Art collector's court case signals potential legal and contractual issues with NFTs
Out-Law Guide | 05 Mar 2020 | 3:01 pm | 21 min. read
The civil offence contained in the 1998 Competition Act closely mirrors article 101 of the Treaty on the Functioning of the European Union (TFEU). It prohibits agreements or concerted practices between two or more undertakings which have the object or effect of preventing, restricting or distorting competition and which may affect trade within the UK.
This is enforced by sectoral regulators and the Competition and Markets Authority (CMA). The sectors where regulators have anti-cartel powers are: gas and electricity; water; broadcasting; electronic communications; postal; healthcare; rail; civil aviation; financial services, and payment systems. The CMA and the sectoral regulators also have powers to enforce EU competition law where conduct may affect trade between EU countries.
Civil sanctions include:
Third parties, such as customers of cartel members, may bring private court actions for damages arising from the cartel activity. Courts may also find an agreement which breaches competition law to be void in whole or in part, or order a cessation of any breach.
The civil regime also contains a prohibition on an abuse of a dominant position, modelled on the article 102 of the TFEU, which is enforced by the same bodies, and generally subject to the same procedures and penalties as the Competition Act's anti-cartel provision.
Under the criminal regime any individual convicted of implementing, or causing to be implemented, arrangements for price-fixing, market-sharing, bid rigging or limiting supply or production, may receive a maximum five-year custodial sentence and/or an unlimited fine. The criminal cartel offence is more restrictive than its civil counterpart. The offence is designed to catch 'hard-core' cartel activity; for a cartel to be criminal, it must be a reciprocal horizontal agreement which is knowingly entered into.
The CMA can investigate and prosecute alleged criminal cartels in England, Wales and Northern Ireland. The Serious Fraud Office may seek prosecutions with the permission of the CMA. The Crown Office and Procurator Fiscal Service have responsibility for enforcement in Scotland. Sectoral regulators do not have powers to enforce the criminal offence.
To open a civil investigation the CMA or sectoral regulator must have reasonable grounds for suspecting an infringement. Once it has started an investigation it may acquire information through:
The CMA can require individuals connected with a company to answer questions, including ex-employees, suppliers and customers.
In criminal investigations, the CMA may also obtain evidence through surveillance and covert human intelligence sources.
Companies or people who obstruct the CMA in the exercises of these powers or failure to comply with any requirements can face civil or criminal proceedings.
The CMA is not obliged to open a formal investigation into all allegations of anti-competitive conduct which it receives and investigates only a small proportion of allegations. It makes decisions based on likely consumer impact; strategic significance, particularly in terms of deterrence; likelihood of success, and cost of investigation.
The CMA’s annual plan for 2019/2020 restated the organisation’s commitment to pursuing a high volume of cases at speed, and the CMA has made some progress against this metric. While complex pharmaceutical cases took a considerable time, some cases are being dealt with quickly.
However, the CMA also recognises the combined challenges of Brexit, the digital revolution and the growing levels of detriment amongst consumers. Post-Brexit, the CMA may be a very different body, taking on bigger and more complex global cases at the same time as seeking to protect UK consumers. Despite this, the UK government’s strategic steer to the CMA published in July 2019 pushed competition enforcement as a priority and asked the CMA to be ambitious in the number of cases it opens and the speed with which it conducts them. This wider pressure on the CMA to enhance enforcement may prove challenging for its resourcing post-Brexit, especially as the CMA’s workload will inevitably increase.
The annual plan emphasises that the protection of vulnerable individuals carries a particular strategic importance to enforcement activity. These are customers identified as being most at risk of suffering detriment in poorly performing markets, or in markets where dominant players are rapidly developing unique services, such as the digital markets. The prioritisation of consumer welfare has been a particular focus of CMA chairman Andrew Tyrie during his first year in the role. He wrote to the secretary of state for business, energy and industrial strategy in February 2019 proposing that the CMA be given a new statutory duty to treat the economic interests of consumers and their protection from detriment as paramount. This differs from the existing public duty to “promote competition both within and outside the UK, for the benefit of consumers”. This emphasis on consumer welfare could conceivably result in a less interventionist approach by the CMA in business to business dealings.
The effectiveness of competition law to regulate digital markets has become more prevalent as the digital economy rapidly evolves. The CMA argues that distortions in competition within digital markets have the potential to cause significant adverse effects for consumers, though these are often difficult to measure as new forms of consumer harm are emerging.
