Anchoring claims to a UK subsidiary

The recent decision of the High Court in Vattenfall AB v Prysmian SpA [2018] EWHC 1694 (Ch) is another example of claimants being allowed to use non-addressee English subsidiaries as anchor defendants for their competition damages claims.  It is also another example of the court considering but not actually having to decide the interesting legal points around attribution of liability which potentially arise in such cases.

There have now been several cases with the same basic structure: the European Commission decides that a company is liable for a competition law infringement and some claimants then start proceedings against that company’s English subsidiary in order to establish jurisdiction in England.  The defendant objects to the claimants’ attempt to sue an entity which was not, after all, an addressee of the Commission’s decision simply to use it as a means of bringing proceedings in London.

The problem which defendants face in such a scenario, and the reason why they keep losing these cases, is that it is relatively easy for claimants to allege that the English subsidiary was knowingly involved in the infringement.  If the Commission has found that there was an EU-wide infringement then it will often be entirely proper for the claimants to infer, at least sufficiently to meet the low threshold for establishing jurisdiction, that the infringement was implemented in England through the English subsidiary.  In Vatenfall the claimants had the additional benefit of being able to point to concrete evidence in support of their knowing implementation plea.  Provided that such a plea is properly made, a standalone claim can be run against the English subsidiary which can then be used as the anchor defendant.

The more interesting legal question is what the position would be if a claimant cannot properly plead a standalone case of knowing implementation against the English subsidiary.  Could the parent’s liability be attributed to the subsidiary so that the subsidiary can be sued and used as an anchor defendant even though it was not involved in the cartel?  The English judges who have considered this question have expressed different views about it.

One view is that the answer is that liability can be attributed from an infringing subsidiary to its parent company but not the other way round.  Supporters of this view point to the fact that, when discussing attribution of liability in the line of cases starting with Akzo Nobel NV v European Commission [2009] 5 CMLR 23, the European Courts have been concerned only with imputing liability to a parent company, and that they only permit such attribution if the parent exercised a ‘decisive influence’ over the infringing subsidiary.

The problem, however, is that the reasoning in the Akzo Nobel line of cases is expressed in quite wide-reaching terms.  The basic logic is that if the parent and subsidiary are part of the same single economic unit then they form a single undertaking, and that if an undertaking infringes competition law then all of its legal entities are liable for the breach.  The ‘decisive influence’ test is really about determining whether the parent and subsidiary are part of the same economic unit, not an additional threshold for the attribution of liability between companies which are in the same economic unit.

Thus the alternative view is that the liability can be attributed between any and all companies in the same undertaking.  This has caused some consternation among English judges because of its apparently wide-reaching consequences.  Does it mean that liability could be attributed to a subsidiary with no knowledge of or involvement in a cartel?  Or even from one subsidiary to another?

In the Sainsbury’s case ([2016] CAT 11) at [363] the CAT suggested something of a compromise: liability could be attributed between companies in the same undertaking but only if they had “in some way” participated in the breach or otherwise exercised a decisive influence over a company which did.  That is a sensible solution, but it might be said that it still sits somewhat uncomfortably with the reasoning in Akzo Nobel.

A different way of formulating the point might be as follows.  In accordance with the reasoning in Akzo Nobel, liability can always be attributed between companies in the same undertaking.  However, when asking whether companies are in the same “undertaking” one needs to keep in mind that the identification of an undertaking depends on the circumstances.  In a competition infringement case, the question is whether the companies acted as a single economic unit for the purposes of the infringement.  If they did then they are all part of the same undertaking and they are all liable.  If they did not then they are not part of the relevant undertaking and liability cannot be attributed to them from any other company in the group.

If this approach is correct then a subsidiary which genuinely had nothing to do with an infringement will not be liable for it.  But a subsidiary which, whether knowingly or not, acted in concert with other group companies such that they operated as a single economic unit to implement an infringement will be liable for it.  That is essentially (with slightly different reasoning) the approach which appealed to the CAT in Sainsbury’s, and it is a solution which avoids some of the extremes of other proposed solutions.

Leave a comment

Filed under Abuse, Agreements, Conflicts, Damages, Procedure

Applicable law in competition infringements: Deutsche Bahn

The recent judgment of Barling J in Deutsche Bahn AG v MasterCard offers important guidance on determining applicable law in competition actions. Practitioners dealing with competition infringements which stretch back prior to the entry into force of Rome II in 2009 should take note – particularly when dealing with limitation issues, which are governed by the applicable law of the tort. The court held that where the 1995 Act regime applies (broadly, between 1996 and 2009) the applicable law is that of the country where the restriction of competition took place. This begs the question: what law applies if the claimants have not defined the geographical market which is affected along national lines?

