The Public Competition Enforcement Review: United Kingdom
Three and a half yearsafter the UK's Brexit referendum, the UK left the EU on 31 January 2020. This followed a 'transition period' under the provisions of the European Union (Withdrawal Agreement) Act 2020 (the Withdrawal Act),2 during which the European Commission retained all of the competencies that it exercised while the UK was still an EU Member State. Shortly before the expiry of the transition period and following the expected political brinkmanship the two sides struck a (partial) deal on 24 December 2020 – the Trade and Cooperation Agreement (TCA) – marking the dawn of a new age in UK–EU relations.
In the 12th edition of this publication we wrote that 'the EU has been clear that it expects the future partnership to prohibit anticompetitive agreements and abuse of dominant positions, contain a merger control regime, and implement rules on State aid as part of the “level playing field” guarantees that the EU is seeking.'3 The TCA has sought to allow tariff-free trade on most goods and has committed both sides to upholding certain environmental, social, labour and tax transparency standards. While either side can, in theory, diverge from the established rules on the level playing field, a 'significant divergence' impacting trade or investment would allow the aggrieved party to impose temporary tariffs to counteract it and will subsequently be subject to review by an arbitration panel. On governance, the TCA contains only one mention of the European Court of Justice (ECJ) (regarding participation in EU programmes) in the entire 1,246-page document. Europe's highest court will not have a role in overseeing the TCA in the future, although it will still have jurisdiction with regards to the EU rules that will continue to apply to Northern Ireland under the Northern Ireland Protocol. Finally, addressing the somewhat unexpected bugbear of the negotiations, the UK will depart from the EU's Common Fisheries Policy and establish a new identity as a 'sovereign independent coastal state' with the value of the fish caught by the EU in UK waters to be cut by 25 per cent over a transition period lasting five-and-a-half years. At the time of writing, the final deal awaits ratification by the European Commission while it is applied provisionally until 28 February 2021 (such provisional approval is likely to be extended). The UK Parliament approved the deal on 31 December 2020.
Following the end of the transitional period, the CMA can now investigate mergers – and conduct investigations (as can the UK's concurrent regulators in fields such as telecoms, post, aviation and financial services) into alleged breaches of competition law under the Competition Act 1998 (CA98) – alongside any investigations by the European Commission. In the case of mergers, they would need to satisfy one of the jurisdictional tests under the Enterprise Act 2002 (EA02) to qualify for investigation, and in respect of conduct cases they must have an effect in the UK. Therefore, it is possible that cases will be reviewed in parallel by UK and EU regulators. In reality, that is not very different to the pre-Brexit situation when cases might have been subject to review in various jurisdictions around the world.
ii UK competition law regime
The 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 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 – although these provisions may also be enforced by private parties before the courts. Clearly, the CMA will no longer be able to enforce the European law equivalents to the Chapter I and Chapter II prohibitions – Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) – now that EU laws have ceased to directly apply in the UK. However, the substantive provisions of the equivalent rules in the UK and the EU remain the same (unless of course they are amended), and the UK authorities will have regard to EU cases and ECJ case law that existed prior to Brexit unless there is a reason to depart from them.4 In addition, a number of sectoral regulators have concurrent powers to enforce the Chapter I and Chapter II prohibitions in the regulated markets that they supervise, and the same principles will apply to them as to the CMA when enforcing the CA98.5
In terms of the prospective reform of the UK Competition law regime, the end of the transition period and a Brexit deal have not, in and of themselves, brought about any immediate changes beyond the obvious, such as the end of the European Commissions 'one-stop-shop principle'. It will remain to be seen whether the UK will deviate substantially from some of the established European regulations simply because there is now the opportunity to do so. The UK government decided to retain the block exemptions for vertical restraints and motor vehicles under UK law and so they will remain in force in the UK until they expire in May 2023 and May 2022 respectively. The CMA has recently begun a consultation on the vertical restraints block exemption ahead of making recommendations to the UK government as to whether the block exemption should be retained or amended when it expires.6 Below we will discuss in greater detail some of the Brexit-related changes impacting competition enforcement in the UK.
Beyond Brexit, in the 12th edition of this publication we reflected on Lord Andrew Tyrie's letter containing his proposals for reforms to UK competition law in February 2019. The letter was sent in response to a request from the Department for Business, Energy and Industrial Strategy (BEIS) asking for his views and it contained a broad spectrum of suggestions. The focus of those suggestions was on measures designed to deal with two main issues: the growth of the digital economy and the need to restore consumer confidence in the market. In terms of consumer confidence, Lord Tyrie suggested that the renewed focus on consumer interests could be derived from an overriding statutory duty on the CMA and the courts to act in protection of consumer interests. He made a range of proposals to bolster CMA enforcement powers, including increased scope to use interim measures and he also suggested an increase to the incentives for whistle-blowers and the extension of director disqualification powers to consumer law breaches as well as competition law breaches. One of the most radical of Lord Tyrie's ideas was that the Competition Appeal Tribunal (CAT) should be limited to a judicial review-based standard of review of competition law cases, rather than a full merits hearing, in an effort to expedite the competition appeals process. The letter also contained a suggestion that once the CMA takes full competence for merger review in the UK after the transition period expiry date that the UK might move from a voluntary, non-suspensory system to a mandatory, suspensory regime for transactions of a certain size. We wrote that the letter could ultimately be seen as a 'wish list' rather than a concrete set of legislative reform proposals, and Lord Tyrie acknowledges throughout that more assessment is necessary, but it does contain several suggestions of substance that BEIS would be likely to engage with within the context of its ongoing competition reform mandate and this is what BEIS has been doing.
Lord Tyrie has since departed from the CMA but reform of UK competition law nevertheless remains very much on the agenda. In November 2020, the CMA's Digital Markets Taskforce (DMT) proposed an entirely new ex ante legislative regime for digital firms with 'strategic market status' which is taken to mean substantial and entrenched power in at least one digital activity which provides the firm with a strategic position. This regime would entail the creation of a specialist Digital Markets Unit (DMU) which would sit within the CMA and function as both a 'centre of expertise and knowledge in relation to competition across digital markets' and a pro-active enforcer of this market. Significantly, it is proposed that firms meeting the Strategic Market Status (SMS) definition would be subject to the 'three pillars of the regime'. These consist of (1) an enforceable code of conduct setting out how an SMS should act and behave (its objective being to 'manage the effects of market power'); (2) pro-competitive interventions that would allow the DMU to 'intervene in markets to promote dynamic competition and innovation' and (3) a set of specific merger rules that would apply to SMS companies and be operated by the CMA in addition to the existing merger control regime. Deviating further from the current rules, notification would be mandatory, assuming transactions meet certain yet-to-be-decided thresholds.
While we have not yet seen the introduction of a general statutory duty to promote consumer interest, we have seen that the CMA is becoming more active in enforcing initial enforcement orders (IEOs) on mergers and director disqualifications. After the CMA issued its first ever fine for breach of an IEO in the Electro Rent Corporation/Test Equipment Asset Management case in 2018, there have been several other cases in which fines have been imposed, illustrating that the CMA is more than willing to use this tool to both punish wrongdoers and most likely deter others from contemplating or carrying out a breach. Accordingly, the use of interim measures as a means of more effective enforcement is something that we are likely to see the CMA continue to utilise more and more.
On director disqualifications, we had previously noted that the CMA's adoption of new guidance in February 2019 had given it more flexibility to pursue directors, replacing a five-step assessment with a 'principles-based' approach; making its decisions 'in the round' rather than on the basis of a seemingly more linear set of criteria. At the time of writing there have been 19 director disqualifications for breach of competition law and approximately half of these occurred between the 12 months from June 2019 to June 2020, making it clear that the enforcement trend is in line with Lord Tyrie's 'wish-list'.
iii Prioritisation and resource allocation of enforcement authorities
One of the areas of prioritisation for the CMA in recent years has been increasing the level of its enforcement activity overall. In a February 2016 report, the UK National Audit Office criticised the CMA's first couple of years for pursuing too few enforcement cases to a decision.7 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 imposed by their German counterparts. However, the CMA has since increased its enforcement action. Between 2010 and 2015, the CMA (or its predecessor the Office of Fair Trading) opened an average of seven CA98 cases a year, but in 2016–18 this rose to an average of 10.8 Factoring in a modest increase in the activity at sectoral regulators like the Financial Conduct Authority (FCA), the direction of travel in the UK is very much towards increased enforcement. Going into 2020, the CMA had 22 open merger cases, 18 competition enforcement cases, seven consumer enforcement cases, 1 market investigation and one market study.9 Going in to 2021, the CMA had 22 merger investigations (including three Phase II reviews), 10 competition enforcement cases, 10 consumer enforcement cases, one market investigation, one market study (which was recently launched) and one regulatory appeal under way. In addition, 14 projects are currently subject to litigation.'10
In terms of resource allocation, for 2019–20, the CMA was allocated a budget (before depreciation) of £65.94 million. For 2020–21, this figure was increased to £91.78 million and for 2021–22, the Chancellor announced that it would be increased again to £109.6 million. In its Spending Review 2020, the government wrote that additional funding has been provided to establish the new, dedicated Digital Markets Unit within the CMA that 'will build on the work of the Digital Markets Taskforce and begin to operationalise the key elements of the UK's regime to unlock competition in digital markets for the benefit of UK consumers and businesses'.11 In order to handle the increased caseload the CMA expects to have as a result of Brexit, it was announced in 2019 that the CMA was targeting an extra 290 hires. Although the CMA's Annual Plan Consultation Paper 2021/22 (which precedes publication of the full Annual Plan) does not confirm whether or not the CMA achieved its recruitment goal, it does state that they 'have recruited many new staff to help [them] take on [their] expanded role and will continue to do so in the period ahead.'12 This includes, the paper continues, 'continuing to recruit expertise to [the] Edinburgh, Cardiff and Belfast offices that will help equip [them] with greater knowledge of priorities in the different nations of the UK.'13 In August 2019, the CMA also relocated its headquarters to new, larger offices in Canary Wharf in London.14
iv Enforcement agenda and outlook
In November 2020, the CMA published its report, 'The State of UK Competition'.15 Reflecting on the deterioration of competition during the recession in 2008 to 2009 in particular, and a possible weakening of competition in the UK over the last two decades in general, the CMA remarked that 'we consider it gives sufficient cause for the CMA, regulators and government to remain vigilant in protecting and promoting competition, especially as the UK emerges from the severe economic impact of the [covid-19] pandemic.'16 This offers some general insight into the rationale behind the CMA's enforcement agenda looking forward. Notably, in evidencing the need for 'vigilance', the CMA found that as a result of the pandemic conditions for competition had been dramatically affected in the UK, where approximately 40 per cent of consumers report shopping around less than usual and 40 per cent of companies have postponed or reduced plans to expand.
More specifically, digital markets remain a top priority on the CMA's enforcement agenda. As stated above, in early December 2020, the CMA delivered the DMT's advice to the British government on the potential design and implementation of pro-competitive measures for unlocking competition in digital markets. These pro-competitive measures would broadly be in line with what we have seen at the European level with the EU Digital Markets Act and Digital Services Act proposals, and at the national level with the German and French governments (among others) notably proposing regimes to regulate digital markets in the first month of 2021.
