FIFPro challenge the football transfer system

FIFPRO2

By Nick De Marco & Dr Alex Mills

As the curtains are drawn on the panic-buying of the January transfer window for another year, it is once again difficult not to reflect critically on the football transfer system. In the Premier League alone, more than £1bn has been spent on football transfers during the 2015-16 season – a staggering figure, and a new record. This is not just a European phenomenon – teams in the Chinese Super League have also spent unprecedented money in the current transfer window, reflecting the incredible rise in football business in the country, even outspending the Premier League during this period. Much of the increase in transfer spending can be attributed to the increasing popularity and commercial success of football around the world, particularly the new broadcasting rights deal in the case of the Premier League, but some have argued argued that the extraordinary inflation in transfer fees is a sign that the system is broken.

One organisation which is firmly in this camp is FIFPro, the union for professional footballers, which represents more than 65,000 players from around the world. In September 2015, FIFPro lodged a formal complaint with the Directorate General for Competition of the European Commission, against FIFA and its member associations, challenging the global transfer market system for football. Here we discuss the background to this challenge and the issues raised by it, before considering its likely outcomes and implications.

The story of the modern transfer system begins with the famous Bosman ruling (C-415/93) of the European Court of Justice in 1995. Bosman, a player registered with Liège in Belgium, wanted a transfer to Dunkerque in France. Although Bosman was out of contract, the rules at the time permitted Liege to refuse the transfer unless Dunkerque met their transfer fee demand. The ECJ held that this constituted a prohibited restriction on the free movement of workers in the European Union. One key consequence of this decision is that a player can now transfer for free at the end of their contract, often known as a ‘Bosman transfer’. This feature of the modern transfer rules is an important factor in the way values in the transfer market are calculated today. Players may also use the threat of running down their contract and thus reducing their transfer value as a means of leveraging their club for a new contract and salary increase.

Following the Bosman ruling, there was talk of abolition of the transfer system. The European Commission’s then Competition Commissioner, Mario Monti, said “International transfer systems based on arbitrarily calculated fees that bear no relation to training costs should be prohibited, regardless of the nationality of the player and whether the transfer takes place during or at the end of the contractual period.” But a political compromise was then fashioned following an informal agreement between the European Commission, FIFA and UEFA, and the modern football transfer system established in 2001. The rules are set out in the FIFA Regulations on the Status and Transfer of Players (RSTP). As presently established, the rules provide that contracts may only be a maximum of 5 years in length, or 3 years for players aged 18 or under (Art. 18(2)). They may only be terminated for just cause or by mutual agreement (Arts. 13 and 14) – hence, the transfer of a player under contract may not take place without the agreement of the player and both clubs. A player out of contract may transfer clubs without any transfer fee being payable, but an agreement to sign for another club may only be entered into in the last six months of a contract or after its expiry (Art. 18(3)). However, perhaps most critically, a player who terminates an existing contract without just cause is liable to pay compensation (Art. 17(1)), jointly with any new club for whom the player has signed (Art. 17(2)), and will also be subject to sporting sanctions (including a ban on playing for any team) if the wrongful termination occurs in the first two or three years of the contract, depending on the age of the player (Art. 17(3)). FIFA guidelines suggest that a failure to pay a player would only be just cause for that player to terminate the contract if payment was not made for a period of more than three months. If an ‘established professional’ plays in fewer than ten percent of the official matches for their club during the course of a season, there is also the possibility for that player to terminate their contract for ‘sporting just cause’ (Art.15).

The amount of compensation payable if a player terminates a contract without just cause has been a controversial question. The Court of Arbitration for Sport (CAS) in Webster (CAS 2007/A/1298/1299/1300) rejected the argument that the player should be liable for their full market value, holding that “giving clubs a regulatory right to the market value of players and allowing lost profits to be claimed in such manner would in effect bring the system partially back to the pre-Bosman days”. The damages were instead calculated based on the “outstanding remuneration due until expiry of the term of the contract”. This decision caused something of an outcry from many clubs, as it was felt that it would enable players effectively to buy themselves out of their contracts too easily. In Matuzalem (CAS 2008/A/159), however, the CAS held that a player who had terminated his contract unilaterally without cause was liable for an amount based on his replacement value on the transfer market (more than €11m). Matuzalem was unable to pay this amount and he was consequently subject to a worldwide playing ban. The decision to prohibit him from playing was later annulled by the Swiss courts for violation of public policy (essentially because he could never make payment if he could never work), but the case nevertheless established that the cost to a player of unilaterally terminating their contract without just cause would be strongly connected to the player’s value in the transfer fee market.

