Chillin'Competition

Our friend Kit Brown (Matrix Chambers) has sent us an interesting blog post on the proposed reform of the UK competition system. Kit is one of the most talented Barristers of his generation and it is a great honour to publish his writings on this blog.

In March 2011 the Department for Business, Innovation and Skills launched a consultation on potential reform to the UK competition law landscape.  The consultation document, A Competition Regime for Growth: A Consultation on Options for Reform, sets out options in respect of virtually every aspect of the domestic regime apart from the substantive tests themselves.  Most notably, the Government is adamant that there shall be a merger of the two principal competition agencies, the Office of Fair Trading and the Competition Commission, creating a Competition and Markets Authority (CMA); it is considering amending the antitrust enforcement framework such that cases would be prosecuted by the CMA rather than decided in the traditional administrative manner; it is pondering the introduction of some form of mandatory merger notification system; and it is interested in removing the dishonesty requirement contained in the criminal cartel offence.  But this reform agenda comes just 8 years after the most recent major piece of competition legislation – the Enterprise Act 2002 – came into force and just 11 years after the entry into force of the most radical reform of them all here in the UK: the Competition Act 1998.  An important question is this: why yet more reform?

Initially, before the consultation document emerged, many in the profession suspected that the Government would look to merge the competition agencies as part of the “bonfire of quangos” [for a panorama of quangos, see picture above] announced shortly after the last General Election; that the merger of the OFT and CC would be motivated by a desire to cut costs.  After all, why have two agencies when one will do?  Cost-cutting is not, however, the Government’s motivation.  Instead, it considers that a merged agency will be better able to make flexible use of the powers currently available to the authorities; will be able to make better use of resources; and will become a stronger advocate for competition in the UK.  In particular, the CMA will be able to deploy its powers to inquire into markets more flexibly than is currently the case – at present, the OFT may conduct market studies or (where it suspects the presence of features of a market which have an adverse effect on competition) may formally refer markets to the CC for in-depth (and costly) investigation.

Most commentators – and, importantly, both the OFT and CC – support the merger proposal, although some have queried whether there is any empirical evidence that a single authority will lead to the benefits that the consultation document claims.

Rather more contentious are the Government’s other suggestions for reform.  Starting with the antitrust enforcement regime, it is clearly concerned that cases currently take too long to reach a conclusion and that there are not enough of them.  It thinks that this may be due (at least in part) to the “overall weight of procedural requirements”, with the authorities (including in particular sector regulators, which in the UK also have competition enforcement powers) taking the view that it is preferable to use other instruments to tackle possible problems, in view of the length and uncertainty of outcome of the enforcement process – a key plank of which is the ability to appeal “on the merits” to the Competition Appeal Tribunal (CAT).  The Government has put forward three options for reform:

• Option 1 – preserving the status quo: the CMA would investigate and decide cases, with a full appeal on the merits to the CAT.
• Option 2 – amending the administrative approach by building in an “internal tribunal”: the idea is that the case team would investigate up to the SO stage, but adjudication would be done by a second-phase tribunal consisting of independent persons drawn from a list, with the possibility of an appeal on a “judicial review” basis to the CAT. (This model is likely to be adopted in any event for phase II merger and market investigations.)
• Option 3 – most radically, shifting to a system under which the CMA would prosecute cases before the CAT, which would then decide on the questions of infringement and, if applicable, penalty.

Broadly speaking, the OFT is unsurprisingly in favour of the first option; the CC appears to be in favour, again unsurprisingly, of the second option – at least in ‘effects’ cases; business (if the CBI’s views are taken as representative) seems to favour the third option; and practitioners are split between options 1 and 3.

Before delving into the merits of each, there is an important underlying question: what should be the aims of the competition regime?  Should the emphasis be firmly on enforcement of the prohibitions on anti-competitive agreements and abuse of a dominant position?  Or should it be on correcting market imperfections such as barriers to entry and information asymmetries?  Relatedly, do we care about the number of decisions pumped out each year by the competition authorities?  It appears that the Government does, and at first sight one can well see why – particularly in view of the OFT’s significant resources.  It is true that the OFT’s output, when viewed solely in terms of the volume of antitrust decisions, looks unimpressive when set against the record of other NCAs in the EU.  There is certainly an argument that a poor throughput of decisions, particularly ones which impose tough penalties, hardly serves to increase awareness and general deterrence.  But numbers alone tell us nothing about the quality of decision-making, the impact of those decisions or the overall (positive) impact made by the authority on consumer welfare through other means – market studies, competition advocacy and so on.  This, in essence, is the OFT’s argument: we deploy a range of tools to attack markets which are not working well for consumers, and antitrust enforcement is just one of them.

