Category Archives: Agreements

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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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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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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