The biggest talking point for UK competition law continues to be the UK’s withdrawal from the EU (Brexit). At the time of writing and present juncture in the UK–EU negotiations, the UK’s future relationship with the EU, and consequently the relationship between UK and EU competition law, remains unclear. Although the UK government is seeking cooperation with the EU on competition matters,2 it appears highly likely that EU competition law will cease to have effect in the UK. This means that the UK’s primary competition enforcer, the Competition and Markets Authority (CMA), will take on a greater number of merger and antitrust cases that previously fell within the jurisdiction of the European Commission. The government has also confirmed that the UK will establish its own state aid regime, an area which again is currently the preserve of Brussels.3 However, it is widely expected that the principles underlying the application and enforcement of competition law and state aid in the UK will remain consistent with those in the EU.
In principle, these changes will take effect from 29 March 2019, two years after the UK gave notice of its withdrawal from the EU. However, both sides have expressed their desire for a transition period, during which EU competition law will likely remain in force in the UK. At the time of writing, EU negotiators favour a period ending on 31 December 2020, coinciding with the end of the EU’s present budgetary cycle, while the UK government favours an open-ended period of around two years.4 The CMA is planning for these possibilities and the potential timing of a transfer of jurisdiction from the Commission, including as early as March 2019.5 It will be most immediately important to have in place arrangements for cases in progress when the Commission’s jurisdiction ceases, and the first draft of the treaty setting out the terms of Brexit published by the European Commission’s taskforce details the EU’s position on such matters (as well as for cases opened in any transition period).6
The CMA views Brexit as an opportunity for the still-nascent competition regulator (which came into existence in 2014, when it assumed functions previously carried out by the Office of Fair Trading and Competition Commission).7 In that vein, it has indicated that it will seek to position itself as a ‘thought leader in the evolution of competition law enforcement’.8 This, however, raises questions regarding the extent to which EU and UK competition law will diverge. At present, Section 60 of the Competition Act 98 (CA98) requires UK competition authorities and courts to ensure that the application of UK competition law is consistent ‘so far as is possible’ with EU competition law. Clearly, there is a degree of uniformity to competition law globally. The CMA also regards it being advantageous for it, post-Brexit, to retain broad consistency with the application of EU competition law, as well as collaborating closely with the Commission on enforcement and merger work (as well as other competition authorities around the world).9 However, its head of enforcement, Dr Michael Grenfell, has indicated scope for taking a different approach on areas subject to intense economic and legal debate, such as online sales restrictions or price discrimination.10 The extent to which this will be possible will depend on how the UK government seeks to recast – or indeed do away with – Section 60, which is in itself an issue ultimately dependent on the negotiations of the UK and EU on their future relationship. In the short term at least, the House of Lords EU Committee has called on the government to replace Section 60 with a softer duty ‘to have regard to’ EU law and precedent.11 At the time of writing, the Prime Minister, Theresa May, has stated in a key speech on her vision of Brexit that ‘we may choose to commit some areas of our regulations like state aid and competition to remaining in step with the EU’s’.12
More broadly, the government has committed as part of its post-Brexit industrial strategy to publishing a review of the UK’s existing competition regime by April 2019.13 While it is currently too soon to predict the contents of that review, it is highly unlikely that it will suggest changes to the fundamental aspects of UK competition law, which are as follows.
CA98 prohibits agreements or concerted practices that prevent, restrict or distort competition (Chapter I prohibition) and abuse of a dominant position (Chapter II prohibition), in each case within the UK. The Enterprise Act 2002 (EA02) contains the criminal cartel offence, and the legal basis for UK merger review and market investigations.
The CMA has primary responsibility for public enforcement of competition law in the UK – both the Chapter I and Chapter II prohibitions and, at present, Articles 101 and 102 of the Treaty on the Functioning of the European Union – although these provisions may also be enforced by private parties before the courts. In addition, a number of sectoral regulators (such as Ofcom for communications, Ofgem for energy, Ofwat for water, the Office for Rail and Road and the Civil Aviation Authority for rail and air transport respectively, the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) for financial services, and UREGNI for utilities regulation in Northern Ireland) have concurrent power to enforce the Chapter I and Chapter II prohibitions and Articles 101 and 102 in their sectors. In the past year, the most notable activity by sectoral regulators has been by the FCA, which has only been a concurrent enforcer of competition law since April 2015. Among its activities in the past 12 months, in November 2017, it issued its first statement of objections (SO) to four asset management firms alleged to have shared price information14 and launched market studies into investment platforms and the wholesale insurance broker market.15 In the wider financial services sphere, in February 2018 the PSR announced that it had opened its first CA98 case involving a number of ‘dawn raids’.16
In addition, a relatively unusual feature of the UK regime is that the CMA and concurrent regulators have the power to investigate markets under EA02 and to impose wide-ranging remedies, even in the absence of any alleged illegal conduct. This is a medium through which the FCA was particularly active in 2017, as discussed below. The CMA also concluded two market studies into digital comparison tools (DCTs) and care homes.
