Competition: into the unknowns

Thirteen months after the UK voted to leave the European Union, the country’s competition lawyers still do not know how Brexit will affect their field of practice. The assumption, until recently, was there will be a ‘hard Brexit’ – full departure, with the UK out of the European Economic Area (EEA) and single market, and the customs union. But the outcome of last month’s general election has made the prospect of a softer Brexit plausible.

As Isabel Taylor, Slaughter and May partner and member of the Law Society’s Competition Section committee, puts it: ‘We are [at] the first-year anniversary of the Brexit vote, and we are no clearer than we were a year ago how this is going to work.’

Whether it be ‘hard’ or ‘soft’, Brexit matters in merger control, antitrust and state aid – the three constituent parts of competition law.

A departure from the EEA means that ‘merger control will cease to be a one-stop shop’, says Thomas Sharpe QC from One Essex Court. Under the EU Merger Regulation’s one-stop-shop principle, the European Commission has exclusive jurisdiction in the EEA to examine cases with a combined worldwide turnover of at least €5bn and a turnover exceeding €250m within the EEA (for two or more of the parties, unless each party has more than two-thirds of its EU-wide turnover in one member state). But post-Brexit, this principle will no longer apply to the UK, meaning notification of large-scale transactions may need to be given in Brussels and London. And, unlike the commission, the UK’s Competition and Markets Authority (CMA) charges merger fees of £40,000-£160,000.

If we are no longer part of the EU, and there is a cartel investigation in Brussels, the [CMA] may decide they want to investigate it as well

Paul Gilbert, Cleary Gottlieb Steen & Hamilton

‘There will be duplication, and somewhere between 30 and 50 [first-phase mergers per year], which are at the moment dealt with by Brussels, will be dealt with by the CMA in London,’ Sharpe says, citing CMA estimates. This would represent an increase of at least 40%-50% in the authority’s merger workload since its creation, acting chief executive Dr Andrea Coscelli has said.

The same applies for antitrust cases affecting both the UK and EU that fall into articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). These deal with anti-competitive agreements and abuse of dominant position, respectively. After Brexit, the provisions will no longer have a direct effect in the UK, because the proposed Great Repeal Act will revoke the European Communities Act 1972, which granted EU legislation direct effect in the UK.

Paul Gilbert, counsel at Cleary Gottlieb Steen & Hamilton says that if the commission takes jurisdiction, an EU national authority cannot investigate.

‘If we are no longer part of the EU, and there is a cartel investigation in Brussels, the UK authority [CMA] may decide they want to investigate it as well’. So, instead of facing one investigation covering the whole of the EU or the whole of the EEA, businesses potentially face a separate and additional investigation in the UK and ‘huge extra costs’.

This means ‘more money for the lawyers’, observes Freshfields Bruckhaus Deringer partner Alastair Chapman. But Chapman, who is a member of the Competition Section committee alongside Taylor, adds: ‘Everybody’s great fear is that you end up with an inconsistent conclusion between the CMA and Brussels, and the relevant authorities will be very conscious of the need to try and avoid that.’

In fact, one argument runs, post-Brexit UK could become an even bigger player in the public and private enforcement of competition law in Europe and internationally. But much rests on the ability of the CMA to take up the challenge.

‘The CMA is going to have to think very hard about how it is going to manage its processes, because in a world where it is also going to have parallel jurisdiction over some cases that previously just went to Brussels its workload is going to increase significantly,’ Chapman says. ‘There is a widely held view in the UK antitrust world that the CMA’s estimate of how many more cases it is going to have to deal with is undercooked, and there is a question as to how it is going to resource all of them.’

This is not just a question of funds but expertise too, he argues.

There are also concerns among practitioners about the UK’s ability to retain its position as a jurisdiction of choice for antitrust private damages actions; partly because of the loss of the EU law framework, which guarantees the enforceability of UK judgments in EU courts. If the UK left the EEA, it is as yet unclear whether the recast Brussels I Regulation will continue to apply to the UK. These rules concern jurisdiction, and the recognition and enforcement of judgments in civil and commercial matters between EU member states.