So what are the competition law issues raised by this system? The FIFPro complaint is directed to Articles 101 and 102 of the Treaty on the Functioning of the European Union, which prohibit agreements, decisions and practices limiting competition, as well as the abuse of a dominant market position. The argument is supported by a Study commissioned by FIFPro and carried out by Stefan Szymanski, a Professor of Sports Management who is otherwise perhaps best known as co-author of the book ‘Soccernomics’. FIFA is clearly in a dominant market position in relation to football, and there is no doubt that the RSTP limits competition because of the restrictions it places on freedom of contract. The FIFPro complaint highlights three features of the RSTP which operate as restrictions on the labour market – (i) the calculation of compensation if a player terminates their contract without cause (Art. 17(1)); (ii) the imposition of a playing ban for the wrongful termination of a contract by a player during the first two or three years of a contract (Art. 17(3)); (iii) the rule that a contract with a different club may only be entered into in the final six months of a contract or after it has expired (Art. 18(3)).

The relationship between sport and competition law has, however, always presented a particularly complex problem. Sporting teams have an important interest in contractual stability – knowing that players signed for a period of time will be unable to leave, even if a wealthier team offers to buy out their contract. There is also an argument that contractual stability benefits players, because the contract of an injured player cannot be terminated by their club. The objective of contractual stability is, however, at least apparently in tension with a free and competitive labour market, and thus it has long been understood that sport requires particular treatment. Article 17(1) of the RSTP indeed expressly requires that “the specificity of sport” be taken into account in calculating compensation for wrongful termination of contract – this was one of the factors leading the CAS in Matuzalem to award such substantial damages. FIFPro’s key argument is therefore that these aspects of the RSTP offer sport too much particular treatment, to the disadvantage of the professional footballers whose labour market mobility is reduced.

A second aspect of the FIFPro argument is the contention that the scale of transfer fees means that only the few wealthiest clubs are able to compete for the elite footballing talent. Although the figures involved may be large, in practice, the argument goes, these clubs are both buying and selling players at this scale, and are thereby (in conjunction with Financial Fair Play regulations) effectively pricing other clubs out of the market for the best players. The effect of this practice is both to reduce competition, leading to the dominance of the same handful of clubs each year (Leicester City’s performance this season being a notable exception) and thereby to reduce the size of the labour market for players to compete at the highest levels of the game. However, it is not only transfer fees that separate the rich clubs from the rest. The largest expenditure of most clubs is usually on players’ wages. Without some form of wage cap or collective agreement (which Prof. Szymanski appears to advocate but which could itself, no doubt, be subject to competition law challenge) it could be argued that rather than create a more level playing field the abolition of football transfer fees might cause more harm to the poorer selling clubs who are at least able to be compensated for losing players to the richer clubs that can afford higher wages and transfer fees.

It is extremely difficult to imagine that the European Commission will require the dismantling of the transfer system altogether, or the abolition of transfer fees. Indeed, the Commission may well simply refuse to entertain the complaint altogether, on the basis that it falls outside its area of interest and is better pursued within national courts. Much will depend on the distinction which the Commission recently announced defines its area of interest in sport; is the complaint simply a dispute “related to governance” or “the application of sporting rules to individuals” or is it, perhaps more likely considering the economic effect of the transfer system and the way it serves to bind a player to a club, a complaint about anticompetitive agreements and the abuse of dominant market positions which can act to prevent a player from taking part in sport?