Background

This judgment is the latest in the interchange fee saga following the Commission’s infringement decision in 2007. It relates to an action brought on behalf of some 1,300 retailers operating in 18 European countries. The retailers claim that Mastercard infringed European and national competition laws by centrally setting interchange fees payable by acquiring banks (and other rules) which in turn inflated the ‘merchant service charge’ paid by retailers whenever they accept payment by Mastercard credit/debit cards.

The claims span nearly three decades, dating back to 1992. As a stepping-stone to determining limitation issues, the parties asked the court to determine the applicable law and nominated test claims relating to 4 countries (Germany, Italy, Poland and the UK).

The three regimes

The resulting judgment is a helpful ready reckoner on applicable law for those faced with claims of long-running competition infringements. The three regimes can be broadly divided as follows:

  • 11 January 2009 to date: where the “events giving rise to damage” occurred on or after 11 January 2009, Rome II applies (see Article 31). Although what constitutes the relevant ‘event’ for the purposes of drawing this temporal dividing line in competition cases was left unanswered ([26]).
  • 1 May 1996 to 10 January 2009: where the “acts or omissions giving rise to a claim” occurred on or after 1 May 1996, the Private International Law (Miscellaneous) Provisions Act (the “1995 Act”) applies (see section 14). This is concerned with the acts and omissions of the Defendant, irrespective of the date of the resulting damage.
  • 22 May 1992 to 30 April 1996: English common law principles will apply.

The parties were in agreement on the import of Rome II: under Article 6(3) the applicable law is the law of the country “where the market is, or is likely to be, affected”. In the present case, it was agreed that this translated to a test of where the claimant was based at the time of the relevant transaction which attracted the merchant service charge ([22]). However, the application of the 1995 Act was heavily contested.

The 1995 Act: place where the restriction of competition occurred

The general statutory test for applicable law under section 11(1) of the 1995 Act is where “the events constituting the tort or delict in question occur”. Where elements of those events occur in different countries, the test outside of personal injury and property damage cases is where “the most significant event or elements of the events occurred” (section 11(2)).

The Defendants argued that that the place where the most significant event occurred was the place where the merchant was based when they paid the inflated service charge, thereby aligning the test with that under Rome II.

The thrust of the claimants’ argument was that ‘the most significant event’ in each claim was not the Claimants’ payment of an inflated service charge – rather, it was the Defendants’ actions in deciding to adopt the relevant interchange fee. The Claimants argued that those actions took place in Belgium (although this was subject to some dispute).

Mr Justice Barling found that the court must make a ‘value judgment’ about the significance of each of the English law constituents of the tort in question and that judgment should be taken in light of the facts of the particular case ([40]-[41]).

In the present case, he found that the most significant element of the cause of action was the restriction of competition. This, he found, was a factual event which could be geographically pinpointed and was not, as the claimants had argued, merely a legal/economic phenomenon without a country of occurrence. In practical terms, Barling J’s approach pointed to the national law of each of the markets where each claimant operated its retail business ([55]).

Beyond national markets?

Mr Justice Barling’s test of where the restriction of competition occurred seems a neat solution on the facts of the MasterCard case. MasterCard relied heavily upon the way in which the particulars of claim had been pleaded by reference to national markets and national laws (see the court’s discussion at [49] and [54]).

Yet the test may not produce such a neat answer for claims in which the relevant geographical market has not been defined along national lines. Claimants might allege a restriction of the pan-European market or even fail to define the geographical market at all in their pleadings. When faced with the argument that claims may plead restrictions by object rather than effect, the Judge observed that in such cases a restriction of competition is presumed to have occurred “on the relevant market”. Yet this begs the question – what is that relevant market? Can it always be neatly mapped on to a single country?

There is therefore considerable scope for future litigants to argue that ‘where the restriction occurred’ cannot be the ‘one size fits all’ solution in all competition claims reaching back prior to 2009. The seeds for such an argument may well have been sown in Mr Justice Barling’s finding that the significance of the different elements of a tort may differ even as between cases involving the same cause of action (see [118]).

Leave a comment

Filed under Abuse, Agreements, Conflicts

Market dynamics in the counterfactual: more competitive, not just cheaper

The judgment of Phillips J in Sainsbury’s v Visa [2017] EWHC 3047 (Comm) demonstrates the importance to claimants in competition damages cases of identifying a counterfactual which not only involves lower prices but also involves higher levels of competition.