The relationship between competition and regulation remains firmly on the CMA's agenda, following the publication of its report: 'Regulation and Competition: a review of the evidence' in January 2020.17 The report reviews existing evidence around the impact of regulation on competition, and provides recommendations for policymakers on how to revise regulations in order to protect competition across markets. In line with the CMA recommendations in the report, it seems fair to assume that we can expect to see updated guidance on assessing the impact of regulation from the CMA in the near future. An overarching theme of the recommendations in the report is for regulators to look beyond price effects at other dimensions of competition, such as service quality and innovation, so as to capture dynamic competition concerns.
Aside from the CMA, 2019-20 also saw an uptake in competition enforcement by concurrent agencies that looks set to continue into 2021. In the regulator's own words: 'the concurrency arrangements form a key part of the UK's competition regime and have an important role in enhancing competition and making markets work more effectively in the regulated sectors, with a view to achieving more competitive outcomes for consumers. These sectors account for an estimated 25 per cent of gross domestic product and almost every household and business in the UK relies on their services, which range from basic utilities like heat, light and water to financial services such as banking and insurance.'18 As for enforcement, the CMA's Annual Concurrency Report 2020 states that 'over the last two years, five cases [led by concurrent regulators] have resulted in infringement decisions [and] this is significant because, prior to then, there had only been two infringement decisions since the start of the concurrency regime in April 2014'.19 It also notes that, in light of the recommendations set out in Lord Tyrie's letter, it has been engaging with both BEIS and the concurrent regulators and expects some 'regime-wide' changes and reforms in the near future.20 No doubt these will be set out more fully in the report for 2020–21 (which is due around April). One of the specific policy ideas that is contained in the 2019–20 report is that concurrent regulators would benefit from 'improvements in respect of interim measures'. As detailed below, interim measures appear to have become a preferred tool in the CMA's enforcement kit and it is notable, therefore, that the concurrent regulators might, under reformed legislation or guidance, be encouraged to follow suit. Indeed, an indication of some of these 'regime-wide' reforms may have come in the form of the Penrose report published in February 2021 and described in more detail below. In short, and most significantly, John Penrose MP proposes that 'each regulator publish and execute a multi-year project plan to turn as much of their sector into a “normal” pro-consumer, high standards competitive market as possible' entailing the formal handover of much of their respective sectoral responsibilities to the CMA.21 The rationale for this handover being that these regulated sectors will be more focused on their customers rather than on lobbying their specific regulators or their legislators in a way that distances them from the workings of what Penrose calls a 'normally competitive industry'.22
Under the current UK regime, cartels are enforced by both civil and criminal means: corporate civil liability under the Chapter I prohibition contained in the CA98 or the criminal cartel offence for individuals under the EA02, or both. In many cartel cases, both investigations will proceed simultaneously.
i Significant cases
We set out below developments in cases in the last year or so.
Precast concrete drainage products
In October 2019, the CMA fined three concrete drainage companies £36 million, having found that the three companies had participated in a cartel for the supply of precast concrete drainage products between 2006 and 2013.23 The cartel members were found to have agreed to fix and coordinate prices and to share the market by allocating customers, and regularly exchanged competitively sensitive information. In addition, in April 2019 the CMA secured the disqualification of two former directors of one of the companies involved.24 The CMA commenced director disqualification against two further directors in January 2020 and it was left to the Northern Ireland High Court to decide whether to make these orders. That court, however, found that it could not rule on the disqualification orders without first referring a question to the CAT as to whether FP McCann Limited had, in fact, breached competition law. This was because FP McCann had, at that time, appealed to the CAT against the CMA's infringement decision. The two individuals concerned were, and are (at the time of writing), directors of this company. In its judgment dated 14 January 2021, the CAT dealt with both matters together, finding that, first, there had indeed been a breach of competition law for the reasons set out in the CMA's initial decision and, second, the Northern Ireland High Court was, therefore, free to determine all remaining matters relevant to the assessment of the disqualification order of the two FP McCann directors.25
In July 2020, the CMA found that a hospital belonging to a large healthcare provider, Spire Healthcare Ltd (a member of the Spire Healthcare Group), and seven private consultant eye specialists, called ophthalmologists, had entered into an illegal agreement following a discussion at a consultants' dinner. The agreement was to fix the price of initial consultations for private self-pay patients at that hospital. The price-fixing agreement started in August 2017 and continued for at least two years until the CMA opened its investigation.26 Ultimately, six individual consultants were fined in the range of £642 to £3,859 for agreeing to fix initial consultation fees and the private healthcare group was fined £1.2 million. The fines were reduced by 20 per cent as the parties involved admitted wrongdoing and complied fully with the CMA. One of the seven consultants was granted full immunity under the CMA's leniency programme. Notably, the CMA stated in its decision that the infringement involved the 'most serious type of cartel behaviour' with Spire acting as both the instigator and facilitator of the agreement between these competitors.27
As of February 2021, there were no criminal cartel cases listed as active by the CMA.
ii Trends, developments and strategies
As part of its commitment to drive greater enforcement, the CMA has made a concerted effort to raise awareness of competition law. In late 2018, the CMA launched a cartel awareness campaign to educate businesses about illegal practices and to encourage whistle blowing. Alongside this campaign, the CMA released ICM research that showed that awareness of the prohibition on cartel-like behaviour among the surveyed companies was low.28 This campaign followed on from the CMA's 'Cracking Down on Cartels' campaign, which promised anonymity and rewards of up to £100,000 for individuals reporting cartel activity.29 This campaign was followed by a 30 per cent rise in the number of tip-offs.30 In a May 2019 article in the Financial Times, it was reported that calls to the CMA's cartels hotline rose 18 per cent in 2018 to 556, up from 471 the previous year.31 This is more than 2.5 times the number reported in 2014 when the CMA began operating.
In February 2020, the CMA launched a new 'Cheating or Competing' campaign targeting business cartels with a focus on issues like price-fixing, bid-rigging and market sharing.32 The campaign page features videos, short guides and case studies to explain what illegal cartels are to business operators. In the wake of the precast concrete drainage products and design, construction and fit-out services cases,33 the new campaign includes targeted advice for project directors and managers in the construction industry on avoiding collusion.34
There has also been a trend when sanctioning cartel activity for the CMA to look to disqualify directors in addition to the fine imposed on the company itself. The CMA now regularly considers whether such an action is appropriate once an infringement decision is adopted.
Finally, the regulator's annual plan consultation document 2021–22 states that as a result of the covid-19 pandemic, the risk of cartelisation has increased. It states unequivocally that it will clamp down on cartels and collusive behaviour that seeks to keep prices up, and that it is committed to investigating and prosecuting individual under the criminal cartel offence where relevant.35
Lord Tyrie's letter noted that hard-core prosecutions are only a small part of the CMA's overall enforcement work, meaning that the CMA does not maintain the scale of specialist expertise normally possessed by agencies with powers of prosecution. He suggested, therefore, that primary responsibility for cartel prosecutions might sit more naturally with an agency that routinely brings criminal prosecutions, such as the Serious Fraud Office (SFO). To that effect, on 21 October 2020, the SFO and the CMA signed a memorandum of understanding (MoU) in respect of their intention to cooperate in the investigation and prosecution of criminal cartel offences.36 The MoU sets out a range of possible types of investigation including joint investigations, SFO or CMA-led investigations (with the participation of the non-leading authority subject to the direction of the leading authority) and concurrent investigations (with the CMA responsible for civil matters and the SFO responsible for criminal matters). Therefore, while the MoU does not exempt the CMA from its responsibility for cartel prosecutions entirely, it does perhaps achieve something close to Lord Tyrie's suggestion with the SFO now positioned to share at least some of this responsibility. There is likely much to be gained from the SFO being able to take its own prosecutions forward or add expertise to CMA-led investigations that might otherwise have fallen flat. Indeed, this MoU might well act as a catalyst for increasing the amount of criminal cartel prosecutions following a relatively extended period of lesser enforcement.
Antitrust: restrictive agreements and dominance
The prohibition in Chapter I of the CA98 captures a range of restrictive agreements, including cartels (see above) and those agreements (both vertical and horizontal) that do not constitute hard-core cartels but nevertheless restrict competition. The most significant (non-cartel) cases from 2020 are outlined below.
i Significant cases
On 22 January 2020, the CMA announced that Fender had been fined £4.5 million, the largest fine imposed in the UK for resale price maintenance (RPM).37 The CMA believes that between 2013 and 2018, Fender Europe operated a policy designed to restrict competitive online pricing, requiring guitars to be sold at or above a minimum price. In its statement of objections, the CMA commented that '[it] takes allegations of RPM very seriously because it removes one of the benefits of the internet of making it easier to quickly find a better price by shopping around. It stops online retailers from selling at the prices they want to, and this then leads to higher prices for consumers.' This follows similar cases against Casio,38 Illinois Tool Works Limited,39 Ultra Finishing Limited40 and the National Lighting Company Limited.41
Following on from the Fender case, and an earlier case against Casio, which was fined £3.7 million for online sales bans, there has been a further spate of enforcement activity in the musical instruments sector with three more decisions issued in the second half of 2020. On 29 June 2020, the CMA issued a decision finding that Roland (U.K.) Limited, a manufacturer of, among others things, electronic drum kits, DJ equipment and amplifiers infringed competition law by engaging in RPM between 2011 and 2018. The CMA imposed a fine of just over £4 million.42 Similarly, the CMA imposed fines of £1.5 million on Korg, another manufacturer of electric musical instruments and equipment, for engaging in RPM from 2015 to 2018.43 The CMA found that Roland and Korg had entered into agreements respectively with online resellers that prevented the resellers from selling the products below a certain price. Both companies actively monitored the resellers to make sure they complied with the pricing policy and threatened (and in cases, applied) sanctions where the resellers did not uphold the obligations set out in the agreement. The CMA also found internal documents in both cases suggesting that senior employees at Roland and Korg were aware that engaging in RPM was in breach of competition law.
Just under a month later, on 17 July 2020, the CMA issued another decision finding that GAK.co.uk Ltd, The Guitar, Amp & Keyboard Centre Ltd and GAK.co.uk (Holdings) Limited (together GAK) and Yamaha Music Europe GmbH (YME) had breached UK or EU competition law by engaging in RPM. The facts of this case were that GAK and YME had agreed that GAK would not discount the online price of certain YME instruments below a set, minimum price. YME received full immunity from any financial penalty (subject to continuing to meet the requirements' of the CMA's leniency policy) because it was YME who alerted the CMA to the possible anti-competitive behaviour. GAK, however, agreed to pay a maximum fine of £278,945. Notably, this case marked the first instance of the CMA taking enforcement action against a retailer in the context of an RPM offence.
