As the dust settles on the UK referendum, attention is turning to the areas of law that will be affected, including competition law. With the actual route to be taken by the UK to leave the EU unclear as yet, this article aims to identify the likely issues which will need to be examined depending on the option that is eventually chosen by the UK.
The EU Treaty Article 50 provides that any member state may decide to withdraw from the Union in accordance with its own constitution requirements. This provision was introduced by the Treaty of Lisbon and has only been in force since December 2009. It has never been used and so falls into the category of the "known unknowns". Procedurally, Article 50 requires that a member state notify its intention to withdraw to the European Council. Under the provision, no reasons need to be given. It is currently anticipated that Article 50 is unlikely to be triggered by the UK government until at least the end of 2016. A decision to invoke Article 50 sets a two year clock running while the UK and the other 27 member states can agree to extend the negotiation period. Unprecedented as the Article 50 process is, many questions will need to be resolved in advance of any agreed departure and the terms of any such agreement will need to be approved by the UK Parliament, the Council and the European Parliament.
The potential options are numerous. If the UK decided to join the European Free Trade Association/European Economic Area (EFTA/EEA), it would be bound by the EEA Agreement provisions on competition, which are modelled on the EU equivalent provisions and found in Articles 53 to 60, Annex XIV and Protocols 21 to 24 of the EEA Agreement. Generally, transposition of all relevant EU regulations and directives occurs on an on-going basis through decisions of the EEA Joint Committee. Soft law EU acts (commission notices, communications, guidelines, etc.) are usually re-adopted for the EFTA/EEA states by the EFTA Surveillance Authority (ESA). The ESA monitors compliance with the EEA Agreement enabling the participating members to participate in the EU single market. It is an independent organisation and safeguards the rights of individuals and undertakings under the EEA Agreement, ensuring free movement, fair competition and the control of state aid. For this option, the UK would have to enter into a treaty to re-join EFTA (it left when it joined the original European Economic Community “EEC” in 1973), and then apply for EEA membership. The prospect of having to sign up to implement free movement rules in addition to competition rules may prove a stumbling block here. Another option is the one taken by the Swiss, who are EFTA members but not signed up to the EEA. The downside here is that competition law is dealt with bilaterally which requires detailed and lengthy negotiations.
Likely impact on UK competition law
As regards the likely impact of Brexit on UK competition law, it is worth remembering that the UK's competition law regime is modelled on the EU Competition rules and in substance, the immediate changes following Brexit may not be substantial. However, much depends here on the options that the UK government pursues in its exit negotiation strategy. These options range from complete withdrawal and reliance on WTO basics only, to options based on the EEA model (and virtually everything in between).
The exit strategy which could potentially have the greatest impact on UK competition policy is if the UK were to withdraw from the EU entirely and not seek access to the single market (such as via EEA membership). This would free the UK of any treaty obligations to apply European law. Switzerland, for example, is neither an EU nor an EEA member but has negotiated a multitude of bilateral agreements with the EU and individual countries, and has undertaken through those agreements to comply with certain EU laws. This is an extremely complex route requiring substantial time and diplomacy to negotiate, and the terms of such agreements would be highly dependent on the UK's negotiating position. Such an approach could potentially allow the UK to develop its own system of competition law without any obligations to the EU.
Since the entry into force of the UK Competition Act 1998 (CA98), UK Competition Law has been modelled on the EU system and in terms of substance not much will change immediately upon a Brexit. It is likely that even if the primary Articles 101 and 102 (EU Treaty) were no longer applicable to the UK (for example - a full withdrawal where an EEA model is not pursued), EU competition law enforcement and existing EU case law would continue to play an influential role for some time. While the UK Competition and Markets Authority (CMA) and UK courts would no longer be bound by the European Courts’ case law, they would also be free from the provisions of Article 3 of Regulation 1/2003 which provides that what is permitted under EU competition law cannot be prohibited under national Competition Law. If the UK courts were no longer required to follow the decisions of the European Courts, it is possible that in due course, divergent interpretations could emerge between the UK and the rest of the EU.