The main focus of the CMA’s attention in the past year has been on increasing enforcement. In a February 2016 report, the National Audit Office criticised the CMA’s first couple of years for advancing too few enforcement cases to a decision.17 It found resources were disproportionately used on market investigations, noting that UK competition authorities imposed only £65 million of competition enforcement fines between 2012 and 2014, compared with almost £1.4 billion of fines imposed by their German counterparts. However, the CMA is gearing up enforcement in preparation for its increased jurisdiction that will result from Brexit.18 In both 2016 and 2017, the CMA launched 11 new CA98 enforcement investigations, as compared to an average of 6.8 cases over the history of the CMA and its predecessor, the Office of Fair Trading. More importantly, the CMA issued six infringement decisions and two commitment decisions (as well as a ‘no grounds for action’ decision) – in total nine, compared with an average of 2.8 decisions in the period from 2010 to 2016. As of March 2018, the CMA has 15 active investigations ongoing. Factoring in the increased activity at the FCA, the direction of travel in the UK is very much towards increased enforcement.
To facilitate this enforcement, and indeed other work of the CMA, in an increasingly digitalised world, the CMA has stated its intention to establish a new digital, data and technology team.19 It will have a threefold remit:
- devising how best to analyse and draw conclusions from large data sets;
- improving means of sharing data with concurrent enforcers, competition regulators in other jurisdictions and parties in cases, and storing them for future use; and
- developing new analytical techniques to improve the CMA’s understanding of issues in the technology sector.
Having freshly completed a market study into DCTs in 2017, and after issuing an infringement decision in late 2016 concerning an infringement related to the use of automated repricing software,20 the CMA is targeting increased enforcement in the digital sphere going forward.
i Prioritisation and resource allocation of enforcement authorities
A 2015 spending review saw the CMA being allocated a budget of £65.94 million (as well as a capital budget of £7.4 million).21 This represents around a 7 per cent decrease in real terms over four years. However, in the Autumn Budget 2017, the Chancellor allocated the CMA an additional £2.8 million funding each year, earmarked for increased enforcement.22 That takes the CMA’s total budget to £68.7 million for 2018 and 2019. The government is continuing to review the CMA’s budget, and it is liable to be further revised when there is greater certainty over the CMA’s post-Brexit workload.
The CMA’s increased enforcement activity is borne out by statistics on how CMA staff time was split across different types of work in 2016 and 2017: 46 per cent of CMA staff time was spent on enforcement in 2016 and 2017, compared with 40 per cent in 2015 and 2016.23 This increase came at the expense of staff time allocated to market investigations and regulatory appeals, which fell from 21 to 14 per cent. Time devoted to mergers remained at 20 per cent, indicating a consistent merger workload over the past couple of years.
The CMA has also announced its intention to increase its presence in Scotland, increasing its Edinburgh headcount to 30.24 The aim is to increase enforcement across the UK, carry out UK-wide projects from Scotland and better engage with stakeholders in Scotland.
ii Enforcement agenda
In its draft Annual Plan for 2018/19,25 the CMA states that it intends to sustain its increased emphasis on enforcement. It sets out the following specific objectives as regards competition enforcement:
- launching as many new competition enforcement investigations under CA98 as possible, where the CMA has the requisite evidence, with six as a minimum;
- opening new criminal investigations and pursuing prosecutions as appropriate;
- continuing to improve processes and challenge the CMA’s ways of working to decrease the time taken to conclude competition enforcement investigations against a rolling three-year average benchmark;
- carrying out new digital campaigns to help businesses understand and comply with competition and consumer law; and
- applying insights from its research into businesses’ awareness and understanding of the law.
There will be no change to the CMA’s established policy of taking on a mix of larger and smaller cases, ensuring compliance by both larger and smaller companies. The draft Annual Plan also goes on to specify high level areas in which the CMA will focus these activities:
- vulnerable consumers;
- ensuring markets can be trusted;
- online and digital markets; and
- supporting economic growth and productivity.
As noted above, online and digital markets deserve special mention. The CMA has been active in the digital sector in recent years, looking at online sales bans, resale price maintenance for internet sales and ‘most favoured nation’ (MFN) provisions in price comparison websites. On the back of this, the CMA’s head of enforcement, Dr Michael Grenfell, has highlighted the use of price-matching software for collusion, free riding (where shoppers browse in bricks-and-mortar shops (receiving pre-sales advice and service) but then purchase products more cheaply online) and using data to personalise prices for individual consumers as areas on the CMA’s radar.26 This is in the broader context of the CMA considering and engaging in debates around whether the digitalisation of commerce represents a paradigm shift in competition dynamics requiring a rethink of competition law and policy, and whether intervention (e.g., by enforcement or interim measures) is warranted in fast-changing technology markets. Digital commerce was already a focus of the CMA’s antitrust enforcement in 2017, as is discussed below.