As a result of these cases, the CMA thought it fit to publish an open letter to the industry highlighting the illegal activity it had uncovered and urging compliance with the law. Additionally, it wrote to almost 70 manufacturers and retailers across the sector, warning them about their conduct. These warning letters, the CMA said, were sent to 'make the recipients aware that the CMA suspects their online pricing arrangements may have been illegal and that they need to take swift action to ensure they are complying with the law or potentially risk an investigation and fines.'44
Other Chapter I and II CA 98 cases
Price comparison websites
The CMA also issued a statement of objections to ComparetheMarket in November 2018 alleging that the price comparison website had breached Chapter I and Article 101 TFEU.45 In particular, the CMA considered that the use of most favoured nation clauses (MFNs) by the price comparison site in contracts with home insurers could be stopping the home insurers from quoting lower price to the companies' rivals and via other channels, causing customers to miss out on better home insurance deals. In November 2020, two years on from the publication of the statement of objections referred to above, the CMA issued an infringement decision addressed to BGL (Holdings) Limited, BGL Group Limited, BISL Limited, and Compare The Market Limited (collectively, BGL) concerning MFNs imposed by ComparetheMarket in its agreements with a number of home insurers. Ultimately, the CMA found that ComparetheMarket's network of wide MFNs had the appreciable effect of preventing, restricting or distorting competition between price comparison websites and between home insurers competing on price comparison websites in breach of the Chapter I prohibition and Article 101 TFEU imposing a penalty fine of £17,910,062.46 The case was a follow-on from the CMA's market study into digital comparison tools, concluded in September 2017.47 BGL has recently appealed the CMA's decision.48
In the wake of the covid-19 pandemic, the CMA launched four investigations under Chapter II of the CA98 into suspected breaches of competition law by four pharmacies and convenience stores. The investigations related to charging excessive and unfair prices for hand sanitiser products. By 13 July 2020, three of the investigations had been closed with the fourth remaining open until 3 September 2020, at which point it too was closed. In its case closure statement, the CMA wrote that 'having carefully reviewed the evidence . . . it is unlikely that the prices which the retailer is currently charging infringe competition law and that further investigation to reach a definitive view on whether the retailer's prices have infringed competition law would deliver limited, if any, consumer benefits.'
Notably, these investigations were instigated following reports that some companies were seeking to capitalise on the pandemic by charging unjustifiably high prices for essential goods or making misleading claims around their efficacy. On 20 March 2020, the CMA wrote an open letter to the pharmaceuticals and food and drinks industries urging firms in these industries to warn against unfair practices during the pandemic and ensure that 'the harmful practices by a minority of bad apples are identified and stamped out quickly so that consumers can rely on these vital markets when they need them most'.49
Of note in the enforcement context is that the CMA set up a taskforce in March 2020 to monitor and respond to these sort of consumer and competition problems arising from the pandemic. Reportedly, the CMA received over 80,000 complaints about coronavirus-related issues, many of which were concerned with excessive prices for essential products such as face masks and hand sanitiser.
Fludrocortisone acetate and nortriptyline
In October 2019, the CMA published its decision to accept binding commitments offered by Aspen to address competition concerns identified by the CMA arising from the pharmaceutical company's 2016 acquisition of a marketing authorisation for fludrocortisone acetate tablets in the UK.50 The CMA had suspected Aspen of illegally agreeing to pay two other pharmaceutical firms, Amilco and Tiofarma, to stay out of the UK market for this product. This would have left Aspen free to dictate its prices as the only supplier in the market. As part of the commitments package, Aspen agreed to an admission that it was party to an illegal, anticompetitive agreement and committed to make a payment of £8 million directly to the National Health Service (NHS), the first time a commitment has included an agreement to pay a third party (rather than just alter its behaviour or pay a fine, or both). This payment is to address the concerns that based on the conditions in the market, the NHS paid a higher price for supplies of fludrocortisone acetate tablets than would otherwise have been the case. The acceptance of these commitments ended the Chapter II CA98/Article 102 TFEU investigations. In addition to the £8 million it was required to pay to the NHS, Aspen was issued with a further fine of £2,101,954, which became payable in July 2020, when the CMA formally concluded that the company had indeed taken part in an illegal arrangement to keep its competitors out of the market. Tiofarma was also fined a sum of £186,000, which was agreed, subject to the outcome of the final decision, in January 2020.52
In March 2020, the CMA followed up its Aspen decision with fines of £3.4 million for competition law breaches with respect to the supply of nortriptyline, a drug used to relieve symptoms of depression.53 The CMA found that King Pharmaceuticals and Accord-UK (formerly Auden Mckenzie) had engaged in market sharing and collusion to fix quantities and prices for the drug. As a result, King and Accord-UK were fined £75,573 and £1,882,238 respectively. Once again, the CMA extracted a commitment from the parties to make a payment to the NHS, in this case for £1 million. The CMA also fined King, Lexon (UK) Ltd and Alissa Healthcare Research Ltd £1,470,868 for illegally sharing commercially sensitive information about prices, volumes of supply and Alissa's plans to enter the market. King and Alissa both admitted to competition law breaches in these respects, which resulted in reduced fines. Additionally, a number of director disqualifications can be credited to this investigation to date. The first relates to a director at King, the second to a director at Alissa and the third to the same Mr Amit Patel referenced above in relation to Amilco in the Fludrocortisone case (Mr Patel was also a director at Accord from September 2014 to May 2015 and will serve both director disqualifications concurrently). A fourth disqualification against Mr Pritech Sonpal, a director of Lexon, is ongoing as of January 2021. Lexon has continued to deny any wrongdoing and has appealed the £1,220,383 fine imposed upon it by the CMA. At the time of writing, the judgment is pending after a five-day hearing took place in November 2020.54
In 2020, further progress was made in the CMA's investigation into suspected Chapter II or Article 102 breaches with respect to the sale of liothyronine tablets. The CMA opened the investigation in 2016. In January 2019, it issued a supplementary statement of objections provisionally finding that Advanz had breached Chapter II and Article 102 TFEU with respect to its practices between January 2009 and July 2017. During this period the price paid by the NHS for liothyronine tablets rose from £15.15 to £258.19, an increase of 1,605 per cent, while production costs remained broadly stable. During that period, Advanz was the only supplier of liothyronine tablets in the UK. The High Court rejected a judicial review application on procedural grounds from Advanz in July 2019. On 10 July 2020, the CMA issued a second supplementary statement of objections alleging that Advanz had abused its dominant position in breach of the Chapter II prohibition and Article 102. The statement addresses issues arising from the Court of Appeal's judgment of 10 March 2020 in the phenytoin litigation – a case that also relates to excessive and unfair pricing in the pharmaceuticals sector, in this instance by Pfizer and Flynn.55 The CMA has stated that it still provisionally finds that Advanz Pharma breached the Chapter II prohibition and Article 102 from at least 1 January 2009 to at least 31 July 2017 by charging excessive and unfair prices for liothyronine tablets in the UK.
On 4 November 2020, the CMA issued a decision finding that Associated Lead Mills Limited, Royston Sheet Lead Limited (along with their parent company International Metal Industries Limited) and HJ Enthoven Limited (along with its parent company Eco-Bat Technologies Limited) (together, 'the parties') had infringed competition law by entering into four anticompetitive arrangements. The CMA imposed fines totalling over £9 million on the parties, which include settlement discounts to reflect the fact that they admitted their role in the infringement and agreed to cooperate with the CMA.56 The four anticompetitive arrangements took place between October 2015 and April 2017 and included colluding on prices, sharing the rolled lead market by arranging not to target certain customers, and arranging not to supply a new business because it risked disrupting the firms' existing customer relationships. Each of the arrangements also included exchanges of commercially sensitive information.57
Supply of groundworks products to the construction industry
On 17 December 2020, the CMA issued a decision finding that three suppliers of groundworks products to the UK construction industry, Vp plc, M.G.F (Trench Construction Systems) Ltd and Mabey Hire Ltd, infringed competition law by colluding illegally. The CMA found that illegal collusion between Vp and M.G.F. lasted for periods totalling nearly two years, Mabey Hire Ltd, took part for a single period of five months.58 Fines totalling more than £15 million have been imposed on Vp and MGF (£11.2 million and £3.7 million, respectively). Mabey was not been fined as it brought the illegal activity to the CMA's attention and cooperated with the investigation under the CMA's leniency programme.59
Several other Chapter I and II cases remain ongoing at the start of 2021, including in financial services,60 construction services,61 domestic lighting, Google's Privacy Sandbox, Rangers FC replica football kit and pharmaceuticals (two cases, one relating to prochlorperazine 3mg buccal tablets62 and the other to nitrofurantoin 50mg and 100mg capsules in the UK).63
ii Trends, developments and strategies
With five cases in less than a year (albeit all in the musical instruments sector) it is clear that RPM (particularly as it relates to online pricing restrictions) remains a top priority in the CMA's enforcement agenda. While historically, the enforcement of RPM has related to manufacturers, the fine imposed on GAK illustrates that even a specialist retailer participating in this type of agreement or practice can be held to have infringed competition law opening up the possibility of retail focused RPM enforcement. Furthermore, with the introduction of the CMA's novel price monitoring tool which will 'be used to monitor pricing and detect suspicious activity', it is expected that the CMA will be even more readily primed to, in its own words, 'clamp down on' sectors showing signs of RPM, 'allowing [them] to prioritise enforcement in those areas.'64 It should be noted accordingly that, as suggested in a CMA blog post dated 29 June 2020, the future enforcement of RPM could entail director disqualifications as well as fines.65 This would indeed be a significant move with personal sanctions usually reserved for cartel behaviour between direct competitors. The message is clear: the CMA will enforce competition law against the practice of RPM with all the powers available to it and issues relating to RPM can be expected to feature heavily in the CMA's review of the vertical agreements block exemption (VBER), announced on 10 February 2021 in preparation for the expiration of the retained VBER in May 2022.
Significantly, given the spate of RPM cases in the musical instruments sector, the CMA thought it fit to publish a warning letter circulated to over 80 manufactures and retailers to raise awareness of and deter anticompetitive practices. The CMA has discretion as to whether it investigates alleged breaches of the CA98, but even if it does not open proceedings, it seeks to encourage compliance with the law if the facts are not sufficiently clear to establish whether there may have been a potential infringement, or on the grounds of administrative priorities. One way of doing this is through the sending of warning or advisory letters and according to a recent publication in February 2021, the number of competition warning letters issued by the CMA in 2020 nearly quadrupled compared to the previous year, rising to 97 from 27.66 The regulator also issued 14 advisory letters in 2020 compared to two in 2019.67 Advisory letters simply require acknowledgement of receipt whereas warning letters require the recipient to report back on how they will address the issues raised in the letter. Of those 97 warning letters, 12 related to RPM. The CMA has reportedly said the jump in warnings reflects evidence it has received or identified, rather than any change in its approach.68
Key areas of interest for 2021 in terms of enforcement are likely to continue to be pharmaceuticals and the digital commerce sector, the latter of the two having grown exponentially as a result of the covid-19 pandemic.69 As discussed above, the CMA's renewed focus on RPM also looks set to continue, particularly in the area of online sales restrictions. More generally, the CMA's new Digital Markets Unit will no doubt come into its own investigating Big Tech once its form and function have been agreed and approved by the British government. Regulators other than the CMA are also becoming more comfortable with their enforcement powers, a trend that is likely to see increased focus on antitrust enforcement in regulated sectors.