‘[Private competition litigation] has been a big growth area for the UK legal industry,’ says Robert Bell, head of the EU and UK competition team at Bryan Cave. But he argues that claimants could ‘be put off’ bringing such actions in London and that it is ‘essential’ that the UK remains part of the current European jurisdictional and enforcement regime after Brexit.

‘That is a big issue for the profession, and does involve the UK bending a little bit to maintain our membership of the European agreements,’ Sharpe adds. Also relevant here is the Rome II Regulation, which ensures conflict of laws rules are compatible: ‘That will require the government to see some common sense there.’

Don’t rock the boat

In a speech in February, the CMA’s Coscelli argued that EEA membership would likely mean that the UK competition regime would largely continue to mirror the status quo. But, reflecting the government’s hard Brexit position, he said the country was now facing ‘a scenario where the UK reverts to international law obligations under [World Trade Organization] rules and where the nature of the future link with the EU is the subject of a specifically negotiated bilateral or wider multilateral agreement, the precise scope and nature of which will only become clear further down the line.’

That the UK will leave the EEA and the single market is the working assumption of the Brexit Competition Law Working Group, which was set up in September to ‘foster public debate and inform government policy on implications of Brexit for competition law and policy’. The ‘wholly independent’ working group published its provisional conclusions and recommendations in April and is due to release a final report later this summer.

The system that we have at the moment does work and we want to preserve it

Alastair Chapman, Freshfields Bruckhaus Deringer

June’s election result has increased pressure on the Conservative government to soften its stance on Brexit. However, speaking to the Gazette after the poll, Richard Whish QC (Hon), one of seven working group members, said the outcome ‘will make no difference’ to its approach and final conclusions.

Sir John Vickers, warden of Oxford’s All Souls College and working group chair, told delegates at the Law Society Competition Section annual conference in May: ‘Brexit does not itself give cause for radical reform of UK statutes or institutions,’ although it did pose ‘major practical issues’ for transitional arrangements, future cooperation between UK and EU authorities, and the resources needed by the CMA to cope with ‘a substantially expanded caseload’.

In its provisional conclusions the working group advocates ‘continuity of UK competition law and policy, so far as is possible following Brexit’, reflecting the government’s approach in its white paper on the ‘great repeal bill’. But it also recommends amending the Competition Act 1998 – including repealing section 10, so that future block exemptions are not automatically imported into the UK, and retaining sections 47 and 58 to allow private actions for breach of article 101 and/or 102 to continue to be brought in UK courts. It is also considering the pros and cons of either repealing or amending section 60, which requires the UK authorities and courts to interpret UK competition rules consistently with the case law of the European Court of Justice (ECJ). Vickers said it would be ‘anomalous and undesirable’ to retain the article in its present form after Brexit, if the ECJ does not have any jurisdiction over the UK.

‘We will probably be suggesting that some form of section 60 should remain,’ Whish told the Gazette, which means that it could become a duty to ‘have regard to’ the ECJ’s jurisprudence, leaving the CMA and UK courts freedom to depart from its rulings.

So, what do competition lawyers think? ‘The working group has done a very good job in synthesising some of the widely held views among practitioners. Their preliminary conclusions are sensible,’ Chapman says. ‘The system that we have at the moment does work and we want to preserve it. That seems relatively easy to do with just a couple of tweaks.’

Section 60 is the tweak with potentially the biggest impact. ‘The government says that it does not want to be bound by any of the jurisprudence of the ECJ going forward, but I don’t think they are going to turn their back completely on section 60,’ Bell says. He argues that, post-Brexit, UK courts will look at the jurisprudence of the ECJ as a ‘persuasive authority rather than a binding [one]. We are going to see a lighter-touch following of EU jurisprudence and we may in future begin to see divergence’.

