The Supreme Court’s decision in Unwired Planet – what comes next?

Introduction

The UK Supreme Court has handed down its long-awaited judgment in Unwired Planet. Its decision has profound implications for patent owners and implementers alike and is likely to lead to heavily contested jurisdictional disputes going forward.

These joined appeals concern Standard Essential Patents, or “SEPs”: a patent which the owner has declared to be essential to the implementation of certain telecommunications standards, such as 3G. In practical terms such a patent, if essential as declared and if it is valid, is necessarily infringed by technology implementing the relevant standard, notably mobile phones.  The appellants, Huawei and ZTE, manufacture smartphones and other telecommunications equipment, and implement such technical standards. They were defendants in two sets of patent infringement proceedings. The patent owners, Unwired Planet and Conversant, each had a multinational portfolio said to include SEPs in the UK and elsewhere. They had declared SEPs essential to practising technical standards set by the European Telecommunications Standards Institute (“ETSI”), and given an undertaking to ETSI that they were willing to license SEPs to implementers on “FRAND” terms: Fair, Reasonable and Non-Discriminatory.

The Supreme Court decided as follows:

  • Jurisdiction: The English courts have the power to declare that, as the price for avoiding an injunction restraining infringement of a UK SEP, the implementer has to enter into a global licence; and can determine the rates and terms of such a licence and declare them to be FRAND. (§49-91). The contract created by the ETSI policy confers this jurisdiction: it envisages that national courts will assess whether the terms of an offer are FRAND, looking at ‘real world’ commercial practice. (§58, 62). The Court was also not persuaded that damages, rather than an injunction, were the appropriate remedy (§163-169).
  • Forum non conveniens: in the Conversant claim, the implementers contended that England is not the appropriate forum for this dispute. The Supreme Court upheld the lower court’s rejection of China as a suitable alternative forum as, on the evidence, Chinese courts cannot currently determine terms of a global licence unless the parties agree. (§96-97).
  • Discrimination: Unwired did not discriminate against Huawei by failing to offer the same worldwide royalty rates that it had previously agreed with Samsung. The non-discriminatory limb of FRAND means that a single royalty price list should be available to all market participants based on the portfolio’s market value. (§112-114).
  • Competition law: Huawei had not abused a dominant position contrary to Article 102 TFEU and to the CJEU’s decision in Case C-170/13 Huawei v ZTE. Seeking a prohibitory injunction without notice will infringe Article 102 TFEU, but what is required by way of ‘notice’ is fact sensitive. Unwired had not acted abusively: it had shown that it was willing to grant Huawei a licence on whatever terms that the court deemed FRAND. (§150-158)

What’s next?

First, it is now clear that the UK courts have jurisdiction to rule on the terms of global licences. This could lead to a “race to sue”: implementers may opt to commence declaratory proceedings in their preferred jurisdiction (such as China) as soon as licence negotiations start to break down, so as to prevent the English court being seised of the entire portfolio if the SEP owner sues in this jurisdiction. This “race to sue” effect is compounded by the Court’s decision on Issue (4), i.e. its interpretation of the CJEU’s Huawei v ZTE. The factors therein are guidance, not “mandatory requirements” or “prescriptive rules(§151-152; 158), and Unwired did not need to propose a licence on the specific terms which the English court later determined were FRAND. (§158) This may reduce the consultation carried out by patent owners in future, before choosing to sue an implementer in the UK.

Moreover, now that the UK and German courts 75-78) have empowered themselves to settle the terms of global licences, other jurisdictions may well follow suit: notably, China and the USA. We should expect to see some hotly contested jurisdiction disputes in the next few years, centred on:

  • Forum non conveniens: The ratio of the Supreme Court’s decision on this point was narrow, focussing on the current practice of the Chinese courts. However, the Court also indicated, in obiter dicta, its agreement with the lower courts’ characterisation of the dispute (§95-96); namely, that global FRAND determination only arises as an issue in the context of relief for UK patent infringement and that it is up to the patent owner which national patents to assert. It is unclear whether the High Court will in future characterise the UK as the appropriate forum for pursuit of UK patent claims involving global licence disputes. The Supreme Court’s reference to “further issues” that could have arisen if China had been an available alternative forum 98) leaves open the possibility of implementers resurrecting arguments as to the suitable forum.
  • Case management stays: Where there are American or Chinese FRAND proceedings underway, there may be strong arguments to stay UK proceedings. The English courts will no doubt closely scrutinise the comity and propriety of litigating the FRAND assessment here; thereby imposing global terms on multinational companies like Samsung, Huawei and ZTE. The UK generally accounts for only a tiny proportion of relevant sales of such entities: in the Conversant proceedings, Huawei claimed that the Chinese market accounted for 56% of its worldwide sales on which Conversant made claims. The UK market by contrast comprised 1% of relevant sales. As to ZTE, 0.07% of its turnover came from the UK and 60% of its operating revenue came from China. Both entities manufacture in China. 37).

Secondly, the Supreme Court’s decision on non-discrimination is potentially highly important, in practical terms. The Court twice referred to a single royalty “price list” available to all licensees irrespective of their individual characteristics. (§114)  This raises the prospect that going to court could present risks for SEP owners; on the Supreme Court’s approach, once the court has set a fair and reasonable global rate, it appears that the patent owner will then have to offer that rate to all putative licensees.

Thirdly, like the lower courts, the Supreme Court drew succour from the prospect of global “FRAND” licences including a clause which reduces the rate payable if foreign patents are later found to be invalid or inessential. The ‘adjustment’ clause imposed by Birss J in the Unwired proceedings had problems, however ([2017] EWHC 2988 (Pat), §582-592): it only applied to “major markets” and did not provide any adjustment to royalties payable if there was a successful challenge to Unwired’s Chinese patents (§47, 65). Inevitably, the Supreme Court’s decision means that there will be much focus, in negotiating the terms of a global FRAND licence, on the drafting of these ‘adjustment’ clauses.

Conclusion

The Supreme Court’s decision has settled the law definitively on the power of the English courts to determine the terms of global FRAND licences for SEPs. However, it leaves important practical implications unresolved. The judgment, while providing clarity on the jurisdictional aspect, is unlikely to be the last word on questions of comity and the proper role of foreign courts; the dictates of non-discrimination; or the drafting and interpretation of ‘adjustment’ clauses, and how they will operate in practice. Moreover, other national courts may well start asserting jurisdiction over these disputes, particularly in countries which account for a far greater proportion of relevant sales than the UK market. The questions posed by this article are therefore likely to play out before the English courts in coming years.

 

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Crisis cartels: relying on Article 101(3) in a pandemic

Brian Kennelly QC and Tom Coates examine how businesses might invoke Article 101(3) to justify collaboration during the pandemic.

The coronavirus pandemic has prompted some slackening of competition rules, but not much. Competition authorities, including the Commission and the CMA, have indicated that they are unlikely to take issue with coordination between providers of critical items such as medical equipment (see here and here). The government has issued exemptions from the Chapter I prohibition for groceries, healthcare services and Solent ferries. But these limited indulgences are all designed to remedy an urgent and heightened demand for essential products. For most businesses – many of whom will have seen a cliff-edge plunge in demand – the competition regime is unchanged.

Nevertheless, the temptation amongst competitors to find a shared solution to a shared problem must be great. For such businesses, the critical question will be: how will competition law principles – and Article 101(3) in particular – be applied in a time of unprecedented crisis?

Clues to the answer may lie in the EU’s reaction to historical crises in the markets for synthetic fibres (Commission Decision 84/380/EEC), Dutch bricks (Commission Decision 94/296/EC) and – most importantly – Irish beef (Case C-209/07). All these sectors suffered declines in demand which led to issues of structural overcapacity. In each case, rival undertakings agreed to reduce capacity in a concerted and orderly way, rather than allow market forces to remedy the problem. When challenged by the Commission, the relevant undertakings invoked Article 101(3) to justify their conduct.

The starting point for the analysis in each case was that the relevant agreement to reduce capacity amounted to a restriction of competition by object under Article 101(1). In the Irish Beef case, the CJEU emphasised that the parties’ honest subjective intentions did not matter: “even supposing it to be established that the parties to an agreement acted without any subjective intention of restricting competition, but with the object of remedying the effects of a crisis in their sector, such considerations are irrelevant for the purposes of applying that provision” [21].

Courts have reached similar conclusions in cases of other crisis cartels which do not concern overcapacity. An example from the UK is the dairy price initiative case, in which retailers clubbed together to agree prices they would charge to farmer suppliers, whose dissatisfaction at milk prices had led them to blockade creameries. Although the scheme had wide public support, the OFT nevertheless considered it an object restriction and the CAT largely agreed (Tesco Stores v OFT [2012] CAT 31).

The objectives and pro-competitive effects of crisis cartels may, however, be relevant to the analysis of Article 101(3). This includes the following four cumulative conditions: (a) the agreement must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress; (b) consumers must receive a fair share of the resulting benefit; (c) the restrictions must be indispensable to the attainment of these objectives; and (d) the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

In both the Synthetic Fibres and the Dutch Brick cases, the Commission found that Article 101(3) was applicable. Reducing capacity brought efficiencies and pro-competitive benefits insofar as it allowed the industries in question to shed the financial burden of keeping under-utilized excess capacity open without incurring any loss of output. Interestingly, the Commission also had regard to the social advantages which would arise from the agreements in the form of the retraining or redeployment of redundant workers. As to consumers, the Commission reasoned – without lengthy analysis – that they would benefit from an overall healthier industry with increased competition and greater specialization. In considering whether the agreements were indispenable, the Commission’s view was that (a) market forces on their own had been unable to solve overcapacity problems and (b) the agreements themselves were solely concerned with overcapacity and so went no further than necessary.

In the Irish Beef case, the CJEU did not itself consider Article 101(3) but the Commission submitted a brief in the underlying Irish proceedings giving guidelines on its application to crisis cartels. The substance of this brief was later replicated in a paper submitted by the Commission to the OECD (here). It illustrates the key hurdles which an undertaking relying on Article 101(3) will have to clear.

First, it will be necessary to establish pro-competitive benefits which outweigh the disadvantages for competition. In the context of the crisis, this may be one of the (relatively) easier hurdles to clear. Benefits could for example take the form of shedding inefficient capacity; or, in the case of an agreement protecting the survival of a shared critical supplier, shielding consumers from an interruption in supply, market collapse, or an overly concentrated market. There may be a useful analogy to be drawn with the failing firm defence which makes rare appearances in the mergers context: the thrust of the argument could be that, although anti-competitive, the conduct is better than the alternative of market exit.

Second, businesses will need to show that the agreement is indispensable to achieve the benefits. The critical – and difficult – question here is likely to be whether market forces alone could remedy the problem at hand. In its paper, the Commission’s view was that an agreement reducing capacity was unlikely to be indispensable unless quite specific conditions were present (in particular, high costs associated with reducing capacity and stable, transparent and symmetric market structures). In the ordinary course of events, mergers and specialisation agreements might produce a more efficient solution.