Sainsbury’s case

Visa’s payment card scheme required ‘acquirers’ (who process card payments on behalf on merchants) to pay an ‘interchange fee’ to the issuer of a payment card whenever a payment was made. All acquirers were required to accept all cards issued in the scheme (the so-called honour all cards rule or ‘HACR’). All issuers were required to remit to the acquirer the whole of the payment made by the customer, less the applicable interchange fee (this was called the ‘settlement at par’ rule). Acquirers passed on all of the interchange fees to merchants, as part of the merchant service charge which also included an element of profit margin for acquirers.

Visa set a default interchange fee (the multilateral interchange fee or ‘MIF’), though acquirers and issuers were free to negotiate different fees bilaterally. However, no acquirer had an incentive to agree to pay more, and no issuer had an incentive to agree to accept less than the MIF. The settlement at par rule prevented issuers from, in effect, forcing a higher interchange fee on acquirers by remitting customer payments at a discount. The HACR prevented acquirers with market power from forcing lower interchange fees on issuers by refusing to accept cards unless bilateral interchange fees were agreed.

The combined effect of these rules was to eliminate any competition as to the level of interchange fees. This was Sainsbury’s case and Visa accepted that these arrangements constituted a restriction of competition ‘in absolute terms’: [103-104].

Sainsbury’s proposed counterfactual, which the court accepted, was one in which there was no MIF set by Visa, but the settlement at par rule and HACR remained in force: [98]. This, in effect, amounted to a MIF of zero and the same dynamics between issuers and acquirers as existed in the factual would have prevented bilateral interchange fees from being agreed in the counterfactual: [126-129]. It followed that on Sainsbury’s counterfactual, the interchange fees paid would have been lower but not because of any re-introduction of competition in the setting of such fees. The suite of rules which had operated to eliminate competition in the factual would operate in the same way and with the same result in the counterfactual, just at different prices: [161]. Sainsbury’s claim therefore failed as it had not established that its loss was caused by a reduction in competition.

What went wrong?

Sainsbury’s counterfactual retained two key elements from the factual scheme: the settlement at par rule and the HACR. All parties agreed that the scheme would be unworkable if it incorporated the HACR but did not require settlement at par: [99]. Such a scheme would be equivalent to allowing issuers to set interchange fees unilaterally, by settling payments at a discount. Assuming acquirers continued to pass interchange fees on to merchants in full, this would result in merchants ceasing to accept Visa, as continued participation in the scheme would mean accepting all card payments regardless of the fee charged.

The parties do not appear, however, to have explored the possibility of a truly bilateral system in which neither the settlement at par rule nor the HACR applied. In a counterfactual from which both of these rules were absent, issuers and acquirers would have been forced to negotiate terms of settlement bilaterally. Issuers would have wished to agree a higher interchange fee (or a larger discount from par) but would have been prevented from demanding too high a fee because of the risk that acquirers (in order to retain merchant business) would cease to accept a certain issuer’s cards.

This counterfactual involves a radical departure from the Visa scheme in the factual, but the market dynamic which would result is familiar: this is how competition works in so-called three-party schemes, such as American Express. The issuer faces competing incentives: higher fees make for greater profits per transaction, but too high fees reduce card acceptance by merchants and reduce transaction volume, ultimately reducing the appeal of the card to customers.

The outcome in this counterfactual could be a patch-work of differing fees charged by different issuers with corresponding variances in merchant acceptance. There are over 50 issuers and around 30 acquirers in the UK[1], which would give rise to a large (but in principle manageable) number of bilateral negotiations assuming the same number of issuers existed in the counterfactual. There may be good reason, however, to think that there would be fewer issuers in the counterfactual: If the setting of MIFs inhibited competition and raised issuer profits, it is likely also to have encouraged more issuers to enter the market than could have been sustained in a competitive scenario. Lower interchange fees, lower profits, the requirement to negotiate deals with all (or almost all) acquirers and the need to reassure prospective customers that the card would be widely accepted would all act to restrain the number of viable issuers in the counterfactual.

Merchants now indicate whether they accept Amex or Diners. Before the emergence of four-party schemes in the UK, merchants indicated whether they accepted Barclaycard, a card issued only by the bank of the same name. In the counterfactual described here, merchants would be required to indicate which of the major banks’ and independent issuers’ cards they accepted.

Of payment cards and dog races: monopoly and monopsony in price setting

Competition within the Visa scheme was inhibited by the fact that fees were set centrally for all participants. The scheme was controlled by participating issuing banks, so central price setting tended to result in higher fees. If merchants (or acquirers who did not also issue cards) had controlled the scheme, the result might have been that low or even negative interchange fees were set, but the result would have been no more competitive. The mischief against competition was the setting of prices centrally; control over the scheme determined which party stood to gain.