A further tool at the CMA’s disposal is company director disqualifications. In December 2016, the CMA secured its first disqualification against the director of a company that participated in an agreement on the price of posters and frames sold through Amazon’s UK website.27 The CMA has indicated that this is a tool that it would like to use more frequently, in particular by pursuing parallel investigations against companies and their directors.28
The CMA has also sought to innovate enforcement in other respects over the past couple of years by deploying flexibly other enforcement tools beyond infringement decisions.29 The CMA produces compliance materials and speaks at trade association meetings in sectors where there have been competition issues, and has launched a ‘stop cartels’ campaign across social media. The CMA also sends advisory and ‘stronger’ warning letters to businesses that it suspects of being in breach of competition law,30 where the conduct concerned does not merit devoting resources to a full investigation. Further, like other competition authorities, the CMA makes use of settlements, commitments and interim measures. The CMA has also resorted to removing the possibility of immunity from fines under CA98 for small companies for non-price fixing agreements.31 A useful tool for competition practitioners and businesses alike that the CMA has made use of is issuing ‘no grounds for action’ decisions, which give a reasoned indication of what an enforcer considers acceptable conduct in potentially grey areas.32 It is without doubt that the CMA will seek to be at the forefront of competition policy in the global post-Brexit competition landscape.
In the UK, cartels are enforced by both civil and criminal means: corporate civil liability under the Chapter I prohibition contained in CA98 or the criminal cartel offence for individuals under EA02, or both. In many cartel cases, both investigations will proceed simultaneously.
The CMA continues to regard cartel enforcement as a major priority, as indicated by its stated intention to open new civil and criminal cartel investigations in 2018 and 2019.33
i Significant cases
In 2017, the CMA issued three cartel infringement decisions concerning ‘cleanroom’ laundry services, furniture parts and real estate agents, and brought its criminal investigation into the construction industry to a close. It also successfully defended an infringement decision before the Competition Appeal Tribunal (CAT) in Balmoral Tanks, a case that raised important points of principle in relation to information exchange. 2017 was also an important year for the FCA as a concurrent cartel enforcer, when it issued its first SO.
FCA asset management case
In November 2017, the FCA issued its first SO as part of its investigation into information exchange in the asset management sector.34 Four asset management firms are alleged to have shared information, generally on a bilateral basis, on prices they intended to pay in relation to one or more of two initial public offerings and one placing, shortly before the share prices were set. This may lead to the FCA’s first CA98 infringement decision. Such a decision would be taken by a three member Competition Decision Committee group within the FCA, but separate from the case investigation team, similar to the procedure followed by the CMA. Further SOs and eventually decisions are to be expected in future as the FCA seeks to cement its role as an active concurrent competition enforcer. In that regard, the FCA also opened a CA98 investigation into alleged collusion in the aviation insurance market. This was subsequently transferred to the Commission, whose investigation is ongoing.
In respect of the CMA’s cartel enforcement, the CAT, which, inter alia, hears appeals from the CMA, upheld a decision fining Balmoral Tanks (Balmoral) £130,000 for exchanging confidential information on prices and price intentions with competitors manufacturing galvanised steel tanks.35 The decision concerned a single meeting in July 2012 at which Balmoral was invited to join a long-running price-fixing cartel. Balmoral refused to take part in the cartel, but exchanged confidential information with competitors. The meeting had been covertly recorded by the CMA. The CAT confirmed that even sharing information on a single occasion, even when refraining from joining others in price-fixing or market-sharing, can constitute a breach of competition law.
Cleanroom laundry services
In December 2017, the CMA fined two suppliers of cleanroom laundry services £1.71 million for market sharing.36 The case concerned cleaning of garments worn in ‘cleanrooms’, highly sanitised environments used in pharmacies and by pharmaceutical and medical device manufacturers. The suppliers had both traded under ‘Microclean’ since the 1980s by virtue of a joint venture arrangement. The CMA found a new May 2012 reciprocal trademark licence agreement to have infringed CA98. By the agreement, the suppliers split the UK in two and agreed that one company would supply to the northern portion while the other would supply to the southern portion. The companies also agreed not to compete for certain customers, regardless of location. This case is particularly interesting as it came to the CMA’s attention in the context of two related merger reviews, as a result of which information relating to the reciprocal trademark licence came to light.
In March 2017, the CMA fined three suppliers of chipboard and MDF-based drawer wraps and fronts £2.8 million for two counts of bid rigging and sharing of confidential, competitively sensitive information infringements.37 This followed the admission by two other companies of an infringement and their also paying £2.8 million in fines, following a settlement agreement, with the business reporting the conduct receiving leniency.