Third, and again critically, businesses will need to demonstrate that consumers receive a fair share of the benefits such that they are at least compensated for any negative impact. This is likely to be a hard condition to satisfy. Although the Synthetic Fibres and Dutch Brick cases contain generous reasoning on consumer benefits, the Irish Beef paper signals a more rigorous and quantitative approach. Of particular importance will be an analysis of the extent to which competitive constraints are reduced. The greater the reduction, the greater the efficiency and benefits must be for sufficient pass-on.

The Commission’s paper concludes that pleading Article 101(3) successfully in overcapacity reduction cases is likely to be “very difficult” [58]. But these are extraordinary times. The key to success is likely to be whether the agreement in question limits any lessening of competition to the bare minimum. If it does, there may be a serious argument that the countervailing benefits in the context of an unprecedented crisis outweigh the harm.

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Litigation in the shadow of COVID-19

Readers of this blog may be interested to know that Blackstone Chambers has set up a dedicated webpage providing legal insights into COVID-19.

In the most recent article, Credit When Credit Won’t Do, Kieron Beal QC and Tom Mountford consider the prospects of group litigation being used to help consumers whose holiday plans have been left in tatters by the pandemic.

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Coronavirus and the EU State Aid Framework

The coronavirus pandemic has ushered in an era of government spending on a scale not seen since the financial crisis. The Chancellor has so far announced £330bn of financial support in the coronavirus business interruption loan scheme and further support for the self-employed. With some squeezed industries such as aviation clamouring for help, many predict that larger bailouts are around the corner. Continue reading

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Merricks v MasterCard: Collective Actions Reinvigorated

The Court of Appeal today gave its much-anticipated judgment in the application to bring collective proceedings against MasterCard: see Merricks v MasterCard Incorporated and others [2019] EWCA Civ 674.  It is a major victory for the Applicant and will reinvigorate the collective proceedings regime, which has seen disappointingly few cases brought since its introduction in 2015. Continue reading

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A warning before bringing an appeal to the CAT? Costs after the BCMR decision

The Court of Appeal’s judgment in the recent BCMR costs case is a stark warning to all those considering challenging a regulatory decision in the Competition Appeal Tribunal: even if you win, you may still face a big costs bill.  See British Telecommunications plc v Office of Communications [2018] EWCA Civ 2542.

Unlike the position in most civil courts under the CPR, in the CAT there is no prima facie rule that the unsuccessful party must pay the costs of the successful party. By rule 104(2) of the CAT Rules 2015, the CAT has a discretion to make “any order it thinks fit in relation to the payment of costs in respect of the whole or part of the proceedings.” Rule 104(4) sets out a list of factors that may be taken into account when making an order under rule 104(2) determining the amount of costs which includes, amongst others, whether a party has succeeded on part of its case, even if that party has not been wholly successful.

The previous practice of the CAT in relation to costs distinguished between certain categories of case. In relation to “dispute resolution appeals” (i.e. appeals against decisions made by Ofcom resolving a price dispute under s.185 of the 2003 Act) the starting point was that there would be no order as to costs against Ofcom if it had acted reasonably and in good faith. That made good sense because, in such a case, Ofcom simply acts as an arbiter between two competing private parties. However, in the case of “regulatory appeals” (i.e. appeals made against decisions made by Ofcom in the regulatory context) the starting point was that costs follow the event. This approach was developed by the CAT in Tesco plc v Competition Commission [2009] CAT 26 and PayTV [2013] CAT 9.

Ofcom’s principal submission in the BCMR case was that the Tesco and PayTV decisions were based on a fundamental misunderstanding of the applicable authorities. The Court of Appeal agreed, finding that the CAT had taken inadequate account of principles set out in analogous cases in the regulatory context. Principally, in Perinpanathan [2010] EWCA Civ 40 at §76, Lord Neuberger summarised the position as follows:

[i]n a case where regulatory or disciplinary bodies, or the police, carrying out regulatory functions, have acted reasonably in opposing the granting of relief, or in pursuing a claim, it seems appropriate that there should not be a presumption that they should pay the other party’s costs.

The Court of Appeal held that those principles are directly applicable to the current case even though, as it acknowledged, Perinpanathan was not a competition case and did not concern an appeal in a specialist tribunal such as the CAT (at §69).

The important point was that, in each case, the regulators were acting solely in pursuit of their public duty and in the public interest in carrying out regulatory functions. The question which the CAT should have asked was whether there were specific circumstances of the costs regime which rendered the principles inapplicable. As a matter of principle, if Ofcom has acted purely in its regulatory capacity in prosecuting or resisting a claim before the CAT and its actions were reasonable and in the public interest, the Court of Appeal concluded that “it is hard to see why one would start with a predisposition to award costs against it, even if it were unsuccessful.” (at §§72, 83). The decision has therefore been remitted to the CAT for reconsideration, in view of the principles set out in the judgment.

The Court of Appeal added for good measure the CAT had made the same error, of giving inadequate weight to the relevant authorities, in the Tesco case (at §§70, 82). Tesco concerned a successful judicial review under s.179(1) of the Enterprise Act 2002 of the Competition Commission’s decision to introduce a competition test as part of planning applications. The CAT ordered the Commission (now Competition and Markets Authority) to pay Tesco’s costs.

Given the Court of Appeal’s comments, it seems likely that the CAT will be required to reconsider the appropriateness of the loser pays principle not only in regulatory appeals but also in statutory judicial review applications against the CMA’s decisions when the issue next arises.  It is still open to the CAT to decide that, notwithstanding that there is no presumption in favour of costs following the event, it would still be appropriate for the regulator to pay the costs of the losing party, perhaps to avoid what BT says would be the ‘chilling effect’ of depriving the winning party of its costs in such cases. However, the Court of Appeal has made clear that successful appellants can no longer assume that their claims for costs will be looked on favourably.

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Retrospective interpretation: DSG v MasterCard

The latest battle over limitation in Competition damages claims was a victory for the claimants – see DSG Retail Ltd v MasterCard Inc [2019] CAT 5.  In some ways it is a surprising decision, because the Competition Appeal Tribunal has decided that when s.47A of the Competition Act was enacted in 2003, certain claims which were time-barred prior to its enactment were revived.  The Tribunal frankly acknowledged that it did not find the matter straightforward, and looking at the rules it is easy to see why.

It used to be the case that competition damages claims could only be brought in the civil courts, where they would be subject to the usual six-year limitation rule (subject to extensions in various circumstances which need not concern us here).  In 2003 a new route was introduced: claimants became entitled bring follow-on claims in the CAT under s.47A, which had its own bespoke limitation regime.  That regime included this provision, which was found in rule 31(4) of the 2003 CAT Rules:

“No claim for damages may be made if, were the claim to be made in proceedings brought before a court, the claimant would be prevented from bringing the proceedings by reason of a limitation period having expired before the commencement of section 47A.”

Rule 31(4) was dropped when the rules were revised in 2015.  The position now is that claimants can still bring s.47A follow-on claims, including for periods pre-2015, but such claims are no longer subject to rule 31(4). The Tribunal had to decide the related questions of what the consequence was of dropping rule 31(4), and what the rule meant in the first place.

The most obvious interpretation of rule 31(4) is that claimants could not bring follow-on claims under s.47A if the claims would have been time-barred in 2003 when s.47A was introduced.  Thus, if an infringement lasted from 1993 to 2003 (and assuming that it was not deliberately concealed), the claimants could have brought a s.47A claim for damages going back as far as 1997 but no earlier.  That would make good sense because it would mean that the introduction of the s.47A regime did not ‘revive’ claims that had otherwise expired.

The main problem with that ‘obvious’ interpretation is that it would lead to very strange consequences when, in 2015, rule 31(4) was dropped.  One possibility is that the effect of dropping rule 31(4) was that, all of a sudden and for no apparent reason, from 2015 claimants were allowed to bring claims for damages which were time-barred in 2003 and which had remained time-barred until 2015.  That would be very surprising.  The only way to avoid such a result would be to say – and this is essentially what MasterCard said – that the rules should continue to be applied as if rule 31(4) still applies.  But that is  an ambitious argument given that the rule was deliberately dropped.

The Tribunal resolved these problems by deciding that what I have called the ‘obvious’ reading of rule 31(4) is wrong.  In fact, the Tribunal held, rule 31(4) required one to ask whether the entire proceedings would have been time-barred in 2003 when s.47A was introduced.  If the answer is that the proceedings would not have been time-barred, because some of the damage was still within the limitation period, then the claimants could have started s.47A follow-on proceedings for the entire loss.  Thus, to take my example of an infringement lasting from 1993 to 2003, the fact that the 1997-2003 period was not limitation-barred in 2003 meant that claimants were entitled to start s.47A proceedings for the entire 1993-2003 period.  Section 47A therefore did, in this limited sense, revive claims that had otherwise expired.

This approach to rule 31(4) has the particular attraction of enabling one to explain why the rule was dropped in 2015.  The explanation, according to the Tribunal, is a practical one: it is extremely unlikely that there will be an infringement decision after 2015 which relates to damages which were entirely limitation-barred in 2003.  Thus, rule 31(4) is no longer practically necessary; the problem with which it was concerned will no longer arise.

The upshot of all of this is that the Tribunal has decided that rule 31(4) never prevented claimants from pursuing claims going back as far as 1993 (or earlier), provided that some part of the damage was suffered in or after 1997, and the fact that rule 31(4) has now been dropped is entirely understandable and makes no practical difference.  Claims can still be brought going back to 1993 (or earlier).  It is undoubtedly a neat solution.

On the other hand, consider this.  It seems pretty unlikely that any claimant who had brought a claim in, say, 2004, or 2014, would have been able to persuade the Tribunal that the 2003 rules had revived claims that were otherwise time-barred.  It is only because the rule was revoked in 2015, and because the Tribunal used the fact of revocation as being relevant to its meaning when originally enacted, that the Tribunal interpreted the rule in the way that it did.  Thus, claims which were time-barred in 2003, and which would probably have been treated as time-barred up until 2015, are now to be treated as having been revived in 2003.  That may well be the least bad interpretation of the regime, but one can well understand why the Tribunal did not find the matter at all easy.

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Jurisdiction after a no deal Brexit

Time for some more speculation about the future which awaits us after 29 March.  The topic this time is jurisdiction.

As the readers of this blog will know, the rules of civil jurisdiction across the EU are currently governed by the Brussels Recast regulation.  The basic framework is:

  1. A defendant domiciled in a Member State can be sued in the court of its domicile and also in various other EU courts under certain specified gateways (e.g. in competition claims, the place where the cartel was concluded – see CDC).
  2. There are strong lis pendens provisions. In general, if the same issue is litigated in more than one Member State, the later proceedings must be stayed.
  3. There is protection for choice of forum contracts in favour of a court of a Member State. The courts of the chosen Member State will accept jurisdiction even if the defendant is not domiciled in that (or indeed any) Member State; and all other courts must stay proceedings in deference to the courts of the chosen Member State.

The proposed Withdrawal Agreement provides that the provisions of Brussels Recast will continue to apply to proceedings instituted during the transitional period.  But, as with most things, if there is no Withdrawal Agreement then things will get more interesting.