Perhaps most significantly of all, September 2020 brought the announcement of the Penrose review; an independent report on how the UK's competition regime can be enhanced in the context of covid-19 and the end of the transition period.70 Published on 16 February 2021, the report, entitled 'Power to the People', contains a host of varied recommendations addressing everything from information asymmetries between sellers and buyers to future state aid and subsidies in the context of free trade agreements. In relation to competition enforcement, some of the most notable ideas include the proposal that the CMA should become 'a micro-economic sibling for the Bank of England's well-established public macro-economic role.'71 Penrose remarks that 'at the moment there is no strong independent institution responsible for the overall progress of competition, consumer rights, supply-side reforms and productivity improvements' and, as such, the suggestion is made that the CMA should publish an annual report measuring and analysing progress and problems in all sectors of the economy using that report to assess its 'own success'.72 In addition, Penrose calls for enhanced powers in civil consumer enforcement. At present, the CMA must go through a non-specialist court to enforce a decision regarding consumer problems (an example being unfair contract terms) and, even then, the court has no power to impose fines on an offending party. This is not the case for competition issues which the CMA has the power to enforce directly (including the issuing of fines), without going through a court. Accordingly, the report states that 'the CMA should be able to decide cases itself and impose fines in the same way as it already does for competition law cases.'73 Another notable point concerns tougher penalties for firms that slow down cases. Penrose makes the case that 'other countries can impose turnover-based fines (between 1% and 5%) which are far more effective getting firms to comply with investigations . . . so penalties for non-compliance with investigations should be strengthened and brought into line with international norms.'74
On merger control, the report proposes that the CMA should be able to accept legally binding undertakings at any stage during a Phase I or II investigation or indeed any stage during a market study or market investigation. At present, undertakings cannot be agreed until the end of an investigation or study. This, the report suggests, could make addressing competition concerns far more expeditious.
On appeals, the report's recommendation is that the CAT should hear all of the appeals from the various concurrent regulators to simplify the current system which is complex and can, depending the circumstances, direct appeals to any of the High Court, the CMA or the CAT. More generally on the court system, Penrose has suggested a 'lower tier of regional “County Competition Courts” for local and regional cases' to sit below the existing tier of fast-tracked CAT cases. The rationale is that such a system will be to the advantage of smaller businesses who could not otherwise fund a case before the CAT or necessarily spare the time.
In relation to digital markets and the proposed SMS regime described above, Penrose warns against the kind of 'regulatory creep' that might arise as a consequence of such ex ante legislation. The report notes that 'since everything is digitising, [a digital regime with strong upfront powers] would put the entire economy at risk of replacing competition with enormous increases in red tape and bureaucracy instead.' Penrose describes these upfront powers a 'headily addictive drug for regulators to use' and it is precisely because they are so strong that there will be a temptation to use them more and more and normal competition and consumer laws less and less. Accordingly, to combat 'regulatory creep' and the increases in red tape and bureaucracy that it entails, the report states that the 'new digital unit's extra-strong upfront powers must be ring-fenced tightly' and should be limited to 'individual firms that own and run new network and data monopolies, rather than to the rest of the sector in which they work'.75
It is now, at the time of writing, for the government to consider the recommendations made in the Penrose report and respond in due course.
A final word on the outlook for 2021 should be dedicated to the 'green initiatives' increasingly being considered by competition regulators. On 27 January 2021, the CMA published guidance on environmental sustainability agreements and competition law.76 As stated by the CMA's Senior Director for Strategy, 'supporting the transition to a low carbon economy is one of the CMA's strategic objectives and [the guidance is designed to] help businesses to achieve their sustainability goals without breaching competition rules.'77 Notably, the guidance stresses that although the UK is no longer a member of the EU, a number of the EU Block Exemption Regulations have been retained as domestic law and, as such, sustainability agreements may well benefit from these. Where agreements do not fall under any of the existing block exemptions, individual exemptions may be given 'provided they generate benefits which are deemed to outweigh the disadvantages of restricted competition'.78 Looking forward, a CMA blog post writes that it 'will continue to consider whether any further steps may be needed to support businesses' compliance with competition law when engaging in sustainability initiatives . . . as well as considering the responses to the European Commission's consultation on competition policy and the Green Deal.'79
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 the recent increase in enforcement activity, much of the competition regulators' efforts were concentrated on these investigations.
i Significant cases
Funeral directors and crematoria services
The CMA launched a market study into the funerals market in the UK in June 2018.80 Following an interim report and consultation on the market, a Phase II market investigation was launched in March 2019. The investigation covered the supply of services by funeral directors at the point of need and crematoria services provided by both private suppliers and local authorities.81 The final report, amounting to 487 pages, was published on 18 December 2020 following provisional conclusions in August. Interestingly, as the CMA noted in its press release, the 'exceptional circumstances of the coronavirus (covid-19) pandemic [meant] that some of the remedies the CMA might otherwise have pursued, including measures to control prices, could not be developed.'82 Instead, the regulator proposed a package of what it called 'sunlight remedies' including an obligation to disclose prices in a manner that will help the customer make more informed decisions and the confirmation that certain practices such as payments incentivising hospitals, care homes or hospices to refer customers to a particular funeral director are prohibited. Despite the length of the final report and the remedies imposed, the CMA has remarked that, to date, it still has some 'serious concerns about the sector' and the CMA has recommended that it considers whether a further market investigation reference is needed when conditions are more stable which is taken to mean when the pressures on the sector resulting from covid-19 are alleviated. The reason for this, the executive summary tells us, is that the pandemic 'made it very challenging to engage with key parties, collect data and design potential interventions in detail.'83 Put simply, the CMA has unfinished business in this sector and we expect a second look in due course if price increases continue to outstrip inflation.
In October 2018, the CMA launched a market study into the statutory audit market.84 The CMA's final report was published in April 2019, recommending that the auditing functions of each of the 'Big 4' accounting firms should be operationally split from their consulting operations.85 The final report also recommended mandatory joint audits, whereby smaller, 'challenger' firms would work alongside the Big 4's auditors, and regulatory oversight of the audit committees that select audit companies. Lord Tyrie wrote to both the BEIS Secretary of State and the chair of the BEIS Select Committee to outline the CMA's findings. BEIS subsequently launched a consultation on the CMA's proposals in July 201986 and an inquiry on delivering audit reform in March 2020 to 'help map out a path for implementing meaningful reform of the UK's audit industry.'87 With the new business secretary Kwasi Kwarteng reportedly making it clear that audit reform is 'one of his initial priorities', legislative proposals are expected in the course of 2021.88
Online platforms and digital marketing
As part of the CMA's digital market strategy, the CMA launched a market study into online platforms and the digital advertising market in July 2019.89 The market study was focused on the assessment of three broad potential sources of harm to consumers including: (1) the extent to which online platforms might have market power in user-facing markets and potential impacts of that; (2) consumers' ability and willingness to control how their data is used and collected by online platforms; and (3) whether competition in the digital advertising market might be distorted by any market power held by online platforms. An interim report was published in December 2019 wherein the CMA found that Google accounted for more than 90 per cent of all search advertising revenues in the UK (with revenues of around £6 billion) and that Facebook accounted for almost half of all display advertising revenues in the UK (around £2 billion).90 While the interim report acknowledges that '[b]ig is not necessarily bad', the CMA agreed with the Furman Report findings that there is 'strong argument' for the development of a new regulatory regime. Proposals for this new regime came in December 2020, with the CMA issuing advice produced by the DMT to the government on the design and implementation of the UK's new pro-competition regime for digital markets alongside the strengthening of existing regulation. The DMT has named the new regulatory framework the SMS regime. It will apply to 'the most powerful tech firms – those with “strategic market status” – meaning those with substantial, entrenched market power and where the effects of that market power are particularly widespread or significant.'91 The DMT writes that the assessment of strategic market status will be an 'evidence-based economic assessment as to whether a firm has substantial, entrenched market power in at least one digital activity'.92 Overseeing the proposed SMS regime would be the specialist DMU, which would function as a 'centre of expertise and knowledge' and a pro-active enforcer of digital markets.93 The proposed regime itself is comprised of 'three pillars' as detailed below:
- The first pillar is an enforceable code of conduct designed and overseen by the DMU that would be 'tailored to each firm and to where the evidence demonstrates problems might occur.' The code will set out how the SMS should act and behave and its objective is to 'manage the effects of market power';
- The second pillar relates to the power of the DMU to make 'pro-competitive interventions . . . in markets to promote dynamic competition and innovation' and target 'the sources of entrenched market position'. Examples of such interventions cited in the DMT's publication include data-related interventions that might, for example, support greater consumer control over data, obligations to provide access (i.e., to provide access to an operating system or online marketplace) and consumer choice and defaults interventions meaning remedies used to address concerns regarding the power of defaults and in relation to the design of choice architecture that influences consumer decision making;
- The third pillar consists of specific merger rules that would apply solely to SMS companies and would be operated by the CMA in addition to the existing merger control regime. Deviating from the UK's current voluntary regime, transactions that meet certain thresholds would be subject to mandatory notification with penalties imposed where companies fail to notify. The DMT points out that further consideration of the exact details of the merger rules would be required but provisionally they would only apply to 'clear-cut acquisitions of control'.94
As far as next steps are concerned, the government has committed to establishing the DMU within the CMA from April 2021, to consult on proposals for a new pro-competition regime and to legislate to put the DMU on a statutory footing 'when parliamentary time allows'. The DMT writes that 'there is a clear opportunity for the UK to lead the way in championing a modern pro-competition, pro-innovation regime' as similar legislation is enacted across the globe.
Scottish legal services
Following the publication of the Roberton Review, an independent review of the regulation of legal services in Scotland,95 the CMA announced in June 2019 that it would be undertaking research into certain aspects of the Scottish legal services market to support the Scottish government's response to the Roberton Review.96 The work, completed in March 2020, found that there is evidence of a similar lack of competition in legal services in Scotland as was found in the CMA's 2016 market study into the legal services market in England and Wales.97 In particular, the CMA made a number of recommendations for implementation by the Scottish government including the introduction of an independent body to regulate the legal profession, setting standards and handling complaints as was recommended by the Roberton Review.98
Super-complaint on loyalty penalties
Although not technically a market investigation or market study, 2019 also saw the conclusion of the CMA's review of loyalty penalties imposed by service providers in 'essential markets' (savings accounts, mortgages, household insurance, mobile and broadband). The super-complaint was received from Citizens Advice raising concerns that long-term customers were paying more for essential services (and so incurring a 'loyalty penalty'). Super complaints are a mechanism under the EA02 that allows consumer bodies to make complaints to the CMA. Once it receives a super-complaint, the CMA has 90 days to make a public statement explaining how it proposes to deal with it.