The strategic steer recognised that new approaches may be needed to make these markets work for consumers. In March 2019 the UK government's Digital Competition Expert Panel published the Furman Report on 'unlocking digital competition' which proposed reforms to enhance competition in the digital sector, which the CMA has publicly supported.
Despite a slowdown in the number of new infringement decisions issued since 2017, the new investigations opened in 2018 and 2019 have raised the CMA’s ongoing case load to 18. Case progression clearly remains at the forefront of the CMA’s objectives, although it remains to be seen how the anticipated additional workload following Brexit will impact the CMA’s ability to continue progressing such a significant case load.
The CMA’s guidance on investigation procedures took effect from 18 January 2019 and outlines how the CMA conducts investigations into suspected competition law infringements.
The CMA has condensed the timetable for parties to submit responses by, for example, reducing to 12 weeks the time parties have to review the documents held on a case file or respond to a Statement of Objections. Tyrie's letter proposed a new statutory duty to conduct investigations swiftly whilst respecting the parties’ right to defence. The often long duration of CMA investigations is frequently identified as a cause for concern for businesses, so proposals to reduce the investigation period appear to be welcome. However, following the changes, there is concern that the CMA will simply reduce the parties’ various response deadlines, rather than seeking efficiencies in the stages which it is responsible for.
The CMA has, though, shown itself willing to use stringent investigatory powers to keep investigations moving and to impose fines for failure to comply. Investigations under Chapter I are no exception. For example, a musical instruments manufacturer, Fender, was fined for concealing notebooks during an on-site investigation, even though it came forward and provided the notebooks to the CMA three weeks later.
The CMA operates leniency and amnesty programmes for individuals and companies in relation to both the criminal and civil regimes. Under the civil regime, leniency is not limited merely to 'hard-core' cartel activity: it is also available for resale price maintenance. This approach differs from other regulators, such as the European Commission.
A successful leniency application can mean complete immunity from fines for companies; immunity from prosecution under the criminal cartel offence for individual employees and directors, and immunity from director’s disqualification for directors. A successful leniency application does not protect a company from damages actions.
There are stringent conditions for establishing leniency that must be adhered to throughout the investigation. These include a requirement for full cooperation and an acceptance of breach and detailed requirements concerning the gathering and preservation of evidence even before any approach has been made to the CMA.
The timing of a leniency application is of paramount importance: the sooner it is made, the greater the benefit to the applicant. Leniency will be unavailable to a company once a Statement of Objections has been issued, or to an individual once they are charged.
There are three categories of immunity:
Individuals whose employers have taken part in cartel activity may also approach the CMA directly in exchange for a no-action letter, granting immunity from criminal prosecution.
The leniency regime remains an important method of discovery of potential breach for the CMA, but is by no means the only method. The CMA intends to become more intelligence led.
Of the four Chapter I decisions issued by the CMA in 2019 two involved a business obtaining full immunity and another of these involved a business obtaining a 50% reduction. Full immunity was also obtained by a participant in each of the FCA’s asset management and Ofcom’s parcel delivery services investigations.
There are two forms of administrative settlement available to parties: a settlement procedure involving an early admission of breach in return for a reduction in fine; and the provision of commitments, a binding commitment to cease and desist conduct or behave in a particular way in place of an infringement decision and a fine. Both are discretionary processes, and are separate from leniency.
The CMA has said that it is unlikely to accept commitments in the case of a secret, hard-core cartel or a serious abuse of dominance. However, they can be a useful tool in other cases.
Under the settlement process a company under investigation can admit that it has breached competition law and accept that a streamlined administrative procedure will govern the remainder of the investigation. Settlement will only be available once the CMA has sufficient evidence to support an infringement decision, but prior to a final decision.
In order to reach a settlement a company must make a clear and unequivocal admission of liability for the alleged infringing behaviour, end the infringement and confirm it will pay any fine imposed by the CMA. Case-specific conditions may also be imposed.
In exchange for settlement, the undertaking will receive a reduction in its penalty of up to 20%, or 10% if the settlement occurs after the Statement of Objections has been issued.
Complaints and information received directly from third parties represent an important source of intelligence. Information gathering exercises by the CMA also provide a route for third parties, such as competitors or customers of the parties under investigation, to participate in an investigation.
If the CMA opens an investigation, third-party complainants may elect to be designated as formal complainants.
All formal complainants must be offered the opportunity to comment on a Statement of Objections and, depending on the confidentiality of documents, a third party may also be granted access to some or all of the case file. Alternatively, a complainant may choose to be designated as an interested third party. An interested third party has no right to receive information, but may be asked for views on, for example, the Statement of Objections.