No deal Brexit: The law in England

The government’s intention in the event of no deal is that Brussels Recast will continue to apply to cases begun in England before Brexit, but otherwise it will be repealed.  A draft statutory instrument to that broad effect was published in December.

It is worth briefly pausing on this point to note that it is not obvious that the proposed statutory instrument will be lawful.  Under the EU Withdrawal Act 2018, the SI can only be made if it is required to remedy or mitigate a ‘deficiency’ in retained EU law.  The government has proceeded on the basis that Brussels Recast in a necessarily reciprocal arrangement and that the UK could not retain it if the EU does not do so too.  That may be open to debate.

However, assuming that the proposed SI is not challenged, the practical consequence will be that the English common law rules will apply instead of Brussels Recast to all cases commenced in England after exit day.  Whether that is a good thing rather depends on your perspective.

The English rules are certainly more flexible than the Brussels Recast rules.  In theory, there will be some cases which could be litigated in England under the English jurisdictional gateways which you could not litigate here under Brussels Recast.  For example, an English court could allow proceedings to be litigated in England even if there is a jurisdiction clause in favour of an EU Member State.  Other examples were given in Naina Patel and Andrew Scott’s previous blog on this topic.

On the other hand most of the English gateways are discretionary.  This gives rise to much more uncertainty, and in practice it may be somewhat optimistic to think that there are going to be lots of opportunities to bring new claims in England that could not have been brought under Brussels Recast.

No deal Brexit: The law in the EU

It may turn out that the more difficult problems will arise in proceedings in the EU-27.

It is worth starting with the obvious point that Brussels Recast will continue to apply, within the EU, to cases where the Defendant is domiciled in an EU Member State.  So, to take a simple example, an English company could still sue a German company in Germany.  That will give rise to various tactical possibilities for claimants wanting to sue an EU defendant.

  1. They might be able to sue in England, under English rules.
  2. They could sue in the EU. If within one of the Brussels Recast gateways, the EU court would (probably) be obliged to accept jurisdiction.
  3. Note that they could sue in the EU even if there is a jurisdiction clause in favour of England. Brussels Recast gives particular weight to such agreements but only if they are in favour of the courts of a Member State.  We therefore face the prospect of EU Member States being obliged by the Brussels Recast regulation to take jurisdiction over disputes even if there is a contractual agreement in favour of English courts.

Brussels Recast will also still apply, within the EU, to cases where there is a jurisdiction agreement in favour of an EU Member State, regardless of the domicile of the parties.  So for example: a German claimant could still sue an English defendant in the chosen EU court.  This gives rise to similar tactical possibilities as are set out above.

But Brussels Recast will not apply within the EU to cases where the Defendant is domiciled in England and there is no EU jurisdiction agreement.  In this scenario, the national rules of the Member States will apply.  For example: if a German company sues an English company in Germany then, in the absence of any jurisdiction agreement, German jurisdiction rules will apply.

There are therefore various complex means by which jurisdiction may be established in the EU in cases with an English connection.  To make matters more complex, all of this must be understood in light of the fact that the Brussels Recast lis pendens rules do not apply in relation to pending proceedings in third states.  Article 33 of Brussels Recast provides only that Member States may, in certain circumstances, stay proceedings to await the resolution of pending proceedings in a third state.  What this means in practice is that we face the prospect of the same parties being tied up in litigating the same issues in the UK and in the EU.

As to how quickly these changes might happen, the European Commission has recently (18th January 2019) published a Notice to Stakeholders which states that, in the event of a no-deal Brexit, Brussels Recast will continue to apply to cases involving a UK-domiciled defendant which were pending before EU courts on the withdrawal date.  The legal basis for that assertion is not explained, but even if it is true it will affect only a small number of cases.  The Commission has not expressed a view on other scenarios which appear rather more likely, such as whether Brussels Recast would apply to proceedings commenced in the EU post-Brexit but where there were pending proceedings in England pre-Brexit; or whether it would apply to jurisdiction agreements in favour of England entered into pre-Brexit.  The broad expectation appears to be that the UK will immediately cease to be treated as part of the Brussels Recast regime.

 

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Subsidiarity liability: Biogaran

I wrote a blog a few months ago on the circumstances in which a subsidiary can be held liable for the infringing conduct of its parent.  That is a somewhat special interest subject which might be said to have received more than its fair share of attention among English judges and lawyers. However, I cannot resist a short update to point out that the issue has recently received attention from the EU General Court.

The context was a clutch of appeals relating to the Commission’s decision on ‘pay-for-delay’ settlements relating to patents owned by the French pharmaceutical company Servier. One of the addressees of the decision was Biogaran, a 100% Servier subsidiary.  One of Biogaran’s grounds of appeal – which was rejected – was that the Commission had wrongly held it liable for an infringement carried out by its parent.

The judgment is not as clear as one might have hoped, and it is also not yet available in English. However, two points are tolerably clear.

The first point is that the General Court considered that a subsidiary may be liable for an infringement even if does not itself have the knowledge that is ordinarily required to find an infringement: see [223]-[225].  That said, it appears that Biogaran did have at least some knowledge, so the precise limits of the court’s analysis are open to debate.

The second point relates to implementation.  Some parts of the Court’s judgment may be read as suggesting that a subsidiary may be liable even if it has played no role in the implementation of the infringement.  Other parts may be read as meaning that the subsidiary must play role in implementation but that it can be relatively minor: at [225] the Court refers to implementation “even in a subordinate, accessory or passive manner.”

So Biogaran is unlikely to be the final word on this issue.  It does, however, tilt the balance more firmly in favour of subsidiary liability than some English judges might be comfortable with.

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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.

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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]).

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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.

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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).

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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.

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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)).

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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.

 

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Collective Proceedings in the CAT: mobility scooters roll on for now

Last Friday the CAT handed down a judgment on the first ever-application for a collective proceedings order under the new regime introduced by the Consumer Rights Act 2015. The judgment will generally be welcomed by potential claimants, but it has a sting in the tail which may cause serious difficulties for class actions in other vertical infringement cases.

The new collective proceedings regime, contained in section 47B CA98 and CAT Rules 75-98, was one of a suite of claimant-friendly measures aimed at improving the remedies for individual victims of competition infringements whose losses were low (other measures included, for example, the new fast-track procedure). Consistently with the regime’s objective, the CAT, although stopping short of reaching a final decision, said much about the scheme which will encourage claimants.

The proposed collective action is a follow-on claim against Pride, formerly the UK’s largest supplier of mobility scooters. The OFT (the national competition regulator) had found that Pride infringed the Chapter I prohibition by object by entering into 8 vertical agreements with retailers forbidding them from advertising mobility scooters online at prices below RRP. Those 8 agreements were in fact the result of a market-wide policy that Pride had been operating and which it had communicated to all of its retailers.

The key issues before the CAT were (broadly) the authorisation of Dorothy Gibson as the class representative (under section 47B(5) and CAT Rule 78), and certification of the claims for inclusion in collective proceedings on the basis that they raised common issues. On both issues, the CAT’s approach to the claimants was benevolent.

The CAT first dismissed the defendant’s preliminary objection. Pride pointed out that both the OFT decision and the underlying infringement pre-dated the introduction of the collective proceedings regime. On that basis, it fired a salvo of arguments based on Article 1 Protocol 1 of the ECHR, the EU Charter, and EU principles of legal certainty/legitimate expectations, the thrust of which was that the CAT should interpret the regime so as to disallow its “retrospective” application. The CAT shot down all these arguments in a comprehensive discussion that should see the end of any similar threshold points about collective proceedings applications.

The CAT also had little difficulty in authorising Ms Gibson as the class representative. Although not a mobility scooter consumer, her status as an advocate of pensioners’ rights (she is the chair of a representative body, the National Pensioner Convention), who had experienced lawyers, satisfied the CAT that she would act fairly and adequately in the interests of the class (§139; see CAT Rule 78(2)(a)). Moreover, the CAT was not concerned about her ability to pay Pride’s costs (see CAT Rule 78(2)(d)). Even though Ms Gibson’s ATE insurance cover level was less than Pride’s anticipated costs, the CAT stated shortly that those costs might not be reasonable or proportionate, so it would not be appropriate to disallow collective proceedings at that stage (§145).

The CAT’s approach to certification and commonality was also – in principle – liberal. Although it said that it could not “simply take at face value” (§102) the applicant’s expert evidence, it nonetheless rejected Pride’s submission that it should take a hyper-rigorous US-style attitude. Rather, the CAT endorsed the Canadian approach, approving at §105 the following comment of Rothstein J in Pro-Sys Consultants Ltd v Microsoft Corp [2013] SCC 57:

“In my view, the expert methodology must be sufficiently credible or plausible to establish some basis in fact for the commonality requirement. This means that the methodology must offer a realistic prospect of establishing loss on a class-wide basis so that, if the overcharge is eventually established at the trial of the common issues, there is a means by which to demonstrate that it is common to the class (i.e. that passing on has occurred). The methodology cannot be purely theoretical or hypothetical, but must be grounded in the facts of the particular case is question.”

The stumbling block for the claimants, however, was the CAT’s reasoning on the proper counterfactual. The claimants posited a world in which not only the 8 infringing vertical agreements were absent but also where Pride had operated no policy of prohibiting below-RRP advertising at all. The CAT, however, endorsed a narrower counterfactual from which only the specifically unlawful agreements (i.e. the 8 vertical agreements about which the OFT had made findings) were assumed to be absent (§112). With this narrower counterfactual, the CAT held that it was not clear whether there was sufficient commonality in the issues of loss, or whether the likely damages would justify the costs of collective proceedings. However, the CAT (again perhaps generously) did not dismiss the application altogether but rather adjourned it to enable the claimants’ expert to formulate a case on common loss on the basis of the revised counterfactual.

Notwithstanding the generally claimant-friendly approach, the CAT’s reasoning on the counterfactual could render other collective cases premised on vertical restraints very difficult in practice. In a large number of vertical restraint decisions, the infringer has adopted a market-wide policy but the regulator focuses, for practical reasons, on a small number of ‘implementations’ of the policy as the basis for its infringement findings. If one only excludes from the counterfactual the particular instances of unlawful implementation, rather than the more general policy which underlay them, the issues between class members may diverge: some will have been direct victims of the anti-competitive agreements, while others will have suffered only from what would have to be characterised as an “umbrella effect”. In addition, if claimants cannot proceed on the basis that the entire policy should be excluded from the counterfactual, the likely quantum may fall to a level where collective proceedings are not worth the candle. It remains to be seen whether the mobility scooter claimants will overcome these difficulties.

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When is an antitrust/competition claim caught by an arbitration clause? The Microsoft Mobile decision

The decision of the High Court in Microsoft Mobile Oy (Ltd) v Sony offers some helpful guidance as to when a competition law tort claim will be caught by an arbitration clause in a sale or supply agreement.

Competition law claims frequently complain about prices, on ground of collusion or abuse.  Those prices may already have been charged, or they may yet to be charged.  If the price in issue has already been charged then it will almost invariably be contained in a written sale or supply agreement.  It may be the product of a specific contractual mechanism to settle a price.  If the relevant agreement contains an arbitration clause, does it catch a competition law claim complaining about the price charged?