Legislation and procedure
In terms of legislation in force, a distinction can be made here between EU directives which have been implemented in the UK through domestic regulations (these may or may not be repealed) while the position is different for directly effective EU Regulations (which would no longer be binding on the UK and for which there are no national implementing rules). Thus, decisions would have to be made about how to legislate in these areas. Currently, s. 10 of CA98 refers to “parallel exemptions” from the Chapter I prohibition (anti-competitive agreements) and provides that an agreement that is covered by an EU block exemption regulation is exempted under UK competition law. This parallel exemption provision would not make sense following Brexit (subject to the route chosen to replace its current EU membership). The benefits of the UK departing from current EU block exemption regulations, relied on by businesses throughout the UK, may be few. So the CMA could recommend some form of "copy out" into UK legislative orders with some changes. Take for example the European Commission's vertical restraints block exemption regulation (VRBER). While the VRBER is currently applied through a parallel exemption in CA98, some of its provisions are aimed at promoting the single market (e.g. active, passive and online sales restrictions) which may not have the same resonance following a Brexit. This would leave scope for deviation from the EU approach to better suit UK policy choices.
One of the commonly agreed successes of the EU merger control regime is the 'one stop shop' principle. Simplistically, mergers/acquisitions exceeding certain financial thresholds are assessed by the European Commission only, and those which do not are dealt with by national competition authorities on the basis of national law (if necessary). This means that big deals involving multiple jurisdictions need only deal with one authority – the Commission – and need not be concerned with multiple separate national regimes. This is considered a great convenience and facilitator for such deals.
When the UK leaves the EU, the automatic dis-application of the UK regime would cease to apply for significant cross-border mergers, and there may be many mergers which could qualify under both merger control regimes (EU and UK). These would then need to be assessed by both the European Commission and the CMA in parallel. This would increase the risk of conflicting approaches and decisions (and timetables) as well as substantially increasing the costs and administrative burdens. While there is no filing fee for EU mergers that fall within the jurisdiction of the Commission, the CMA currently imposes a merger filing fee of between £40,000 and £160,000 (depending on the turnover of the target company). Where a merger triggers both UK and EU merger control regimes, costs would increase and different clearance deadlines would apply.
Another major difference between these two systems is that while the EU regime prevents implementation of a merger in advance of a clearance decision, the UK operates a voluntary system where mergers can be implemented but where the CMA has significant powers to prevent businesses being merged if they are later found to produce anti-competitive effects. As a result, the vast majority of purchasers will choose to notify to the CMA if there is any prospect of an adverse impact on competition. This is in order to avoid the risk of a forced divestment of the acquired business and the imposition of initial enforcement orders ("hold separate") while the CMA investigates the transaction. It remains to be seen how this would work in parallel with needing to pre-notify the same merger to the EU, which is a mandatory step (once the relevant financial thresholds are crossed) leaving no room for discretion. Deals which were subject to EU control would need to wait for EU clearance before they could complete, regardless of CMA jurisdiction or attitude towards them generally.
This duplication of competition law regimes could apply equally to behavioural investigations (restrictive agreements/abuse of dominance). At the moment, either the European Commission or the CMA will claim exclusive jurisdiction over any investigation into anti-competitive activity within the EU that affects the UK. Normally, if there is an "effect on trade between member states" the European Commission will investigate while the CMA will only investigate if the effect of the anti-competitive activity is restricted to the UK. Without such cooperation both the European Commission and the CMA could end up investigating the same anti-competitive activity where the effect of such activity is felt in both the UK and some other EU member states. This would inevitably lead to a duplication of the investigatory burden and a potentially significant increase in fines if fines can be imposed in two jurisdictions for the same activity.
