a legal blog on market regulation

Gallaher and Somerfield: will the CMA change its approach to settlement?

The latest episode in the tobacco litigation saga has seen Gallaher and Somerfield’s attempt to benefit from the collapse of the OFT’s case in November 2011 rejected by the High Court in R (Gallaher Group Limited and Ors) v Competition and Markets Authority [2015] EWHC 84 (Admin). Although the CMA will breathe a sigh of relief, Collin J’s critical judgment will give it food for thought on how it conducts early resolution negotiations in competition infringement cases in future.

The saga began with the OFT’s decision on alleged price fixing agreements between tobacco manufacturers and retailers. During the course of the OFT’s decision making process, which stretched from March 2003 to April 2010, Gallaher and Somerfield chose to enter into early resolution agreements (ERAs) admitting infringement of the Chapter I prohibition in return for reduced penalties. Other retailers and manufacturers appealed the OFT’s final decision. During the hearing of those appeals in late 2011, the OFT’s theory of harm fell apart before the CAT and its attempt to cobble together what was memorably labelled a “Frankenstein” case on liability out of its ruins failed (see here).

Gallaher and Somerfield, in opting to stick with their early resolution rather than appeal, had chosen badly. Their attempt to obtain leave to appeal out of time initially succeeded before the CAT, but the decision was overturned by the Court of Appeal, which stressed the need for legal certainty and finality (see our previous blogs on each decision: here and here).

A lifeline for Gallaher and Somerfield appeared, however, in the form of a statement on the OFT’s website in August 2012 that it was making a repayment to another retailer, TMR, which had also entered into an ERA, pursuant to assurances the OFT had made to TMR in 2008. It subsequently appeared that the OFT had assured TMR that if another party successfully appealed against the OFT’s decision, the OFT would grant TMR a corresponding reduction in its penalty. Gallaher and Somerfield sought similar payments, arguing that they should have been given the same assurances. When the OFT rejected these requests, Gallaher and Somerfield commenced judicial review proceedings, alleging unfair treatment in the negotiation of the ERAs.

On the issue of fairness, Collins J not only found for the claimants but levelled some criticism at the OFT. He found that assurances were indeed given to TMR, contrary to the OFT’s contention that the negotiations in this respect were inconclusive, and further stated that the matter had been “badly mishandled” by the OFT (§37). Moreover, the failure to notify other parties negotiating ERAs of the assurances given to TMR was contrary to the requirements of fairness and equal treatment placed on the OFT by the Competition Act and further contained in its own guidance paper on settlements. Collins J stated the principle as follows (§39):

Anything which can act as an inducement to enter into an ERA is likely, if not limited to the particular circumstances of a party, to be material and should be put to all parties. To give one party an unknown advantage where there are no special circumstances pertaining to that party is in my judgment clearly unfair.

The second issue which Collins J had to decide, however, was whether the claimants should benefit from the error the OFT had made in granting TMR the assurances and so receive payments analogous to those received by TMR. Notwithstanding his finding that the OFT had acted unfairly, Collins J held that Gallaher and Somerfield should not receive such payments. In doing so, he relied on the principle from a tax case, Customs and Excise Commissioners v National Westminster Bank plc [2003] STC 1072, that a mistake should not be replicated where public funds were concerned (§50). Accordingly, Gallaher and Somerfield’s claims were dismissed. As the Court of Appeal had done before him in its judgment refusing leave to appeal out of time, Collins J stressed that the claimants were expertly advised and fully aware that entering into the ERAs would in all likelihood make them unable to benefit from a successful third party appeal (§51).

The CMA has escaped having to make payments to Gallaher and Somerfield as it did to TMR. Its knuckles have, however, been sternly wrapped over its conduct of the early resolution negotiations. We may in future see the CMA conduct settlement processes more transparently, as it strives to ensure that all matters acting as inducements to enter into an ERA, if not limited to a party’s particular circumstances, are put before all parties.



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