As in 2017, the CMA leadership devoted much of 2018 to preparing for Brexit – publishing draft regulations, revising guidance, and increasing the CMA’s workforce. The CMA has also continued efforts to enforce competition rules on a business-as-usual basis, although its activity dropped slightly compared with 2017, falling somewhat short of the aim set out in its last annual plan to “take forward a higher volume of cases.” In 2018, the CMA issued:
Three Chapter 1 infringement decisions, compared with five in 2017;
No Chapter 2 infringement decisions, as in 2017;
One decision closing a case with no infringement finding, compared with three in 2017; and
Fines amounting to around £6.7 million, compared with £11.8 million in 2017.
In line with its intention to use Brexit as an opportunity to “be a leading actor in global competition law enforcement,” the CMA stepped up its enforcement efforts, including by launching a campaign in October 2018 to encourage whistleblowers to expose cartels.
The CMA reviewed fewer mergers in 2018 compared with 2017, which may reflect a fall in M&A activity during the second half of the year. At Phase 2, two of seven cases were unconditionally cleared, compared with four of six cases in 2017. At Phase 1, the proportion of cases that required a more detailed Case Review Meeting process (43%) was slightly lower than in 2017 (48%).
The CMA launched two market studies in 2018 (into statutory auditors and funerals) – the same number as in 2017 – and made no market investigation references.
According to its draft annual plan for this year, the CMA has a substantial volume of ongoing work: at the time of publishing, it was running 23 competition enforcement cases, five consumer enforcement cases, 17 merger investigations, two market studies, one market investigation, and one supercomplaint. In addition, the concurrent sector regulators have a number of ongoing Competition Act enforcement cases, covering business parcel delivery (Ofcom), wholesale energy trading (Ofgem), and asset management (FCA).
The CMA has continued efforts to prepare for Brexit even as its terms and timing remain unclear. As well as publishing draft regulations and revising guidance that would apply in the event of a no-deal Brexit, the CMA expanded its teams in London and Edinburgh, and created a new State aid group. Post-Brexit, the CMA expects to review an additional 30-50 Phase 1 mergers each year, leading to an additional six or so Phase 2 investigations, as well as an additional five to seven complex antitrust cases. To accommodate its enlarged teams, the CMA plans to relocate its London offices to Canary Wharf in September 2019. For a fuller discussion of the possible impact of Brexit, see our previous newsletters, especially last year’s November/December edition (as well as the January, February and June editions).
Focus on Digital Markets
Like other competition authorities, the CMA has maintained a close interest in digital markets. In 2018, it subjected several mergers between online platforms to close scrutiny, including Experian/ ClearScore, Nielsen/Ebiquity, and PayPal/iZettle. The CMA is currently conducting a research project into its assessment of past merger cases in the technology sector and has formed a new Data, Technology and Analytics Unit to bolster its expertise in this area. On the enforcement side, following its market study into digital comparison tools in September 2017, the CMA issued a statement of objections to CompareTheMarket in 2018 relating to the use of “wide MFN” clauses (clauses that prevent the insurer from selling the same product at a cheaper price through any other website) in contracts with home insurers.
Also in 2018, the CMA engaged closely with the Furman Panel established to assess competition in digital markets. Among other things, the Panel is exploring: (i) how new firms can adequately compete with established players in digital sectors, (ii) the aggregation of data by large companies and its consequences for the competitive process, and (iii) the implications of increased concentration in digital markets. According to its annual plan, the CMA is considering conducting further work into digital advertising once the Furman Panel has concluded, although its ability to launch new discretionary work depends on the UK securing an EU Exit deal with a transitional period.
Public Interest Interventions
Public interest interventions continued to attract attention in 2018, with the conclusion of the CMA’s review into the anticipated acquisition of Sky by 21st Century Fox (Fox). After a referral by the Secretary of State on public interest grounds, in May 2018, the CMA found that the transaction would raise concerns over loss of media plurality and recommended that Sky News should be divested to a suitable third party for the transaction to proceed. On July 12, the Secretary of State, Jeremy Wright, announced that he had accepted undertakings from Fox to divest Sky News to Disney. Ultimately, Fox’s bid for Sky was unsuccessful, after Sky’s shareholders accepted Comcast’s £30.4 billion rival bid in September 2018.
2018 also saw measures designed to enable the Government to intervene more readily in mergers that raise national security concerns. Updated merger thresholds published in June 2018 enable the Government to intervene in mergers involving firms that develop or produce items for military use, computer hardware, or quantum technology, where the target’s UK turnover exceeds £1 million or the target has a UK share of supply of at least 25% (even where the share will not be affected by the merger). The Government is also considering longer-term reform to give it greater scope to intervene in transactions on grounds of national security.
Strict Enforcement of Procedural Rules
In 2018, the CMA showed a greater readiness to bring compliance cases for breaches of its procedural rules. In particular, the CMA made clear that it will strictly enforce compliance with initial enforcement orders (IEOs) that prevent companies integrating their businesses while the CMA’s merger investigation is ongoing. The CMA almost always imposes IEOs in completed mergers to prevent companies taking action that might prejudice the CMA’s ability to enforce remedies. The CMA may also exceptionally impose IEOs in anticipated mergers (for example, to prevent a target closing stores in areas of potential concern in Tesco/Booker).