In the loyalty penalty super-complaint the CMA published its public response in December 2018.99 It found that the loyalty penalty paid by consumers could be in the region of £4 billion annually. The CMA also identified that the most vulnerable in society, such as those on low incomes, people who struggle to use online services, or people with poor mental health who may avoid or fear change, could be among the most affected. The CMA also established a loyalty penalty working group in March 2019 to oversee the implementation of the reforms identified as necessary in their response. In response, BEIS also published a letter commending the CMA recommendations.100 In a six-month progress update published in June 2019, the CMA explained that the super complaint had led directly to the CMA investigations into antivirus software (launched in December 2018) and in online console video games (launched in April 2019).101 Ofcom also launched a consultation on the treatment of easier switching for broadband and mobile customers, which, at the time of writing, is ongoing. The super complaint also prompted cooperation between the CMA and the FCA on its work on cash savings, home and motor insurance, and mortgages.
The CMA published an update in January 2020 setting out the progress that had been made in taking forward potential reforms in the sector.102 To that end, the update notes that Ofcom has introduced new rules on end of contract notifications and annual best tariff notifications for customers. It has also secured voluntary commitments from all of the major mobile provides (with the exception of Three) and from the UK's largest broadband providers to better protect out-of-contract customers. A further update from Ofcom is expected in the Spring of 2021. The update also details the FCA's efforts, including the ongoing consultation on potential remedies in the insurance, cash savings and mortgages arena. In terms of next steps, the update emphasises, however, that there is further work to be done and calls on regulators to focus on putting in place sufficiently strong remedies to address the problems that have been identified in their various investigations. The CMA published a further update in July 2020, which cautioned that work in this area had necessarily been postponed as a result of covid-19. Despite this, the CMA wrote that it had commissioned research to build on its understanding and evaluation of the economic impacts of loyalty penalties duly published in December 2020 alongside another update.103 Notably, in that time, the FCA announced measures to tackle insurance loyalty penalties including a ban on price walking (gradually increasing the renewal price to consumers over time other than in line with changes in a customer's risk).104 In that December update, the CMA commented that work is still ongoing in some markets and it will continue to work with the regulators and the government to address any concerns. Otherwise, it welcomes the Penrose review into the UK competition regime which may well address the issue of the loyalty penalty and the reforms that both have been, and are yet to be, made.105
ii Trends, developments and strategies
The CMA's annual plan consultation document for the year 2021–22 makes the same point as was made in the full form annual plan from the previous year (2020–21). Namely that, given a 'record level' caseload alongside other expanded duties resulting from Brexit, the CMA's 'ability to launch major new discretionary projects over the coming year may be more limited than in the past'.106
That is not to say, however, that these major projects won't surface throughout the year in one form or other. On 19 January 2021, for example, the CMA published a paper on the potential harms to competition and consumers from the use of algorithms. This study falls in line with the general and increasing scrutiny of competition authorities on digital markets and is prime example of the CMA '[addressing] the root cause of market power', a quote extracted from the DMT's advice to government on the intended direction of the CMA's review of digital markets. To some extent, the publication of the algorithms study is therefore an example of the CMA already acting on some of its proposals and certainly building the sort of knowledge bank that will assist in the process of regulating these complex digital markets.
On 2 December 2020, the CMA launched a market study into the electric vehicle charging sector in the UK. It reported that it was considering two broad themes: how to develop a competitive sector while also attracting private investment to help the sector grow, and how to ensure people using electric vehicle chargepoints have confidence that they can get the best out of the service.107 This study ties in with the wider commitment made by the government to bring forward the ban of new petrol and diesel vehicles to 2030 as well as the intention set out in the CMA's annual plan consultation 2021–22 to develop its capability to ensure that it acts in a way that supports the transition to a low-carbon economy.108 Furthermore, we expect during the course of the year that the CMA will publish its guidance on 'green-claims', which relate to products and services being marketed as environmentally friendly. The CMA is keen to understand the impact of this marketing on consumers and indeed whether 'this surge in demand for green products and services could incentivise some businesses to make misleading, vague or false claims about the sustainability or environmental impact of the things they sell'.109
State aid, the rules for how countries can subsidise their own industries, was one of the last remaining issues being negotiated up until the announcement of the TCA on 24 December 2020. The EU was determined to secure something close to parity of treatment for UK and EU business in order to protect the level playing field for competitors. The UK insisted that post-Brexit it should not be bound by evolving EU rules on state aid nor the jurisprudence of the ECJ.
The TCA strikes something of a balance between these competing priorities; the UK has committed to the creation of a 'subsidy' regime, that will need to ensure that subsidies (akin to the concept of state aid) will not have a negative effect on EU–UK trade. That regime will be based on six 'principles' or criteria that should govern TCA-compliant subsidy grants. These broadly mirror the assessment criteria that the European Commission uses to determine whether state aid is compliant with the TFEU (proportionality, necessity, etc.) The Commission and the ECJ will no longer have enforcement roles in the administration of this new regime. In terms of the detailed form that the subsidy regime will take, the UK will need to design and implement further new legislation to give effect to the new system. To that end, BEIS has launched a consultation on the new subsidy regime that will run until 31 March 2021.110 Until then, subsidy-granting authorities will need to make reference to the TCA principles to determine that any grants are compliant with its rules. In practice, they will likely make reference to their experience under the EU state aid rules to carry out those assessments. While the new regime is still being developed, competitors seeking to challenge the grant of subsidies will be limited to judicially reviewing such grants.
In terms of enforcement and oversight, the UK is required to designate an independent body to administer the new regime.111 In 2019, the CMA was pre-emptively designated the body to administer any UK-based state aid system and carried out a slew of recruiting to reflect this. However, there has not yet been an announcement as regards what role, if any, the CMA will have in the subsidy system in the future. Indeed the government consultation indicates that the government is committed to 'establishing' a body for these purposes, so a new entity may well be created.112
The enforcement powers this independent body will enjoy are the subject of the consultation. Important decisions will need to be made on whether a complaint mechanism is created to allow competitors to challenge the grant of subsidies that are not considered compliant with the subsidy rules. This is the EU status quo but without a dedicated mechanism, aggrieved parties would need to rely solely on judicial review, which can only be instigated for challenges to the legality, rationality or failure to adhere to process in taking a granting decision. This is a much narrower option as compared to the EU state aid complaints procedure, which allows for a challenge on grounds merely that a decision has not been taken correctly or has used incorrect (as compared to irrational) inputs or metrics.
What is already clear, is that the UK now has substantial freedom to deviate from the state aid procedures that have been established by the European Commission. The TCA does not commit the UK, for example, to the ex ante system of approvals that is the general foundation of the EU regime, which could see the UK move to an ex post approval or review process, or seek to rely on more general exemptions. Much like the EU system, the TCA contemplates extra conditions for subsidies to certain sectors such as credit institutions and insurance companies; rescue and restructuring measures; export subsidies; energy and environment measures; and to air carriers for the operation of certain routes. How these extra conditions are interpreted may well merit detailed guidance, as the EU guidelines on such sectors are no longer applicable in the UK, and subsidy grantors and recipients (as well as their competitors) will need to be in a position to assess how their schemes and projects achieve compliance to assure legal certainty on the validity of their grants going forward.
The CMA carries out both Phase I and, if warranted, in-depth Phase II merger investigations in the UK. Save for a limited category of investigations (in which the government makes the final decision), decisions at Phase II are made by a panel independent from the case 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, if found necessary, impose remedies in completed mergers), and it has an active Merger Intelligence Unit that monitors merger and acquisition activity for transactions that may raise competition concerns. At the beginning of 2021, the CMA had four ongoing Phase II cases.
i Significant cases
In December 2019, the CMA referred the Amazon/Deliveroo merger to a Phase II investigation.113 The CMA had found that the merger could result in a substantial lessening of competition (SLC) within markets in the UK. In its Phase I investigation, the CMA had held that the deal could lead to higher prices and a worse service for customers ordering restaurant meals and convenience groceries for 'ultra-fast' home delivery. The CMA thus launched a Phase II investigation based on two key concerns. First, based on internal documents and interviews with senior personnel, the CMA had discovered that Amazon might have had intentions to re-enter the UK market for restaurant meal deliveries (even though it had only recently exited the UK market with the closure of its Amazon Restaurants business), if it had not invested in Deliveroo. Second, the CMA found that in the market for grocery delivery, Amazon and Deliveroo are rivals with 'major expansion plans' and that a merger could reduce competition. In April 2020, the CMA announced that it had provisionally cleared the transaction on the basis of the 'failing firm' defence insofar as Deliveroo was likely to exit the market without Amazon's investment as a result of the impact of covid-19. To date, this is the only example of an application (albeit provisional) of the failing firm defence in a Phase II investigation during the pandemic period. However, this decision was met with criticism from a number of third parties and the CMA subsequently conducted a further assessment of Deliveroo's financial position (with the benefit of additional data available after the beginning of the first 'lockdown' in the UK, which had had a material adverse impact on Deliveroo) ultimately concluding that this was not, in fact, a case in which the 'failing firm' defence would apply. Accordingly, in its final decision in August 2020 the CMA unconditionally cleared the transaction on the basis that Amazon's acquisition of a 16 per cent stake would not substantially lessen competition in any relevant market.
Most notably, this case serves as a good example of the CMA investigating the acquisition of a minority shareholding (16 per cent). In the UK, the relevant test for control is the acquisition of 'material influence', which is a lower threshold than that of 'decisive influence' that applies in many other jurisdictions. The CMA's own guidance suggests that, typically, acquisitions of above 25 per cent of a target's shares are likely to give rise to material influence whereas those below 15 per cent will only exceptionally result in material influence. Acquisitions of any shareholding in between these two thresholds is typically subject to an assessment of other factors. In this transaction, the CMA commented that while a 16 per cent shareholding with limited rights (one board seat out of seven with no strategic veto) would not give Amazon a 'realistic prospect' of acquiring material influence, the e-commerce giant's 'particular industry knowledge and expertise' would allow it, nevertheless, to exercise 'material influence' both at shareholders' meetings and through its board seat.114 As stated above, in its substantive analysis, the CMA focused on whether Amazon's investment in Deliveroo would result in the former being less likely to re-enter to the market for food delivery. It concluded that the answer was ultimately no, this minority investment would not alter any future decision to re-enter the market in such a way as to significantly limit competition. Notably, the CMA stressed that it reserved the right to reassess the investment, should Amazon decide to increase its stake that might change the position and could result in an SLC.