However, should the Commission (or others as a result of FIFPro’s complaint and associated campaign) determine that the system is not functioning in a satisfactory way, there are a number of modifications which could be made to the rules which would have the effect of increasing the flexibility of the labour market and thus would be likely to reduce transfer fees, with the money most likely to go instead to player salaries. For example, the maximum length of contracts could be reduced from five years to four, giving players more opportunity to obtain or at least threaten a free transfer, or the damages payable for the termination of the contract by a player without just cause could be reduced, overriding the Matuzalem decision. One key concern which is likely to be raised is the risk that reductions in transfer fees would reduce the incentives for clubs to develop young players, although the RSTP rules do provide for training compensation (Art. 20) and a solidarity mechanism (Art. 21), each of which secures financial support for clubs which have contributed to a player’s training. If changes were to be made to the rules regarding contracts and transfers, these may need to be counterbalanced with adjustments to these provisions – such adjustments may in any case be considered as a means of addressing competitiveness. The consequences of all such changes would, of course, be difficult to predict with complete confidence, and any modifications of the FIFA RSTP would require long and complex negotiations with a range of stakeholders.

When one reads about the salaries of the highest paid footballers, some might find it difficult to be entirely sympathetic to the argument that the transfer system is harmful to the position of professional footballers. But the FIFPro challenge is less about the position of the elite and more about the average professional footballer around the world, most of whom are on salaries much closer to those of ordinary workers, and some of whom are badly treated, regularly not paid by their clubs, and yet unable to move on. If changes to the rules governing the transfer market were to reduce the amount of money spent on transfer fees, increase freedom and job security for more players, and promote greater competition between clubs, such a development would be likely to be welcomed not only by lawyers, but also by most football players and fans around the world.

Nick De Marco is a barrister at Blackstone Chambers specialising in sports law and disputes in football. He was a recent guest speaker at the FIFPro Legal Legends international conference and regularly represents the English Professional Footballers Association.  Dr Alex Mills is a member of Blackstone Chambers’ Academic Research Panel and the UCL Faculty of Laws.

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Asset acquisitions and mergers: Eurotunnel in the Supreme Court

The Supreme Court’s recent decision in Eurotunnel II ([2015] UKHL 75) brings some much-needed clarity to what was becoming a rather opaque corner of the UK merger regime. It also contains statements of general principle which are bound to make it one of the most frequently-cited merger cases.

The case concerns the circumstances in which an asset acquisition may constitute a merger. SeaFrance, a cross-channel ferry operator, had gone into liquidation and could not be sold as a going concern. Eurotunnel bought three ferries and various other assets. The OFT (now the CMA) investigated.

In deciding whether the acquisition was a merger, the essential question under the Enterprise Act was whether Eurotunnel had acquired “the activities, or part of the activities” of SeaFrance.

I complained in one of my earlier blogs about how the procedural history of the case was causing problems. The parties had apparently agreed that the underlying question of law had been decided by the Competition Appeal Tribunal in the first Eurotunnel case, Eurotunnel I [2013] CAT 30, and that the only issue arising in Eurotunnel II was a rationality challenge to the CMA’s decision. The Court of Appeal accepted the limited scope of the challenge but could not resist suggesting that Eurotunnel I might have been wrongly decided.

Fortunately (and not surprisingly), the Supreme Court did not limit itself to the rationality challenge. It addressed the underlying question of law head-on, endorsing the CAT’s approach in Eurotunnel I.

In deciding whether an asset acquisition is a merger, Lord Sumption held (with the agreement of the rest of the Court), it is necessary to ask whether the acquiring entity has obtained more than it would have obtained by going out into the market and purchasing ‘bare assets’. If so, one must go on to ask whether the ‘extra’ which it has obtained is attributable to the fact that the assets were previously employed in combination in the target’s activities (para 39). Or:

“Put crudely, it depends on whether at the time of the acquisition one can still say that economically the whole is greater than the sum of its parts.” (para 40)

The word “economically” should be emphasised. The main reason why Lord Sumption adopted this expansive approach to the question of whether an asset acquisition is a merger was because of his concern to give effect to the purpose of the legislation. See in particular para 31, which contains the first statement of general principle that is bound to be relied on in later cases:

“The first point to be made is that in applying a scheme of economic regulation of this kind, the Authority is necessarily concerned with the economic substance of relevant transactions and not just with their legal form.”

Seen in this light, the fact that the target has ceased its operations will be a relevant factor in deciding whether there is a merger, but it will not necessarily be decisive.

