European Competition Law Newsletter – June 2021

June 1, 2021

Table of Contents

  • Buyer Beware: Court Confirms Wide Scope of UK Merger Control Jurisdiction
  • UK Court: Post-Termination Restrictions in Franchise Agreement Unenforceable
  • UK Court Eases Requirements for Finding Abuse of Dominance
  • UK Subsidy Regime Begins to Take Shape

Buyer Beware: Court Confirms Wide Scope of UK Merger Control Jurisdiction

The extremely wide jurisdictional coverage of the UK merger control rules was confirmed in a recent appeal judgment by the Competition Appeal Tribunal (CAT) following a decision originally taken by the Competition and Markets Authority (CMA).

The CMA blocked Sabre’s proposed acquisition of Farelogix. Among other products and services, Sabre and Farelogix supply software solutions which help airlines sell flights via travel agents, including those that operate online.

The CMA found that it had jurisdiction to consider the proposed merger under the UK merger control rules on the basis of the “share of supply” test. The CMA further found that the proposed merger may be expected to give rise to a substantial lessening of competition in two worldwide markets: the supply of merchandising solutions to airlines and the supply of distribution solutions to airlines.

The share-of-supply test is satisfied if a transaction creates or extends a share (i.e., there must be an overlap between the parties) of at least 25 percent in the UK or a substantial part of the UK in the supply or acquisition of goods or services of any description. The CMA identified the relevant services as the supply of IT solutions to UK airlines for the purpose of airlines providing travel services information to travel agents, to enable travel agents to make bookings. Sabre’s share alone exceeded 25 percent of revenue from the provision of those services to UK airlines, and there was some increment from Farelogix’s supply of those same services to UK airlines.

Sabre put forward various arguments as to why this analysis was incorrect, including that the CMA had relied on an increment that was both hypothetical and vanishingly small and had applied different, and inconsistent, methodologies in respect of Sabre and Farelogix and so failed to compare like with like. All of Sabre’s arguments were rejected.

The CMA welcomed the judgment, saying the CAT had confirmed that the application of the share-of-supply test is a matter of judgment for the CMA and it has a broad discretion in determining the criteria used.

This is a significant victory for the CMA. Filings under UK merger control are voluntary, but the CMA is increasingly interventionist and willing to push the boundaries of its legal jurisdiction to review mergers even where those are not notified to it. The judgment will embolden it to continue doing this as it seeks to establish itself as an important competition law and merger control regulator on the world stage following the UK’s exit from the EU.

UK Court: Post-Termination Restrictions in Franchise Agreement Unenforceable

On 11 May 2021, a UK court provided a reminder that post-termination restrictions in franchise and similar agreements may not be enforceable, whether this is under common law restraint of trade or competition law. Depending on the situation, this may be a significant commercial issue.

The case concerned a franchise agreement between Dwyer (UK Franchising) Limited (the franchisor of the “Drain Doctor” plumbing and drain repair services franchise) and Fredbar Limited as franchisee. Fredbar was a vehicle for its sole employee Shaun Bartlett. Dwyer claimed Fredbar committed a repudiatory breach of the agreement when Fredbar purported to terminate it.

One of the issues considered in the judgment was the enforceability of post-termination restrictions on Fredbar and Bartlett. Those restraints — lasting for one year — would prevent any competition within the franchise area or within a five-mile radius. Breach would lead to an obligation to account for profits. There was a “blue pencil” reasonableness provision in the agreement providing for unenforceable parts of the agreement to be struck and for the remainder of the agreement to continue.

The judge found these post-termination provisions unreasonable under common law restraint-of-trade principles. They had to be considered against the background to the agreement. There was a situation of “total inequality of arms” in which the overall agreement had to be accepted or rejected by the franchisee in its standard form.

The judge noted that the restrictions did not distinguish between terminations at an early stage of the franchise and terminations toward the end of the 10-year term when the goodwill to be protected probably would be substantially more valuable. It was unreasonable for the 12-month restraint to apply however early or late in the term the agreement terminated.

In addition, the prohibition would unreasonably prevent the franchisee from being engaged or concerned in any plumbing or drainage business within the territory without exception. That included acting as a subcontractor or being employed by a plumbing or drainage company, even when such subcontracting and/or employment would have no effect on the franchisor’s protected goodwill.

Further, the additional radius of five miles was unreasonable. There would be no goodwill to protect insofar as the franchisee had not provided services within any part of that extended area.

There were no trade secrets to be protected by these prohibitions and, in any event, insofar as there was knowledge to protect, protection could have been provided (to the degree entitled) by more specific provisions. For example, this could have included prohibitions against soliciting or acting for former customers.

