit for such benefit against his recoverable loss.”

Popplewell J’s judgment is something of a tour de force, and it repays close reading. He reaches the conclusion, which will surprise no-one who has ever had to consider this issue, that there is no single general rule to determine whether a wrongdoer obtains credit for a benefit received following his breach of duty. However, there are certain general principles.

Of most relevance, the Judge explained that:

“In order for a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking a necessary condition that the benefit is caused by the breach […] The test is whether the breach has caused the benefit; it is not sufficient if the breach has merely provided the occasion or context for the innocent party to obtain the benefit, or merely triggered his doing so […] Nor is it sufficient merely that the benefit would not have been obtained but for the breach.”

Applying that test to passing on, the question would be whether the increase in the direct purchaser’s own prices was caused by the cartel. It would not be sufficient for the cartelist to show that the cartel “provided the occasion or context” for the direct purchaser to increase its prices, or that those prices would not have been increased but for the cartel.

There is no obvious dividing line between causing an increase in prices and providing the occasion or context for such an increase. It follows that, if those are the principles applicable to passing-on, cartel damages claims are likely to require a close factual analysis of how the claimant’s prices were affected by the cartel. It would also follow that, unless and until there is EU intervention, these cases will remain highly uncertain: there will be no judgment deciding once and for all that damages “should” or “should not” be reduced due to passing-on. Instead, all will depend on the judge’s view of the facts of the particular case.

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Competition law and covenants restrictive of land use

Covenants restricting use of land to particular commercial purposes are commonplace. Until recently, the potential for competition law to regulate them was limited, because “land agreements” were excluded from the reach of the Chapter I Prohibition under the Competition Act 1998. The exclusion has, however, been revoked by the Competition Act 1998 (Land Agreements Exclusion Revocation Order) 2010. The OFT has also provided guidance on the application of competition law in this field.

Accordingly, practitioners can increasingly expect competition law to provide a basis for challenging commercial arrangements restrictive of land use. Martin Retail Group Limited v Crawley Borough Council – a County Court case decided in December last year but which BAILII has just made available at our request – well-illustrates the point. It is (so far as we are aware) the first reported decision considering the application of the Competition Act 1998 to “land agreements” following the 2010 Order (although see Humber Oil Terminals Trustee Limited and Associated British Ports for a Chapter II land use case).

In Martin, the relevant arrangement was a “letting scheme” operated by a Council in respect of various parades of shops of which it was freehold owner. Under the scheme, the Council imposed on lessees covenants restricting use of each shop to specific retail purposes. In Martin’s case, the old lease contained covenants restricting use to (essentially) the business of a newsagent; upon its expiry, Martin applied under Part II of the Landlord and Tenant Act 1957 to renew the lease, seeking incorporation of clauses permitting broader use, including (essentially) the business of a convenience store. The Council refused, proposing instead clauses which would have prevented such business. Martin responded contending that the proposal was unlawful, being contrary to the Competition Act 1998.

The Court directed that competition law point be tried as a preliminary issue. By the hearing, the Council had accepted that its proposal would be contrary to the Chapter I Prohibition unless it constituted an “exempt agreement” for the purposes of section 9 of the 1998 Act, i.e. that the arrangement was one that:

(a) contributes to—

(i) improving production or distribution, or

(ii) promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit; and

(b) does not—

(i) impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or

(ii) afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.

HHJ Dight found that the burden lay on the Council to establish that section 9 applied (see at paragraph 31), and that the Council had not discharged it (see at paragraphs 32-39). Two general points may be emphasised in the light of the judge’s analysis:

First, neither party had adduced independent expert evidence on the competition law issues before the Court. Rather, each had provided statements of their employees explaining (broadly speaking) the reasons for and against expanding trade at the relevant premises, and referring to hearsay evidence of the local community. The Judge considered such material to be of limited use (see at paragraph 32). His approach is yet further encouragement to parties faced with competition law issues to rely on expert evidence. Indeed, it is difficult to imagine a case for “exemption” being made without reference to such evidence.

Second, the Judge placed significant weight on the OFT guidance, structuring his analysis by reference to the four cumulative criteria set out at paragraph 5.3. Those criteria are that, in order to qualify as “exempt”:

• The agreement must contribute to improving production or distribution, or to promoting technical or economic progress.

• It must allow consumers a fair share of the resulting benefits.

• It must not impose restrictions beyond those indispensable to achieving those objectives.

• It must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

The Judge found that the Council had adduced no evidence sufficient to establish its case on any of these criteria: see at paragraphs 35-39.

Martin should serve as an important reminder that land agreements are no longer beyond the reach of competition law. Restrictions on use are of course a widespread feature of leases, and there is plainly scope for them now to be subject to far more rigorous judicial scrutiny.

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