The starting point in this regard is that a detailed semantic analysis of the particular arbitration clause in question is unlikely to provide the answer.  As Lord Hoffmann observed in Fiona Trust v Privalov [2007] 4 All ER 951 at para 13:

“…the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to have entered to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.”

This “one-stop shop” presumption has helped greatly in reducing disputes about the ambit of arbitration clauses.  But its application in the competition law context has been less straightforward, because of debates about precisely what the rational businessman would intend in respect of such claims.

The net effect of the law to date is that competition law claims will be regarded as coming within an arbitration clause only if they are closely related factually to a viable contractual claim which has already been, or could be, made.  Thus, for example, in ET Plus SA v Welter [2006] I.L.Pr. 18, the key consideration for Gross J in finding that competition law claims were within an arbitration clause was that they were “simply a variant on the familiar factual theme” which could be discerned from contractual claims already made (see para 51).

Conversely, in Ryanair Ltd v Esso Italiana Srl [2015] 1 All ER (Comm), the Court of Appeal held that the absence of any viable form of contractual complaint about an allegedly cartelised price rendered it impossible to claim that a competition law complaint about the same price was within an exclusive jurisdiction clause.  Having referred to the one-stop shop presumption in Fiona Trust, Rix LJ then held at para 53 that:

“Such reasoning, however, does not carry over into a situation where there is no contractual dispute (by which I intend to include disputes about contracts), but all that has happened is that a buyer has bought goods from a seller who has participated in a cartel. I think that rational businessmen would be surprised to be told that a non-exclusive jurisdiction clause bound or entitled the parties to that sale to litigate in a contractually agreed forum an entirely non-contractual claim for breach of statutory duty pursuant to article 101, the essence of which depended on proof of unlawful arrangements between the seller and third parties with whom the buyer had no relationship whatsoever, and the gravamen of which was a matter which probably affected many other potential claimants, with whom such a buyer might very well wish to link itself.”

The English Courts therefore treat competition law claims essentially as falling outside the one-stop shop presumption unless they are, factually, simply a variant on the theme of an arguable contractual claim.  This was, furthermore, the approach of the CJEU in Case C-352/13 CDC v Akzo [2015] QB 906, in which it was held that a clause “…which abstractly refers to all disputes arising from contractual relationships” would not cover tortious liability as a result of a cartel, because “…the undertaking which suffered the loss could not reasonably foresee such litigation at the time that it agreed to the jurisdiction clause” (paras 69-70).

The latest word on this topic is the Microsoft decision.  Microsoft brought a claim in the English Courts for damages for the allegedly anti-competitive tortious conduct of Sony, LG and Samsung in relation to the pricing of Li-Ion batteries.  All the allegedly cartelised supplies by Sony had been made pursuant to an agreement with an arbitration clause requiring “any disputes related to this Agreement or its enforcement” to be settled by ICC arbitration.  Sony applied to stay the proceedings under section 9 of the Arbitration Act 1996, arguing that the arbitration clause covered the tort claims made against it.

Mr Justice Marcus Smith held that, on an orthodox application of the principles identified in Ryanair, the question of whether the tortious claims were within the arbitration clause depended on whether the conduct giving rise to the tortious claims also gave rise to an arguable contractual claim.  As he observed, “…it is difficult to see how a tortious claim can arise out of a contractual relationship when the only claim in contract that can be said to be related is unarguable” (para 54).

The unusual incentives created by this (correct) understanding of Ryanair can be seen from the fact that Sony was accordingly required, in order to succeed in its application, to formulate a contractual claim against itself which Microsoft had not advanced.  Sony argued that because the relevant prices had been subject to an express obligation that they be negotiated in good faith, and because Sony was subject to a further obligation to disclose events that reasonably may affect its ability “to meet any of its obligations” under the agreement, the operation of a cartel would have been a clear breach of contract as well as tortious.

The Court accepted this submission, holding that it was “very difficult” to see how Sony could have engaged in the conduct complained of in the tort claims, without also breaching the contract.  On that basis, the competition law claims fell within the arbitration clause.  It did not matter in this regard that Microsoft had not advanced the contractual claim which Sony successfully contended it could have done, because otherwise “…it would be easy for a claimant to circumvent the scope of an arbitration or jurisdiction clause by selectively pleading or not pleading certain causes of action” (para 72(ii)).

The upshot for practitioners is that a decisive consideration when assessing whether a competition law claim falls within a jurisdiction clause is likely to be whether there are any viable contractual claims which “…would be sufficiently closely related to the tortious claims actually advanced by the Claimant so as to render rational businessmen likely to have intended such a dispute to be decided (like a contractual dispute) by arbitration” (Microsoft at para 72).  The existence and extent of any express or implied contractual obligations to observe competition law therefore looks set for detailed examination in competition law claims in the future.

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Brexit and implications for UK Merger Control – Part 2/3: Implications for the CMA’s workload and what not to do

The Competition Bulletin is pleased to welcome the second 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 voluntary nature of UK merger control and can be found here.

Introduction – the CMA’s mergers workload will increase

At present, UK mergers that meet certain turnover thresholds fall exclusively under the jurisdiction of EU Merger Regulation[1]. However, Brexit is likely to end this “one-stop” merger control regime for UK companies, leading to more mergers being caught by UK merger control.

To put this in context, the Competition and Markets Authority (CMA) published 72 decisions concerning qualifying mergers in 2014/15, and 60 such decisions in 2015/16.  Even 20 or 30 more UK merger decisions would therefore represent a very substantial increase in the CMA’s workload, and large-scale European mergers may impact multiple UK markets.  The CMA’s workload will further increase as Brexit will also mean that the UK authorities acquire sole responsibility for enforcing all competition law in the UK.

This part of our blog series focuses specifically on two particularly poor, but often-discussed, options for reducing the CMA’s mergers workload (i.e. what not to do):

  • Removing the ‘share of supply’ test; and
  • Integrating the CMA’s Phase 1 and Phase 2 review teams.

The reason for this starting point is that the UK merger control regime has been subject to extensive fine-tuning in recent years, and it is important to ensure that future changes do not compromise the efficacy of the regime.

The third part of this blog series will focus on much more sensible options for adjusting UK merger control.

Should the CMA look at fewer mergers, and is the ‘share of supply’ test an appropriate jurisdictional threshold?

As set out in the first part of this blog, the CMA focuses more of its investigations on anti-competitive mergers than under the EU Merger Regulation. Nevertheless, another distinctive feature of UK merger control is that mergers may qualify for investigation where the merger creates (or enhances) a market share of 25% or more in the UK, or a “substantial part” of the UK (the so-called “share of supply” test). They may also qualify where the UK turnover of the target firm exceeds £70 million (the “turnover test”).

The share of supply test can be applied very narrowly at both:

  • The product level – This is because the share of supply test is based on the “description” of goods and services. These descriptions can be very narrow and do not need to correspond to economic markets; and
  • The geographic level Small parts of the UK (such as Slough), which the CMA considers to be a “substantial” part of the UK.

The share of supply test often creates uncertainty for the parties. Often they do not know the products and geographic area over which the CMA will apply the test. They may also not know their competitors’ sales, making market shares difficult to calculate.  It is therefore legitimate to question whether the share of supply is an appropriate jurisdictional threshold.

However, we believe there are two good reasons for retaining the share of supply test.  First, the share of supply test captures effectively mergers that may be problematic. From 1 April 2010 to 30 September 2016, 56% (53 cases) of the 95 Phase 1 merger cases that were either cleared subject to undertakings in lieu of reference or referred only qualified for investigation under the share of supply test.  Abandoning the share of supply test would therefore grant a “free pass” to these mergers – unless the turnover test is reduced.

The jurisdictional basis of Phase 1 merger cases either cleared subject to undertakings in lieu of reference or referred

ap

Source: AlixPartners analysis

Second, the share of supply test is a highly effective and focussed way of enabling the CMA to investigate mergers that may lead to a SLC.  In particular, UK merger control focuses on mergers that create or enhance high market shares, or that reduce the number of competitors from four to three (or fewer). Between 1 April 2010 and 31 March 2016, 94% of Phase 1 mergers where undertakings in lieu were accepted or the merger was referred, involved horizontal mergers between competitors where:

  • The merger created or enhanced high market shares of 40 per cent or more;
  • The merger reduced the number of competitors from four to three (or fewer), or where the merged undertaking’s market share exceeded 35% (calculated on various different bases).[2]

Should the CMA be fully integrated such that there is no distinction between the review teams at Phase 1 and Phase 2?

Creating the CMA as a single, integrated competition authority was intended to yield various synergies. In particular, the CMA has responsibility for both Phase 1 merger review (previously carried out by the Office of Fair Trading) and Phase 2 merger review (previously carried out by the Competition Commission).  However, a clear distinction between Phase 1 and Phase 2 has been retained.  In contrast to most other competition authorities, at Phase 2, a new case team is appointed, with largely separate staff to Phase 1 and the decision makers at Phase 1 are not involved at Phase 2.  The purpose of this structure was to retain the independence of the decision makers at Phase 2, with the CMA Panel making the final decisions at Phase 2.

The particular concern is that an integrated Phase 1 and 2 process would suffer from “confirmation bias”, namely a case team finding a competition problem at Phase 1 may be predisposed to follow suit at Phase 2.

The CMAs’ costs, and possibly those of the parties, could be reduced to some degree by dispensing with the separation of the Phase 2 and Phase 1.  However, as the government indicated when it created the CMA, the independence and impartiality of the Phase 2 regime is a particular strength of UK merger control.  Whilst the government consulted in May 2016 on the precise structure, identity and number of CMA panel members, there are strong arguments for retaining the independence and impartiality of the CMA panel.

Conclusions

Notwithstanding the inevitable increase in the CMA’s workload we would not recommend either:

  • Abandoning the share of supply test. This test is a strength of the UK regime as it focuses UK merger control on mergers that experience suggests are most likely to lead to competition concerns; or
  • Changing materially the independent and impartial nature of the CMA in relation to its investigation of Phase 1 and Phase 2 mergers.

Part three of this blog series considers, in our view, much more sensible adjustments to UK merger control to reduce the CMA’s workload without compromising its effectiveness.

[1]    There are provisions for mergers to be referred down to individual member states and up to the Commission from member states.

[2]    See further s.6-009 of “UK Merger Control: Law and Practice”, Parr, Finbow and Hughes, Third Edition, Sweet & Maxwell, November 2016.

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Brexit and implications for UK Merger Control – Part 1/3: Should UK merger control filings be mandatory?

The Competition Bulletin is pleased to welcome the first 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”. They can be contacted on bforbes@alixpartners.com and mhughes@alixpartners.com.

Introduction

Brexit will have wide-ranging impacts on the UK economy and society, including on merger control in the UK.

The focus of this blog is the voluntary nature of UK merger control.  Our subsequent blogs will consider the UK Competition and Markets Authority’s (CMA) workload post-Brexit, and the appropriate mitigating steps to manage the likely increase in workload.

Why are merger filings voluntary in the UK when they are mandatory from Albania to Uruguay?