In Bookmaker’s Afternoon Greyhound Services [2009] LLR 584, cited by Phillips J at [91], the boot was on the other foot. Whereas in the Visa scheme, prices were set by or on behalf of the party receiving payment, in the BAGS case, prices were set by the paying party, which was controlled by the leading bookmakers, and which had a monopsony on buying live television footage from racecourses. When a group of racecourses jointly agreed to sell their footage exclusively through a newly formed distributor, prices for footage rose and BAGS claimed that the racecourses had acted anti-competitively. On the contrary, the court found, the market power of BAGS had been reduced and competition had been increased. As Phillips J pointed out in Sainsbury’s, the BAGS case shows the pitfalls of a facile analysis which equates price decreases with increases in competitive intensity and vice-versa.

It ought to be possible for the payment card market to operate competitively given the large number of retailers, banks and other issuers. Where collective price-setting is interposed between the parties on each side of the transaction, there is an obvious possibility of distortions to competition. It was common ground in Sainsbury’s that the Visa scheme as implemented had eliminated competition in the setting of interchange fees: [103-104]. A claimant seeking damages for the setting of payment card interchange fees should ask the court to consider a simple counterfactual, in which these distortions are eliminated: What would the result have been if the parties on each side had decided whether to transact with one-another and on what terms, without the central setting of prices or a compulsion to transact?

[1] In Arcadia v MasterCard [2017] EWHC 93 (Comm), at [103] Popplewell J found that there were 55 MasterCard issuers in 2015 in the UK; it is assumed that there were a similar number of Visa issuers.

Leave a comment

Filed under Abuse, Agreements, Damages, Economics

Intel Corporation Inc v European Commission

In its recent judgment in Intel, the Grand Chamber shed valuable light on the “qualified effects test” for jurisdiction and on the room for loyalty rebates to be compatible with competition law.

Background

Intel designed computer processors and sold them to original equipment manufacturers (“OEMs”) to use in central processing units (“CPUs”). One of its competitors, Advanced Micro Devices Inc (“AMD”), complained to the Commission that Intel was abusing its dominant position by offering loyalty rebates to its OEMs if they purchased all or most of their processors from Intel.  The Commission agreed and imposed a €1.05 billion fine. The General Court dismissed Intel’s appeal.

On appeal, the Grand Chamber of the CJEU rejected Intel’s complaints about jurisdiction and procedural irregularities but allowed its appeal on the assessment of the rebates as abusive.  That rendered three other grounds unnecessary to consider.

There are two key points of interest arising from the judgment:

  1. Arrangements that are intended to form part of a grander anti-competitive scheme may fall within CJEU jurisdiction, even though they are relatively removed from the EEA, under the “qualified effects” route to jurisdiction.
  2. Loyalty rebates are not automatically anti-competitive; in particular, they can be saved if the undertaking can show that they could not have the effect of foreclosing an as efficient operator from the market.

The qualified effects test for jurisdiction

The Court considered two tests for jurisdiction.

  1. The “implementation test”:  Were the anticompetitive practices implemented in the EEA?
  2. The “qualified effects test”: Would the practices have foreseeable, immediate and substantial effects in the EEA?

The General Court had found that it had jurisdiction over Intel’s agreements with Lenovo (a Chinese OEM) on both tests. Intel unsuccessfully challenged the latter as a valid route to jurisdiction, and the Court’s application of both.

The Court confirmed that the “qualified effects test” is a valid route to jurisdiction.  Although the test had previously been accepted by the General Court in Gencor v Commission (T‑102/96, EU:T:1999:65) at §92, this is the first time it has been recognised by the CJEU.  It explained that it pursues the objective of “preventing conduct which, while not adopted within the EU, has anticompetitive effects liable to have an impact on the EU market”. If EU competition law were confined to the places where agreements were reached or concerted practices engaged in, it would “give undertakings an easy means of evading” Articles 101 and 102 (§§41-45).

How then is that test to be applied?  The Court provided some guidance. The question is whether “it is foreseeable that the conduct in question will have an immediate and substantial effect in the European Union”. In answering that question it is necessary to examine the undertaking’s conduct as a whole.  On the particular facts (§§51-57):

  1. The agreements with Lenovo in China had a “foreseeable” impact on competition, taking account of their “probable effects”.
  2. They had an “immediate” effect, because they formed part of an overall strategy to ensure that no Lenovo notebook equipped with an AMD CPU would be available on the market.
  3. They had a “substantial” effect on the EEA market, having regard to the whole of the conduct.

This last point is the most interesting one. Even though agreements with Lenovo for CPUs for delivery in China would by themselves have had a negligible effect, they formed part of conduct that would have a substantial effect. The Court refused to examine them in isolation on the basis that such an approach would “lead to an artificial fragmentation of comprehensive anticompetitive conduct”.