European Competition Network (ECN)
The CMA is currently an active member of the ECN the coordinating body for the competition law activities of the EU member states. This body facilitates engagement between member states and the European Commission on competition issues. Without access to the ECN, the influence and reputation of UK competition law enforcement could suffer. It is therefore assumed that the UK would seek an alternative arrangement with the ECN in order to continue close collaborations for the good of all.
Unlike other parts of competition law, there is no UK national equivalent of EU state aid law. Up to an actual Brexit, EU state aid law remains in force in the UK as much as in any other EU member state. Thus, the European Commission will continue to monitor compliance of any aid granted in the UK with EU state aid laws. However, it remains to be seen how vigorously the Commission would exercise its discretion to open cases against the UK where state aid implications are not crystal-clear, e.g. regarding block-exempted aid. The Commission may concentrate its resources on the more prominent cases with a UK angle to demonstrate its commitment to enforcement of the state aid rules prior to Brexit.
Were the UK to opt for a full Brexit (by which we mean only WTO rules applying and no EU law) there may be less of an incentive for the UK to notify all aid measures to the Commission, particularly the closer the UK gets to EU exit. That said, there is little to indicate that the UK would not have an incentive to fully comply with EU state aid rules throughout the transition period, and indeed state aid law would continue to remain enforceable through the national courts during this period anyway.
The European Commission has recently significantly increased state aid enforcement concerning national tax rulings. So far, there have been no proceedings against the UK. However, the Brexit vote may create incentives for the UK Government (and/or devolved administrations) to use taxation as a means of subsidising domestic companies. If this was the case, the Commission may consider increasing its enforcement activities with a view to ensuring a level playing field in advance of a UK exit.
If the UK were no longer subject to the EU laws on state aid and public procurement, it is possible that the UK government could use this freedom to give preferential treatment to UK businesses. However, it seems unlikely that the UK would adopt such an approach. Any attempt by the UK to provide state aid may prove counterproductive, since it might be expected that those remaining in the EU might seek to take retaliatory measures to the detriment of the UK.
The UK is generally considered to be in favour of market economy principles. It has been less active in providing governmental support to the UK economy than other member states and has a strong record of compliance with EU state aid rules. However, with the economy under threat and the loss of EU funding, the UK government may find itself under increased pressure to support national industry.
If the UK opted for a full Brexit, i.e. leaving without entering into any special relationship with the EU or access to the single market, no state aid rules would apply in the post-Brexit UK. The UK would still be bound by the WTO Agreement on Subsidies and Countervailing Measures which prohibits the use of some subsidies and it provides for remedies to counter the adverse effects of other subsidies if they can be considered to give exports from subsidised producers an unfair advantage over the domestic industry in the importing country. WTO law allows a country, following an investigation, to charge extra duty (“countervailing duty”) on subsidised imports that are found to be hurting domestic producers.
In a full Brexit scenario (ie. no EFTA/EEA relationship retaining any element of binding EU law) the UK would need to adopt its own state aid law. We speculate it would make sense for the CMA to enforce this, in order to complete the approach to the level playing field in the UK, and we expect the substance would be very similar to EU law, at least to begin with and in order to give the UK time to consider what other policy priorities it might seek to influence through state aid law (eg. relaxation on rules to aid the steel sector) and whether this could be compatible with other trade deals the UK wished to conclude with other countries (not least with the EU). For more information visit Brexit and State aid.
The extent to which UK procurement rules may alter depends on the type of relationship that the UK opts for during Brexit negotiations. If the UK requires access to the single market on the same or similar terms to the EFTA or EEA member states, compliance with EU procurement rules are likely to be part and parcel of any agreement reached.
On the other hand, if the UK does not negotiate access to the single market, it could seek to remain a party to the Government Procurement Agreement (GPA) which is a non-obligatory plurilateral agreement between certain World Trade Organisation (WTO) members which regulates the basis on which the GPA signatories give access to their government procurement markets to foreign suppliers. GPA signatories include countries such as the US, Japan and Canada while China is in the process of negotiating accession. Signing up to the GPA requires detailed procurement legislation to be implemented nationally though narrower in scope than the current EU procurement rules. The UK has been a WTO member since 1 January 1995. All EU member states are WTO members, as is the EU in its own right. Currently, the EU is a signatory to the GPA and EU procurement rules are compliant with the GPA.