In contrast to most other countries’ merger control regimes, including the EU Merger Regulation, UK merger control is “voluntary”. This means there is no requirement for mergers to be notified to the CMA prior to completion or at all. Whilst this is not a new issue, it is appropriate to revisit this point as post-Brexit the CMA will have sole responsibility to assess mergers that affect UK markets, which raises the question of whether the UK system should be made mandatory, as it is in most countries.

One important issue is whether UK merger control would be more efficient or effective if UK merger filings were mandatory prior to completion.

Mandatory regimes are not efficient – finding needles in haystacks

Considering first efficiency, it is highly unlikely that anyone wishing to reduce the CMA’s workload would propose mandatory filings. This is because mandatory regimes require the parties to file – and the competition authority to investigate – regardless of whether the merger raises any real competition issues that warrant investigation.[1]

However, just how inefficient would a mandatory regime be? Over the last five years, only 7.0% of the mergers notified to the European Commission were either cleared subject to commitments at Phase 1 or subject to Phase 2 review.[2]

By contrast, over a similar period,[3] 30.4% of the CMA’s Phase 1 decisions relating to qualifying UK mergers were either: (a) clearances subject to undertakings in lieu of reference; (b) clearances on de minimis grounds (which is not a basis for clearing mergers under the EU Merger Regulation – covered in part three of this series); (c) or subject to Phase 2 review. Moreover, over this period, 40.5% of qualifying UK mergers were subject to a case review meeting (such meetings are called by the CMA in relation to all mergers that may warrant detailed Phase 2 investigation).

These figures indicate that the UK merger control regime, with its voluntary filing rule, is far more focussed on investigating mergers that may be anti-competitive, rather than finding needles in haystacks.

Mandatory regimes may fail to capture all anti-competitive mergers – keeping it (jurisdiction) simple may be stupid

Another difficulty with mandatory regimes is that, because notification is mandatory, in order to make the system business-friendly the jurisdictional criteria tend to be relatively simple. Accordingly, mandatory regimes typically apply to certain types of merger transactions and depend on the turnover of the parties.[4]  However, there are trade-offs between the simplicity of these criteria (and legal certainty), failing to capture anti-competitive mergers, and inefficiently investigating and delaying mergers that are not problematic.

For example, the European Commission has consulted on extending the EU Merger Regulation to the acquisition of minority stakes in rivals or firms active in related markets, even where the firm has not acquired “control”.[5]  Similarly, the European Commission has consulted on whether the EU’s turnover thresholds should be expanded by adding more thresholds.  In 2016, the Commission observed that turnover based jurisdictional thresholds may be particularly problematic “in certain sectors, such as the digital and pharmaceutical industries, where the acquired company, while having generated little turnover as yet, may play a competitive role, hold commercially valuable data, or have a considerable market potential for other reasons.”[6]  In both instances, the concern is that anti-competitive mergers may be escaping scrutiny under EU merger control.

Whatever the precise scale and seriousness of any enforcement gaps in EU merger control, any such gaps are smaller in relation to UK merger control. In large part this reflects the more subjective nature of the jurisdictional tests applied. For example, UK merger control applies where firms acquire “material influence” over another firm, which is less than “control” under the EU Merger Regulation.  Similarly, UK merger control is not limited to a turnover based threshold. This is because a merger may also qualify if market shares of 25% or more are created or enhanced in the supply or acquisition of particular goods or services, whether in the UK as a whole or a substantial part of the UK. Accordingly, the CMA can investigate the acquisition of small competitors with low turnovers where the so called “share of supply” test is satisfied.

The downsides of voluntary filings are low

There are two potential downsides of voluntary filings. First, the CMA may fail to investigate some anti-competitive mergers that were not voluntarily notified. While this is possible, this is likely to be rare. In particular, from 1 April 2015 to 8 March 2016, the CMA’s Merger Intelligence Committee (MIC) reviewed more than 550 transactions to assess whether they warranted investigation. Ultimately, the CMA only investigated a small minority of these mergers, but approximately 20% of the CMA’s decisions over this period resulted from MIC investigations into non-notified mergers.[7]

In short, the parties to anti-competitive mergers, even in small markets, should not assume that by not notifying they can “fly under the radar” and avoid investigation.  It is particularly unlikely that large UK mergers that currently fall for consideration under the EU Merger Regulation will escape scrutiny from the CMA.

A second potential downside is that, after merger integration, it may be difficult for the CMA to re-create two independent firms. However, this issue is largely addressed by the CMA’s power to impose “hold separate orders” in relation to completed mergers that prevent merger integration pending the CMA’s final decision.  The CMA routinely exercises this power, but it may revoke the order earlier if it becomes clear that there are no issues.

Conclusions

The voluntary nature of UK merger control is unusual compared to most merger control regimes. Brexit naturally raises questions as to whether this should persist as the UK CMA is likely to acquire sole responsibility to investigate mergers affecting the UK.  However, in our view, there is not a good case for the UK to impose a mandatory regime on either efficiency or efficacy grounds.  This is particularly the case in light of the likely increase in the CMA’s mergers workload post-Brexit, which is the focus of our next two blogs.

[1]    In 2011, the UK government considered and rejected both mandatory pre-notification for mergers, and a hybrid system that would require mandatory filings above the current UK turnover threshold of £70 million.

[2]    These figures do not consider the impact of merger cases that were referred to and from member states.

[3]    The UK statistics cover the period from 1 April 2012 to 31 December 2016.

[4]    This is obviously a simplification, and some countries’ jurisdictional thresholds are highly complex. A good review of merger control in 50 countries is set out in “The International Comparative Legal Guide to: Merger Control 2017”.

[5] See further the Competition Law Forum’s discussion of these issues, available at http://www.biicl.org/documents/346_the_clf_response_to_the_european_commissions_consultation_towards_more_effective_eu_merger_control.pdf?showdocument=1

[6]    European Commission, “Consultation on Evaluation of procedural and jurisdictional aspects of EU merger control”.

[7]    https://events.lawsociety.org.uk/uploads/files/0a14983f-fb2f-4297-9884-aa9382c52b90.pdf

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Islands of jurisdiction for competition damages claims in a post-Brexit world

By Naina Patel and Andrew Scott

When the UK leaves the EU, the rules governing jurisdiction in cross-border competition damages claims will likely change. Most immediately, this will impact those who had acquired pre-Brexit causes of action for breach of statutory duty under section 2(1) of the European Communities Act 1972, based on Articles 101 and Articles 102 TFEU. The doctrine of acquired rights would preserve such causes of action;[1] but it is unlikely to preserve EU rules of jurisdiction in relation to them. Thereafter, the changes will impact those able to establish post-Brexit causes of action based on foreign laws, as Kieron Beal QC has explained. In either case, Claimants may wish to establish English jurisdiction, including as against EU domiciled defendants. This post considers some of the issues likely to be encountered.

Currently, jurisdiction in such cases is governed by the Recast Brussels Regulation (EU) No. 1215/2012 (the “Recast Regulation”). Despite the Prime Minister’s suggestion that the Great Repeal Bill will convert the entirety of the ‘acquis’ into British law, it seems unlikely that the Regulation will survive without more. It is a prime example of EU legislation predicated on reciprocity and the principle of mutual trust and recognition: see e.g. Recitals (3) and (26) of the Recast Regulation. In the absence of an arrangement between the UK and the rest of the EU to maintain post-Brexit common rules on jurisdiction and the recognition and enforcement of judgments, the premise for the Recast Regulation falls away.

At present, there are no such arrangements in place between the EU and third states.[2] It is true that Denmark entered into an agreement with the rest of the EC in relation to the predecessor of the Recast Regulation, the Brussels I Regulation. But Denmark was and remains a Member State. Whether a similar agreement is sought by or available to the UK as a non-Member State remains to be seen.

An alternative would be for the UK to seek to accede to the Lugano Convention 2007, which applies between the EU and Norway, Switzerland, Iceland and Denmark. However, Article 70 of the Convention restricts accession to members of EFTA, members of the EU acting on behalf of non-European territories which form part of them or for whose external relations they are responsible, and those states that can satisfy the conditions in Article 72, which include the unanimous consent of the Contracting States. It is reasonable to think that a condition of any such consent would include submission in some form by the UK to the jurisdiction of the CJEU in relation to interpretation of the Lugano Convention. Even if such consent were forthcoming, it is worthwhile noting that there are important differences between the Lugano Convention and the Recast Regulation. For example, Article 31(2) of the Recast Regulation has gone some way to disarming (in exclusive jurisdiction clause cases, at least) the “Italian torpedo” which still fires under the Lugano Convention owing to its rigid “first seised” lis pendens rule.  Further, the process of recognition and enforcement of judgments under the Recast Regulation is more streamlined than that which prevails under the Lugano Convention.

Failing either of these options, there is a serious question over whether the UK remains a party to the Brussels Convention, having acceded to it in its own right in 1978.  The Recast Regulation and its predecessor make clear that these instruments superseded the Convention as between Member States, except as regards the territories of the Member States which fell within the scope of the Convention but were excluded from the Regulations pursuant to Article 299 TEC and Article 355 TFEU respectively. The UK was a Member State when these Regulations were adopted and was not excluded from their provisions superseding the Brussels Convention. Brexit will not turn the UK into a territory of a Member State excluded from the Recast by virtue of Article 355 TFEU, only into a country to which TFEU does not apply at all.  It is therefore difficult to see how the application of the Brussels Convention to the UK can be revived. In any event, as Adrian Briggs QC has underscored, no country ratified the Convention after 2001 so it would not create a framework for jurisdiction with all EU Member States.

In the absence of an agreed bilateral framework, the UK will revert to applying its domestic rules on jurisdiction. These would permit the English Court to assume jurisdiction over EU domiciled defendants based on a far broader range of factors than are presently provided for by the Recast Regulation. Defendants with a mere (including fleeting) presence in the jurisdiction would be liable to be served here, even if domiciled elsewhere. Defendants with no such presence would also be liable to service outside the jurisdiction, with the Court’s permission, based on a far broader range of territorial and other connections under CPR r. 6.37 and PD 6B than are presently available under the Recast’s jurisdictional rules.

The purpose of the Recast Regulation and its predecessors is to protect EU domiciled defendants from such national rules of jurisdiction: see Article 5(2). A post-Brexit world in which the EU refuses to agree a new bilateral arrangement on cross-border jurisdiction with the UK will result in the application of English domestic law rules against EU citizens for the first time since accession to the Brussels Convention. Depending on how the English Court’s discretionary powers to stay proceedings or permit service out on forum conveniens grounds are exercised, there is real potential for the English Courts to enlarge their effective jurisdiction over competition law claims against EU domiciled defendants.