The CMA imposed penalties on companies for breaching IEOs in two cases over the last year. In Ausurus, the CMA imposed a fine of £300,000 because Ausurus, among other things, directed the target’s customers to make payments to its bank account. In Electro Rent, the CMA imposed a fine of £100,000 where Electro Rent failed to seek the CMA’s consent before terminating the lease on its only premises in the UK. Electro Rent appealed the CMA’s decision before the CAT in October 2018, arguing that it had informed the monitoring trustee about the termination in advance. The CAT judgment, pending at the date of writing, should have ramifications for other enforcement cases.
The CMA’s enforcement in Ausurus and Electro Rent follows the fine on Hungryhouse for failing to produce documents in response to an information request. Together, these cases confirm that the CMA takes procedural requirements seriously and will take enforcement action against companies that breach those requirements. Companies should therefore follow closely the CMA’s guidance on IEOs and document production.
The protection of vulnerable consumers, such as those on low income or the elderly or disabled, is a stated priority for the CMA. On February 1, Martin Coleman, a Panel Chair at the CMA, explained that the CMA is “increasingly focusing on whether our competition regime and remedies take sufficient account of the circumstances of vulnerable consumers.” The CMA spent 2018 advancing a research project on how competition rules can help protect vulnerable groups, which is expected to shape the CMA’s enforcement over the next few years.
The CMA has already taken enforcement action against care homes charging residents large upfront fees, and is considering launching a market investigation into the funerals sector, after its initial study found that the cost of a funeral has risen by three times the rate of inflation over the last ten years. The CMA’s recent referral decision in the Tobii/Smartbox merger (discussed below) highlighted the potential harm to vulnerable consumers as justifying the reference.
Likewise, in December 2018, the CMA announced a package of reforms intended to protect vulnerable consumers who pay loyalty penalties to companies. The CMA found that in five sectors – cash savings, mortgages, household insurance, mobile phone contracts, and broadband – companies penalise loyal customers by (i) charging them higher prices than new customers, (ii) levying costly exit fees, (iii) imposing difficult cancellation processes, and (iv) automatically renewing contracts. The CMA’s reforms include recommending targeted price caps and publishing guidelines businesses should follow.
Stringent Oversight by the CAT
The CAT has continued to exercise close judicial scrutiny over the CMA. Most significantly, in June 2018, the CAT quashed the CMA’s landmark 2016 decision to fine Pfizer and Flynn £90 mil- lion for charging excessive prices for phenytoin sodium tablets (an anti-epileptic drug). The CMA had considered that overnight price increases of 2,600% after the drug was de-branded were excessive and broke competition rules.
The CAT found that the CMA applied the wrong legal test for identifying excessive prices. It failed to identify the appropriate economic value of the drug. It also wrongly ignored the price of comparable products, such as the price for phenytoin sodium capsules. Unsurprisingly, the CMA has expressed disappointment with the judgment and is appealing it before the Court of Appeal. The CMA has other excessive pricing cases in the pharmaceutical industry in the pipeline (Hydrocortisone and Lyothyronine), and the direction of those cases may turn on the outcome of the appeal proceedings. Given the uptick in exploitative abuses in Europe (with cases at the EU Commission, Germany, France, and Italy), there is keen interest in the appeal, and the EU Commission has applied to intervene.
In March 2018, the CAT issued a 180-page judgment in the CMA’s ongoing pay-for-delay case against GSK, relating to Paroxetine, an antidepressant. The CAT subjected the CMA’s decision to a detailed legal, factual, and economic analysis, including on market definition, the approach to identifying potential competitors under Article 101 TFEU, and the effect of the pay-for-delay agreements. Given the similarity of the issues with those in the European proceedings in Servier and Lundbeck, the CAT referred several questions to the Court of Justice.
Expectations for 2019
Several significant ongoing merger investigations will conclude this year, including the Phase 2 reviews of Sainsbury’s/Asda, Experian/ClearScore, and PayPal/iZettle. The approach taken in these cases may have significant implications for the future assessment of national and local competition, analysis of potential competitors, and the framework for reviewing theories of harm relating to loss of innovation.
The level of enforcement activity in 2019 will depend, in part, on the outcome of Brexit. As the CMA’s annual plan recognises, a no-deal Brexit will require the CMA to divert staff from discretionary enforcement work to focus instead on mergers work returning from Brussels. By contrast, under an orderly Brexit with a transitional deal, the CMA may find itself with an expanded workforce and the capacity to take on new and complex antitrust work.
Depending on the outcome of the Pfizer/Flynn appeal, the CMA may seek to progress the several pharmaceutical cases currently on its docket. In addition, the CMA has stated its intention to conduct further work into digital advertising following the conclusion of the Furman Panel. Finally, following publication of the CMA’s study into pricing algorithms, further scrutiny is anticipated on the impact of artificial intelligence on competition law.