Loyalty rebates

The main substantive implications of this case arise from the findings that loyalty rebates are not always be abusive: it will depend on their scope and effect.

The purpose of Article 102 is to promote, not inhibit, competition.  So it does not protect undertakings which are not as efficient as the dominant undertaking.  Rather, it prevents illegitimate competition that pushes equally efficient undertakings out of the market.  That includes forcing purchasers to meet their requirements from the dominant undertaking.  It also includes inviting purchasers to undertake a contractual obligation to do so.  By extension, it might include incentivising purchasers to do so through loyalty rebates.  But, the Court has now made clear, that latter category is not inherently abusive.

In order to determine whether it is, it is necessary:

  1. First, to consider all the circumstances, including the level and duration of the rebates, the market shares concerned, and the needs of customers. Most importantly, the Commission must consider the capability of the rebates to foreclose an “as efficient competitor” (the “AEC test”).  That is, could the rebates force such a competitor to sell below cost price?
  2. Second, even if the rebates do have an exclusionary effect, they might still be redeemed if that effect is counterbalanced by efficiency advantages (§§139-140).

There are three key points of interest.

First, it appears that the general rule remains that loyalty rebates are abusive, unless the undertaking can produce evidence to the contrary.  The Court recounted that loyalty rebates have an anti-competitive effect, and “clarified” its case-law to say that undertakings can displace that presumption by showing that they could not have that effect in the particular case.  That brings Article 102 in line with the position under Article 101.

Second, the Court made clear that the AEC test applies generally to assessing whether conduct is an abuse of dominant position. Article 102 is not calculated to come to the aid of less efficient undertakings. Accordingly, to determine whether the practice is illegitimate, it is necessary to determine the effect it would have on a competitor who is as efficient as the dominant undertaking. That principle had been applied to attracting purchasers and excluding competitors by predatory pricing in Post Danmark v Konkurrencerådet (C‑209/10) and AKZO Chemie BV v Commission (C-62/86). In a victory for consistency, it is now clear that it applies more generally, including to attracting purchasers and excluding competitors by loyalty pricing schemes.

Third, in the context of that AEC test the Court said the inquiry was as to the “capability” of the rebates to foreclose an as efficient competitor (§§138, 141), even though Intel’s objection was that the General Court had failed to consider the “likelihood” of the rebates having that effect (§§113-114).  That is a harder task for an undertaking seeking to avoid breaching the Article 102 prohibition.  However, it is also consistent with other cases of actions with an anti-competitive object (which are less easily excused, only if they could not have that effect) rather than those with an anti-competitive effect (which are, for obvious reasons, excused if they are not likely to have that effect).

Leave a comment

Filed under Abuse, Conflicts, Economics

Collective (in)action? The CAT’s recent judgments on collective proceedings orders

At first glance, two recent judgments from the CAT may give the impression that the new UK class action regime is dead in the water. However, on closer inspection there is much in these judgments that prospective claimants will welcome.

The first decision was in the Pride mobility scooters case (see Tom Coates’ blog here). The CAT made clear that it might have been prepared to grant a collective proceedings order (“CPO”), but on a basis so narrow that the claimants chose not to proceed. In the second decision, Merricks v Mastercard Inc & Ors [2017] CAT 16, the CAT rejected the CPO application, bringing an end to what would have been an extraordinarily ambitious claim—on behalf of 46.2 million people, seeking aggregate damages of approximately £14 billion, for Mastercard’s unlawful setting of fallback multilateral interchange fees in breach of Article 101 TFEU.

Under the new provisions in s.47B of the Competition Act 1998, a CPO application must satisfy the CAT of two criteria. They are, in brief, that (i) the person bringing the proceedings is an appropriate representative of the class of claimants, and (ii) the claims are eligible for inclusion in collective proceedings.

In Merricks, as in Pride, the applicants succeeded on the first criterion but failed on the second. The CAT adopted a relatively liberal approach to certifying the class representative in both cases: a former ombudsman and consumer protection advocate in Merricks (§§93-94), and an advocate for pensioners’ rights in Pride (§§125-139).

The CAT was also satisfied with the litigation funding arrangements in both cases (Pride, §§140-145; Merricks, §§95-140); although it strongly criticised the “impenetrable” drafting of the American-style funding agreement in Merricks, and was only prepared to approve it in light of amendments proposed at the hearing: §§121-127. Prospective claimants will welcome the fact that, in neither Pride nor in Merricks was the CAT unduly concerned by the prospect of a shortfall between the applicants’ costs cover and respondents’ likely costs.

