UK: The Potential Impact Of Brexit On UK Competition Law

Last Updated: 7 June 2016
Article by Richard Craig

EU competition law aspires to create a level playing field of undistorted competition within the European Single Market, seeking to promote economic efficiency and consumer welfare, and to prevent the creation of private barriers that might interfere with this.

The EU competition law framework is largely based on Articles 101 to 107 of the Treaty on the Functioning of the European Union (TFEU) which prohibit the conclusion of anti-competitive agreements, the abuse of a market dominant position, and the grant of state aid which distorts competition.

As with any area of law which has a clear link with Europe, there has been a great deal of speculation around the likely impact on competition law if the UK were to leave the European Union. Unfortunately, it is unlikely that this speculation will be fully resolved for quite some time after a vote to leave, since it will be the terms surrounding any exit which will ultimately determine the impact on UK competition law. The Treaty on the European Union (TEU) states, in Article 50, that "any member state may decide to withdraw from the Union in accordance with its own constitutional requirements", and that "the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union". Given that the terms of any such agreement may need to be approved by the UK Parliament, the Council and the European Parliament, it could be quite some time before the full picture becomes clear (see our article for more on the exit procedure). Nevertheless, in this article we examine the most likely areas in which UK competition law might be affected, and the impact on those areas of the options the UK might pursue. The two most likely possibilities are:

  • That the UK will seek to withdraw from the EU and the European Economic Area (EEA) altogether (Full Brexit); or
  • The UK will apply to become a member of the EEA.

Full Brexit

The exit strategy which could potentially have the greatest impact on UK competition policy is that the UK would withdraw from the EU and would not apply for EEA membership. This would mean the UK could be free of any Treaty obligations to apply European laws. It is possible, of course, that even if it does not pursue EEA membership it could still agree to observe EU laws through an alternative form of agreement with the EU. 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 clearly an extremely complex route which would take substantial time and diplomacy to negotiate, and the terms of such agreements would be highly dependent on the UK's negotiating position. However, such a route could potentially allow the UK to develop its own system of competition law without any obligations to the EU.

The UK has largely implemented the key elements of the TFEU relating to competition law through the Competition Act 1998 (CA98). The key question in the event of Full Brexit, therefore, would be whether there would be a sufficient incentive for the UK government to seek to make changes to these provisions of UK law. However, no major political party is currently advocating a change to these rules in the event of Full Brexit, and the UK has long been committed to the view that free markets are the best way to ensure the efficient allocation of resources. As such, amendments to CA98 would appear unlikely either in the short or medium term. In addition, since EU competition laws apply to any undertakings whose conduct may have an effect on trade within the EU, it is likely that many UK companies would continue to be subject to EU competition laws, even if the UK were to adopt a different set of rules.

Interpretation and enforcement

That is not to say, however, that Full Brexit would not have any impact on competition law more generally. In particular, if the UK courts were no longer required to follow the decisions of the European Courts this may give rise, over time, to divergent interpretations which could gradually shift the direction of the two regimes. Morevoer, although any EU Directives which have been implemented in the UK through domestic regulations may be safe from interference, directly effective EU Regulations will no longer be binding on the UK. This raises an interesting question regarding the European Commission's Block Exemptions from EU competition law. In particular, the Vertical Restraints Block Exemption Regulation (VRBER) itself will no longer be binding, but has been effectively implemented through a parallel exemption in section 10 of the CA98. However, certain provisions of VRBER are solely designed to promote the Single Market, for example the prohibition on suppliers restricting the onward sales of products by their customers. Since the UK's regulator, the Competition and Markets Authority (CMA) rarely investigates such restrictions where their effects are confined to the UK, this may be one area in which the UK position could deviate substantially from the EU's approach. Some companies may also choose to re-align their risk assessments should a Full Brexit occur even if the law itself does not change immediately, due to the possibility of a reduced enforcement risk.

Damages claims

In addition, since Directive 2014/104/EU on antitrust damages actions (Damages Directive) 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. Both the 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. 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). On the other hand, however, if decisions of the European institutions will no longer be binding on UK courts this would discourage many claimants from bringing some damages claims in the UK. Many "follow-on" damages claims rely on an infringement decision by the European Commission as proof that a breach of competition law occurred, thereby eliminating a substantial evidential burden for claimants. As a result, following Brexit, many claimants would likely seek to bring their damages actions in alternative jurisdictions.