As to the rationality challenge, the Supreme Court held that the CMA’s decision was rational. It also took the opportunity to emphasise – in the second passage likely to become familiar to competition lawyers – the respect which should be paid to the CMA’s expert judgment in merger cases (see para 44):

“This court has recently emphasised the caution which is required before an appellate court can be justified in overturning the economic judgments of an expert tribunal such as the Authority and the CAT: British Telecommunications Plc v Telefónica and others [2014] UKSC 42; [2014] Bus LR 765; [2014] 4 All ER 907 at paras 46, 51. This is a particularly important consideration in merger cases, where even with expedited hearings successive appeals are a source of additional uncertainty and delay which is liable to unsettle markets and damage the prospects of the businesses involved. Concepts such as the economic continuity between the businesses carried on by successive firms call for difficult and complex evaluations of a wide range of factors. They are particularly sensitive to the relative weight which the tribunal of fact attaches to them. Such questions cannot usually be reduced to simple points of principle capable of analysis in purely legal or formal terms.”

There is bound to be further debate about the precise point at which the sale of assets risks becoming the sale of part of a business’s activities, bringing the transaction within the Enterprise Act. However, that debate will now take place within the much clearer boundaries established by the Supreme Court.

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Standalone claims in the CAT: bypassing the transitional rules

We have written before about the problems inherent in the transitional provisions of the new Consumer Rights Act 2015 (see Tom de la Mare QC’s blog here). A recent decision from Mr Justice Barling in the Mastercard litigation places a (small) sticking plaster over some of the difficulties.

One problem is that the transitional provisions appear to severely limit claimants’ ability to bring stand-alone claims in the Competition Appeal Tribunal (“CAT”) – in theory you can bring such claims, but you may face much less favourable limitation rules than you would have faced had you started in the High Court.  It is difficult to see this as anything other than a drafting error, since part of the purpose of the new statutory regime was to do away with the oddity of having a specialist competition tribunal unable to hear such claims.

Barling J has found a partial solution to this problem. In Sainsbury Supermarkets Ltd v MasterCard Incorporated [2015] EWHC 3472 (Ch) (see here), he decided that Sainsbury’s standalone claim, issued in the High Court, could be transferred to the CAT – and that, importantly, such a transfer would preserve the limitation position in the High Court.

The Judge held that it did not matter whether or not the claim could have been started in the CAT (and he did not decide that particular issue). What mattered was that it could be transferred there.

The ability to transfer standalone claims to the CAT has obvious advantages for those cases which would benefit from the CAT’s economic and industry expertise. It is somewhat clunky for claimants to have to issue in the High Court (and incur fees there) only to then transfer to the CAT, but it is better than nothing.

It also means that claimants who wish to take advantage of the different limitation provisions in the High Court (in general, better for standalone claims) and in the CAT (in general, better for follow-on) now have the option of starting claims in both jurisdictions and then seeking to consolidate them in the CAT.

Of course, Barling J’s decision does nothing to fix the other problems highlighted in Tom’s blog. Most obviously, it does nothing for standalone class actions, which cannot be started in the High Court and still face the usual problems in the CAT. It is, however, a helpful ‘workaround’ which will go some way towards mitigating the problems caused by the transitional arrangements.

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Eligibility for sporting competitions caught in the cross-hairs of competition law

In a recent announcement, the European Commission got its skates on and launched an investigation into the rules of the International Skating Union (ISU) which preclude skaters from taking part in events which have not been approved by the ISU. The announcement is only preliminary and does not represent a statement of what may or may not infringe competition law. However, it provides an indicator as to the issues of interest to the Commission, which may potentially have wider implications for other sporting bodies and the impact of competition law on their rules. It also reflects a growing willingness for EU bodies to apply antitrust rules to organisational rules of sporting bodies.

In this case, two Dutch ice speed skaters, Mark Tuitert and Niels Kerstholt, complained to the Commission that the ISU’s rules are “unduly preventing athletes from exercising their profession” by effectively precluding other companies or entities from organising alternative ice-skating events. No more detail has been provided at this stage, however the allegation bears a striking resemblance to that in the Bruce Baker dispute (see my previous post on this here) or the Indian dispute over the BCCI’s licensing of rival cricket events, Barmi v Board of Control for Cricket in India (see my post here).