Where both claims failed, however, was on the eligibility criterion. This second criterion is further broken down in rule 80 of the CAT Rules 2015, which provides that claims will be eligible for inclusion in collective proceedings where they (a) are brought on behalf of an identifiable class of persons; (b) raise common issues; and (c) are suitable to be brought in collective proceedings.

In both cases, the CAT was prepared to accept that the claims were brought on behalf of an identifiable class of persons. In Pride that conclusion was uncontroversial, given that the class was defined as “any person who purchased a new Pride mobility scooter other than in the course of a business in the UK between 1 February 2010 and 29 February 2012” (§§5, 85). In Merricks, however, the CAT’s apparent acceptance of the class was no small matter. The class included all individuals who were over 16 years old at the time of the transaction, resident in the UK, and who purchased goods or services from UK businesses which accepted MasterCard cards, at any time over a 16 year period (§1). This included more than 46 million potential claimants; and yet, the CAT was untroubled by the “identifiable class” criterion.

As to the requirement that the claims raise common issues, in both cases the CAT emphasised that the appropriate approach was that followed in Canada, rather than the much stricter approach in the United States (Merricks, §58; Pride, §105). Although only three of the six issues in Merricks could properly be regarded as common, the CAT considered that to be sufficient.

In Pride, the applicant faced the difficulty of proving causation in circumstances where the regulator had focused on a small sample of infringing agreements (“the low-hanging evidential fruit”: §109), and the claimants were time-barred from pursuing anything other than a follow-on claim for the infringement (§110). The CAT’s decision on this issue may well create difficulties for other follow-on vertical infringement claims, but that category of claims is likely to be quite narrow.

In Merricks, the CAT was concerned about the methodology by which the applicant proposed to assess individual losses. The methodology needed to distinguish between three sets of issues: “individuals’ levels of expenditure; the merchants from whom they purchased; and the mix of products which they purchased” (§88). Regrettably, there had been “no attempt to approximate for any of those in the way damages would be paid out” (§88). The CAT observed that the experts’ oral evidence in response to questions from the Tribunal was “considerably more sophisticated and nuanced than that set out, rather briefly, in their Experts’ Report” (§76), but it still could not be satisfied that the damages sought would broadly reflect “the governing principle of damages for breach of competition law”, that is, “restoration of the claimants to the position they would have been in but for the breach” (§88). The judgment sounds a valuable warning to future claimants of the necessity for a detailed and precise methodology for calculating both individual and aggregate losses.

The CAT showed little sympathy for the applicant’s argument that refusing the CPO would result in a vast number of individuals who suffered loss going uncompensated, since there was no realistic prospect of claimants pursuing Mastercard individually. The CAT observed shortly that this was “effectively the position in most cases of widespread consumer loss resulting from competition law infringements” (§91).

The judgments in Pride and Merricks provide important guidance on the CAT’s likely approach to CPOs in future. In spite of the outcomes in both cases, the CAT’s ready acceptance of the proposed class representatives, its flexibility in regard to litigation funding, and its affirmation of the Canadian approach to collective action, are all likely to give heart to prospective claimants. Further, the judgment in Merricks leaves the door open to mass claims in the future, while signalling the heightened importance which expert evidence on calculating losses is likely to assume in such cases.

Leave a comment

Filed under Abuse, Agreements, Damages, Economics, Policy, Procedure

Brexit and implications for UK Merger Control – Part 3/3: Managing and prioritising the CMA’s mergers workload

The Competition Bulletin is pleased to welcome the third in a three-part series of blogs on Brexit and merger control by Ben Forbes and Mat Hughes of AlixPartners.  Ben and Mat are (with others) co-authors of the new Sweet & Maxwell book, “UK Merger Control: Law and Practice”.

Part one focused on the issues associated with the voluntary nature of UK merger control (and can be found here), and part two considered options for change that in our view should not be adopted (and can be found here).

Introduction

Prioritising the CMA’s work load is clearly important due to Brexit.  This is because the European Commission will cease to have exclusive jurisdiction over large UK mergers that currently fall for consideration under the EU Merger Regulation. In March 2017, the Competition and Markets Authority (CMA) indicated that this could lead to increase in its mergers caseload by 40-50% since 1 April 2014, potentially amounting to an additional 30-50 phase 1 cases and six phase 2 cases per year.

This final blog in our series considers how the CMA could prioritise and manage its mergers workload, with particular focus on the CMA’s consultation of 23 January proposing amendments to its guidance on the application of the exception to its duty to refer a merger in markets of insufficient importance (i.e. the de minimis exception).[1]

The CMA is proposing increasing the upper threshold for markets considered to be sufficiently important to justify a merger reference from £10 million to £15 million, and would raise the lower threshold for markets not considered to be sufficiently important from below £3 million to below £5 million.  Where the size of the market falls between these two thresholds, the CMA would continue to evaluate, on a case-by-case basis, the potential harm caused by the merger against the cost of an investigation.

