This article was first published in Competition Law Insight, November 2015
The question of whether the UK will remain a member of the European Union (EU) has been rumbling around British politics for well over 20 years – indeed, almost back to the referendum in which the UK decided to stay in the Common Market (as the EU was then known) back in 1975, only three years after joining in 1972. Matters have now come to a head.
The UK government has committed to a referendum on the UK’s membership of the EU by the end of 2017. It is possible that it will be brought forward into 2016. If the outcome were a vote to leave the EU (commonly known as Brexit) – an outcome that cannot be discounted as a real possibility – the leaving process would take at least two years and the effects of leaving would depend to a good deal on what the new relationship with the EU would be.
Nature of the future UK-EU relationship
There are many possibilities that could be negotiated between the UK and the EU, if there is a vote for the UK to leave the EU. However, some seem more likely than others. Because one of the major concerns raised by those who want to leave the EU is the EU regime for free movement of workers, for the purposes of this article it is assumed that the new relationship is not a close one, such as membership of the European Economic Area (EEA) and the European Free Trade Area (EFTA) or a UK/EU free trade agreement similar to the Swiss/EU agreement. Joining the EEA or entering into a close free trade agreement would involve continued acceptance of the EU free movement rules and joining the EEA would involve acceptance of much other EU law and a continued role for the EU Commission and the Court of Justice of the European Union (CJEU), including in relation to competition law issues affecting the UK.
It therefore seems more likely the UK might obtain a looser arrangement that would avoid tariffs on goods traded with the EU, such as a customs union similar to that between the EU and Turkey. In any event, World Trade Organisation (WTO) rules would provide some protection against discrimination in the EU for UK businesses, including some services businesses. These looser arrangements would be unlikely to give a remit to the CJEU or European Commission in a way that would impinge directly on the development of competition law in the UK. Legally, this loose new relationship would mean that EU law would cease to have effect as such in the UK and the UK national competition authorities would become free of the rules on jurisdiction in competition cases and mergers, which currently confer sole jurisdiction on the EU Commission in many important cases.
So how would this affect competition law in the UK and the lawyers who practise it?
Essentially, the prospect is one of parallel regulation for many larger mergers.
At present, the jurisdictional rules in the Merger Regulation mean that the UK is unlikely to have jurisdiction over the larger international mergers, which will fall within the EU Commission’s exclusive jurisdiction even if they involve significant businesses in the UK. Although there are circumstances where the UK does retain jurisdiction (for example, water companies and defence) and the UK’s Competition and Markets Authority (CMA) can apply to the EU Commission for jurisdiction where there is a threat of significant effects on competition in a discreet market within the UK, the mergers that are currently considered by the CMA under the Enterprise Act 2002 are smaller mergers outside the jurisdiction of the EU Commission.
This would change. Instead, the CMA would have jurisdiction over large international mergers alongside the EU Commission wherever the UK rules on jurisdiction are satisfied. The CMA’s different rules and timetable for investigation would apply and different remedies could be required. The large UK fees for merger review, which have no EU equivalent, could be collected.
The risk of UK authorities banning a merger where both parties operate their relevant businesses largely outside the UK would also increase without the protection which EU jurisdiction affords against this: at present, this can only affect smaller mergers where national authorities retain jurisdiction. For instance, the CMA banned the acquisition by AkzoNobel of the 51% it did not already own of the shares in Metlac Holding (otherwise controlled by an Italian family) on the grounds of its effects on competition in the UK market for the supply of metal packaging coatings for beer and beverage metal packaging in the UK (final undertakings dated 1October 2015 and complete case history available on the CMA website).
All these increased risks would add to the complexity and cost of larger international mergers involving businesses supplying goods or services in or to both the UK and the continuing EU.
Breaches of competition law
Again, the risk is one of parallel regulation, with the consequence of parallel fines and other remedies.
As with mergers, the UK is currently precluded from applying either EU law or its own national competition law in cases taken up for investigation by the EU Commission. After Brexit, though, the CMA and other UK authorities with competition jurisdiction would become free to apply UK competition law – alongside the Commission’s application of EU law – to a cartel, agreement or practice that has anticompetitive effects in both the UK and the EU.
Although at present articles 101 and 102 of the TFEU and Chapters 1 and 2 of the Competition Act 1998 apply closely equivalent substantive rules at EU and national level, differing processes would apply. Fines and other remedies might be cumulative, which carries a risk of greater cost for affected businesses (whether headquartered in the UK or elsewhere) than would arise from a single EU process.
