Category Archives: Mergers

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

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

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

Introduction

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

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

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

The importance of the de minimis exception in UK merger control

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

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

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

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

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

AP1

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

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

AP2

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

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

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

The CMA’s proposed changes in market size thresholds

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

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

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

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

Conclusions

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

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

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

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

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

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

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

Leave a comment

Filed under Mergers

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.

1 Comment

Filed under Mergers

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

1 Comment

Filed under Mergers

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).

 

 

Leave a comment

Filed under Agreements, Mergers, Pharmaceuticals, Policy

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.

Leave a comment

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

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.

Leave a comment

Filed under Mergers

When should a decision be remitted to a different decision-maker?

The Court of Appeal’s answer to this question in HCA International Limited v CMA [2015] EWCA Civ 492  was, in effect: rarely. The judgment, which contains some serious criticism of the CMA even though it won the case, illustrates just how high the threshold is before a court will insist that a remitted decision should go to a new decision-maker. It is not enough for the original decision-maker to have made a mistake, however conspicuous. Rather, there needs to be a reasonable perception of unfairness or damage to public confidence in the regulatory process.

The background was the CMA’s private healthcare market investigation, which determined that HCA should divest itself of two hospitals in central London. That decision was premised in part on the CMA’s insured price analysis (“IPA”), which HCA argued (on an appeal to the Competition Appeal Tribunal) contained serious flaws. The CMA eventually accepted that its divestment decision should be quashed, and the CAT held that the matter should be remitted to the original CMA inquiry group for re-determination. Continue reading

Leave a comment

Filed under Mergers, Procedure