The importance of the de minimis exception in UK merger control

The de minimis exception is designed to save the CMA[2], and therefore the public purse, money by not referring insignificant mergers to phase 2. These costs are material as the National Audit Office’s 2016 report on the UK Competition Regime estimated that the average cost of a phase 2 investigation to the CMA is £275,000.[3] Moreover, this figure does not include any costs to the merging parties (or third parties), and for a large complex phase 2 investigation, these costs are high and often substantially more than the CMA’s costs.

The de minimis exception has become an important part of UK merger control.  It is particularly important since it only applies where, in principle, clear-cut undertakings in lieu of reference could not be offered, and the parties would thus otherwise face the costs and risks of a phase 2 investigation. In particular, over the last seven years, 28 mergers have been cleared on de minimis grounds, and absent this exception the number of merger references would have increased by 46 per cent (28/61). (Over this period, a further 40 mergers were cleared conditionally at phase 1 on the basis of undertakings in lieu of reference).

As many cases affect markets worth under £10 million per annum, any assessment of merger control risks needs to consider even overlaps in relation to even small parts of the merging parties’ businesses.

The Office of Fair Trading’s (OFT) guidance on exceptions to its duty to make merger references, which has been adopted by the CMA, also indicates that, for now, it draws a distinction between markets with an annual value of below £3 million and those with values of between £3m and £10m.[4] In particular, their guidance notes that it would “expect to refer a merger where the value of the market(s) concerned was less than £3 million only exceptionally, and where the direct impact of the merger in terms of customer harm was particularly significant”. For mergers between £3m and £10m, the OFT/CMA will weigh up the size of the market and the likely harm to customers, as well as considering the wider implications of the decision.

Our analysis of 400+ UK merger decisions since 1 April 2010 also included many cases where the OFT/CMA considered applying the de minimis exception. As set out in the chart below, there were 45 cases between 1 April 2010 and 31 March 2017 where the OFT/CMA considered applying the de minimis exception and how the decision reached varies according to the size of the relevant markets affected.[5]

AP1

Consistent with the OFT’s guidance, there were very few cases where the relevant market was valued at under £3 million per annum where the CMA/OFT nevertheless decided to refer the merger for a phase 2 investigation. An analysis of all the various cases is set out in the next chart, and the two exceptions relate to mergers between local bus operators, where the OFT and CMA respectively decided that these mergers warranted phase 2 investigation.  This reflected a recommendation from the Competition Commission for a cautious approach following its market investigation into local bus services.

Where the relevant market size is greater than £3 million per annum, a merger reference is more likely. This is set out in detail in the following chart, which covers all 45 merger decisions that considered the de minimis exception from 1 April 2010 through to 31 March 2017.  This chart also covers the phase 2 outcomes of those cases where the OFT/CMA decided not to apply the de minimis exception and referred the merger.

AP2

Note: The OFT/CMA decisions often only included a range for the relevant market size. Therefore, the bars represent the expected market size (i.e. the middle of the range) where applicable. The top of the range is represented by the black triangular dotes.

This review highlights the rather sharp distinction in outcomes between mergers that affect markets with an annual aggregate value of around £3 million per annum and those valued between £3 million and £10 million.

Looking more closely at the 17 cases that were referred at Phase 1 despite the small sizes of the markets affected, seven of these mergers were abandoned. This is entirely unsurprising given the high costs to the parties of phase 2 investigations, which will often exceed merger synergies in small markets.  For non-abandoned mergers, three cases were cleared unconditionally, six were cleared with remedies, and only one prohibited. Accordingly, it seems reasonable to speculate that some of the seven abandoned mergers would have been cleared either unconditionally or with remedies.

The CMA’s proposed changes in market size thresholds

At first sight, the proposed changes in the thresholds at which the de minimis exception will apply suggests that it may be applied substantially more often.

However, some words of caution are warranted.  First, as a matter of policy, the CMA will not apply the de minimis exception if, in principle at least, clear cut undertakings in lieu of reference could be offered.

Second, considering the CMA’s proposed £5 million threshold for mergers where the de minimis exception will generally apply, since 1 April 2010 only another two referred mergers would fall into this category.

Third, turning to those mergers with turnover between £5 million and the proposed £15 million threshold, the de minimis exception may be considered in many more cases. However, historically the OFT/CMA has referred many of the mergers below the £10 million upper bound, and it remains to be seen whether this will be the case in relation to the higher £15 million threshold.