To take a few examples:

  • At present, an EU domiciled defendant can only be sued in England in “matters relating to tort etc.” where England is the place where the “harmful event” “occurs or may occurs”: see Article 7(2) of the Recast. That requires showing in a cartel case that England is where the cartel was “definitively concluded” or that England is where “the [victim’s] own registered office is located”: see CDC (C-352/13) [2015] Q.B. 906. The equivalent common law gateway for service out in CPR PD 6B, para 3.1(9) is broader in scope, e.g. it would require only that the damage sustained results from an act committed… within the jurisdiction” (emphasis added). It would likely suffice that some substantial and efficacious aspect of the cartel could be located in England.
  • At present, an EU domiciled defendant can only be joined as a co-defendant to English proceedings where an English-domiciled anchor defendant has been sued here: see Article 8(1) of the Recast. There is no such limitation under the common law necessary or proper party gateway in CPR PD 6B, para. 3.1(3). Thus, if English jurisdiction can be established by service on an anchor Defendant – whether within or outside the jurisdiction – that suffices to expose other Defendants to the risk of joinder to English proceedings. In a cartel case, for example, the requirements of the necessary and proper party gateway will ordinarily not be difficult to satisfy.
  • At present, an applicable jurisdiction clause for another Member State court has a “trump card” status under the Recast. Even if the party able to rely on that clause is one of many sued in England, and even if the sound administration of justice would favour not giving effect to it in the circumstances, the English Court is nonetheless bound to do so under Art. 25(1) of the Recast. Not so at common law, where the Court would retain a discretion – and in an appropriate case could decline to give effect to the clause so as to ensure that the entire dispute remain in the English Court: see e.g. Donohue v Armco [2001] UKHL 64; [2002] 1 All E.R. 749.
  • On account of the common jurisdictional rules in place under the Recast Regulation and the underlying principle of mutual trust, EU law prevents English Courts from granting anti-suit relief in respect of proceedings before courts elsewhere in the EU.[3] In the absence of a similar multilateral arrangement post-Brexit, English Courts are unlikely to feel inhibited from applying ordinary principles on anti-suit relief, e.g. to restrain a party from pursuing in the EU proceedings brought in breach of jurisdiction or arbitration clauses, or proceedings which are vexatious and oppressive or otherwise unconscionable.

Perhaps then, at least in the context of competition damages claims, if the effect of Brexit is that we return to common law rules, there will be some hidden treasure.

So in what direction should clients be advised to row their boats in the run up to Brexit?  English jurisdiction and arbitration clauses are likely to remain valuable tools in dispute resolution so it will continue to make sense to include them in new contracts; it may also be prudent to review old contracts to insert such clauses or to revise those drafted by reference to EU legislation. In doing so, it will be important to pay close attention to the remarks made by Rix LJ and the CJEU respectively in Ryanair Limited v Esso Italiana Srl [2013] EWCA Civ 1450 and the CDC case. The effect of each is that (at least some) tort claims founded on breaches of competition law will not ordinarily be caught by even broadly-worded jurisdiction clauses (e.g. those providing for jurisdiction over “all disputes arising from contractual relationships”): express words will be necessary. The scope of the principles stated in these decisions is likely to be a fertile area of dispute in competition law cases, not least because some claims (e.g. those in a bid-rigging context) have a more obvious connection to contracts containing such jurisdiction clauses than others (e.g. the price-fixing cartel contexts of Ryanair and CDC).

As for litigation strategy more generally, depending on which jurisdictional framework the UK ends up embracing, there may be significant value in re-considering the torpedoes and injunctions which we have seen submerged in EU competition litigation in recent years.

[1] Subject, of course, to any transitional arrangements to the contrary.

[2] While the EU and several third states are party to the Hague Convention on Choice of Court Agreements 2005, it deals only with exclusive jurisdiction agreements.

[3] See, for example, the decisions in Turner v Grovit (C-159/02 [2004] ECR I-3565) and West Tankers (C-185/07).

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Competition Law claims post-Brexit: the issue of applicable law

Once notification is given by the UK Government of its intention to withdraw from the European Union under Article 50 TFEU, EU law will cease to apply in the UK after the expiry of two years (absent an agreement between all 28 Member States extending the relevant period). What then happens to the UK’s competition law regime, which is closely intertwined with EU law, both substantively and procedurally?

The answer will depend to a large extent on the terms of the Great Repeal Bill. What is clear, however, is that the provisions of Article 101 and 102 TFEU will no longer apply within the territory of the United Kingdom. Those Articles presently have direct effect in the UK legal order. General principles of EU law, including the principle of direct effect, are binding in the UK under Article 6 TEU, read in conjunction with sections 2 and 3 of the European Communities Act 1972. But it seems inevitable that the Great Repeal Bill will remove the direct effect of substantive EU competition law. Moreover, Regulation 1/2003 (the Modernisation Regulation) will no longer be directly applicable in this jurisdiction. But the terms of the Competition Act 1998 (‘CA 1998’) will still apply. The Chapter I prohibition, for example, prohibits cartel conduct producing an actual or potential effect on trade within the United Kingdom. The provisions of the CA 1998 can no doubt continue in force largely unamended, save of course for section 60 CA 1998 with its focus on aligning as far as possible the position adopted by domestic and EU law on parallel issues.

It will be no secret to those reading this blog that competition law claims in the UK have increased in number in recent years. The ‘mystery of the reluctant plaintiff’ finally seemed to have been resolved.[1] Many of these claims have been brought on the basis of Articles 101 TFEU, Article 53 of the EEA Agreement and the Chapter I prohibition contained in section 2 CA 1998. Indeed, some of these claims have also incorporated claims based on the applicable laws of tort in other Member States of the EU. Does the departure of the UK from the EU mean that these claims will no longer be brought? The answer is very likely to be no. There are two principal reasons.

First, there has been no suggestion that claims seeking to enforce accrued rights to damages cannot be brought once the UK leaves the EU. Anyone who is the victim of cartel conduct, for example, will continue to have rights under EU law which confer a right to damages up until the UK’s departure from the EU. The Great Repeal Bill cannot lawfully deprive victims of the benefit of these accrued rights without seriously risking falling foul of Article 1 of Protocol 1 to the European Convention on Human Rights. The English legal system should accordingly continue to recognise the tortious liability of Defendants for damage that occurred while EU law was applicable in this jurisdiction.

Secondly, a distinction needs to be drawn between jurisdiction and applicable law. Once jurisdiction is established against one or more Defendants within this jurisdiction, the question of which claims may be pleaded and proved against them is a question of the applicable law of the tort. At the moment, the applicable law for competition claims for loss arising after 10 January 2009 is determined by the application of the Rome II Regulation[2] (and principally by Article 6(3)). That Regulation will no longer be binding on English courts once we leave the EU. But absent any legislative intervention in the Great Repeal Bill, the default position will then be that the pre-Rome II legislative framework will continue to apply. Section 15A of the Private International Law (Miscellaneous Provisions) Act 1995 (‘PILMPA 1995’) suspends the application of that Act when the Rome II Regulation applies. It follows that, when the Rome II Regulation is not applicable (either by virtue of its temporal or geographical scope), then the provisions of PILMPA 1995 remain fully effective.

The 1995 Act abolished the common law requirement of “double-actionability.” So free-standing claims for breach of the competition laws of other Member States – and of Articles 101 and 102 TFEU – can still be advanced in the courts of England and Wales, if the criteria for liability under those laws is met. Where, for example, a claimant sustains loss both in the EU markets and in the UK, there is no reason in principle why a claim for all of its loss cannot be brought in England. Expert evidence would be needed as to what the contents of those laws – including of EU law – are. See section 4(1) of the Civil Evidence Act 1972. But it is common for commercially significant cases to involve the pleading and proof by experts of causes of action based on foreign laws. Sections 11 and 12 of the PILMPA 1995 determine how the applicable law of the relevant tort or torts is to be selected.

One potential issue that arises is whether or not the enforcement of a foreign competition law would fall foul of the prohibition on English courts enforcing foreign, penal laws. Section 14(3)(a)(ii) of the 1995 Act provides that nothing in Part III of that Act “(a) authorises the application of the law of a country outside the forum as the applicable law for determining issues arising in any claim in so far as to do so— . . .(ii) would give effect to such a penal, revenue or other public law as would not otherwise be enforceable under the law of the forum.”

But this provision is highly unlikely to prevent a claim being brought for compensation on the basis of the foreign laws of one or more jurisdictions. A claim for compensation based on a breach of a foreign competition law (or foreign law of tort or delict) is not the enforcement of a penal law. Such claims do not amount to an attempt to enforce a competition law which gives the national competition authorities in those foreign jurisdictions powers to fine cartelists. In Huntington v. Attrill [1893] AC 150, PC, Lord Watson at p. 157-158 stated: “A proceeding, in order to come within the scope of the rule, must be in the nature of a suit in favour of the State whose law has been infringed.” That is not the case where a claimant (who is in any event not likely to be a public body in a foreign state) is claiming a compensatory remedy rather than enforcing a fine or penalty. See United States Securities and Exchange Commission v. Manterfield [2009] EWCA Civ 27; [2010] 1 W.L.R. 172, CA per Waller LJ at [19] to [23].

It follows that if jurisdiction of the English Courts can be established, then there is no insuperable impediment to claimants bringing claims for loss arising from cartels and other anti-competitive conduct in much the same way as they do at present.

[1] The “mystery of the reluctant plaintiff” was a reference by J. Maitland-Walker at a conference in London, 1982, cited in Enric Picañol, Remedies in national law for breach of Articles 85 and 86 of the EEC Treaty – a Review, Legal Issues of European Integration, Deventer No. 2 (1983) 1 at page 2. Comprehensive reasons why there were not more claims under the pre-Modernisation competition regime were provided by John Temple Lang in EEC Competition Actions in Member States’ Courts – Claims for damages, declarations and injunctions for breach of Community Antitrust Law (1983-4) vol. 7 Fordham Intl L.J. 389 at page 407.

[2] Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations.

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License fees, invalid patents and Article 101 TFEU: Genentech v Hoechst and Sanofi-Aventis

Consider an agreement under which a license fee is payable for use of a patented technology even if it transpires that the patent is invalid. Is such an agreement contrary to Article 101 TFEU? The answer is no, provided that the licensee is able freely to terminate the contract by giving reasonable notice. Some years ago the ECJ so held in relation to expired patents: C-320/87 Ottung [1989] ECR 1177 at §13. The recent decision in C-567/14 Genentech v Hoechst and Sanofi-Aventis clarifies that the same proposition applies to revoked patents (and indeed to patents which are valid but have not been infringed). The case also throws into sharp relief the tensions that may arise between European competition law and domestic procedural rules on the reviewability of arbitrations.

Facts

In 1992, Genentech (“G”) was granted a worldwide non-exclusive license for the use of technology which was subject of a European patent as well as two patents issued in the United States. G undertook to pay inter alia a ‘running royalty’ of 0.5% levied on the amount of sales of ‘finished products’ as defined in the license agreement (“the Agreement”).  G was entitled to terminate the Agreement on two months’ notice.

The European patent was revoked in 1999. G unsuccessfully sought revocation of the United States patents in 2008 but this action failed; these patents therefore remained validly in place. G was later held liable in an arbitration to pay the running royalty. Late in the day in the arbitration proceedings, G alleged that construing the Agreement to require payment even in the event of patent revocation would violate EU competition law. That argument was rejected by the arbitrator. G sought annulment of the relevant arbitration awards in an action before the Court of Appeal, Paris. From that court sprung the preliminary reference that is the subject of this blog.