This may cause disruption initially, but could bring longer-term benefits, some argue. ‘Many businesses are quite dissatisfied with the case law of the ECJ; they find it either wrong or just very obscure,’ says Elizabeth McKnight, a Herbert Smith Freehills consultant. ‘So, over time there could be improvements. We could find that the English courts provide better reasoned judgments or more sensible interpretations. If these met with widespread approval among academics and clients, it is possible in due course that the ECJ itself might be influenced to follow the English courts.’ But, she cautions: ‘That is obviously some way down the line.’

Appeal problem

Following Brexit, claimants may no longer be able, or will find it harder, to bring private damages actions for breaches of competition law in the High Court or Competition Appeals Tribunal (CAT) that ‘follow on’ from decisions made by the commission. Examples include: the series of damages claims against MasterCard and Visa that followed findings by the commission in 2007 that MasterCard’s cross-border EEA Multilateral Interchange Fees were in breach of Article 101 of TFEU; and the damages claims arising from the commission’s trucks price-fixing cartel decision in July last year, which followed a five-year investigation.

Everybody’s great fear is that you end up with an inconsistent conclusion between the CMA and Brussels

Isabel Taylor, Slaughter and May

The Consumer Rights Act 2015 facilitated such actions by extending the jurisdiction of the CAT to hear claims. It introduced a new fast-track procedure for less complex cases to ‘encourage greater private enforcement of competition law infringements in England and Wales’, noted Morgan Lewis partner Frances Murphy, speaking at the May conference. The most notable example is a £14bn collective damages claim against MasterCard on behalf of British payment cardholders, currently before the CAT.

‘Many of the damages cases being brought at the moment are based on a claimant going to court and saying here is the European Commission’s decision fining a cartel in relation, say, to the trucks industry, and now I would like compensation for being overcharged by [the cartel infringers],’ says DWF partner Howard Cartlidge. ‘But if you can’t rely on the commission’s decision post-Brexit, then the UK just ceases to be an attractive venue. You’d have to go through all the hassle of re-proving something that the commission has already.’ That would mean a separate investigation and decision by the CMA.

Cartlidge argues that, in order to ‘promote continuance’ of private competition litigation in the UK, section 60 should not be repealed but preserved in some form: ‘It is important that there should be some acknowledgement of EU law, even if it’s just that the courts must have regard to relevant rulings.’

Under section 47A, the commission’s infringement decisions may be relied on for the purposes of follow-on damages claims in the CAT. Section 58A states that final infringement decisions, including those by the commission, are binding before the High Court (or, in Scotland, the Court of Session and sheriff courts), as well as in actions for damages and in collective proceedings before the CAT. Hence the working group’s recommendation to preserve both.

But, its provisional report said, ‘the extent to which claimants continue to bring claims in the UK for infringements of EU competition law post-Brexit will depend on the applicable rules concerning jurisdiction and enforcement of judgments’.

Meanwhile, the working group has made clear it is not focusing on state aid, saying only: ‘As industrial subsidies are generally costly to the economy, the UK should be open to agreeing constraints on them in trade negotiations.’

‘State aid is going to be subject to the agreement between the UK and the EU,’ more so than the other two pillars of competition law and enforcement, Gilbert says. EU state aid rules will no longer apply to the UK post-Brexit, but this does not mean the government could begin subsidising or favouring its industries. ‘That is a little bit simplistic,’ says Gilbert, ‘because there are [World Trade Organization] rules that essentially place restrictions on countries providing aid to their businesses.’

Whatever the Brexit deal, the CMA will likely have a bigger role to play – more merger and antitrust cases, and potentially oversight of state aid too.

The question of state aid aside, Taylor says the UK’s competition law ‘will be done more or less similarly to how it is done now’, but adds: ‘What [Brexit] means for the CMA as a competition authority and the global status of competition law in the UK’ is a more interesting question.

‘In some ways there is an opportunity here. The cases that are currently being done by the commission the CMA could get to do, and it can operate independently in the competition world in a way that it can’t do today.’