Residential estate agency services
On 31 May 2017, the CMA issued a decision finding that six estate agents operating in the Burnham-on-Sea area in South-West England had taken part in a cartel to fix prices in relation to the provision of residential estate agency services, with fines totalling £370,084.38 This followed the admission of liability by four other estate agents and their paying fines totalling £372,233 under a settlement agreement reached with the CMA on 2 March 2017. On the basis of information received during that investigation, the CMA has opened an investigation into estate agents in other locations across the UK, which are undisclosed at the time of writing.39
The CMA also brought its criminal investigation in the construction industry to a close. Seven arrests were made in 2013, but only one person was charged, who pleaded guilty to the cartel offence in March 2016. Despite the criminal investigation continuing after that guilty plea, the CMA concluded in June 2017 that it did not have enough evidence to pursue prosecution against any other individuals.40
Supply of solid fuel
In March 2018, the CMA issued an SO at the same time as announcing that two companies had admitted infringing competition law in relation to the supply of bagged household fuels in the UK and agreeing to pay fines totalling £3.4 million (after a 20 per cent reduction for settling the case, resulting in administrative savings for the CMA).41 This case started after intelligence work following a tip-off to the CMA’s cartels hotline. The CMA will issue its formal infringement decision in due course (probably later in 2018).
ii Trends, developments and strategies
As part of its commitment to drive greater enforcement, the CMA embarked in 2017 on a variety of strategies to detect anticompetitive conduct. In March 2017, the CMA launched its ‘Cracking Down on Cartels’ campaign with a reminder that individuals who report cartel conduct can receive a reward of up to £100,000, as well as promising anonymity to witnesses who report cartel activity.42 The CMA advertised the campaign via social media feeds such as Twitter and Linkedin, as well as on targeted websites. The CMA saw a 30 per cent increase in tip-offs following the campaign’s launch, and is repeating the campaign.43
In addition, the CMA is planning in 2018 to make the process for reporting cartels simpler by increasing accessibility and making the use of cartel reporting systems easier.44 The CMA has also introduced a new tool to spot bid-rigging that procurement professionals can download and use free of charge.45 The software uses algorithms to detect unusual bidding behaviour and pricing patterns that may suggest bid-rigging has taken place, and therefore prompt further inquiry.
A further angle adopted by the CMA was sending an open letter in September 2017 to businesses in the creative industries.46 The open letter was conceived as follow-up compliance work, highlighting that the CMA had fined five businesses and a trade association in the modelling sector in December 2016 £1.5 million for discussing prices for modelling, exchanging commercially sensitive information and fixing prices. Following the conclusion of that investigation, the CMA conducted further research, which showed the creative industries as having a particularly low understanding of competition law.
2017 also saw the completion of the first ‘fast-track’ standalone damages actions in the CAT, bolstering the CMA and concurrent regulators’ public enforcement. The fast-track procedure, introduced in 2015, is aimed at allowing consumers and small and medium-sized enterprises to challenge anticompetitive behaviour by allowing certain claims to be brought and decided quickly (within six months) with limited financial risk by capping the substantial costs often incurred in such cases. The first fast-track case that went to trial and judgment, Socrates Training v. the Law Society, merits particular attention. It was exactly the type of ‘David and Goliath’ battle that was envisaged for the procedure.47 Socrates Training (Socrates), a provider of online compliance courses, brought an action against the Law Society, the regulator of solicitors in England and Wales, for requiring member firms of its Conveyancing Quality Scheme to purchase anti-money laundering and mortgage fraud training exclusively from the Law Society. Socrates, which had already complained to the CMA (which declined to pursue the case based on the application of its prioritisation criteria), was represented by high street solicitors and a sole junior barrister, facing off against the Law Society being represented by a large, well-known law firm, Queen’s Counsel and a junior barrister. After a four-day trial, seven months after the claim was brought, the CAT found in favour of Socrates.
These cases, however, stand in contrast to the failure of applicants in the first cases seeking a collective proceedings order following the introduction of the new opt-out class action-type regime in October 2015. Under this new legislation, an individual or body can seek permission from the CAT to act as a representative of a class of claimants to bring collective proceedings to recover damages allegedly suffered as a result of anticompetitive conduct. These cases were Mobility Scooters48 and Mastercard (at the time of writing, the Mastercard decision on this point is scheduled to be heard by the Court of Appeal later in 2018).49
As previously noted, and in line with the CMA initiatives outlined above, the expectation is that the CMA will further increase its cartel enforcement even prior to the UK’s withdrawal from the EU. After the Commission ceases to have UK jurisdiction, the CMA will be responsible for investigating and enforcing the UK elements of major international cartels. The CMA estimates that it will handle an additional five to seven complex cartel and antitrust cases per year.50
III ANTITRUST: RESTRICTIVE AGREEMENTS AND DOMINANCE
The prohibition in Chapter I of CA98 captures a range of restrictive agreements, including both cartels and those agreements (both vertical and horizontal) that do not constitute hardcore cartels but nevertheless damage competition. The most important such Chapter I cases for 2017 are outlined below, together with Chapter II cases (dealing with the abuse of a dominant position).
i Significant cases
Restrictive agreements under Chapter I
In 2017, the CMA delivered Chapter I antitrust decisions in areas as diverse as a golf club manufacturer’s distribution system, retail price maintenance of light fittings, mobility scooter advertising restrictions and auction houses. There was, however, a thread running through these cases: regulating digital commerce online.