The CMA’s prioritisation principles, in practice, represent a significant hurdle for third-party complainants. Many complainants are unable to gather sufficient evidence to satisfy these principles, in particular relating to prospects of success, and even those complaints which are supported by strong evidence can be rejected as not constituting a priority for the commitment of investigatory resource. The CMA’s annual plan has a clear focus on cases directly affecting consumers, in particular, vulnerable consumers, online and digital markets and markets of strategic importance to economic growth and productivity. Such a focus, combined with the active filtering of cases, can significantly constrain its willingness to take up cases not falling into these categories brought to them by complainants, unless there is strong evidence from the outset of a serious breach.
Given the costs and evidential burden involved in pursuing a complaint through the courts it is still generally the preferred option for a complainant to approach the CMA. However, the increasing understanding of the courts of competition actions, and the active application of the CMA’s prioritisation principles, means that recourse to the courts is becoming an increasingly attractive option.
The CMA does have the power to impose interim measures, pending the final outcome of any investigation. The threshold for the application of interim measures was lowered in 2014 to a requirement to show ‘significant damage’ but these remain a rarely used tool. However Tyrie's letter identifies interim measures as an important tool in helping to reduce consumer harm. This strongly indicates that the CMA will follow other global authorities, including the European Commission, by pro-actively using these powers and potentially seek further reforms to the existing regime.
As far as possible the CMA tries to ensure that liability for penalties follows responsibility for the breach. The UK rules on parental and successor liability for fines generally reflect those of EU law.
The overarching policy goals in determining the level of a fine are to reflect the seriousness of the offence and to deter future infringements. The CMA has published guidance applying six steps in the calculation of a fine. The guidance requires the CMA to identify a starting figure, which may be up to 30% of the undertaking’s turnover in the relevant market. The precise level chosen will depend on the seriousness of the offence, with cartels typically towards the upper end of this scale.
Through the remaining steps the CMA makes adjustments to the starting point to reflect the duration of breach, aggravating or mitigating factors, settlement agreements and leniency applications. The CMA must also ensure that the fine does not exceed the stated maximum of 10% of the undertaking’s total, worldwide turnover.
If the CMA intends to impose a fine, it must issue a Draft Penalty Statement, which must show how these six steps are followed. The parties to the investigation must be given a reasonable period of time to make representations on the Draft Statement. The final penalty calculation will be included in the decision.
The CMA may also use civil powers to apply to the court for disqualification of directors of companies implicated in an infringement from acting as a director for a period of up to 15 years, or may agree a disqualification undertaking with the director concerned in lieu of a court order.
The CMA remains committed to pursuing enforcement against individuals as a deterrent to anti-competitive behaviour. This includes enforcing the criminal regime and pursuing directors’ disqualification, where appropriate.
The CMA has had the ability to disqualify directors for competition infringements since 2002, but the use of these powers has grown significantly reaching 9 disqualifications in 2019. In 2019 the CMA issued new guidance on Competition Disqualification Orders. All competition disqualifications to date have been by consent, but the CMA’s approach may be tested in 2020 as the CMA is pursuing three disqualification orders through the Courts.
Tyrie's letter also cautiously proposes introducing powers to impose civil fines on individuals who breach the Chapter 1 Prohibition, although it also identified that further work would be required to devise such a system.
The Consumer Rights Act 2015 (CRA15) sets out a voluntary redress scheme applicable to Chapter I/Article 101 TFEU infringements. The legislation says that businesses which are the subject of a competition law investigation or infringement finding can enter into a redress scheme under which they voluntarily compensate parties which have suffered a loss due to the anti-competitive conduct in question.
The intention is that such a scheme will enable parties to receive compensation without resorting to expensive and drawn-out litigation through the courts. It may also lead to a reduction in any fine imposed for the infringement. However, the infringing business is not protected from subsequent private actions, and third parties are not obliged to apply for compensation from a redress scheme where one is available.
UK law contains extensive rights of appeal against infringement decisions.
First instance appeals are made to the Competition Appeals Tribunal (CAT), a specialist body with expertise in competition law matters which is independent from the CMA. The CAT has the power to conduct a full-merits hearing and may quash a CMA decision in whole or in part. This includes both infringement decisions and no-grounds-for-action decisions, which interested third parties may appeal. If an appeal is successful the CAT may also remit the decision to the CMA for reconsideration or reach its own decision, which supersedes that of the CMA. The CAT may also hear appeals on penalties alone. Decisions of the CAT may also be appealed to the Court of Appeal.