But the CMA risks being stifled by lack of funds and vision. ‘It will need resources,’ says Taylor. ‘The CMA is going to have a massive influx of cases, and [if] it’s just going to be bogged down in dealing with the volume, then it isn’t going to be in a position to do that. It is also a question of ambition. What kind of competition authority does the CMA want to be?’

‘I don’t think we are going to get a real feel about [the CMA’s] appetite to step up to the plate until we actually have a chief executive confirmed,’ Bell says. Coscelli has been acting up since Alex Chisholm departed in May 2016 to join the Department of Energy & Climate Change.

Bell further notes that post-Brexit, the CMA will no longer be part of the European Competition Network. ‘They need to have information-sharing agreements with the EC and all the member states,’ he says, adding that the CMA will need to have similar arrangements with other countries’ regulators ‘which previously were under the banner of the European Commission’.

Yet, by ‘coming out from underneath the shadow of the European Commission, if it plays it right [the CMA] may gain greater influence in the international community, rather than less’, Bell says, by ‘sitting alongside the Federal Trade Commission, the [US Department of Justice] and the commission’.

In February 2016 a National Audit Office report on the CMA said that ‘while it has improved the robustness of its enforcement casework, the regime has so far not produced a substantial flow of enforcement decisions or fines’.

Gilbert notes that in last 18 months or so, it has become ‘a much more active competition authority. It’s done a lot more cartel and abuse-of-dominance investigations, and it seems to be starting to tackle some of the bigger cases as well’. Dr Michael Grenfell, executive director for enforcement since July 2015, and a former National Retail Federation partner, is ‘driving things forward’, he adds.

The CMA’s ‘mantra’ in competition enforcement is ‘more cases, more quickly, but consistent with fairness and vigour’, Grenfell told conference delegates in London.

In 2015 the CMA issued three enforcement decisions and fines totalling £1.1m. Last year, the figures rose to eight and £142m, including nearly £90m against pharmaceutical companies Pfizer and Flynn Pharma for charging excessive prices to the NHS; and a £37.6m penalty for GlaxoSmithKline over ‘pay-for-delay’ agreements, which were also to the detriment of the NHS and UK taxpayers. The CMA is currently defending appeals against both decisions.

The supply of pharmaceuticals to the NHS is one area the CMA has been targeting, Grenfell said. Others are the online and digital markets. For instance, it is conducting a market study into online price comparison tools, to be completed in September. It also reached decisions in three online cartel cases in the last year, including one relating to sales of posters and frames by two competing online sellers on Amazon’s UK website. A penalty of £163,371 was imposed on one of the sellers. The other seller, which reported the cartel to the CMA under its leniency policy, was not fined.

In terms of deal flow, Bell says competition lawyers were incredibly busy with large-scale mergers before the commission last year, ‘[but] since [Donald] Trump and Brexit’ occurred, merger activity has been tailing off, particularly in what he calls ‘the middle ground’.

Lawyers also face having to decide which authority they should notify in merger and antitrust cases that are likely to run over the date of Brexit. McKnight, for instance, has already encountered cases of clients wanting to make a complaint about anticompetitive behaviour that will not come to a resolution until well after Brexit.

‘There is a question now as to whether the commission is likely to want to exercise its discretion to run with a case that has implications mainly for activities in the UK, with less relevance for the rest of the EU. It might think “what is the point of prioritising cases that relate principally to the UK, when, by the time we finish it, the UK will be out of the EU?” We don’t know the answer to that. So in some of the cases that I am involved in, we would probably want to speak to the authorities and test the waters before deciding with whom to lodge a complaint.’

Practitioners are no less busy than normal on the ‘behavioural’ side of competition law – that is, alleged infringements of the article 101/chapter 1 prohibition of anticompetitive agreements, and the article 102/chapter 2 prohibition of abuse of dominance.

‘We see a focus by the authorities, including the European Commission, on technology markets and competition among online platforms,’ Gilbert says. He points to the commission’s recent ebooks investigations involving Apple and Amazon, and the use of so-called most-favoured nation clauses.