The Ping infringement decision is symptomatic of the CMA’s increasing focus on digital commerce. In August 2017, the CMA fined Ping, a golf club manufacturer, £1.45 million for banning two UK retailers from selling its golf clubs on their websites, and ordered Ping to bring the online sales ban to an end.51 While the CMA did find that Ping was pursuing the legitimate commercial aim of promoting in-store custom fitting, it held that this could have been achieved through the less restrictive means of requiring retailers to demonstrate the promotion of custom fitting in the online sales channel. Moreover, the CMA considered that there was a low chance of free riding, given the strict criteria for the selective distribution system, including requiring account holders to have a bricks-and-mortar shop and to invest in custom fitting. In its decision, the CMA drew heavily on the opinion of Advocate General Wahl in Coty before the Court of Justice of the European Union (CJEU).52 The CJEU delivered its judgment in December 2017, deciding that a manufacturer operating a lawful selective distribution system for luxury goods is allowed to prohibit its authorised distributors from selling those goods on a third-party internet marketplace.53 Both the CMA and CJEU decisions add further texture to the competition law’s application to digital commerce, following the Commission’s final report in May 2017 on its e-commerce sector inquiry.54
Ping has appealed the CMA’s decision to the CAT.55
Retail price maintenance (RPM) cases continued to be a focus of the CMA in 2017, following its conclusion of two investigations in 2016. In May 2017, the CMA fined the National Lighting Company £2.7 million, and sent warning letters to other suppliers in the light fitting sector, for imposing minimum prices on online sellers of light fittings.56 In August 2017, the CMA exercised its power to remove immunity from fines for small companies for non-price fixing agreements for a mobility scooter supplier, TGA, at an early stage of a CMA investigation into TGA preventing retailers from advertising the prices of their mobility scooters online or from advertising them below specified prices.57
In June 2017, the CMA accepted commitments from the online bidding platform provider, ATG Media, with respect to suspected exclusionary and restrictive pricing practices contrary to both Chapter I and II.58 The three practices under investigation were:
- a obtaining exclusive deals with auction houses so that they do not use other providers;
- b preventing auction houses getting a cheaper online bidding rate with other platforms for their bidders through MFN and or price parity clauses; and
- c preventing auction houses promoting or advertising rival live online bidding platforms in competition with ATG Media.
ATG Media gave commitments to end these practices.
Abuse of dominant position under Chapter II
Apart from the online bidding platforms case, only one other CMA abuse of dominance case reached a decision in 2017, albeit having some importance for the hotly contested topic of rebates.
In August 2017, a month before the CJEU delivered its much-anticipated judgment in Intel,59 the CMA issued an important ‘no grounds for action’ rebates decision, concluding its investigation into Unilever for supplying single-wrapped impulse ice cream products free of charge or at a reduced price if a minimum number of single-wrapped impulse ice cream products were purchased from Unilever (e.g., ‘buy eight cases, get four cases free’) between January 2013 and February 2017. The CMA considered whether Unilever’s offers were likely to produce an exclusionary effect by providing incentives to retailers to purchase a large proportion of their total requirements from Unilever with the likely effect of filling (or nearly filling) retailers’ freezers, and so of restricting competition in the supply of single-wrapped impulse ice cream products. The CMA concluded that, although Unilever was likely to have had an assured base of sales during the relevant period, and retailers’ freezer capacity was constrained, nevertheless the structure and availability of Unilever’s offers, taken together with the purchasing patterns of retailers, were such that Unilever’s promotional deals were unlikely to have had an exclusionary effect. It is rare for competition authorities to publish such ‘no infringement’, ‘no grounds for action’ decisions, despite their utility in guiding businesses conduct.
ii Trends, developments and strategies
Despite not rendering any infringement decisions against pharmaceutical companies in 2017, that sector remains high among the CMA’s antitrust enforcement priorities, particularly given that by far the largest customer of pharmaceutical products in the UK is the taxpayer-funded National Health Service. Indeed, four out of 15 of the CMA’s active investigations (as at March 2018) are in the pharmaceutical sector. Previously, in 2016, the CMA had issued landmark decisions fining GlaxoSmithKline plc (GSK) and Generics a total of £45 million for a pay-for-delay patent settlement agreement over the antidepressant paroxetine,60 and Pfizer and Flynn Pharma £90 million for each abusing their dominant position by excessively and unfairly raising the price of phenytoin sodium capsules used for treating epilepsy (both decisions having been appealed to the CAT).61 The CMA is continuing to pursue several excessive drug price and related investigations. In that vein, in August 2017, the CMA issued an additional SO to Actavis UK’s new owners as of January 2017, Pharmaceuticals and Accord Healthcare, alleging Actavis had charged excessive and unfair prices in relation to the supply of hydrocortisone tablets, used to treat adrenal insufficiency, in the UK.62 The CMA had already issued an SO to Actavis UK in December 2016.63 This was followed in November 2017 by the CMA issuing an SO alleging the same infringement against Concordia in relation to the supply of liothyronine tablets, primarily used to treat hypothyroidism, in the UK.64 In addition, the CMA issued an SO to Merck Sharp & Dohme in May 2017 alleging an anticompetitive discount scheme for its medicine Remicade, used primarily in the treatment of patients with gastroenterology and rheumatology conditions such as Crohn’s disease, ulcerative colitis and rheumatoid arthritis.65 The CMA also opened an investigation in October 2017 into suspected anticompetitive agreements or concerted practices, or both, and suspected abuse of dominance in relation to the supply of certain generic pharmaceutical products.66
In line with the CMA’s stated intention, increased antitrust as well as cartel enforcement should be expected. As identified above, key areas of interest will continue to be pharmaceuticals and digital commerce: this is before mentioning the prospect of Brexit, and the five to seven complex cartel and antitrust cases per year that are likely to be brought into the CMA’s jurisdiction. It is also worth noting that the outcomes of the CAT appeals against the CMA’s first pay-for-delay (GSK ) and excessive drug pricing (Pfizer/Flynn) cases mentioned above are expected in 2018, which will be of great importance to the CMA’s future pharmaceuticals enforcement.