Effective EU competition law vs domestic restrictions on review of arbitration awards

Hoechst and Sanofi Aventis (the parties to whom the running royalty was due and not paid) argued that the reference was inadmissible because of French rules of procedure preventing any review of international arbitral awards unless the infringement was ‘flagrant’ (AG Op §§48-67) and the arbitral tribunal had not considered the point (AG Op §§68-72). In essence, the CJEU rejected this argument on the narrow basis that it was required to abide by the national court’s decision requesting a preliminary ruling unless that decision had been overturned under the relevant national law (§§22-23). Interestingly, the Advocate General ranged much more broadly in reaching the same conclusion, stating that these limitations on the review of international arbitral awards were “contrary to the principle of effectiveness of EU law”, (n)o system can accept infringements of its most fundamental rules making up its public policy, irrespective of whether or not those infringements are flagrant or obvious” and “one or more parties to agreements which might be regarded as anticompetitive cannot put these agreements beyond the reach of review under Articles 101 TFEU and 102 TFEU by resorting to arbitration” (AG Op §§58, 67 and 72).

Ruling on Article 101 TFEU

As mentioned above, this aspect of the CJEU’s ruling builds on the earlier decision in C-320/87 Ottung [1989] ECR 1177.  A single, simple proposition emerges. An agreement to pay a license fee to use a patented technology does not contravene Article 101 just because the license fee remains payable in case of invalidity, revocation or non-infringement, provided that the licensee is free to terminate the agreement by giving reasonable notice (Ottung §13; Genentech §§40-43).

Digging deeper, two practical caveats must be added. First, it would be unsafe to assume that contractual restrictions on termination are the only restrictions on the licensee’s freedom that are relevant to the assessment. The Advocate General’s opinion in Genentech gives the further example of restrictions on the licensee’s ability to challenge the validity or infringement of the patents (AG Op §104). Indeed, any post-termination restriction which interferes with the licensee’s “freedom of action” might change the outcome if it places the licensee at a competitive disadvantage as against other users of the technology (AG Op §§91, 104; Ottung §13). Second, on the facts of Genentech, the commercial purpose of the Agreement was to enable the licensee to use the technology at issue while avoiding patent litigation (§32). Accordingly, it was clear that fees payable were connected to the subject matter of the agreement (AG Op §94). It is unlikely that a license agreement imposing supplementary obligations unconnected to its subject matter would be treated in the same fashion (AG Op §§95, 104; C-193//83 Windsurfing International v Commission [1986] E.C.R. 611).

 

 

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The passing-on “defence” after Sainsbury’s

The passing-on defence – ie. whether the damages suffered by a purchaser of a product which has been the subject of a cartel are reduced if he passes on the overcharge to his own customers – had, as Tristan Jones blogged a few years ago, been the subject of much policy discussion but relatively little legal analysis in the English case law.

That remained the position when the Competition Appeal Tribunal heard the claim in Sainsbury’s Supermarkets v Mastercard Incorporated and others [2016] CAT 11. The Judgment, handed down on 14 July, noted at §483 that there had been no case under English law substantively dealing with the pass-on defence. It represents the first English judgment which gives detailed consideration to the defence following full argument.

However, despite its length (running to some 300 pages), the Judgment leaves us with a number of big questions about the nature and scope of the defence.

The four key principles which emerge from the Judgment are as follows.

First, the Tribunal considered that the passing-on “defence” (their quotation marks) is no more than an aspect of the process of the assessment of damage. “The pass on “defence””, the Tribunal reasoned, “is in reality not a defence at all: it simply reflects the need to ensure that a claimant is sufficiently compensated and not overcompensated, by a defendant. The corollary is that the defendant is not forced to pay more than compensatory damages, when considering all of the potential claimants”(§484(3)). The “thrust of the defence” is to ensure that the claimant is not overcompensated and the defendant does not pay damages twice for the same wrong (§480(2)).

Second, the passing-on defence is only concerned with identifiable increases in prices by a firm to its customers and not with other responses by a purchaser such as cost savings or reduced expenditure. The Tribunal considered that although an economist might define pass-on more widely to include such responses (and there is a discussion of this in the Judgment at §§432-437), the legal definition of a passed-on cost differs because whilst “an economist is concerned with how an enterprise recovers its costs… a lawyer is concerned with whether or not a specific claim is well founded” (§484(4)).

Third, that the increase in price must be “causally connected with the overcharge, and demonstrably so” (§484(4)(ii)).

Fourth, that, given the danger in presuming pass-on of costs, “the pass-on “defence” ought only to succeed where, on the balance of probabilities, the defendant has shown that there exists another class of claimant, downstream of the claimant(s) in the action, to whom the overcharge has been passed on. Unless the defendant (and we stress that the burden is on the defendant) demonstrates the existence of such a class, we consider that a claimant’s recovery of the overcharge incurred by it should not be reduced or defeated on this ground” (emphasis original) (§484(5)).

But these principles leave a number of questions.

First, the Judgment firmly places the burden on defendant (and the importance of that is brought home when the Tribunal considered the issue of interest without this burden and, having found that Mastercard’s passing-on defence failed, nevertheless reduced the interest payable to Sainsbury’s by 50% because of passing-on). However, precisely what the Defendant has to demonstrate is less plain.

The Judgment refers to Mastercard’s passing-on defence failing because of a failure to show an increase in retail price (§485); language which reflects back to §484(4)(ii). But an increase in price is not the language used when the Tribunal states the test, and the Judgment leaves open whether demonstrating an increase in price would in itself be sufficient to satisfy the requirement to show the existence of “another class of claimant downstream of the claimant(s) in the action, to whom the overcharge has been passed on”.

Second, and similarly, there is no explanation of what the Tribunal means by the term “causally connected” (or, rather, “demonstrably” causally connected) when it refers to the need for the increase in price to be connected to the overcharge. It might be – as was suggested in our earlier blog – that, applying ordinary English principles of causation and mitigation, a party would need to show that the price increase or the benefit arises out of the breach. Given the Tribunal’s repeated statements that the defence is not really a defence at all but is simply an aspect of the process of the assessment of damages (§§480(2), 484(4)), such an approach would, at first blush, sit perfectly with the Judgment.

However, third, the Tribunal’s splitting of passing-on from other responses to an overcharge creates some confusion in this regard. Under the Tribunal’s approach cost savings are not to be considered under the passing-on defence (§484(4)) but must be considered under an analysis of mitigation (§§472-478). It is, however, difficult to separate out principles of mitigation and causation in this context.  Indeed, the Tribunal, when discussing mitigation, expressly recognised that the issue is “akin to one of causation” (§475). But the Tribunal took pains to emphasise that an assessment of passing-on and mitigation are separate exercises, without explaining whether and if so in what way the test in the context of mitigation – said to be that the benefit must “bear some relation to” the damage suffered as a result of the breach (§475) – differs from that of causation in the passing-on defence.

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Can several wrongs make a right? Gallaher v CMA in the Court of Appeal

When a public body makes a mistake in its treatment of one person, can fairness require it to treat other people in the same way – even if that means amplifying the effects of the mistake?

According to the Court of Appeal in the latest instalment of the tobacco litigation, the answer is yes.  The history of the case is well-known.  The Office of Fair Trading’s decision, that various manufacturers and retailers had committed an infringement in the setting of tobacco prices, collapsed on appeal to the CAT in 2011.  Gallaher and Somerfield, who had entered into early resolution agreements (“ERAs”) with the OFT and therefore decided not to appeal the infringement decision, then sought to appeal out of time.  The Court of Appeal rejected their attempt in 2014, emphasising the importance of finality and legal certainty (see my blog here).

Undeterred, Gallaher and Somerfield pressed on with a different aspect of their case.  They had discovered that another company, TM Retail, had been assured by the OFT when it entered into its ERA in 2008 that, in the event that any other party succeeded on appeal, TM Retail would have the benefit of that appeal.  The OFT’s assurance to TM Retail was based on a mistaken view of the law, since a successful appeal by one addressee of a decision does not normally let non-appellants off the hook.  However, following the successful CAT appeal in 2011, the OFT decided to honour its assurance to TM Retail.  TM Retail’s penalty was repaid (although for reasons which need not detain us the OFT has refrained from calling it a ‘repayment’).  But the OFT also decided that, given that it had not given any similar assurance to Gallaher or Somerfield, it would not repay their penalties.

Gallaher and Somerfield challenged the OFT’s decision on fairness grounds.  The Court of Appeal has now held that the OFT, now the Competition and Markets Authority, is obliged by principles of fairness to treat Gallaher and Somerfield in the same way as it treated TM Retail.  That will mean repaying their penalties, at a cost of something north of £50 million.

The Court of Appeal’s decision recognises that the requirements of fairness will depend on all the circumstances of the case.  The decision is therefore based very heavily on the particular facts of this case.  Of particular importance was the fact that all ERA parties were told that they would be treated equally.  They therefore had a strong expectation of equal treatment.

Nonetheless, the case raises some important questions.

Firstly: what is the significance of detrimental reliance in an equal treatment case?  In cases concerning legitimate expectations, itself a branch of the law of fairness, it is generally the case that a party will not succeed unless he shows that he has suffered some detriment in reliance on the expectation in question.

In this case, Gallaher and Somerfield could not say that the OFT’s assurance to TM Retail was what made them decide not to appeal against the infringement decision.  They didn’t know about the assurance when they chose not to appeal.  The Court of Appeal answers this point by remarking at [44] that:

“the only reason why the appellants could not have claimed that they relied on assurances of the type given to TM Retail was because such assurances had not been given to them …”

But the question is surely not whether Gallaher and Somerfield could “claim” to have relied on assurances: it is whether or not they did in fact rely on such assurances.  They did not.  The absence of such a factor must be relevant to an assessment of what is fair in all the circumstances.

Secondly: what is the significance of the fact that assuring equal treatment will end up costing the public purse a huge amount of money?

The Court does not go into this question in any detail.  It rejects, as a statement of general principle, the contention endorsed by the High Court that a mistake should not be replicated where public funds are concerned.  Instead all depends on the circumstances.  But the Court’s discussion of the circumstances does not consider the significance of the impact on the public purse.

Of course, the point cuts both ways because the heavy impact on the public purse if the penalties are repaid is the mirror-image of the impact of the unequal treatment on Gallaher and Somerfield if the penalties are not repaid.  There is, however, an important question of principle as to how to balance the desirability of ensuring equal treatment, on the one hand, against the unattractiveness of requiring public bodies to magnify their errors at great expense, on the other.  The Court of Appeal explains in detail why the former consideration should weigh heavily in favour of repayment, but it remains unclear whether, or in what circumstances, such factors may be counter-balanced by public expense considerations.

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Economic complexity: CAT vs High Court

One of the advantages of the Competition Appeal Tribunal is said to be the fact that its three-member panel typically includes an economist. But is that really such a big advantage over the High Court?

The question is particularly topical in light of a couple of recent trends. On the one hand, recent legislative developments have increased the jurisdictional overlap between the CAT and the High Court, so that litigants more frequently face a choice between the two. In making that choice, the CAT’s economic expertise can exert a strong pull. Claimants might plead their case narrowly in order to come within its limited powers. Or, parties might seek to transfer their case across to the CAT from the High Court (not always successfully – see here).