In the past two years, the commission has opened three separate investigations into allegations of abuse of dominance by Google, involving the internet giant’s Google Shopping and AdSense services and its the Android operating system.

In the commission’s preliminary conclusion into the Google Shopping investigation, it said that Google had abused its dominant position by systematically favouring its comparison-shopping service in its search result pages.

Sharpe also highlights recent state aid cases. In August, the commission concluded that Ireland had granted undue tax benefits of up to €13bn to Apple and ordered the US company to pay it back. This decision is under appeal. There are also investigations into the tax treatment of McDonalds and Amazon by Luxembourg, which have been ongoing since October 2014 and December 2015 respectively.

‘That is a fairly major issue. Ireland and Luxembourg have given these companies massive tax remissions,’ says Sharpe, adding, in relation to the Grand Duchy, that: ‘Sooner or later, when Mr [Jean-Claude] Juncker ceases to be president, that will be investigated with rigour. At the moment, if the president of the commission is the guy who negotiated those deals, it is a little bit awkward.’ Before taking the commission’s presidency in November 2014, Juncker was prime minister of Luxembourg from 1995 to 2013.

Meanwhile, ‘the focus on procedural compliance is going up the agenda’, Taylor notes, pointing to the commission’s recent crackdown on ‘gun-jumping’ and the provision of incorrect or misleading information in merger control proceedings.

In May, the commission fined Facebook €110m for submitting incorrect or misleading information to it during its review of Facebook’s 2014 takeover of WhatsApp. It is also investigating whether Dutch telecom operator Altice did ‘jump the gun’ ahead of the commission’s clearance of its acquisition of PT Portugal in April 2015 – a breach that commands a fine of up to 10% of parties’ aggregate turnover.

Fortune-tellers

Offering the in-house perspective is Fleur Herrenschmidt, senior legal counsel for antitrust at Swiss multinational pharmaceutical company Novartis (and previously of Allen & Overy). Basel-based Herrenschmidt says that, for an in-house lawyer, ‘antitrust compliance requires a certain amount of crystal ball gazing’.

‘Unfortunately, we are increasingly seeing authorities taking novel approaches, so it is more challenging to predict enforcement priorities,’ says Herrenschmidt. ‘Recent decisions and investigations relating to excessive pricing are an interesting example where we are observing numerous decisions and investigations in the pharmaceutical sector over a period of one year,’ she adds.

Control of excessive prices has been a significant feature in antitrust enforcement in the UK and elsewhere in Europe: for example, the CMA’s fining of Pfizer and its distributor Flynn Pharma for charging the NHS excessive prices for a drug used to treat epilepsy. Or the case of South African multinational Aspen Pharmacare, which last year was fined more than €5m by the Italian competition authorities for hiking the price of its cancer drugs by up to 1,500%.

In May, the commission launched its first investigation into allegations of excessive pricing in the pharmaceutical sector by announcing a formal probe into Aspen’s pricing practices for cancer medicines covering all of the EEA, except Italy.

The role of the EU has been central to the development and administration of competition law, so post-Brexit the careers of UK competition lawyers will be dependent on practice rights. Many have looked, pre-emptively, to membership of the Irish bar, in the hope that Ireland’s continued membership of the EU will afford them necessary rights of practice and privilege. Three-quarters of solicitors registering in Ireland in the last year were from the UK.

Of the 1,448 solicitors admitted to the Irish roll of solicitors over the past 12 months, only 350 were Irish nationals. Most England and Wales solicitors adding their name to the role or taking a full practising certificate were based in London or Brussels, the Law Society of Ireland confirms.

Writing in the Gazette last week, Ken Murphy, director general of the Law Society in Ireland, said: ‘All the evidence that the society has is that England and Wales solicitors, almost without exception, are staying exactly where they are.’

Of the international firms, only Pinsent Masons has so far confirmed it will open an office in Dublin. Post-Brexit, it seems, England and Wales lawyers expect to have a role in European competition law.

Marialuisa Taddia is a freelance journalist

For more information, see the Law Society Competition Section.