Article 1(1) of the ISU’s Constitution (2014) makes clear that it is “the exclusive international sport federation (IF) recognized by the International Olympic Committee (IOC) administering Figure Skating and Speed Skating Sports throughout the world”. Article 2(1) goes on to provide that “[t]he ISU has jurisdiction throughout the world over all forms of international Figure and Speed Skating on ice and on synthetic polymeric ice surfaces whether performed using ice skating blades or substitutes simulating such blades”. Article 7(1)(b) contains a general prohibition that:

Members of the ISU, their affiliated clubs, their individual members and/or all other persons claiming standing as participants in the international activities of a Member or of the ISU […] shall not participate in any activities, national or international, against the integrity, the exclusive role and interests of the ISU.”

This set-up is not unusual. Indeed, in the so-called ‘European model of sport’, as recognised by the Commission itself, one of the ‘specificities of sport’ is that of:

the sport structure, including […] a pyramid structure of competitions from grassroots to elite level and organised solidarity mechanisms between the different levels and operators, the organisation of sport on a national basis, and the principle of a single federation per sport” (White Paper On Sport, COM(2007) 391 final, §4.1)

Although in its more recent documentation (e.g. the Communication, “Developing the European Dimension in Sport” COM(2011) 12 final) the Commission noted that there is no single model of good governance in sport (see §4.1), the ‘specificity of sport’ is now recognised in the EU Treaties, in particular at Article 165(1) TFEU.

However, since its seminal decision in Case C-519/04 P Meca-Medina and Majcen v Commission [2006] ECR I-06991 (ECLI:EU:C:2006:492), the Court of Justice of the European Union (“CJEU”) has made clear that “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”. In other words, sporting rules are not per se excluded from the scope of competition law where they have economic effects on the internal market. Indeed, other international bodies, such as FIFA, have been found to be dominant undertakings or associations of undertakings for the purposes of EU competition law (see, e.g. Case T-193/02 Piau v Commission of the European Communities [2005] E.C.R. II-209 (ECLI:EU:T:2005:22) at [114]-[115]).

On eligibility, the ISU Regulations provide (at Article 102(1)(b)) that an “eligible person”, i.e. one who can participate in ISU events (pursuant to Article 103), must be one who

elects to take part only in International Competitions which are:

1. sanctioned by the Member and/or the ISU;

2. conducted by ISU recognized and approved Officials, including Referees, Technical Controllers, Technical Specialists, Judges, Starters, Competitors Stewards and others; and conducted under ISU Regulations.

By virtue of Article 102(2), a person who fails to do so, and participates in other non-sanctioned events may be declared ineligible and effectively excluded from ISU activities.

The Commission has indicated the initial view that this “may prevent alternative event organisers from entering the market or drive them out of business” and therefore “constitute anti-competitive agreements and/or an abuse of a dominant market position in breach of EU antitrust rules”. It should be stressed that this is only an early announcement and the relevant rules will need to be examined according the objectives they pursue, and their proportionality in light of those objectives. However, the substantive analysis of the compatibility of sporting rules with EU competition law appears to be a growing trend.

In MOTOE (Case C-49/07 Motosykletistiki Omospondia Ellados NPID (MOTOE) v Elliniko Dimosio [2008] ECR I-4863 (ECLI:EU:C:2008:376)), the CJEU was faced with a case concerning an application by an independent Greek motorcycling association to organise various events, refused by the body charged by Greek law with authorising motorcycling events within the national territory. The CJEU carried out a substantive analysis of the legislative framework and held that “[a] system of undistorted competition, such as that provided for by the Treaty, can be guaranteed only if equality of opportunity is secured as between the various economic operators” (at [51]).

What is more, this is not the first time the ISU has been in the news in the past year, its rules on arbitration famously giving rise to the Munich Higher Regional Court’s decision in the case of Claudia Pechstein v ISU that a decision by the Court of Arbitration for Sport is void (as noted by Jane Mulcahy in her post). In that decision, the German Court considered that for the purposes of German law, the ISU was dominant on the relevant market, namely the organisation of World Speed Skating Championships, as it was the sole person able to organise those events.

