The infamous Frankenstein's monster of competition law – the Office of Fair Trading's (OFT) Tobacco decision – has finally been laid to rest.(1) The final instalment addressed the interesting legal and public policy question of whether, when a company admits an infringement and enters a settlement for a reduced penalty with the OFT, it could still be liable for that penalty when, during the subsequent appeal by other parties to the alleged infringement, the basic premise of the infringement decision collapses. Does the need to observe legal process (ie, the failure by the settling party to join the appeal in time) mean that significant financial penalties can still be imposed for conduct which has been shown on appeal not to have been illegal?
The recent announcement that the appeals by Gallaher and Somerfield addressing this point have been withdrawn leaves the Court of Appeal's ruling that legal process takes priority as the final word in this debate. The outcome will influence the incentives of parties in future to settle competition law infringement cases and their willingness to consider appealing infringement decisions, even where they have settled in the first instance.
The OFT's investigation into the retail pricing of tobacco products began in March 2003. More than seven years later (in April 2010), the OFT reached a decision imposing total fines of £225 million on a number of retailers (including Somerfield) and the two main tobacco manufacturers, Imperial Tobacco and Gallaher, for pricing arrangements which the OFT found had infringed Chapter I of the Competition Act 1998 (the prohibition on anti-competitive agreements).
Imperial Tobacco and a number of retailers appealed the OFT's decision to the Competition Appeal Tribunal (CAT). The appeals were heard together in late 2011, but the hearing was not completed. The OFT's case rested on an economic theory of harm caused by so-called 'parity and differential' requirements between manufacturers and retailers. However, when the witness evidence consistently denied the operation of this scheme, the OFT relunctantly concluded that its case was no longer sustainable on the basis set out in its decision and accordingly withdrew its defence to the appeals.
As a result, the CAT quashed the OFT's decision and the fines that it had imposed on the appellants.
This outcome left a question unresolved. What happened to the OFT's decision for those parties which had not chosen to appeal and had accepted a reduction in fine in return for settling the case with the OFT? The decision had been quashed against the appellants, but did that give the remaining parties any right to challenge?
The answer to this question has now finally been confirmed to be no. Gallaher and Somerfield were two of the parties which originally settled with the OFT, accepting fines of £50 million and £4 million, respectively. Following the collapse of the OFT's defence to the appeals, Gallaher and Somerfield sought to bring their own appeals to the CAT. The difficulty that they faced in doing so was that they were out of time: the CAT rules give a strict two-month time limit for appeals against Competition Act infringement decisions, subject to extension only in exceptional circumstances.
Gallaher and Somerfield sought to argue that the collapse of the OFT's defence in the Tobacco appeals constituted an exceptional circumstance. The CAT agreed with them, finding that:
"Gallaher and Somerfield had a legitimate expectation that the OFT would be able to defend (even if not necessarily successfully) its Decision on the merits. For the OFT to concede, in the middle of the proceedings, that the Decision could no longer be maintained as it stood was a concession that fundamentally undermined not merely the case against the Appellants, but also the basis on which Somerfield and Gallaher entered into the early resolution agreements."(2)
In other words, the CAT's view was that the exceptional circumstance that justified the late appeal was that the OFT's case had collapsed in the CAT: while the parties may have factored in the possibility of a successful appeal against the OFT's decision, the CAT felt that they could not have expected, at the time that they entered into settlement agreements with the OFT, that the OFT might subsequently withdraw its entire decision.
The Court of Appeal disagreed that this was an exceptional circumstance and overturned the CAT's ruling, finding the appeals to be out of time. Lord Justice Vos said: "The need for finality in legal process and legal certainty does sometimes lead to unsatisfactory overall outcomes as it did in this case."(3)
Further, the Court of Appeal emphasised the responsibility of the parties to make their own decisions:
"Each party can decide for itself whether to settle or appeal or (in this case) both. They will be bound by their informed decisions, but the outcome of the litigation will sometimes show that they made an unwise call."(4)
The reference to "settle or appeal or… both" is notable in this case, as Asda, one of the parties in the original investigation, had appealed the infringement decision despite having originally chosen to settle the case before seeing the full OFT decision. Such a strategy was open to Somerfield and Gallaher, and the fact that they have decided not to further appeal to the Supreme Court suggests a recognition that the Court of Appeal's judgment will not be overturned.
As indicated by the Court of Appeal, finality and legal certainty have emerged as the winners from this aspect of the Tobacco litigation. These policy imperatives override any individual unfairness that might arise from parties being bound by decisions that are subsequently found to be flawed. Therefore, the message for recipients of future competition law infringement decisions is clear: if a party wishes to benefit from an appeal, it must take part in that appeal. There can be no freeriding on the coattails of others that appeal, and so the possible benefit of a successful appeal must be weighed against the risks of losing any settlement discount and possible increased fines and costs if the appeal fails.
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(1) On the final day of the 2011 hearing in the Competition Appeal Tribunal of the various appeals against the OFT's Tobacco decision, Dinah Rose QC submitted that the case was like Frankenstein, featuring not a living entity but the corpse of a decision rising from the grave. Rose invited the tribunal to bury the corpse. Transcript of Day 29 (November 18 2011) of Imperial Tobacco v OFT, page 131.
(2) Somerfield v OFT  CAT 5, ruling of March 27 2013, paragraph 93(6).
(3) Somerfield v OFT  EWCA Civ 400, paragraph 42.
(4) Id, paragraph 57.