Turning to the options, the pertinent question is: which of the three options is most likely to achieve the Government’s aims (which appear to be the speeding up of decision-making and a greater throughput of cases, and at what cost?  In particular, would a prosecutorial model be any more efficient?  This is not something on which the consultation document sheds any light.  Might it deter the CMA from bringing cases on the basis that it would have much less ‘control’ over the process and outcome?  Might it incentivise the authority to settle cases even more readily than is currently the case?

There are clearly pros and cons to each of the options, although the weight of opinion seems to be against option 2.  There is a strong argument in favour of option 1 to the effect that the last thing the system needs is major upheaval so soon after it has ‘bedded down’ – the OFT has recently introduced measures to speed up the administrative process and improve procedural safeguards, and it argues that these measures are starting to bear fruit and should be given a proper chance to succeed.  On the other hand, splitting up the investigatory and decision-making functions of the authority would be welcomed by many in the business world and also by those who consider that the current system does not contain sufficient procedural guarantees.  Of the two reform options on the table, the more attractive appears to be a full prosecutorial model rather than an internal tribunal system, which would likely suffer from a perception of closeness to the investigatory arm of the authority, no matter how independent its members would be.

Turning to the other reform proposals, there are some positive suggestions for speeding up other processes, too, including market investigations.  More controversially, the Government is considering whether to do away with the voluntary nature of merger notifications.  It points to the ‘egg scrambling’ problem: firms merge without notifying the OFT beforehand; they immediately begin to consummate the merger, including by merging sales functions, combining sensitive information, making key members of staff redundant and so on; the authorities only become aware of the merger once that process is underway; and thereafter spend too much time trying to put in place hold-separate measures, which may or may not be effective, pending the outcome of the investigation.  This issue is one which has vexed the CC in particular, ever since the Stericycle case in which the appellant challenged the CC’s use of its hold separate powers (Stericycle International v CC [2006] CAT 21).

The Government has put forward the possibility of a full mandatory notification system and a ‘hybrid’ system under which mergers over a certain size (where the target’s turnover exceeds £70m) would be subject to mandatory pre-notification but the CMA would retain the ability to look into smaller mergers which nonetheless satisfy the nebulous “share of supply” test currently used – perhaps accompanied by a “small mergers” exemption.

Reaction has been rather less favourable to the merger control proposals than to the idea of an OFT/CC merger.  Many, including the OFT and the CBI, consider that the current voluntary system works well and is much less intrusive on business than a mandatory notification system.  The risk of problematic mergers slipping through the net unnoticed is very low, particularly now that the OFT has a dedicated “mergers intelligence” unit and generally deploys its hold-separate powers more proactively than previously.

Equally if not more controversially, the Government suggests scrapping the requirement for prosecutors to prove dishonesty under the criminal cartel offence.  The offence, contained in section 188 of the Enterprise Act, has been prosecuted successfully only once in eight years, and that was in relation to the Marine Hose cartel, where the British defendants had already entered into a plea bargain with the DoJ in Washington, and so it was in their interests to agree to plead guilty in the UK so that they could serve time in a British jail rather than an American one.  The only other prosecution – that of several British Airways executives in respect of their alleged roles in air passenger fuel surcharge collusion with Virgin Airlines – was a lamentable failure.  But it was not because of the difficulty with showing dishonesty; rather, the case collapsed after the OFT disclosed a large number of documents, some of which were exculpatory, at a very late stage, just before the trial was due to commence – seemingly due in part to Virgin’s late realisation that documents on its servers which it thought were irretrievably corrupted were in fact salvageable (see Purnell et al, “Criminal Cartel Enforcement – More Turbulence Ahead?” [2010] Comp Law 313).

Whilst one can see why it is in the OFT’s interests to have the dishonesty element removed – it is, after all, the prosecutor – and why the Government wants to see more prosecutions and convictions, given their strong deterrent effect, there are strong objections to doing so by removal of the requirement to show dishonesty: many would argue that dishonesty is the morally reprehensible element to the conduct, justifying both its categorisation as criminal and the prosecution of individuals rather than merely undertakings involved.  Furthermore, there is no evidence that juries have difficulty understanding the concept of dishonesty – after all, they have been applying it in the context of theft and other offences for many years.

Time will tell which of the Government’s proposals are to be taken forward towards draft legislation.  One thing is certain: the landscape will soon look very different.  What is less certain, however, is whether it will end up being a good thing for consumers, and how long it will take for the dust to settle.