These decisions appear to illustrate an incoming tide of interest from national and European competition authorities in the duties of international and national sporting bodies which are in monopolistic positions. It may be that the recognition of the organisational traditions of sport no longer cuts ice (or at least carries the same weight) with competition bodies as it did, such that rules conferring exclusivity and monopolies will need to be justified on the merits. However, this expansive approach is likely to be limited to cases of clear exclusions from or foreclosure of a market, given the Commission’s consistent recognition that the primary responsibility for governance of sports lies with “sport organisations” themselves (see, e.g. §4.2 of the 2012 Communication). Like skaters in the “Kiss and Cry”, awaiting results alongside the rink, this is a space to keep watching…

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Blown out of the water? Air Cargo and the future of extra-EU/EEA cartel damages claims

If the captain of a trading ship fires cannon on a canoe to prevent the canoeists trading with another boat vying for their trade, that boat’s owners can sue the captain: Tarleton v M’Gawley (1793) Peake 270. An intention to gain where your gain must be another’s loss is an intention to injure the other for the purposes of the “unlawful means” economic torts: OBG v Allen [2007] UKHL 21, [63] per Lord Hoffmann, [164]-[167] per Lord Nicholls.

What if there are two other boats competing for the canoe’s business, and the captain doesn’t care which of them will lose out? In such a case there remains an intention to injure, even though one of the victims will in fact have suffered no loss, because ‘there is the intent to damage the identifiable and known class of two boats’, competition for the canoe’s business being ‘effectively a zero-sum game’. So the Court of Appeal accepted in its judgment yesterday [2015] EWCA Civ 1024 in the Air Cargo litigation at [168]-[169].

But swap cannon for cartels; increase the number of victims; change boats for air cargo shippers and freight forwarders; exeunt the canoeists and enter The Gondoliers. In W.H. Newson [2013] EWCA Civ 1377 (blogged here by Andrew Scott), Arden LJ waxed lyrically dismissive of a cartel victim’s argument that it formed part of a class of persons against whom the cartelists intended to injure: ‘When everybody is somebody, then nobody is anybody’, to quote, as she did, Gilbert & Sullivan. Now in Air Cargo the Court of Appeal has endorsed Arden LJ’s approach and affirmed the binding nature of the Newson decision. Because the immediate victims of a cartel, or those next in the supply chain, may be able to pass on their losses to others further down the chain, the cartelists cannot be said to be seeking to gain at their expense. And while the loss must ultimately be borne by someone, to expand the class of victims ‘to anyone in the chain down to the ultimate consumers’ would open up ‘an unknown and unknowable range of potential claimants’. See the Court of Appeal’s judgment at [169]. The Court on this basis (reversing a judgment of Peter Smith J discussed in a previous blog of mine) struck out the Air Cargo claimants’ economic tort claims.

This is significant. Tort claims at common law might allow cartel victims to recover damages in respect of losses which EU/EEA law claim provides no remedy, for example where particular anti-competitive behaviour falls outside the territorial scope of EU/EEA law (see the Court’s judgment at [120]).  But the Court of Appeal at [174] made no secret of their pleasure, as a matter of policy, not to let the common law expand the scope of the remedies available to cartel victims under the law of the EU/EEA.

How then will claimants seek to recover such losses? There may be other routes to (some) recovery, such as the Air Cargo claimants’ “umbrella effect” argument, or claims based upon the competition law of foreign states which can be advanced in this jurisdiction (mentioned in the Court’s judgment at [157] and [120]). But the question of intention to injure in cartel claims must now be ripe for consideration by the Supreme Court. In particular, as Andrew Scott has remarked of Newson, pass-on appears to be attributed an unusual significance in this context. The captain of the Othello could not know whether the owners of the Tarleton would pass on their losses to others further down the chain, but he was liable nonetheless.

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Appealing energy price controls: guidance for beginners from the CMA

The CMA recently published its final determinations in two appeals brought by British Gas and Northern Powergrid against Ofgem’s electricity price controls for the next 8 years (decisions here and here). The appeals were the first under section 11C of the Electricity Act 1989 and the CMA’s decisions will therefore be the first port of call for any practitioners considering appeals against not only price controls but also any modifications made by Ofgem to electricity distributors’ licences.

British Gas, a supplier, broadly appealed on the basis that Ofgem’s price control allowances were too generous to distributors by around £1.4bn. British Gas won a partial victory on only one of the six grounds of appeal it advanced. On this ground, the CMA found that Ofgem’s recalibration of one of its incentive mechanisms (the information quality incentive) had been, on the facts, excessive, but agreed with Ofgem that it had in principle been right to recalibrate.