Restraint of trade

It is also possible that full Brexit could prompt something of a renaissance for the common law of restraint of trade. Membership of the EU means that EU competition laws take precedence over national laws deemed to pursue the same purpose, and it has been established that the doctrine of restraint of trade serves the same purpose as EU competition law. As such, if conduct has the potential to affect trade between EU Member States and complies with EU competition law, it is not possible to challenge it under restraint of trade. Following Brexit, it may once again be open to companies to seek to escape restrictive contractual provisions on the grounds that they are not reasonable, even if their effects are not confined to the UK.

Merger control

EU merger control operates on the basis of a 'one stop shop'. This means that a merger which has a "community dimension" will be assessed by the European Commission; UK mergers which fail to satisfy this test are dealt with by the CMA. However, no merger would be assessed by both regulators. As a result, if the UK were to leave the EU, there would likely be many mergers which would fall to be assessed by both the European Commission and the CMA. This not only runs the risk of conflicting approaches and decisions, but would also substantially increase the costs associated with such transactions. Aside from the costs of complying with parallel regulatory assessments, the CMA currently imposes a merger filing fee of between £40,000 and £160,000, depending on the turnover of the target company. Although UK merger filings are technically voluntary, the CMA has highly intrusive powers to reverse the effects of mergers which are completed but not notified, if they are later found to produce anti-competitive effects. As a result, the vast majority of purchasers will choose to notify if there is any prospect of an adverse impact on competition, in order to avoid such a scenario. Brexit could, therefore, also have a considerable adverse effect on the CMA, which is likely to need substantial additional resources in order to deal with its increased case load. This concern could equally apply to anti-trust investigations.

State aid and public procurement

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 would appear 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. In addition, although the public procurement rules were initially implemented in support of the EU Single Market, it is now widely recognised that ensuring transparency and non-discrimination in public spending is beneficial regardless of the Single Market, and that following the formal tendering procedures set out in the EU Directives helps governments deliver value for money and accountability. The UK has only recently implemented the Public Contracts Directive through domestic regulations in 2015, and it would seem highly unlikely that amending these would be a legislative priority.

Influence and reputation

Finally, the UK's CMA is currently an active member of the European Competition Network, which facilitates engagement between Member States and with the Commission on competition issues. The EU is widely regarded as one of the most comprehensive competition frameworks and, as such, has a key role in shaping the development of both established and formative competition regimes around the world. It is possible that, in the absence of ECN membership, the influence and reputation of UK competition law enforcement might suffer. In addition, the European Commission is a well-resourced and highly experienced institution, and although EU competition law will continue to apply to the activities of many UK businesses, UK competition law undoubtedly derives benefits from close relationships with other EU regulators. Further, should the UK leave the EU it will diminish its ability to influence EU mergers and investigations which might impact upon UK consumers.

EEA Membership

Of course, Full Brexit is not the only option available, and another possible scenario is that the UK will seek to retain access to the Single European Market by applying to become a member of the EEA (as Norway, Iceland and Liechtenstein have). Joining the EEA would certainly seem to represent a simpler option, since the terms of membership are already clearly established. However, that does not mean this route would be straightforward, since the UK would first have to enter a treaty to become part of the European Free Trade Area (EFTA), and then apply for EEA membership.

For many, EEA membership would defeat the purpose of Brexit and it is very unlikely that current UK competition laws would be amended. Although EEA members do not have the ability to influence EU legislation, they remain under obligations to apply it, and the EEA Agreement contains similar prohibitions on restrictive agreements and the abuse of a dominant market position. The courts of EEA members are also required to interpret EEA provisions which reflect EU laws and in accordance with decisions of the European Courts. Further, although EEA members are not part of the European Competition Network, the relationship between the CMA and the EFTA Surveillance Authority would be broadly equivalent to that which currently exists between the CMA and the European Commission. It is also likely that the UK would retain the benefit of the one stop shop for merger control.

Conclusion

As such, whether there are any changes at all to UK competition laws will substantially depend upon the precise terms of the UK's exit. However it seems highly unlikely that, whatever the route chosen, there will be much appetite for an overhaul of the substance of the UK competition regime. Instead, it is possible that there could be a gradual policy shift, in addition to some more immediate procedural effects in relation to merger control, the desirability of the UK as a jurisdiction for competition damages claims, and the international role of the CMA.

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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