On the other hand, there have been several indications that more could be done to make economic issues accessible to High Court Judges. A high-profile example is the recent Streetmap case, in which the experts gave evidence concurrently in a “hot tub” arrangement. Another example comes from the MasterCard litigation, in which Mr Justice Flaux recently asked whether it might help for the trial judge to be assisted by an expert economist appointed as an Assessor under CPR 35.15. I understand that the suggestion has not been taken any further in that particular case, but the general idea of using Assessors was also endorsed by another judge at a recent lecture on competition litigation.

Another tool which could be used much more widely in competition cases is the use of ‘teach-ins’ at which an independent expert spends time (perhaps a couple of days) educating the judge on the basic economic concepts relevant to the case. Care obviously needs to be taken to ensure that the teacher does not take a stance on controversial issues in the case. But if it is done well, as a recent patent case shows, it can be an invaluable way of helping a judge to prepare for a complex trial.

Of course, all of these techniques could be used in the CAT as well as in the High Court. It is perhaps too easy for parties in the CAT to assume that, just because there is an economist on the Panel, there is no need to do any more to make the economic issues accessible. The economist can only do so much, and the role does not include providing formal training to the other Panellists.

Against that background, it is worth revisiting the advantages of having an economist on the CAT Panel. The first is that he/she is fully involved in the hearing, and able to ask questions of the parties’ expert witnesses. Anyone who appears regularly in the CAT will have seen cases in which it is the economist Panellist who manages to cut through the arguments and identify the central point.

But there is no reason in principle why that advantage could not be replicated in the High Court. An Assessor could be appointed with the function of (among other things) asking question of the expert witnesses.  In practice this would be an unusual request, and of course the parties would need to foot the bill.  But there is no reason in principle why it could not be done.

The other main benefit of having an economist on the Panel is that he/she participates fully in the decision making. He works collaboratively, in private, with the other Panellists as they reach their decision. In contrast, if an Assessor were appointed in the High Court to help the judge reach a decision on the economic issues in the case, his advice would need to be given in public so that the parties could comment on it (see the Court of Appeal’s guidance at paragraphs 18-21 of this patent case). Such a process would be much more cumbersome than that in the CAT, but it would at least ensure that the parties could engage fully with the thinking of every economist involved in the case.

I do not mean to suggest that parties in economically complex cases should flock to the High Court rather than the CAT. But it is worth thinking hard before tailoring a case to fit within the CAT’s limited powers, or getting into a procedural fight over the forum. With a bit of imagination, and provided the parties are willing to pay for it, much can be done to assist the judge in the High Court to match many of the advantages available as a matter of course in the CAT.

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The Freight-Forwarding Cartels in the General Court: Lessons on Leniency and Discretion

On 29 February 2016, the General Court handed down its judgments in Case T-265/12 Schenker Ltd v European Commission; Case T-267/12 Deutsche Bahn AG and ors v European Commission, upholding the Commission’s decision on the freight forwarding cartels. The judgments provide some useful guidance on the operation of the leniency scheme and highlight the Commission’s broad discretion in deciding to whom it should attribute liability.

The Cartels

The applicants were found by the Commission to be participants in cartels relating to four different surcharges levied in the freight-forwarding sector between 2002-07.

The operation of the cartels was no lesson in subtlety. In the new export system cartel, the participants had organised their contacts in a ‘Gardening Club’ and had re-named surcharges according to vegetables. One set of minutes of the cartel’s meeting distinguished ‘standard asparagus’ from ‘contractual asparagus’, while another email explained ‘new equipment is on its way to enable fresh marrows and baby courgettes to hit the shops this month. Up to my elbows in fertilizer’.

The Commission fined 14 groups of companies a total of €169 million. The applicants were fined approximately €35 million for infringements of Article 101 TFEU and Article 53 of the EEA Agreement.

Leniency

The Commission began its investigation after an application for immunity was submitted by Deutsche Post AG (‘DP’). DP and its subsidiaries received full immunity from fines, while some other undertakings (including the applicants) received a reduction in fines ranging from 5 to 50 per cent.

In order to qualify as an immunity applicant under the Commission’s 2006 Leniency Notice, the evidence provided to the Commission must enable it (inter alia) to ‘carry out a targeted inspection in connection with the alleged cartel’ (paragraph 8(a)) and must include a ‘detailed description of the alleged cartel arrangement’ (paragraph 9(a)). The applicants contrasted the information initially provided by DP with the Commission’s final findings to argue that these criteria had not been met – in particular, no information was provided about one of the specific cartels, the CAF cartel.

The General Court rejected the applicants’ comparative approach. It explained that the Leniency Notice did ‘not require that the material submitted by an undertaking should constitute information and evidence pertaining specifically to the infringements which are identified by the Commission at the end of the administrative procedure’ (at [338], paragraph references in this post are to T-267/12). It was sufficient that the information provided by DP ‘justified an initial suspicion on the part of the Commission concerning alleged anticompetitive conduct covering, inter alia, the CAF cartel’ (at [340]).

The applicants also argued that the Commission had breached the principle of equal treatment by treating DP’s immunity application differently from the leniency applications of other undertakings. When assessing DP’s immunity application, the Commission granted conditional immunity on the basis of the information it had at the time, and then granted final immunity by considering whether those conditions had been satisfied. In contrast, when considering the applications for reductions of fines made by other undertakings, the Commission considered at the end of its procedure whether the information provided had added value.

The General Court upheld this approach. It explained that the Leniency Notice is structured such that an ex ante assessment is to be carried out in respect of applications for immunity only (at [358]). This distinction is justified by the objectives of (i) encouraging undertakings to cooperate as early as possible with the Commission, and (ii) ensuring that undertakings which are not the first to cooperate do not receive ‘advantages which exceed the level that is necessary to ensure that the leniency programme and the administrative procedure are fully effective’ (at [359]).

Attribution of Liability

A further ground of challenge concerned the Commission’s decision to hold Schenker China solely liable as the economic successor for the conduct of Bax Global, rather than including Bax Global’s former parent company.

The General Court noted that the Commission had a discretion concerning the choice of legal entities on which it can impose a penalty for an infringement of competition law (at [142]), but that such a discretion must be exercised with due regard to the principle of equal treatment (at [144]).

In the present case, the Commission had decided to hold liable parent companies of subsidiaries, but not former parent companies of subsidiaries. The General Court was content that such an approach was within the discretion available to the Commission. It was perfectly legitimate for the Commission to ‘take into consideration the fact that an approach designed to impose penalties on all the legal entities which might be held to be liable for an infringement might add considerably to the work involved in its investigations’ (at [148]). This purely administrative reason was sufficient to entitle the Commission to decline to attribute liability to a party who would be jointly and severally liable for the same infringement, even if the necessary consequence were to increase the fine levied against the existing addressee.

Given the sums involved, it would be no great surprise if the General Court’s judgments were appealed to the Court of Justice. In the meantime, there is greater certainty regarding the Commission’s approach to the Leniency Notice, and it is clear that the Commission has broad discretion in identifying the relevant addressees of its infringement decisions.

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Illegal counterfactuals: bringing in new claims by the backdoor?

It is fairly well-established in competition cases that the hypothetical counterfactual – which, for the purposes of causation, posits what the situation would have been absent any breach of competition law – cannot contain unlawful elements: see e.g. Albion Water Ltd v Dwr Cymru [2013] CAT 6. In a normal case, C will claim damages, arguing – let’s say – that D abused a dominant position by imposing discriminatory prices. D defends the claim on the basis that, absent any abuse, it would have set prices at a certain (high) level. C replies that those prices too would have been discriminatory – i.e. the counterfactual is inappropriate.

In other words, the legality of the counterfactual normally becomes an issue when the defendant pleads a hypothetical scenario which C alleges to be unlawful. But consider a different situation. In this, D pleads by way of defence that prices would not have been any lower even without the alleged anti-competitive conduct. C replies that that is only the case because D was actually engaging in some separate anti-competitive conduct – about which it has made no complaints in its original claim. Is C entitled to raise this kind of a response to a counterfactual? The answer may well be yes, according to Barling J’s recent judgment in Deutsche Bahn AG and others v MasterCard Incorporation and others [2015] EWHC 3749 (Ch).

The context is the MasterCard litigation, in which various retailers are claiming that the multi-lateral interchange fees (MIFs) charged by MasterCard to banks breached Article 101 TFEU and caused them loss. Specifically, the MIFs inflated the charges (MSCs) that banks imposed on merchants in connection with processing MasterCard payments and distorted competition in that market.

One line of defence which MasterCard has adopted is that the MIFs did not have any material effect on some categories of MSCs. MasterCard specifically points to a period when the MIFs were set at zero and there was no consequent deflation in MSCs. The retailers riposted by pleading in their Reply that that was only because MasterCard was operating another different rule which was also anti-competitive (the “Central Acquiring Rule” or “CAR”) – absent this too, the Claimants say, MSCs would have fallen. The retailers had originally made no complaint about the CAR in their Particulars of Claim.

Not only this, but the retailers relied on their pleaded case on the CAR in their Reply to support an argument that they should be entitled to amend their Particulars to raise the CAR as a fresh and independent claim. Even though the CAR claim was arguably or partially time-barred, the fact that it appeared in the Reply meant that it “arose out of the same facts” as the original claim under CPR 17.4(2). The application to amend was the issue before Barling J. He granted it, accepting that it was an ‘arguable’ point which the Claimants were entitled to run in their Reply, that evidence on the CAR would therefore be needed, and that they could therefore also add it as a new claim under CPR 17.4(2).

There are perhaps three interesting points arising from the decision. The first is that it raises the prospect that in responding to a counterfactual, C can do more than simply say that the hypothetical conduct on which D relies is illegal. C can arguably go further – and claim that some other aspect of D’s actual conduct – not previously in issue – is also illegal and so must be purged from the counterfactual. This represents a departure from the kind of arguments run in Albion Water and Enron Coal Services Ltd v EW&S Railway Ltd [2009] CAT 36 – as Barling J himself recognized (§72) – although there are closer similarities with C’s argument in Normans Bay Ltd v Coudert Brothers [2004] EWCA Civ 215.

The second is that that kind of argument can seemingly be raised even though the conduct complained of is not specifically raised in the Defence. MasterCard had not pleaded that MSCs were not affected by the MIFs because of the CAR. But that did not prevent the retailers from raising the legality of the CAR in response to the counterfactual. The situation was therefore unlike that in the Norman Bay case – where D had pleaded in its counterfactual conduct which C claimed was itself negligent in its Reply.

The third is that the allegation of unlawfulness that C raises in its Reply may even be time-barred. And, if it is, the plea may allow C to argue that it should be able to amend its Particulars so as to include the substantive new claim on the basis that it is one which arises out of facts already in issue under CPR 17.4(2). Barling J rejected MasterCard’s submission that this was to allow the retailers to pull themselves up by their own bootstraps. The retailers therefore succeeded in bringing a new claim into their Particulars through the “back door” of their Reply.

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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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