The CMA launched its investigation into the acquisition of Spark Therapeutics by Roche Holdings Inc on 21 October 2019. Despite the fact that it was cleared in December 2019 at Phase I, the case is a key illustration of the CMA's approach to the share of supply test which requires that, as a result of a merger, the parties will supply or acquire at least 25 per cent of a particular good or service in the UK. The CMA had identified in this case that the companies overlapped in the supply of certain novel prophylactic Haemophilia A treatments in the UK. That being said, only Roche was commercialising its treatment, with Spark in the process of developing its competing product. Accordingly, Spark's product was not yet on the market anywhere in the world and generated no sales in the UK. However, the CMA found that because of how integrated research and development and clinical trials are in the development of medical treatments, Spark could, in fact, be said to be involved in the supply of Haemophilia A treatments even without a commercialised product. Roche and Spark made the point that even if the CMA were to adopt the description of a 'good' as comprising all actual and potential treatments (i.e., those currently available and those in the pipeline), the share of supply of Haemophilia A treatments was still only equivalent to 5 per cent and therefore far below the required 25 per cent threshold. The CMA focused on two other factors to satisfy the share of supply test. Firstly, the CMA found that Roche and Spark employed more than 25 per cent of all of the workers employed in the UK engaged in activities related to these two types of Hemophilia treatments in the UK and, secondly, it found that both parties had procured more than 25 per cent of UK patents for such treatments. Accordingly, the CMA had jurisdiction to review the proposed deal even though it would be fair to say that the parties had a seemingly limited UK nexus. Notably, the deal exemplifies how the CMA will use its full discretion in choosing the criterion to meet the share of supply test which can include either one or a combination of value, cost, price, quantity, capacity, number of workers employed or some other criterion like patents in this case. Although cleared at Phase I, the CMA's review highlights the wide discretion the CMA has in determining whether it has jurisdiction to review a merger under the share of supply test.
On 9 April 2020, two days after the deal was cleared in the US, the CMA blocked Sabre's acquisition of Farelogix. Sabre is a US technology and software provider to the global travel industry, providing technology solutions to airlines and travel agents in particular. Farelogix is also a US technology and software provider that supplies technology solutions for airlines that enables them to connect directly to travel agents and offer customers in-flight extras such as additional legroom. The significance of this case is in how the CMA was able to assert jurisdiction over the deal which (if the target's turnover is below the relevant threshold) requires there to be an increment in the share of supply of goods or services in the UK resulting in a combined share of supply of 25 per cent or more.
Despite the fact that Farelogix had no direct relationship with a British company, the CMA found that Farelogix was, in fact, supplying one of its services to British Airways (BA) in the UK indirectly by virtue of a separate agreement that it had with American Airlines. More specifically, this indirect relationship arose because American Airlines, a direct Farelogix customer, had an agreement with BA relating to 'interlining', which allowed for individual airlines to handle passengers travelling on itineraries that require multiple flights on multiple airlines. This interlining agreement between BA and American Airlines, in turn, relied on the Farelogix service that was supplied to American airlines. Despite the fact that Farelogix's revenue increment from this was small, the CMA stressed that the law 'does not require a minimum increment'. The decision is currently being appealed by Sabre before the CAT with Sabre arguing that 'our essential submission is the transaction entirely lacked the required nexus with the United Kingdom' for the CMA to assert jurisdiction.115 The outcome of the case will be particularly significant if the CAT rules against the CMA in finding that it failed to apply the share of supply test correctly, not least because of its tendency to give the CMA wide discretion in such matters.
Finally, as one commentator noted, 'Sabre may well have taken note of comments made by the CAT's chairman Peter Freeman earlier this year, when he hinted that it might have to shift from its current 'light-touch' judicial review approach should the CMA become more interventionist.'116 The promise of a heavier hand could certainly encourage further appeals in similar cases where the CMA appears to have been particularly novel in its approach and material questions arise as to the application of such fundamental points of law. The main hearing of the application took place between 24 and 26 November 2020 and at the time of writing the judgment is pending.
On 17 May 2019, the CMA served an IEO on Pentland Group PLC (Pentland) and its subsidiary JD Sports Fashion PLC (JD Sports), in relation to the completed acquisition by JD Sports of Footasylum PLC (Footasylum). The case was referred to a Phase II investigation on 1 October 2019 and subsequently blocked on 6 May 2020 with the CMA finding that the merger would result in an SLC in sports-inspired casual footwear and apparel products sold both in stores and online ultimately leaving shopping worse off.117 The CMA recommended the divestment of the entirety of the Footasylum business to a suitable buyer. As if foreshadowing events to come, the CMA included a disclaimer in its final report writing that, the uncertain and challenging trading conditions that many retailers were facing due to covid-19 has only arisen during the final stage of the investigation and that, accordingly, the evidence gathering for their investigation was mostly completed before the effects of covid-19 arose. JD Sports, appealed the CMA's decision before the CAT on the grounds that the CMA erred in law or acted irrationally by excluding the effect of covid-19 on Footasylum when considering the relevant counterfactual, or when assessing the impact of the merger on competition in the relevant market. Significantly, the CAT partially upheld JD Sport's appeal finding that, generally speaking, the CMA had acted irrationally in not gathering sufficiently robust evidence in relation to the impact of covid-19 on the parties and that, accordingly, the regulator did not have the necessary evidence for drawing the conclusions that it did. Additionally, the CAT found that the CMA had acted irrationally in not requesting information from the suppliers on the impact of the pandemic in order to determine whether this would have created a stronger constraint on the merged entity and therefore not resulted in an SLC. Instead, the CMA relied on evidence from the suppliers that was only relevant to a pre-pandemic market.118 The case was therefore remitted back to the CMA for reconsideration on these points with the CAT remarking that the 'assessment of the effects [of covid-19 are] sufficiently material to the CMA's overall conclusions as to require further examination of the final report as a whole'.119 The CMA made the decision to appeal the CAT's judgment writing on its website that, 'it is the CMA's belief that the CAT misapplied the law in reaching [its] decision. The CMA determined that at the time of the final stages of its investigation – shortly after the UK had entered lockdown – the uncertainty facing retailers and suppliers meant they were not in a position to provide robust evidence on the medium to long term impact of coronavirus from which reliable conclusions could be drawn'.120 However, on 17 December 2020, the CAT rejected the CMA's request for appeal, restating that on two particular aspects of their investigation, the CMA did not seek sufficient evidence, and drew conclusions on the impact of covid-19 that the evidence before it did not allow it properly to draw. Therefore, it was right that the case be remitted back to the CMA for a second review. At the time of writing, the CMA has announced that it will renew its application at the Court of Appeal.
On 5 November 2020, the CMA blocked FNZ (Australia) Bidco Pty Ltd's completed acquisition of GBST Holdings Limited after just under a year of investigation. The acquisition itself was the result of a hostile takeover in November 2019; the regulator was not notified at that time but subsequently called in the acquisition on 14 November 2019. In May 2020, the CMA imposed an IEO prohibiting the companies from integrating their businesses, transferring control or ownership or otherwise impairing the ability of either business to compete independently until the review had been completed.121 FNZ and GBST both supply software and services to investment platforms in the UK and the regulator stated that following its in-depth Phase II investigation, the loss of competition brought about by the deal could lead to investment platforms, and therefore the UK consumers who rely on these platforms to administer their pensions and other investments, facing higher costs and lower-quality services. The CMA concluded that 'although there are differences in the business model that the 2 companies use, with FNZ providing an integrated software and servicing solution and GBST being a software-only provider . . . they compete closely and face few other significant suppliers at present. Looking at how the sector is expected to develop in future, the CMA found no basis to suggest that entry or expansion by other suppliers would mitigate the harm caused by the merger.'122 However, FNZ filed an appeal before the Competition Appeal Tribunal on 2 December 2020 claiming the CMA's market definition was 'inadequately reasoned, incoherent and unduly vague' as well as arguing that CMA reached 'an unreasonable determination of the counterfactual'.123 In a statement posted on the case webpage on 24 December 2020, the CMA wrote that 'following receipt of the Notice of Application, the CMA identified certain potential errors in its market share calculations as a result of the provision of inconsistent information during the course of the CMA's investigation. The CMA will now ask the CAT to send the case back to the CMA to reconsider.'124 This was duly done via a remittal order issued by the CAT on 21 January 2021. At the time of writing we are waiting to see to what extent these 'potential errors' will change any of the CMA's substantive analysis. If the CMA reaches a different conclusion after the remittal, it remains possible that it could clear the deal unconditionally or it could return to some of the remedies initially suggested by the parties in September 2020.
The UK government, acting through the relevant Secretary of State, may review a transaction involving the acquisition of a UK business if a relevant merger situation is created.125 The Secretary of State can intervene in these transactions on specified public interest grounds, which are set out in Section 58 of the EA02. These include national security (e.g., defence sectors),126 cases relating to accurate news and free expression (e.g., newspapers),127 media plurality, media standards and broadcasting,128 and prudential regulation.129 If the relevant Secretary of State considers that one or more of these public interest grounds are met, and has 'reasonable grounds' to suspect that the transaction in question results in a relevant merger situation (or is informed as such by a competition regulator), then he or she can issue a public interest intervention notice.130 It should be noted that the Secretary of State also has the power to intervene in transactions on the basis of a consideration that is not specified, but that, in his or her opinion, ought to be.131 In these cases, the Secretary of State must present an order for approval before both Houses of Parliament where such approvals must be given within 28 days.132 As such, the public interest grounds under which the UK government can intervene in a transaction that creates a relevant merger situation are relatively fluid and flexible, allowing the government to continually revise and alter its approach to these forms of investment in the UK.
It is worthy of note that in June 2020, the British government enacted reforms to the EA02 introducing an additional ground of intervention that permits it to review any deal that it perceives to be related to the UK's 'capability to combat, and to mitigate the effects of, public health emergencies.'133 Additionally, the government brought three additional technology sectors (artificial intelligence, cryptographic authentication and advanced materials) within the purview of its lower jurisdictional thresholds. These lower thresholds were introduced in the summer of 2018 and provide that, for acquisitions in certain sectors, the target need only have a turnover of £1 million (down from £70 million) or 25 per cent of the share of supply (without the need for the transaction to result in an increment of this percentage which would otherwise be required).134 The sectors to which these lower thresholds apply now total six. In addition to the three new sectors mentioned above they also include
- the development or production of items for military or military and civilian use;
- the design and maintenance of aspects of computing hardware; and
- the development and production of quantum technology.135
At the time of writing, the UK government has not yet used its powers to intervene in a transaction related to a public health emergency despite the pressures of the pandemic and, generally speaking, neither of the two reforms detailed above were expected to have hugely significant implications in the short term. This is because many saw them as a sort of stopgap or filler before the introduction of the National Security and Investment Bill (NSIB), which, when passed by Parliament in the course of 2021, will constitute a much more comprehensive and wide-ranging regime and will in fact replace the existing public interest merger regime contained in the EA02 (please see below for more information on the NSIB), for national security cases. The EA02 will, however, continue to apply to the other specified public interest considerations (i.e., media plurality, financial stability and public health emergencies).
