UK: Competition Appeal Tribunal Criticises Parts Of The Competition Commission´s Report On The UK Groceries Market

On 4 March 2009, the Competition Appeal Tribunal (CAT) published its judgment on an appeal by Tesco against the Competition Commission (CC) findings in its final report on the UK groceries market. The CAT concluded that the CC had failed to take account of relevant considerations when recommending the competition test be incorporated into the planning regime, and will now hear submissions on appropriate relief.

The CAT's judgment is focused on the narrow issues directly raised by the Tesco case. The CAT has declined to enunciate general principles, or to prescribe precisely how the CC should address the task of formulating remedies in a market investigation case. It has declined to answer some of the questions of statutory interpretation raised by Tesco in the formulation of its case.

But, whilst emphasising the narrow scope of judicial review, and the wide margin of appreciation available to the CC, the CAT's judgment is more likely to be remembered for its result – namely, that the CAT ultimately decided that the CC had not applied the proportionality test properly.

Background

Tesco's appeal challenged the recommendation in the CC's report that a "competition test" should be incorporated into the planning regime as part of a package of remedies to address the adverse effect on competition the CC had found in its inquiry. The competition test would generally prevent local authorities from granting planning permission for the construction of a new large supermarket, or the extension of an existing supermarket, where the relevant local market for the supply of groceries was already highly concentrated in favour of, among others, the applicant or would become highly concentrated as a result of the grant of planning consent.

The competition test was designed to prevent additional local markets becoming highly concentrated. During the course of the CAT proceedings, it became apparent that the CC also saw the test as facilitating new market entry, on the basis that, if a large incumbent operator was unable to secure planning consent to build a new or extended store, that would enhance the prospects that others could secure planning consent for a rival store.

In its judgment the CAT concluded that the CC had failed to take account of certain relevant considerations in deciding to recommend that the competition test should be adopted, and those matters could not be dismissed as incapable of affecting that recommendation. However, the CAT reached no conclusion as to whether the CC could lawfully have adopted the competition test, if it had had due regard to these additional relevant considerations.

The parties will address the CAT as to specific relief to be granted at a separate hearing. Under the provisions of the relevant legislation the CAT may quash the whole or part of the decision in question and refer it back to the CC with a direction to reconsider and make a new decision in accordance with the CAT's ruling.

Key issues

Tesco argued that, in observing its obligations to act proportionately, the CC had failed properly to take into account the "economic costs" of the competition test (i.e. detriments to consumers which would arise where there was local demand for additional supermarket services, an incumbent supermarket's application for planning consent was refused by virtue of the competition test, and no alternative proposal was presented to meet the relevant demand.)

The CAT held that the CC's report did not properly address this potential detriment of the proposed competition test, but should have done so.

Tesco also argued that the CC had failed to consider how effective the competition test would be in addressing the adverse effects on competition which it had identified as arising from local market concentrations. In defending its report, the CC argued that the competition test had two aspects: it would prevent new concentrations from arising in local markets; and it would facilitate competitive market entry by third parties. This "facilitative" aspect of the proposed remedy was, according to the CC, an important element of its effectiveness.

The CAT held that, in the same way that the CC had failed properly to address the possibility that there would be cases where the competition test might block one new supermarket development, where there was no alternative development in prospect, the CC had likewise failed to assess how effective the competition test would be at facilitating, or ensuring, competitive market entry. The CC's report was deficient in this respect.

Whilst the CAT's judgment focuses, in many respects, on the particular issues raised by Tesco's appeal, the judgment also sets out some principles of wider application as to how the CC should carry out the proportionality exercise in the context of the statutory framework of a market investigation and the scope of the CAT's powers of review in relation to the test.

CAT's consideration of the principle of proportionality

Principles to be applied

The CAT identifies, in its judgment, the main aspects of the proportionality principles to be applied in assessing remedies to be imposed in the context of a market investigation, namely that "the measure: (1) must be effective to achieve the legitimate aim in question (appropriate), (2) must be no more onerous than is required to achieve that aim (necessary), (3) must be the least onerous, if there is a choice of equally effective measures and (4) in any event must not produce any adverse effects which are disproportionate to the aim pursued".

In the case under examination, the CC had failed to examine how effective the proposed competition test would be (compared with other possible remedies, such as store divestments) and what scale of adverse effects it might produce (issues (1) and (4)).

Margin of appreciation

The CAT specifically notes that the application of the principles is likely to give rise to many questions of judgment and appraisal and that this is particularly so when the CC is required to balance the aims of the proposed measure on one side and any adverse effects it may produce on the other. The CAT confirms that, in resolving these questions, the CC has a very wide margin of appreciation and makes it very clear that a Tribunal carrying out a judicial review process will not easily interfere with this.

The CAT goes on to make clear that the margin of appreciation to be exercised by the CC extends to the methodology that it decides to use to investigate and estimate the factors to be considered in any proportionality analysis (as well as in the determination of statutory questions of comprehensiveness, reasonableness and practicability). It notes that neither the relevant legislation nor the general law impose any requirements as to the formal procedure or methodology to be followed when it considers the effectiveness of a possible remedy or its relevant costs, adverse effects and benefits: ultimately the CC can "tailor its investigation of any specific factor to the circumstances of the case and follow such procedures as it considers appropriate". In particular, a methodology may be appropriate, even if it does not entail any precise quantification of the effects of a particular remedy.

"Double proportionality approach"

However, the CAT also states that, in tailoring its investigation of a specific factor to the circumstances of a case, it may well be "sensible" for the CC to "apply a double proportionality approach", so that the more important a particular factor is likely to be, or the more intrusive, uncertain or wide ranging a remedy is likely to be, then the more detailed the investigation of that factor may need to be.

The CAT states that the CC must "do what is necessary to put itself in a position properly to decide the statutory questions", including examining and taking into account relevant considerations such as the effectiveness of the remedy, the time period in which it will achieve its aim and the extent of any adverse effects that may flow from its implementation.

Assessment of proportionality in the groceries report


In this case, the CAT found the CC's assessment of proportionality to be flawed. In addition to the deficiency in relation to the consideration of welfare losses or "economic" costs which were also relevant to the assessment of proportionality, the CAT noted that:-

  • The CC did not attempt to estimate the competition test's contribution to the achievement of the aim of the test (in particular, the extent to which it would facilitate further entry), describe how or to what extent the remedy might be expected to achieve those aims or indicate the timescale over which the remedy might be expected to have effect;
  • The report did not include any of the specific considerations of the question of timescale or effectiveness generally which would be expected in a report as "detailed and painstaking" as the groceries report. The CAT considered this to be particularly significant given that the competition test would be capable of having widespread effects in the sector;
  • Whilst the CC had put in front of the CAT a number of arguments as to why it could not assess the effectiveness of the test or the timescale within which it could be expected to introduce more competition into concentrated markets, none of the CC's arguments appeared in the text of the report and had merely been produced in a "forensic" context.

"The assessments and the weighing must take place"

The CAT concluded that "Whilst the precise methodology adopted for assessing these matters, and the weight to be attributed to such assessments are (subject to rationality or questions of law) likely to fall within the margin of appreciation of the Commission, the assessments and the weighing must take place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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