The appeal system has been heavily used, and is considered to be a success.
One of the most eye-catching parts of Tyrie's letter was a proposal to replace the full merits appeal standard with either a judicial review “reasonableness assessment” or a new standard of review setting out specified grounds of permissible appeal, similar to the approach used by the EU General Court. The letter argues that such a change is necessary to reduce the duration and complexity of CAT hearings, although it has proved controversial.
The CMA has the power to pursue financial and custodial sentences against individuals, although these must be imposed by a court. Undertakings and individuals may also be subject to confiscation orders.
While the possibility of significant custodial sentences has existed for a number of years, there are very few examples of successful prosecutions.
In 2017 the CMA secured its latest custodial sentence in the precast drainage products case. This is the third example of successful prosecutions in respect of the criminal cartel offence, in addition to the Marine Hose and Galvanised Steel Tanks cases, all after guilty pleas. As each of the cases concerned arrangements which existed prior to 1 April 2014, the offence involved a requirement to show that those involved acted dishonestly. In practice, his presented a significant barrier to successful prosecutions. The CMA is yet to secure the conviction of an individual who has not pleaded guilty.
The dishonesty requirement was removed with effect from 2014. In recognition of the loss of this requirement and in the light of the fact that the criminal regime is designed to cover 'hard-core' cartels only, a number of exclusions apply. These include an exclusion related to advance notification of the cartel agreement to customers and advance publication. Three new statutory defences were also introduced. These apply where there was no intention to conceal the arrangement from customers or the CMA or reasonable steps were taken to seek prior legal advice.
As these reforms only apply to conduct post-dating 1 April 2014 it could be some time before an investigation under these rules is completed and the exclusions and defences are tested. The CMA currently has no ongoing criminal cases which may be because the new, lower criminal test was introduced in 2014 and only applies to activity after the date of introduction. It may also reflect the CMA’s focus on director’s disqualification as a tool of deterrence for individuals.
Tyrie's letter also tentatively proposed transferring some or all of the CMA’s powers to the Serious Fraud Office, a non-ministerial government department that investigates and prosecutes serious and complex financial crimes. This proposal would address concerns that the lack of case throughput means the CMA lacks the necessary expertise to effectively pursue and prosecute criminal cases.
The CMA values connections with other national authorities and such relationships are of particular importance in relation to the cartels. For example, the CMA has entered into a network of bilateral agreements with other domestic authorities. It is actively involved in international networks including the International Competition Network and the European Competition Network.
The marine hose investigation is an example of successful cooperation with other authorities. It involved cooperation with the US, EU and Japanese authorities; the CMA also liaised with its counterparts in France and Italy in relation to the modelling agencies investigation.
The CMA’s plans also take account of international trends in enforcement; for example, in relation to online pricing and price comparison websites, and the plans note the need to ensure consistent international enforcement.
Brexit will introduce uncertainty about the future cooperation within the European Competition Network. However, the CMA has said it is keen on international cooperation after Brexit, and there is unlikely to be any change in the short term at least.
Private enforcement of competition law is well established in the UK. The UK remains an attractive forum for damages actions due, largely, to the fact that English law disclosure rules are broader than those in other EU member states, giving claimants greater access to defendants’ documentary evidence than in other EU jurisdictions. However, as a result of the uncertainty surrounding Brexit, we are already seeing a shift in private damages litigation, with claims following-on from an EU Commission infringement decision increasingly being brought in other EU member states, especially the Netherlands and Germany, rather than in the UK.
Currently claimants may bring private actions for damages following an infringement finding in respect of EU or UK competition law by the European Commission or the CMA, respectively, in either the High Court or the CAT – a 'follow-on' damages claim in which the claimant can rely on the infringement decision as binding evidence of liability. 'Standalone' civil actions, where there is no pre-existing infringement decision such that the claimant must prove liability, may also be brought in the High Court and the CAT.
As well as introducing a number of procedural changes the CRA15 permits a representative to bring a collective damages claim in the CAT on behalf of a class of claimants. Importantly, a collective action can be on an ‘opt out’ or ‘opt in’ basis. ‘Opt out’ means that the relevant class of claimants is, by default, deemed to be all UK customers who might have been affected by the competition law breach unless they have been asked to be excluded from the action. An application must be made to the CAT for a Collective Proceedings Order (CPO), and this will be determined at a certification hearing.