On 20 December 2019, the Secretary of State intervened in the proposed acquisition of Mettis Aerospace by Chinese fund Aerostar on national security grounds. This was under the power to intervene in cases under the lower turnover threshold introduced by changes to the EA02 in 2018. Notably, the deal was abandoned following the intervention notice so it is not known whether the government would eventually have found there was a national security issue that warranted remedial measures.
ii Trends, developments and strategies
In November 2020, the CMA launched a consultation on its proposed update to the Merger Assessment Guidelines, which set out the substantive approach of the CMA to its analysis when investigating mergers (the consultation closed on 8 January 2021).136 The CMA's current guidelines were published in 2010 and the regulator noted that much had changed since then. It wrote that, 'the guidelines will build on recommendations made by the Furman (Unlocking digital competition: Report from the Digital Competition Expert Panel)137 and Lear (Ex-post Assessment of Merger Control Decisions in Digital Markets)138 reports in 2019 on how the CMA should approach its assessment of digital mergers; for example, an increased focus on the potential for future competition, and considering innovation and other non-price related effects when assessing whether there is likely to be an SLC. This will reflect the CMA's recent case experience and improve its merger enforcement within the existing legal framework.'139
All three updates are significant in their own right, but a selection of some of the key points are as follows. In line with the CMA's increasingly elastic approach to asserting jurisdiction (as detailed in the cases above – see Amazon/Deliveroo, Roche/Spark and Sabre/Farelogix), the updated draft guidance on jurisdiction and procedure states that, while the CMA cannot apply the share of supply test unless the merging companies 'together supply or acquire the same category of goods and services', it will consider the 'commercial reality' of the merging companies' activities when assessing how goods or services are supplied, 'focusing on the substance rather than the legal form of arrangements'.142 It goes on to state that, in practice, this means that the test can be met by, or capture within its scope 'pipeline products or services' or any situation 'where there are sufficient elements of common functionality between the merger parties' activities, among other factors'; it is not limited to overlaps in directly marketed products.143
Similarly, in the draft updates to the Merger Assessment Guidelines the CMA stresses that, when identifying the relevant market for the purposes of its investigation into whether or not a merger has, or will, result in an SLC, it will 'place more emphasis on the competitive assessment as opposed to the static market definition'.144 In other words, the CMA will ensure it is not bound or restricted by a formal market definition where that definition does not capture the competitive dynamics of the given market.
Moreover, the updated draft Merger Assessment Guidelines introduces a much more comprehensive section on 'potential competition', which refers to competitive interactions involving at least one firm that has the potential to enter or expand in competition with other firms. This increased attention on 'potential competition' is not coincidental; on the contrary it ties in with one of the recurrent themes throughout the updated guidance (and, for that matter, a great deal of the recently published CMA literature) namely, under-enforcement in digital markets. After all, it is known that this market is one in which relatively early stage acquisitions of small firms by larger, more powerful players can reduce if not eliminate potential or future competition in the market (the 'Killer Acquisition' hypothesis). Equally, an increased focus on potential competition might put the CMA in a better position to consider any efficiencies that could arise from digital mergers which, it has been argued, it might have previously overlooked.
On procedural matters (and in light of the CMA's predications on the increased number of cases as a result of Brexit), it is notable that the updated jurisdictional and procedural guidelines formalise a procedure to 'fast track' cases to Phase I remedies or Phase II review as well as setting out how companies can 'concede' that their deal has the potential to substantially lessen competition.145
On the first point, merger parties can now fast track to the consideration of undertakings in lieu of reference (UILs) to a Phase II investigation; the objective being to reach a Phase I clearance with remedies more quickly. A request for referral to consideration of UILs can be submitted as early as the pre-notification stage (where the parties are in dialogue with the CMA on the completeness of the draft merger notification). The second purpose for fast tracking is to proceed more quickly to an in-depth Phase II review and requests can be made during the Phase I investigation or, again, during the pre-notification period. In both instances, the updated guidance acknowledges that 'the CMA will therefore not follow all of the normal procedural steps' including reducing time for third-party consultations in the first instance, given that third parties will have the opportunity to present their views either during the consultation on the proposed UILs or during the Phase II investigation, depending on which particular fast track route is being pursued.
The concession of an SLC is reserved for Phase II investigations and the guidance provides two examples of where merger party might wish to consider such a concession: the first is where it would 'aid the alignment of the CMA's remedies process with proceedings in other jurisdictions' and the second is where it would 'enable the CMA and merger parties to focus their efforts during the remainder of the CMA's substantive assessment on other areas'.146 Notably, for a party to concede an SLC is to waive their right to challenge that position during a Phase II investigation and, of course, the CMA reserves the right to decline a request to 'concede' an SLC 'where this would not be appropriate for the substantive assessment of the case'.147
Ultimately, while fast-track cases have been possible (as recently used in the Crowdcube/Seedrs merger investigation), the updated guidance has formalised this, no longer stating that the treatment of cases may only 'exceptionally' be accelerated significantly.
A new mandatory regime for national security cases
In November 2020, BEIS published a draft of its National Security and Investment Bill (NSIB). This came after a long period of consideration by the government, which announced its intention to tighten up the UK's national security rules in 2017.148 The new NSIB foresees a comprehensive overhaul of the existing foreign investment review powers in the UK creating a standalone regime for the first time that is completely separate from competition law oversight. Transactions will now need to be assessed for both competition and NSIB issues, which will run on separate timetables. This is likely to add complexity (and cost) to transactions with an impact in the UK. The NSIB foresees the introduction of a mandatory pre-screening mechanism for investments in the designated sensitive sectors. This is a significant change from the status quo under the EA02, under which, broadly speaking, the government can only intervene in cases if they meet the jurisdictional tests for review under the UK's merger regime. The government appears to consider that as the new regime for monitoring investment in sensitive industries is sufficiently different from the general merger control regime the introduction of a mandatory notification requirement is just one aspect of the new regime to which companies will have to adapt.
As drafted, the NSIB will require mandatory notification of mergers and acquisitions by investors involving companies active in certain sensitive sectors,Acquisitions will be notifiable where an investor gains control or a qualifying entity or asset due to an increase in either shares or voting rights by exceeding and of the following thresholds: going from a percentage of less than 15 per cent to 15 per cent or more (however small the increment); or exceeding, for the first time, a threshold of 25, 50 or 75 per cent; or gaining material influence over the company (whether alone or together with other interests or rights that the investor may already hold).
The sectors proposed for mandatory notification under the NSIB are as follows: advanced materials, civil nuclear, critical suppliers to government, data infrastructure, engineering biology, satellite and space technologies, artificial intelligence, communications, critical suppliers to the emergency services, defence, military or dual-use technologies, transport, autonomous robotics, computing hardware, cryptographic authentication, energy and quantum technologies. This list includes all the sectors that currently fall within the remit of the EA02, as well as introducing a significant number of others such as communications, transport and energy. BEIS launched a consultation on the precise scope of these definitions with the intention of refining them 'so they provide enough clarity to allow parties to self-assess whether they need to notify' that closed on 6 January 2021.149 The consultation intends to set out which types of transaction in these sensitive sectors will require mandatory notification under the new law.
Notified transactions in these sectors will be scrutinised to evaluate the extent to which they may pose 'a threat to national security'. In such cases, the government will have the ability to impose conditions on parties, such as altering the equity level that an investor is allowed to acquire, restricting access to certain commercial information or controlling access to certain operational sites or works. There will also be an option to block a deal in any sector that is deemed to pose an unacceptable national security risk. BEIS has made clear that it expects that the 'vast majority' of transactions will require no intervention and will be cleared quickly.
Transactions that require mandatory notification that are closed without clearance will be legally void. The NSIB anticipates sanctions for non-compliance of up to 5 per cent of global turnover or £10 million – whichever is the greater. Criminal sanctions including imprisonment of up to five years are also foreseen. This is a major change from the existing position where, due to the voluntary nature of UK merger control, there are no sanctions for completing deals without clearance although such transactions can be investigated post-closing and remedies imposed (including partial or full divestment) if required to address any competition, or indeed, national security issues.
A significant feature of the NSIB is the proposed five-year 'retrospective power' to review completed transactions that are deemed to raise potential national security concerns. A power of this kind was described in the government's consultation on legislative reform of foreign investment review in July 2018, but in that publication the anticipated period of review was expected to be six months.150 It should be noted that the five-year rule is not without exception. Should the Secretary of State be made aware of the transaction, the 'call in' power only extends to six months. This means that there will be strong incentives for purchasers to either voluntarily approach BEIS even when a mandatory notification is not required, or otherwise make sure details of the transaction are sufficiently publicised to ensure the Secretary of State is 'aware' of them. Under the NSIB, the power for retrospective review became effective for all deals concluded from 12 November 2020 even though the legislation is not yet in force. Once the law becomes effective, the government will be able to review deals that completed since 12 November 2020.
To handle notifications a new Investment Security Unit has been created within BEIS. The Secretary of State will have exclusive competence to 'call in' deals for review and make a determination on potential national security concerns. Statutory deadlines will be introduced, which is not the case under the current EA02 public interest intervention regime, with a target review period of 30 working days from the date a notification is made. The Secretary of State will therefore have 30 working days to either confirm no further action will be taken or issue a 'call-in notice'.
For otherwise non-notifiable transactions, the NSIB also contemplates voluntary notification both in terms of completed and anticipated deals. This will be an option that some investors will wish to explore to avoid the prospect of call-in notices being issued by the Secretary of State at a later date under the retrospective review powers. If a voluntary notification is made, the Secretary of State must decide 'as soon as reasonably practicable' to either reject the notification, confirming to the parties in writing the reasons for that rejection, or accept it. If it is accepted, the Secretary of State will have 30 working days to issue a call-in notice or confirm no further action will be taken.
If a call-in notice is issued, either in respect of notified transactions or because the Secretary of State has elected to issue such notice for un-notified or completed transactions (including under the retrospective powers), there will be an initial period of review of 30 working days, extendable by a further 45 working days where required. The government predicts that it will receive around 1,000 to 1,830 notifications under the NSIB and could be calling in as many as 70–95 transactions a year for a full assessment.151 This compares an average of less than one intervention notice issued a year by the government since the EA02 regime came into force.
At the time of writing, it is expected that the bill will enter into force during 2021.
The CMA's published statistics tracking merger inquiry outcomes record that from April 2002 to December 2020, just under 30 per cent of transactions reviewed by the CMA in Phase I were referred for an in-depth Phase II review (approximately 28 per cent). Of those nine Phase II transactions, only one was ultimately approved, three were blocked, one resulted in an order for divestiture and four others were abandoned.152 Interestingly, this rate of referral to Phase II marks an increase of approximately 12 per cent on the five-year average (which sits at approximately 16 per cent of all cases at Phase I being referred to Phase II).
In the year 2019–20, there were 10 appeals to the CAT relating to merger decisions, which is nearly twice the number recorded in the previous five years where it was the case that appeals against merger decisions had been relatively rare. Naturally, if the CMA is referring more cases to Phase II, it follows that there might be an upward trend in the number of appeals but there may also be something to be said for the number of appeals increasing as a consequence of a more contentious breed of CMA decision such as Roche/Spark, Sabre/Farelogix and JD/Footasylum.
It has been remarked relatively widely that although the UK's merger control regime remains voluntary, its approach of late has brought it closer to being a de facto mandatory regime. That characterisation is as a result of a number of trends including its (sometimes contentious) approach to asserting jurisdiction and requiring remedial action when investigating completed mergers, and its approach to IEOs. Some of these characteristics are assessed in further detail below.