Conclusions

As discussed in part one and part two of this blog series, productively improving the UK merger control regime is not simple. The CMA has had to address the changes associated with becoming a single authority covering phase 1 and phase 2 decisions, and having a full prenotification regime and statutory phase 1 deadlines.

In our view, the CMA’s proposed changes to the de minimis thresholds is sensible. However, it remains to be seen whether this will substantially reduce the CMA’s workload, and the burden of UK merger control on small mergers.

[1]   https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/585147/small-mergers-consultation.pdf

[2]   As of the 1 April 2014, the OFT transferred its merger related functions to the newly created CMA. CMA has been used throughout this document, but if any examples occur before this date, read as OFT.

[3] See paragraph 2.2: http://www.regulation.org.uk/library/2016_NAO_The-UK-Competition-regime.pdf

[4] OFT, “Mergers, Exceptions to the duty to refer and undertakings in lieu of reference guidance”, December 2010.

[5]    Note that this excludes certain mergers where the OFT/CMA briefly considered applying the de minimis but where the parties could offer clear-cut undertaking in lieu of reference to address the competition concerns identified. In these cases, the OFT/CMA did not consider the size of the relevant market (see for, example, Reed Elsevier / Jordon Publishing (2015)).

Leave a comment

Filed under Mergers

Illegal counterfactuals: the Court of Appeal shuts the back door

Suppose a defendant to a competition claim runs a defence that, in the counterfactual world in which no anticompetitive conduct occurred, pricing would have been no different; and that the claimant replies, “maybe so, but only because you were at the same time operating some independent anti-competitive scheme, which must also be purged from the counter-factual”. Can the claimant amend his claim to plead the independent anti-competitive scheme raised in his Reply as the basis for a new substantive claim even where it would ordinarily be time-barred?

In February last year, Barling J appeared to answer, “Yes”, in a judgment given in the MasterCard litigation. On one view, the curious result of that judgment was that a claimant could apparently circumvent limitation rules by introducing a time-barred allegation of unlawfulness in his Reply, then using that as a basis to apply to amend his original claim. In other words, when a limitation point blocked the front door, claimants could still bring in new claims through the back.

The Court of Appeal, however, has now shut this back door, by overturning the High Court’s judgment. For the background to the judgments, and the details of Barling J’s decision, see my previous post here.

The issue before the Court was whether or not the new claim, premised on MasterCard’s Central Acquiring Rule (CAR) arose out of the same or substantially the same facts as the existing claim, premised on MasterCard’s Multilateral Interchange Fees (MIFs) (see CPR 17.4 and section 35(5) of the Limitation Act 1980). If it did, the Court could permit an amendment notwithstanding that it was time-barred. Barling J had held that it did on the following two grounds: first, the existing claim would already require an investigation into and evidence on the CAR; and, secondly, the claimants’ reply had pleaded that the CAR was unlawful and had to be excised from MasterCard’s counterfactual – so the new claim arose out of facts already in issue with respect to the existing claim.

The Court of Appeal disagreed with Barling J on both scores. Sales LJ said that the facts underlying each claim could not be said to be the same because the counterfactual inquiry required by each claim was so different (§46). On the existing claim, the counterfactual world was one in which the MasterCard rules in dispute (principally the MIFs) were excised but the CAR remained in place. On the new claim, however, the Court would have to investigate both the counterfactual world in which the MasterCard rules were excised as well as the CAR and the counterfactual world in which all the MasterCard rules remained in place but the CAR was excised.

Sales LJ, doubting the obiter comments of Waller LJ in Coudert Brothers v Normans Bay Ltd [2004] EWCA Civ 215, further said that the claimants could not introduce the new claim by pointing to their reply and saying that the CAR’s lawfulness was already in issue. The proper rule was that, where the defendant had pleaded facts by way of defence to the original claim, the claimant could introduce a new claim premised on those facts: Goode v Martin [2002] 1 WLR 1828. However, that was not the case here because MasterCard did not specifically rely on the CAR in its defence.

The Court of Appeal was further clearly motivated by a concern about the avoidance of limitation rules. Sales LJ said at §64:

“…it would be unfair to a defendant and would improperly subvert the intended effect of limitation defences set out in the Limitation Act if a claimant were to be able to introduce new factual averments in its reply (which are not the same as or substantially the same as what is already pleaded in the claim), after the expiry of a relevant limitation period, and then rely on that as a reason why it should be able to amend its claim with the benefit of the “relation back” rule to circumvent that limitation period.”

The curious result of Barling J’s judgment has therefore been reversed by the Court of Appeal. A claimant can no longer pull himself up by his own bootstraps; limitation now guards the back door as jealously as the front.

 

Leave a comment

Filed under Abuse, Agreements, Damages, Procedure