There is also a risk of divergence in approach: for example, the UK would be free to criminalise corporations participating in cartels, or to change the cartel offence as regards individuals from a criminal to a civil offence, in either case with a view to a more integrated enforcement regime with competition law. The difficulties and delays that have been caused by the EU law’s need to establish the cartel offence separately from competition law would fall away.
As things stand, the Competition Act 1998, as well as tracking closely the language of articles 101 and 102 of the treaty for the functioning of the European Union (TFEU), provides for consistency in the interpretation with EU law, with the courts obliged to apply the rulings of the CJEU and to accept the factual findings of the Commission and the CMA. The approach to interpretation of EU law is purposive, while rules applied within the UK to national laws are different, especially in the pure common-law jurisdictions of England and Wales and Northern Ireland.
For competition law, as well as for other areas of EU-derived UK law which will remain in force (or be re enacted as a transitional measure), the UK parliament will have to decide whether to continue to follow the EU purposive approach or expect UK courts to apply national rules of interpretation to laws originally drafted for purposive interpretation. They will also have to decide whether to treat CJEU rulings on language common to EU law and continuing UK law as binding, persuasive authority or to be ignored.
The decisions taken on these points may seem arcane, but would have a significant effect on businesses subject to laws originally drafted to EU standards, and also on the pace of divergence between EU law as applied in the EU and EU inspired law that continues to be applied within the UK.
The Competition Act 1998 is just one example of the very many laws that would remain in force after Brexit to which this issue will apply.
It has been possible to bring actions in the UK for breach of both EU and UK competition law and to seek damages and other relief. A growth area has been follow-on damages actions after a regulatory decision on a breach of competition law, particularly in relation to cartel decisions. Both the EU and the UK have taken steps to encourage actions on behalf of classes of claimants.
The effect of Brexit would be that EU substantive rules would cease to form part of the law applicable in the UK. It might be thought that this would limit the prospects for litigation in the UK, particularly actions seeking damages for losses suffered in the UK and right across the EU in respect of breaches of EU competition law.
There will be complex issues of limitation of actions and conflicts of law relevant to how far the Competition Appeal Tribunal (CAT) and the courts in the UK will be able to entertain actions based solely on breach of EU competition law. However, the possibility of follow-on actions based on decisions of UK authorities will increase.
Procurement and state aid
Most UK law on these subjects is drawn from directly effective EU law which would cease to apply. However, the WTO requires a strong open procurement regime and successive UK governments have chosen to supplement EU law. It is likely that a very similar national law regime would remain in force, although the CJEU would probably cease to be the ultimate arbiter on compliance and interpretation.
The state aid regime will also be affected to some extent by WTO commitments, but it would be likely that the UK would have more freedom of action.
It is worth noting, though, that these areas may be affected by terms of any agreement with the EU.
Effect on the profession
Recently published research by Oxford Economics for the Law Society estimates that Brexit would cost the profession between £225m and £1.7bn in loss of annual output by 2030, and that the profession would shrink in size by up to 1.4% as a whole. This is potentially disproportionate to the effect on the economy as a whole and is thought to be linked to some extent to the anticipated effect of Brexit on clients in the financial services sector. (The UK Legal Services Sector and the EU: An Analysis by Oxford Economics, commissioned by the Law Society for England and Wales, September 2015).
How would competition lawyers fare in the changed environment described above?
As we can see, competition law would be an area of swings and roundabouts. Instead of being castigated for a lack of competition enforcement cases, the CMA and other UK authorities with competition jurisdiction would find themselves able to start proceedings on the coat-tails of many of the Commission’s large cartel investigations. The CMA would keep jurisdiction in cases such as ebooks and interchange fees, recent examples where the EU Commission took over investigations that national authorities had started, forcing the national authorities to close their investigations. Similarly, many more international mergers with effects in the UK would seek a UK clearance. This should increase work for UK competition lawyers.
On the other hand, EU law would be dealt with in the EU and cases in the UK would not require to be resolved by references to the CJEU.
The effect on larger international firms with offices in many jurisdictions may actually be beneficial overall, but EU law would be less likely to be practised on a significant scale from their UK offices, the more so over time. Smaller UK-centred firms seem at risk of suffering more over time.
Given the ups and downs of the changes to competition law and practice that might come from Brexit, the pace of change in this area seems likely to be manageable.