Initial enforcement orders
On 9 June 2020, the CMA issued an initial enforcement order (IEO) against Facebook and Giphy even before it had formally launched an investigation into the proposed merger. The CMA then appointed a monitoring trustee and a hold separate trustee to ensure that, in accordance with the IEO, the Giphy business operates as a viable and competitive business, separately from and independently of the Facebook business. On 10 June 2020, Facebook requested 'carve-outs' from the IEO so that certain provisions of the order would not apply to it. The CMA made further requests for information in order to review the carve out request but Facebook did not provide the information. Accordingly, no such derogations were granted and Facebook launched an appeal on the grounds that the IEO was irrational and disregarded the statutory purpose for which the CMA may order interim measures against a merger party; disproportionate; and in breach of the legal certainty principle. The CAT dismissed the appeal on all grounds.
Significantly, the CAT's judgment has confirmed that the CMA has a broad scope to impose IEOs; the regulator is not required to have formed a view as to whether a Phase II investigation is likely or whether any action taken by the parties will impact the CMA's remedial options – merely the risk or possibility of the aforementioned factors is enough. Secondly, the judgment confirms that the CMA is fully entitled to request information and that it has a wide margin of appreciation to decide what information is needed. The court stressed that the CMA is under a duty to acquaint itself with relevant information and of course it cannot review an IEO without access to this information. As noted by the CEO of the CMA, Andrea Coscelli, 'initial enforcement orders are an essential part of the CMA's merger toolkit' and that companies seeking derogations from IEOs 'must provide sufficient information to the CMA before a decision can be made to release them' from the obligations.153
The Facebook/Giphy appeal can be seen as an important case both in terms of providing guidance on the practical application of the IEO and on the scope of the CMA's discretion as it relates to the use of such a tool. Earlier in the year, the CMA stressed the importance of complying with IEOs and the consequences of breaching them. To illustrate this, the CMA imposed a fine of £300,000 (the highest fine to date for a single breach of an IEO imposed by the CMA) on JD Sports and its parent company Pentland Group, for breach of an IEO in the context of its completed acquisition of Footasylum. Although the CMA ultimately revoked this fine as a result of new information that came to light during JD's appeal against the penalty (information which has not yet been made public), the essential point is that we might expect penalties such as this to become more common in the context of tougher merger enforcement.
An extension of the theme above might draw on the case of Amazon/Deliveroo where, in September 2020, the CMA imposed two penalties of £25,000 and £30,000 for the late provision of information. Indeed, there is the possibility that the CMA might yet still seek greater power to impose fines for non-compliance with information requests in light of comments made in Lord Tyrie's 2019 reform proposals (at the time of writing, the maximum fine is £30,000).154 In a slightly different vein, the CMA fined Sabre £20,000 in the Sabre/Farelogix case for unintentionally (but negligently) withholding information. The issue arose owing to an incorrect categorisation of documents as privileged in Sabre's dealings with the DOJ as part of the US investigation into the proposed deal. While the CMA acknowledged that it had been on notice that Sabre was providing the same universe of documents as had been given to the DOJ (and therefore documents privileged before the DOJ would likely be privileged before the CMA), that Sabre had been transparent and that the documents were 'only of limited relevance' to its review, the UK regulator sanctioned the company nonetheless. In the CMA's view, withholding the documents gave rise to a 'material risk' that the CMA's decision would be taken on the basis of incomplete evidence.155 The decision acts as a reminder for all parties subject to a CMA investigation that the approach is strict and could elicit large penalties were the merger control process is compromised.
The CMA is certainly engaging with the full breadth of its powers when it comes to exercising its jurisdiction in merger control cases, and that is a trend that is likely to continue. In its draft annual plan for 2020–21, the CMA noted that it would enter 2020–21 with a high volume of ongoing casework including and an 'unprecedented number of Phase II merger investigations'156 and this comment is echoed in the draft plan on 2021–22, where again the CMA enters the new year with a 'substantial volume of ongoing work'.157
With the UK no longer a member of the EU, global mergers can expect to face parallel reviews on both sides of the English Channel. The CMA expects that its workload will increase by 50 per cent as a result of Brexit, insofar as it will review somewhere between 30–50 more transactions per year. It is important to note that this is simply as a result of the UK's exit from the EU, rather than as a result of any developments in its approach to merger control.
In many ways, regardless of Brexit, we have seen that the CMA is not afraid to intervene in transactions with only a relatively limited UK nexus – in Sabre/Farelogix there were no direct UK customers and in Roche/Spark no UK sales. It has been said that the UK is operating one of the most interventionist regimes in the world at present, with one statistical report finding that of all Phase II investigations carried out by the CMA since 2018, approximately 50 per cent of them were called in by the regulator rather than proactively notified. Deals such as the proposed Taboola/Outbrain merger, abandoned in 2020 after the CMA referred the acquisition to Phase II despite being cleared in the US and Germany, are illustrative of the potential impact of a particularly interventionist UK regulator in global deals. Indeed, even without being abandoned, other examples such as Sabre/Farelogix (which was cleared in the US but held up in the UK), should be borne in mind when considering the impact on timelines and, of course, the costs of extended CMA reviews.
Also of note in the post-Brexit environment is that the CMA recently signed a new agreement with five of its international counterpart competition authorities (from Australia, Canada, New Zealand and the United States (FTC and DOJ)) to 'deepen cooperation on competition enforcement'.158 The agreement, named the 'Multilateral Mutual Assistance and Cooperation Framework for Competition Authorities' includes a memorandum of understanding designed to reinforce and improve existing case coordination and collaboration tools among the agencies, including in relation to merger control, and a model cooperation agreement. Comments made by the CMA's chief executive in early February 2021 indicate that the UK government wishes to sign enhanced cooperation agreements with the EU later in the year to and engage more fully with both the Member States and the European Commission.159 The CMA, he remarked, is fully supportive of the idea but it is the government that will be responsible for implementing it. Assuming such cooporation agreements are signed and assuming that the CMA is able to fully engage with Member States and the Commission on merger control, it might be the case that parallel reviews become slightly less burdensome than they otherwise might be.
Looking forward, the CMA has stated that it will be focusing on the following four themes:
- Protecting consumers and driving recovery during and after the coronavirus pandemic including:
- protecting the vulnerable from breaches of competition and consumer protections laws and poorly functioning markets;
- supporting the UK economy by fostering competition to promote innovation, productivity and growth.
- Taking its place as a global competition and consumer protection authority as it assumes new responsibilities after the expiry of the post-Brexit transition period.
- Fostering effective competition in digital markets.
- Supporting the transition to a low-carbon economy.
We have already seen significant developments in each of these areas, ranging from a study on algorithms designed to expand the regulator's understanding of, and expertise in, digital markets through to a guidance paper on the interaction of competition law and sustainability. In 2021, we will likely see legislation to support the CMA's work in these four areas, in particular in relation to digital markets, as well as the enactment of the NSIB, which will apply alongside but separately to the CMA's merger control function.
As remarked by Andrea Coscelli, the UK's plans to regulate Big Tech will be an 'early test of Brexit' insofar as it may indicate to what extent the UK is willing to diverge from the emerging EU legislation in the same field. Both Coscelli himself and the CMA's chief economist, Mike Walker, have commented that while it is not preferential to have substantial regulatory diversion within Europe (or across the Atlantic) this does not mean that the UK would not seek to pursue and develop its own unique or bespoke approach to competition enforcement in certain areas or sectors.
Furthermore, the CMA has stated that it is ready to launch complex cartel and antitrust cases and merger investigations with a global dimension that would have previously been reserved to the European Commission. With more staff on hand and an increased budget, we wait to see whether the regulator's predications for its increased workload will come true or whether the prospect of greater regulatory intervention will have a chilling effect on M&A with a UK dimension.
What seems certain is that the CMA will continue with its activist (or interventionist) approach, which means that all dealmakers must account for a higher risk of regulatory review in the UK. For legal advisers, it will be necessary to take into consideration the CMA's more flexible approach to asserting jurisdiction in order to help mitigate the risks of an investigation, as well as navigating the NSIB. Companies and advisers will need to interact with both the CMA and BEIS in many cases.
1 Marc Israel is a partner, Kate Kelliher is an associate and Robert Eyres is a trainee at White & Case LLP.
4 Section 60A CA98.
5 The Civil Aviation Authority (CAA) for airport operation and air traffic, Office of Communications (Ofcom) for broadcasting, electronic communications, and postal services, Gas and Electricity Markets Authority (Ofgem) for electricity and gas in Great Britain, Water Service Regulation Authority (Ofwat) for water and sewerage services in England and Wales, National Health Services Improvement (NHSI) for health services in England, the Office for Rail and Road (ORR) for rail services, the Financial Conduct Authority (FCA) for financial services, the Payment Systems Regulator (PSR) for payment services, and the Northern Ireland Authority for Utility Regulation (NIAUR) for electricity, gas, water and sewerage services in Northern Ireland.
9 See https://www.gov.uk/government/news/cma-consults-on-annual-plan. Details of the cases can be found at http://www.gov.uk/cma-cases.
54 See 2017 https://www.catribunal.org.uk/cases/134411220-lexon-uk-limited and included colluding.
111 TCA, Article 3.9(1),189.
112 BEIS Consultation, 'Subsidy control: designing a new approach for the UK', p. 37.
117 See https://assets.publishing.service.gov.uk/media/5d92260940f0b65e5b537d53/JD_Sports_Footasylum_decision_to_refer.pdf and https://www.gov.uk/cma-cases/jd-sports-fashion-plc-footasylum-plc-merger-inquiry.
125 The Secretary of State for Business, Energy and Industrial Strategy has the power to intervene in all public interest cases, except media mergers, in which the Secretary of State for Digital, Culture, Media and Sport can intervene.
126 Section 58(1)–(2) of the Act.
127 Section 58(2A) of the Act. Media plurality is defined as 'the need for, to the extent that is reasonable and practicable, a sufficient plurality of views in newspapers in each market for newspapers in the United Kingdom or a part of the United Kingdom'. Sections 58(2B) and 58(2C)(a) of the Act.
128 Sections 58(2C)(b)–(c) of the Act.
129 This public interest ground reflects the need to maintain the stability of the UK financial system. To date, this public interest grounds has only been used once in relation to the merger between Lloyds TSB plc and HBOS in 2008. Section 58(2D) of the Act.
130 Under Section 42 of the EA02.
132 Sections 42(7), 42(8)(b) and 124(7) EA02.
135 See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950185/Mergers_-_Guidance_on_the_CMA_s_jurisdiction_and_procedure__2020_-_revised_-_guidance_.pdf.
145 See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950185/Mergers_-_Guidance_on_the_CMA_s_jurisdiction_and_procedure__2020_-_revised_-_guidance_.pdf.
146 See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950185/Mergers_-_Guidance_on_the_CMA_s_jurisdiction_and_procedure__2020_-_revised_-_guidance_.pdf.
147 See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950185/Mergers_-_Guidance_on_the_CMA_s_jurisdiction_and_procedure__2020_-_revised_-_guidance_.pdf.
159 Comments made at the ICN Spotlight Coscelli/Mundt — Leading your agency through change,' virtual event, 2 February 2021.