IV SECTORAL COMPETITION: MARKET INVESTIGATIONS AND REGULATED INDUSTRIES
The CMA and concurrent regulators have wide powers to study and investigate markets that they consider may not be working properly, and to make recommendations and impose remedies to improve the operation of competition in those markets. Market studies and investigations are a particular feature of the UK system, with previous investigations being high profile and tending to focus on consumer-facing industries. Until recently, and the uptick in enforcement activity, much of the competition regulators’ efforts were concentrated on such investigations.
i Significant cases
Despite its pivot to investigating infringements, the CMA delivered important reports in 2017 into DCTs and care homes. In addition, this has been an area in which the FCA has become particularly active.
Digital comparison tools
In September 2017, the CMA published its final report in its DCTs market study.67 Its findings were generally positive, highlighting the fact that DCTs help to save people time and effort through making searching around and comparing easier and more appealing, particularly for household services such as car insurance, home insurance, energy and broadband, which are often complicated and not immediately interesting to people. The implied pro-competitive effect of this was also borne out by the CMA’s research. However, the market study caused the CMA concern about contracts between suppliers and DCTs that prevent suppliers from offering better prices on one DCT than on another (wide MFN clauses). As a result, the CMA opened an investigation into a DCT’s use of wide MFN clauses in relation to home insurance products.68 Given the financial nature of the products involved, the CMA is receiving support for the investigation from the FCA.
The CMA’s care home market study, completed in November 2017, reflects one of the CMA’s priorities: vulnerable consumers.69 The CMA had two areas of concern: first, those requiring care need greater support in choosing a care home and greater protections when they are residents; and second, the parts of the industry that supply primarily local authority-funded residents are unlikely to be sustainable at the rate that local authorities currently pay. While the CMA did not identify any competition concerns that required further investigation, it began a specific consumer law enforcement action as a result of the market study.70
FCA asset management market study
In June 2017, the FCA issued its final report in its asset management market study.71 The market study found weak price competition in a number of areas of the asset management industry. It also found no clear relationship between charges and the performance of actively managed UK retail funds. To address the FCA’s competition and value-for-money concerns, the FCA is implementing a suite of remedies aimed at making the industry and products on offer more transparent. In particular, the FCA is strengthening the duty of asset managers to act in the best interests of investors and to provide greater protection for investors. In addition, the FCA identified concerns about the way the investment consultant market operates, including concerns relating to conflicts of interest. The three main providers of investment consultancy services in the UK offered undertakings to address the FCA’s concerns. However, the FCA rejected these undertakings, and consequently referred the entire market for these services to the CMA for a full market investigation.72 That detailed investigation is due to conclude in early 2019 and, subject to its findings, the CMA may ultimately order remedies.
ii Trends, developments and strategies
A definite trend has been the FCA’s increased use of market studies to examine the competitiveness of financial services industries. In addition to an asset management market study, the FCA began market studies in 2017 into the wholesale insurance broker market73 and investment platforms.74 The wholesale insurance broker market study is looking at how effectively competition is working in the wholesale insurance broker sector, as well as how brokers influence competition in the underwriting sector. The investment platforms market study is examining services that offer access to third-party investment products, but is also looking more broadly across the financial product distribution landscape, in particular how much competition platforms face from wealth managers and other distributors.
For its part, the CMA intends to follow through on the recommendations made in its 2017 market studies into DCTs and care homes for the elderly.75 This follows the completion of market investigations into energy and retail banking in 2016, in respect of which the CMA has followed through with remedies.
The CMA will continue to use market studies as part of its toolkit going forward,76 despite the increasing emphasis on enforcement. The CMA also made changes in July 2017 to streamline its market investigation procedure to address criticism over the length and burden of such market investigations.77 These changes include:
- the earlier consideration of remedies;
- reducing the number of set-piece consultations;
- earlier, more flexible interaction with stakeholders; and
- enhancing efficiencies between market studies and investigations.