The covenants were therefore unenforceable and this was not a case where the unreasonable part could be severed. They did not strike a reasonable balance between the freedom to contract and the freedom of trade. They were far more extensive than was required to provide reasonable protection.

It is clear that, instead of seeking to apply standard termination provisions, much more thought should have gone into whether they were appropriate in the circumstances of this arrangement. In practice, the franchisor in this case may not have been concerned commercially that it would not be able to enforce the restrictions. However, that will not always be the case.

UK Court Eases Requirements for Finding Abuse of Dominance

The English Court of Appeal (CA) handed down an important judgment considering the basis for demonstrating a finding of abuse of dominance.

The case was an appeal by Royal Mail plc (RM) against a judgment of the UK Competition Appeal Tribunal (CAT) from November 2019 dismissing RM’s appeal against a decision of the UK Office of Communications (Ofcom). RM is the UK’s former monopoly provider of postal services.

Ofcom had found RM guilty of an abuse of its dominant position in the market for bulk mail delivery services (to individual addresses) by issuing notices which introduced discriminatory prices impacting a potential competitor in that market (Whistl), although those notices were never implemented. Ofcom imposed a fine of £50 million for that conduct.

RM appealed on two closely related grounds concerning the treatment by Ofcom in its decision and by the CAT in its judgment of an “as efficient competitor” (AEC) test RM relied upon. The application of the AEC test consists of examining whether the pricing practices of a dominant undertaking could drive an equally efficient competitor from the market; if so, that is an indication that there is an abuse of that dominant position.

The CA concluded that “Ofcom was not required as a matter of law to treat the AEC test as either determinative or highly relevant. In those circumstances Ofcom gave adequate consideration to the AEC test, and the Tribunal did not err in law in so concluding.” The CA therefore confirmed, for the purposes of UK competition law, that there is no obligation on a competition authority to carry out an AEC test before concluding that a pricing practice is an abuse.

The CA further held that, while an AEC test has been a useful tool for determining abusive conduct in some pricing cases, such a test is not always relevant.It is no more than one tool amongst others and it remains necessary to consider all the circumstances of the case. Competition law does not determine how much weight should be given to the AEC test. That is a matter for the court to decide, taking into account not only the robustness of the test itself, but all the other circumstances which point toward or against a finding of abuse.

In the present case, the CAT found that the pricing changes Royal Mail announced were intended and expected to restrict competition by excluding competitors (specifically Whistl) from the bulk mail delivery market, that they did not constitute competition on the merits, and that they had precisely the anti-competitive effect intended by causing Whistl to suspend its rollout of bulk delivery services and causing its financial backers to withdraw their support. In those circumstances, the CA concluded that “a hypothetical AEC test conducted after the event would need (to say the least) to be particularly compelling in the dominant undertaking’s favour in order to outweigh these considerations … the test relied on by Royal Mail [in its defence] did not come close to doing so.”

The CA’s judgment is particularly significant since it reduces the ability of dominant companies to rely on the AEC test and allows competition law regulators greater leeway to disregard it when finding an abuse of dominance.

UK Subsidy Regime Begins to Take Shape

Following the end of the EU/UK post-Brexit transitional period on 1 January 2021, the EU state aid rules no longer apply to the UK.

The UK government since then has followed the commitments on subsidy control set out in its free trade agreements with the EU and other countries and the World Trade Organization rules on subsidies, as well as the relevant provisions relating to Northern Ireland contained in Article 10 of the withdrawal agreement with the EU.

Against this background, the UK government announced on 11 May 2021 in the Queen’s Speech (setting out its legislative programme for the coming year) that it will implement a domestic UK subsidy control regime that will provide a legal framework within which public authorities make subsidy decisions. This will include the following principles:

  • Setting out consistent UK-wide principles that public authorities must follow when granting subsidies
  • Exempting categories of subsidies from certain obligations of the regime or leaving them out of scope entirely
  • Prohibiting and placing conditions on certain types of subsidies which are at a particularly high risk of distorting markets
  • Obligating public authorities to upload information on subsidies to a new UK-wide, publicly accessible transparency database
  • Establishing an independent subsidy control body to oversee the UK’s subsidy control system
  • Providing for judicial oversight and enforcement of the granting of subsidies

Although the proposals do provide for a subsidy control body (likely to be the UK CMA), they do not include a notification and approval regime such as that which exists in the EU under the state aid regime. That is a dramatic change from the position which applied while the UK was in the EU. Nevertheless, recipients will still need to consider carefully the legality of subsidies, since third parties and the new subsidy control body will still be able to challenge their provision in court.

Additional European competition law news coverage can be found in our news section.

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