The UK Government’s wide ranging reforms to the competition regime announced on 20 April 2022 (see our client alert here) include a key change to the antitrust enforcement regime. The Chapter I prohibition in the Competition Act 1998 (CA98) (the UK’s Article 101 TFEU equivalent) will be amended to apply to anti-competitive agreements, decisions or concerted practices (“agreements”) implemented outside of the UK, where there are (or likely to be) direct, substantial, and foreseeable effects within the UK.
This shift to an effects-based approach is consistent with the approach taken in other jurisdictions, including the EU – an ironic alignment post-Brexit but also one which reverses the UK’s historic hostility to the qualified effects doctrine (particularly vis-à-vis the US). This piece considers the changes the reform package proposes with respect to extraterritoriality and the drivers for this.
What has changed?
Alignment with Europe: Shift from “implementation” to “qualified effects”
The Chapter I prohibition applies to agreements that affect trade and competition in the UK. This is qualified under Section 2(3) CA98 to apply only if the agreement in question is implemented, or intended to be implemented, in the UK. Under this so-called “implementation approach” an agreement cannot infringe the Chapter I prohibition if it was implemented (or intended to be implemented) outside the UK – even if it produces effects in the UK so for example a collective boycott of UK suppliers by EU undertakings could not be lawfully challenged under the current regime.
This is notably different from the approach taken in the EU, where the “qualified effects” doctrine is used to assess whether an agreement falls within the scope of Article 101 TFEU. The European Commission and Courts (as confirmed in Intel) consider whether it is foreseeable that the conduct would have an immediate and substantial effect in the EU. The test was originally outlined in the merger control context, and also applies to Articles 101 and 102 TFEU as confirmed in European court jurisprudence.
Under the reforms, the UK Government plans to replace the “implementation approach” with what is essentially a “qualified effects” approach to assess whether Chapter I applies to an agreement. Under this approach, the Chapter I prohibition will apply if the conduct has or is likely to have direct, substantial and foreseeable effects within the UK – even if the contract was not implemented (or intended to be implemented) in the UK. However, the reforms will not extend to the Chapter II prohibition (equivalent of Article 102 TFEU) or to merger control rules.
Overcoming historic hostility to the qualified effects doctrine
This is a significant change considering that the UK Government has historically taken a narrow view of the ability of states to exercise extraterritorial jurisdiction, adopting the position that jurisdiction should be based on territoriality and nationality. In the antitrust context, this has translated to hostility towards the “qualified effects” doctrine and resistance to the extraterritorial application of competition law by foreign regulators.
The UK Government has made submissions to this effect in previous litigation. In an amicus brief submitted to the US Supreme Court in Hoffman-La-Roche v Empagran (a private enforcement action in the US brought by plaintiffs in Ukraine, Panama, Australia and Ecuador in relation to the Vitamins cartel which involved several non-US members). It described the qualified effects doctrine as being “more controversial” than jurisdiction based on territoriality, and asserted that under US law the exercise of extraterritorial jurisdiction was limited by considerations of comity and a limiting principle of ‘reasonableness’.
Reasons for change
Empowering the CMA to protect the UK’s interests
The stated reason for the change in territorial scope is to ensure “stronger and faster enforcement against illegal anti-competitive conduct“. The Government has recognised that globalisation has increased the ability of agreements implemented outside the UK to harm competition or consumers in the UK and has voiced its concern that the disparity between the UK’s approach and that of its international partners could leave the CMA less able to protect the UK’s interests.
It is also politically expedient post Brexit to ensure that the CMA has comparable powers to its European neighbours and largest trading partners. The proposed reforms would empower the CMA to take enforcement action in situations where EU companies engage in conduct (e.g. price fixing, resale price maintenance, geo-blocking) that is implemented in the EU but has anti-competitive effects in the UK.
Ensuring continuity: Entrenching EU law post-Brexit?
The Brexit Competition Law Working Group (“BCLWG”) in its final report published in 2017 made recommendations to ensure the continuity of UK law post-Brexit. This included a recommendation for amending Section 2(3) CA98 to apply to an agreement that is implemented or that produces direct, substantial and foreseeable effects in the UK.
At odds with its domestic stance, pre-Brexit, the UK was bound to apply the qualified effects doctrine in cases involving enforcement of Articles 101 and 102. The Court of Appeal in Iiyama ruled that a national court may, in a private enforcement action, award damages for conduct that violates Article 101 outside the EU, on the basis of the qualified effects test. It is possible that a secondary reason for shifting to an effects-based approach is to ensure some continuity since UK courts have already applied the qualified effects test in private damages cases like Iiyama (leaving the agency’s competition law enforcement out of step).
While, in principle, removing the jurisdictional requirements is sensible and consistent with the approach taken in other jurisdictions, the adoption of what is essentially the qualified effects doctrine signals a significant philosophical shift in the UK. However, the proposed reforms require legislation to implement, so further discussion and debate is likely, particularly as draft bills move through the parliamentary process.
First, there will likely be further debate around the precise wording of the amendment. For example, rather than introduce an additional limb to the legal test, the Government could merely remove the implementation requirement under section 2(3) CA98. This would retain the qualifications under section 2(1) which applies to conduct that “may affect trade” within the UK and which has as its object or effect the “prevention, restriction of distortion of competition” within the UK.
Secondly, now that the UK has definitively abandoned its traditional hostility towards the qualified effect doctrine, this could signal a future move to adopt this approach in relation to the Chapter II prohibition. In fact, the Government originally considered whether it would be consistent to also apply the qualified effects doctrine in relation to Chapter II. While the Government has since said this does not seem necessary since it has not identified a significant enforcement gap, given the ongoing concern in relation to abuse of dominance in digital markets, there is scope for these rules to be reformed in future. As Whish and Bailey note, an interesting an untested question, particularly in the context of the current crop of EU big tech enforcement cases, is whether the Chapter II prohibition would apply where the dominant position is (wholly or partly) in the UK or globally, but the abuse occurs in a related market outside the UK. The reform proposals given they do not relate to Chapter II do not address this conundrum whilst legislation to implement the Digital Markets Unit and to enable the designation of entities with “Strategic Market Status” may be some considerable time in the future.
Finally, we note that the proposals do not consider applying the qualified effects test in merger control investigations. In the merger control context, the CMA has used its elastic merger control thresholds to assert jurisdiction over deals where the target has limited (or even no) UK turnover. For example, in Meta/Giphy the CMA has ordered the unwinding of a completed transaction between two US undertakings and has required the buyer (a US corporate) to reconstitute the target (a US corporate) and provide significant cash funding for its recapitalisation, to recruit a Chief Revenue Office and third party consultants in order to develop its capacity to generate revenue, and for any potential purchaser to show commitment to develop GIF-based advertising in the UK and create a business plan for its entry into the UK. This decision is currently under appeal before the Competition Appeal Tribunal. Given this background, introducing something akin to the qualified effects doctrine (with its requirements of foreseeability, immediacy and substantiality) in a merger context might provide a welcome limitation on the CMA’s extraterritorial application of merger rules.
This is the first of three posts in our “deep dive” into the UK competition and consumer protection reforms. Next up: The UK Government plans to expand the CMA’s powers to review killer acquisitions. Is it casting the net too wide, or can this be limited to mergers with a UK nexus?
*We act for an intervener in the Meta v CMA proceedings before the Tribunal and are advancing arguments in relation to international law and comity in the context of the appeal.
For further information, please contact:
Nicole Kar, Linklaters