Northern Powergrid, a distributor, conversely appealed on the basis that the allowances were not generous enough. The CMA found for Northern Powergrid on only one of the three grounds it advanced, holding that the savings that Ofgem anticipated distributors would make through the advent of smart technology were probably too great and, in any event, premised on an unsafe methodology. Accordingly, the CMA upped Northern Powergrid’s allowances by around £11m.

Prospective appellants will find some crumbs of comfort in the CMA’s decisions, but perhaps more to discourage them.

On the plus side, the CMA stated that the standard of review to be applied to Ofgem in such appeals was more intense than the judicial review standard; the CMA was required to look at the merits of the decision under appeal and determine whether it was wrong on one of the grounds prescribed by section 11E of the Electricity Act 1989. The CMA saw its function as that of an expert appellate body. There is a clear analogy (which the CMA expressly recognised) with the role of the CAT when considering telecoms appeals brought under section 192 of the Communications Act 2003.

Moreover, the CMA was unpersuaded by arguments that it should be slow in principle to alter a price control decision because such a decision is taken “in the round” and it was impermissible for appellants to “cherry-pick” individual errors in an appeal. While the CMA recognised in principle that altering one part of the price control could have knock-on effects for other parts, it saw nothing in the appeals before it to prevent it from adjusting the price control, if necessary.

At least three aspects of the CMA’s decision will dishearten future appellants, however. First, the CMA placed clear limits on the extent to which it would interfere with Ofgem’s decision. It stressed that (like the CAT when considering telecoms appeals) it would not substitute its views for Ofgem’s simply because it would have taken a different approach; rather, Ofgem’s decision had to be wrong. Moreover, the CMA rejected the submissions of one of the intervenors, Scottish and Southern Energy, that it was required to conduct a re-hearing and, if necessary, decide matters afresh. Consistently with the Supreme Court’s judgment in BT v Telefonica O2 UK [2014] UKSC 42, it stated that it was not a “fully equipped duplicate regulatory body waiting in the wings” – rather, it should confine its inquiry to the grounds advanced.

Second, the CMA did not appear to set much store by procedural grounds of appeal. British Gas made much of its point that Ofgem’s decision-making process had not been transparent enough to enable effective consultation. Perhaps most conspicuously, Ofgem had at the hearing of the appeals advanced justifications for one element of the price control (concerning transitional arrangements for a change in asset life policy), which had never been put before the parties. To an extent, the CMA agreed, and wrapped Ofgem’s knuckles for not giving consultees enough information. However, it refused to allow the appeal on that basis, considering that any failures in process were not enough to undermine the decision in question. The lesson for practitioners is not to rely on allegations of procedural unfairness unless these are backed up by substantive criticisms.

Third, the success rate of the appellants was low. Overall, it was hard to persuade the CMA that Ofgem had got it wrong. In the British Gas appeal, Ofgem emerged as the clear winner. And even though Northern Powergrid had some measure of success, the CMA sweetened the pill for Ofgem by making no order as to inter partes costs, thereby shielding the regulator from paying any of Northern Powergrid’s substantially higher bill.

Costs notwithstanding, the financial implications of the price controls for both distributors and suppliers are, of course, enormous. It remains to be seen whether any will take the next step of attempting a judicial review of the CMA’s decision.

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PRIVATE ACTIONS: The CRA 2015 giveth; and the 2015 CAT Rules taketh away

Introduction

Today, on the 1st October 2015, when we are supposed to be celebrating the brave new world of the Competition Act 1998 (“CA”) as amended by the Consumer Rights Act 2015 (“CRA”), cartelists and other competition law infringers up and down the land[1] must be rubbing their hands in glee at the transitional provisions contained in Rule 119 of the Competition Appeal Tribunal Rules 2015 (“the 2015 CAT Rules” or the “New Rules”).[2]

The glee stems from the fact that these transitional provisions are very broad in temporal and material scope and yet very narrow in terms of gateway they provide into the new promised lands of flexible standalone claims,[3] and of collective redress leading to effective enforcement of private damages claims.   The problem, in essence is this: these transitional rules set in aspic for an unnecessarily long time the old CAT regime and all its manifest defects, defects which were the express cause for reform in the first place. Continue reading

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