A more complicated option from the perspective of the impact on the current UK procurement rules would be if the UK decided to opt for limited access to the EU single market (so, for some sectors but not others) or to enter into a free trade agreement (commonly these cover goods but not services).
Although the current UK public procurement rules are based on EU rules on free movement (rather than Competition Law per se) the UK recognises that ensuring transparency and non-discrimination in public spending is beneficial (regardless of EU membership) and that formal tendering procedures help governments deliver value for money and accountability. The UK has just implemented into UK law EU directives on public contracts, utilities and concessions by way of national regulations and it seems unlikely that repealing these would be high on the UK priority list of legislation to be revoked following a Brexit. The relevant UK regulations would remain in force post-Brexit and the expectation would simply be that the UK would take some time to reflect and which areas, if any, it might seek to amend in future (and within GPA or other trade deal limitations) if no longer required to comply with the EU directives. Certain minor issues related to current UK procurement regulations would need to be considered (eg. financial thresholds of the directives set in Euro’s, publication of adverts in the EU Official Journal etc.) but these are expected to be relatively minor rather than substantive. For more information visit Brexit and procurement.
Third party damages actions
As Directive 2014/104/EU on antitrust damages actions has not yet been transposed into UK law, Brexit could have an important impact on the UK as a preferred jurisdiction to bring competition law damages actions. The recently launched collective damages action against Mastercard, alleged to be worth £19 billion, is an example. Both the EU Damages Directive and EU case law provide protection for certain documents from disclosure, including any applications the defendant may have made for leniency, from competition law regulators. There are upsides and downsides here. If the Damages Directive is not implemented in the UK and EU case law is no longer binding, this could make the UK an even more attractive jurisdiction for claimants (particularly in light of the procedural changes introduced by the Consumer Rights Act 2015). On the other hand, in "follow-on" damages cases, claimants rely on an infringement decision by the European Commission as proof that a breach of competition law occurred. This eliminates a substantial evidential burden for claimants. Should EU law no longer apply in the UK, Brexit could affect London as an international litigation centre for damages actions for violations of EU competition law.
Following Brexit. the Rome I/II and Brussels Regulations would cease to have effect unless saving legislation was enacted by the UK government. These rules apply to damages actions for non-contractual obligations arising out of restrictions of competition and determine which law applies. When the market is affected in more than one country, the claimant may also choose to base his claim on the law of the EU member state where he is bringing his claim (as long as the market of that member state is directly and substantially affected by the restriction of competition that gives rise to the damages claim). This claimant-friendly rule, read together with the rules on jurisdiction contained in the Brussels I Regulation, provide claimants with the option to have their case for antitrust damages heard by one court applying one single law, even in situations where more than one defendant is involved and where the damages occurred in several EU member states.
If the parties to an agreement agree to apply EU competition law in the event of a dispute, nothing prevents the jurisdiction of the UK courts from its application, though following a Brexit, the court would be applying EU competition law as part of a foreign applicable law.
Legal Professional Privilege (LPP)
The flight by UK competition lawyers seeking refuge via qualification under other national bar rules stems from the potential loss of LPP and the right to represent clients before the European Courts. Following Brexit, lawyers qualified solely in England & Wales, Scotland or Northern Ireland would no longer be enrolled in an EU member state’s Bar or Law Society and, consequently, their advice would not be privileged for EU competition law investigation purposes, nor would they be eligible to plead before the (EU) General Court or European Court of Justice. This is currently the situation in the EU for foreign lawyers (such as US qualified lawyers) and while work-arounds can sometimes be found, it is not an ideal position for UK lawyers advising on competition matters across the EU, nor their clients.