There have been a number of significant developments in private enforcement of anti-trust activity in 2019. Standalone and follow-on proceedings relating to merchant service charges historically levied by Visa and Mastercard are continuing. Cases incorporated as two collective action, (UK Trucks Claim Limited v Fiat Chrysler Automobiles N.V. & Others and Road Haulage Association Limited v Man SE & Others, continue, following a finding by the European Commission of cartel behaviour by suppliers of trucks. These claims generally remain at the early stages.
The collective action case between Walter Hugh Merricks and MasterCard Incorporated in represent a test case. Merricks brought a £14 billion claim on behalf of 46 million consumers who used Mastercard, seeking recovery of inflated card fees following-on from the European Commission’s 2007 finding that the fees charged by card issuers infringed competition law.
Mastercard argued that these claims are not suitable to be brought under the collective proceeding regime. The CAT found against the Merricks but this ruling was overturned by the Court of Appeal in February 2019. Mastercard has appealed to the Supreme Court, which is expected to issue a precedent-setting judgment on the eligibility of collective claims in May 2020.
Pending the Supreme Court’s decision, two further collective action cases have been stayed, Justin Gutmann v First MTR Southwestern and Justin Gutmann v London & South Eastern Railway Ltd, meaning the Supreme Court judgment will have significant ramifications for future collective action cases.
Third party specialist litigation funders have become important for collective actions, ensuring that claimants can demonstrate they have the financial clout to bring claims. However concerns have emerged that, after payment of compensation, there is a risk that there may be insufficient funds to cover the funder’s fee.
This risks disincentivising a source of funding which is important in the burgeoning market for private damages actions. Nevertheless, in 2019 four CPO applications were lodged with the CAT, separate to those relating to the Mastercard/Visa action. It is not yet clear whether cost recovery will act as a deterrent.
The CRA15 also brought in a new ‘fast track’ procedure, aimed at encouraging and facilitating competition claims by SMEs which might otherwise not be brought at all. Under the ‘fast track’ procedure, a claim is expedited so that the hearing takes place within six months and the CAT has the power to impose caps on the parties’ costs.
One example of a successful action in 2019 is the Achilles case involving a challenge to the rail infrastructure operator’s requirement for those working on certain infrastructure to use a particular assurance scheme. The challenge succeeded on Chapter I and dominance grounds. Numerous other ‘fast track’ actions have led to settlements.
During the transition period which lasts until no later than 31 December 2020 the European Commission will continue to monitor and enforce Articles 101 or 102 TFEU in the UK, retain jurisdiction over existing cases and have the power to open new investigations into the UK elements of cartels involving potential effects on cross-border trade. European law will also continue to take primacy in the UK. For ongoing cases at the end of a transition period the CMA will be able to open a parallel investigation into the same conduct. New cases involving UK effects would fall within the CMA’s remit, although they may also fall within the EU’s competence where there are effects in the EU.
The UK Government intends to negotiate a new trade deal with the EU during the transition period, and it is anticipated that such a trade deal will give some direction on the extent to which the UK will align itself with EU competition law in the future. Although the political declaration setting out the intentions for the future framework between the EU and UK commits to ensuring open and fair competition, the UK government has said it will not seek regulatory alignment with the EU. There is a possibility of divergence from EU principles over time, but this may not be immediate as the UK government may have other priorities following the UK’s withdrawal from the EU.
As regards UK competition law reforms, the government’s 2019 election manifesto indicated that it would continue to support a number of reforms. These centred on reforming the UK’s competition framework to protect vulnerable consumers and protect consumer markets, a focus area of Tyrie's letter. It is therefore expected that the proposals in letter may be considered at some stage in the future. However, the government’s legislative programme did not refer to any reforms, indicating that these are not a priority, at least in the short term.
Another important area of potential reform is the regime relating to digital markets. The Furman Report included proposals to enhance competition in the digital sector for the benefit of consumers. The most significant of these is the establishment of a specialised digital markets unit with capabilities and resourcing to deliver greater competition, backed by new powers to set and enforce competition-enhancing rules. The report stopped short of proposing that the new unit would be a concurrent competition law regulator. This report may provide extra momentum to certain reforms, although again the government’s focus may be on other areas in the short term.
Additional research by Tim Riisager and Bryony Bruzon-Edwards.
This is an edited version of a chapter of Global Legal Insights – Cartels, 8th Edition, published by Global Legal Group, Ltd.
Art collector's court case signals potential legal and contractual issues with NFTs