The CMA is test-driving some these changes in relation to the supply and acquisition of investment consultancy services and fiduciary management service market investigations referred to it by the FCA.78
In addition to progressing in and completing its investment consultant market investigation in 2018 and 2019, the CMA began a market study in December 2017 into heat networks (the generation and distribution of heat to buildings, consisting of district heating and communal heating).79 The deadline for the heat networks market study is December 2018. Further, the CMA is looking to launch at least two further market projects.80
V MERGER REVIEW
The CMA carries out both Phase 1 and, in the event it deems them warranted, in-depth Phase 2 merger investigations in the UK. Save for a limited category of investigations (in which the government makes the final decision), decisions at Phase 2 are made by a panel independent from the case team so as to avoid any ‘confirmation bias’. The UK regime is also unusual in that merger notifications are voluntary, but the CMA has the ability to investigate non-notified transactions, and it has an active Merger Intelligence Committee that monitors merger and acquisition activity for transactions that may raise competition concerns.
i Significant cases
The CMA undertook around 60 merger inquiries in total in 2017 (a similar number to 2016), five of which resulted in a reference to Phase 2 for a more detailed investigation. The most significant cases concluded in 2017 are examined below.
In December 2017, the CMA cleared, after a Phase 2 investigation, the acquisition of Booker, a wholesaler, by Tesco, a supermarket chain and the UK’s largest retailer.81 The competition concerns the CMA was examining stemmed from Booker supplying smaller retailers that compete with Tesco. The CMA’s Phase 2 panel noted that retailers that compete with Tesco to which Booker supplies are free to set their prices and decide what products to stock. Therefore, Booker (controlled by Tesco post-transaction) cannot directly determine how these other retailers compete with Tesco.
The panel also concluded that strong competition existed at both the wholesale and retail levels, which meant that it was unlikely that the merged entity could raise prices or reduce service quality at either the wholesale or retail levels, despite Tesco’s general influence in the retail sector. The CMA’s research showed that most retailers used multiple wholesalers and often switched. If Booker raised prices, retailers would switch wholesaler. The CMA’s panel was also not convinced that Booker’s post-transaction increased buyer power in relation to suppliers would raise competition concerns. Booker’s market share made it unlikely that it could lower prices, force out competitors and eventually raise wholesale prices. The CMA instead viewed Booker’s increased buyer power as pro-competitive, given that it might intensify competition in the wholesale market and in turn result in cheaper prices in the retailers that Booker supplies.
Besides providing an in-depth account of the CMA’s thinking on the retail sector, and showing the CMA’s willingness to consider merging companies’ pro-competitive stories, this case is also notable as an example of the fast-track merger referral procedure in action. The companies requested a fast-track referral in June 2017, less than a month after the Phase 1 investigation began. The ultimate successful clearance, without remedies, shows that the Phase 2 fast-track procedure is an option to be considered by merging parties when competition concerns arise.
In September 2017, the Secretary of State for Culture, Media and Sport referred 21st Century Fox’s anticipated acquisition of control of UK broadcaster Sky to the CMA.82 Given the size and international coverage of the parties, the proposed acquisition fell within the jurisdiction of the European Commission.83 However, even where this is the case, a Member State still has the power to intervene on public interest grounds (as opposed to intervening under competition concerns). The Secretary of State intervened over concerns in relation to media plurality and broadcasting standards, and referred these matters to the CMA for review. The CMA provisionally found in January 2018 that the proposed acquisition was not in the public interest due to media plurality concerns, but not because of a lack of a genuine commitment to meeting broadcasting standards in the UK. The CMA will deliver its final report to the Secretary of State by 1 May 2018, with whom the final public interest decision rests.
In October 2017, the CMA cleared Just Eat’s acquisition of Hungryhouse, both web-based food ordering platforms, after the merger was referred to Phase 2.84 The deciding factor for the panel was the lack of competitive constraint Hungryhouse placed on Just Eat. The CMA found that Hungryhouse’s size meant that it offered too few unique restaurants, making it increasingly difficult for Hungryhouse to attract and retain consumers. The panel also gave weight to the fact that the industry was evolving fast, and noted that there were other platforms that offered more competition to Just Eat: Deliveroo, UberEATS and Amazon. Direct orders to restaurants also placed a competitive constraint on these platforms.
Just Eat/Hungryhouse is noteworthy in particular for the CMA fining Hungryhouse for failing to provide certain documents to the merger inquiry when required by the CMA in the context of the Phase 2 inquiry.85 This is the first time this has occurred in a merger case, and comes on the back of the CMA imposing a similar fine on Pfizer in April 2016 for failing to respond to a request for information in the context of the Pfizer/Flynn phenytoin sodium capsules excessive pricing investigation mentioned above.86
ii Trends, developments and strategies
The fines in Just Eat/Hungryhouse and Pfizer/Flynn should be seen in the context of full and accurate information provision in merger inquiries and antitrust investigations being a hot topic for competition enforcers. In May 2017, the European Commission imposed a substantial fine of €110 million on Facebook for providing incorrect or misleading information to the Commission in relation to its takeover of WhatsApp.87 In June 2017, the Commission also issued SOs alleging similar conduct against the pharmaceutical companies Merck and Sigma-Aldrich.88
In October 2017, the UK government announced a proposal to enable it to intervene in cases that might raise national security concerns, but that were not otherwise reviewable.89 The proposal targets key areas of concern such as companies that design or manufacture military and dual use equipment, and parts of the advanced technology sector (computer chips and quantum technology). At present, the government can only intervene in mergers that meet the CMA’s jurisdiction threshold: either the UK turnover of the target is greater than £70 million, or a share of supply greater than 25 per cent is created or strengthened in any particular market in the UK. In the areas of concern, the government proposes lowering the threshold to enable it to intervene on national security grounds to a UK turnover threshold of £1 million (irrespective of the share of supply). The government is also consulting on other potential changes to the merger regime, including the introduction of a mandatory notification regime for foreign investment in certain security-sensitive sectors, such as the civil nuclear or defence sectors. The government’s response on these matters, following consultation, is expected later in 2018.
The CMA took an important step in its commitment to prioritise both smaller and larger cases in June 2017 by raising the threshold for smaller mergers to be referred to a Phase 2 investigation.90 The CMA may decide not to refer mergers to Phase 2 where the relevant market is of insufficient importance, and where the costs involved would be disproportionate to the size of the market concerned. Following consultation, the CMA raised the figure for markets generally considered as sufficiently important to warrant a merger reference from £10 million to £15 million. It also raised the threshold below which markets are generally considered not sufficiently important from £3 million to £5 million.
Although the CMA’s merger review output is dependent on M&A activity, the CMA is putting preparations in place for gaining jurisdiction over larger and more complex international mergers resulting from the UK’s withdrawal from the EU. The CMA is expecting an increase of around 30 to 50 additional Phase 1 merger cases per year, and an additional five Phase 2 cases per year.91
The CMA’s core challenge in 2017 was preparing for the UK’s withdrawal from the EU. As discussed above, the CMA is making progress in increasing its enforcement output, and is devoting resources to preparing for the increased scale and complexity of work that will fall within its jurisdiction once the UK has withdrawn from the EU. 2017 was also notable as the year when the FCA ‘came of age’ as a concurrent competition enforcer, issuing its first SO in a CA98 case.
Although the CMA’s Brexit planning has added greater clarity, there remain many issues to be clarified in 2018 and beyond. Notably, at the time of writing, it is not known how EU and UK competition law will interact and the basis on which the Commission and CMA will cooperate. As has been highlighted, the CMA foresees a close relationship with the Commission. However, the CMA also views Brexit as an opportunity to tread its own path and cement its reputation as a thought leader in the international competition law community. Depending on the future relationship of UK and EU competition law, the next few years may see the CMA taking a different approach in more hotly contested areas of competition law, such as price discrimination and online sales bans.
1 Marc Israel is a partner and Andrew Wright is an associate at White & Case LLP.
3 See http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal-market-subcommittee/brexit-competition/oral/73024.pdf and https://www.gov.uk/government/news/david-davis-foundations-of-the-future-economic-partnership-speech.
4 See https://ec.europa.eu/commission/sites/beta-political/files/transition.pdf; the UK government’s position was not published but was leaked to the press: https://www.ft.com/content/b4b49654-16fb-11e8-9376-4a6390addb44.
6 See Articles 88 and 89 of the European Commission Draft Withdrawal Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, https://ec.europa.eu/commission/sites/betapolitical/files/draft_withdrawal_agreement.pdf.
9 See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/664451/annual-plan-consultation-2018-2019-web-accessible.pdf and https://www.gov.uk/government/speeches/reflections-on-the-past-ambitions-for-the-future.
12 See the Prime Minister’s 2 March 2018 Mansion House speech, https://www.gov.uk/government/speeches/pm-speech-on-our-future-economic-partnership-with-the-european-union.
30 The CMA’s advisory letters are publicly available at https://www.gov.uk/government/publications/competition-law-warning-and-advisory-letters-register/advisory-letters-issued-by-the-cma; and the CMA’s warning letters are available at https://www.gov.uk/government/publications/competition-law-warning-
32 See the single-wrapped impulse ice cream case discussed in Section III.i.
33 CMA Annual Plan consultation 2018/19, Paragraph 2.31.
46 See https://www.gov.uk/government/news/cma-warns-creative-sector-about-illegal-price-collusion and https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/643685/letter_to_creative_industries.pdf.
53 For more details and comment on Coty, see https://www.whitecase.com/publications/alert/suppliers-luxury-
78 See the February 2018 progress update: https://assets.publishing.service.gov.uk/media/5a8d44a540f0b641
83 Under the EUMR.