On 25 November 2020, the UK Chancellor of the Exchequer, Rishi Sunak, delivered a one-year Spending Review for the UK economy, setting out the economic and financial impact of the COVID crisis on UK public finances. It is clear that the economic repercussions of the crisis will be long-lasting, with the economy not expected to return to pre-COVID levels until the end of 2022. From a competition law perspective, the disruption brought about by the COVID crisis led to a number of changes to processes, together with flexibility in the application of competition law to accommodate this difficult situation. An important question to be considered now is what the long-term impact of the COVID crisis will be on competition law and enforcement. How long will it take to return to pre-COVID levels, or will a new post-COVID regulatory regime emerge?
At the beginning of the crisis, businesses and regulators were faced with a large number of challenges, many of which required flexibility and quick action:
- Panic buying and supply chain issues led to concerns over shortages in particular critical areas, which prompted the government to issue a number of Exclusion Orders in sectors from groceries to private hospitals, temporarily relaxing some aspects of the competition rules to allow discussions between competitors to address those issues.
- Procedural difficulties, both within regulators adapting to new demands and home-working, and within businesses with remote working, crisis management and furlough made responding to information requests more difficult, leading to the CMA offering longer deadlines and more accommodation in its information requests.
- A surge in consumer law complaints (the CMA receiving thousands of complaints a week), raising concerns over refunds arising from cancellations and price gouging. From the CMA’s perspective, this served to highlight a standing request to the government for enhanced consumer law powers from its then Chair.
- Where the CMA found competition law concerns, the uncertainty arising from COVID has necessitated a degree of flexibility with regard to timescales for remedies to address those concerns. In Hunter Douglas N.V. / 247 Home Furnishings Ltd, the CMA granted at least nine months (longer than the typical six months) to allow for divestment to take place. In Germany, the six months given by the German competition authorities to Vue Group (CinemaxX) and Cinestar to divest cinemas in six locations could not be complied with, at least in part, due to the severe disruption caused by the pandemic to the cinema industry.
Substantive challenges - long-term effect of COVID in merger cases
The difficulties of conducting a forward-looking assessment in cases at a time when the outcome of the COVID crisis is highly uncertain can be seen in the CMA’s consideration of two merger cases earlier this year, particularly in sectors of the economy severely impacted by the virus and resulting lockdown.
In May 2020, the CMA published the final report on its review of JD Sports’ acquisition of FootAsylum, finding that the transaction gave rise to a substantial lessening of competition. The CMA found that JD Sports and FootAsylum are close competitors and post-merger would not face sufficient competition from other competitors. In its decision, the CMA acknowledged that the investigation and information gathered was mostly finished before the effects of COVID began. Nevertheless, the Report considered whether the merger assessment would change in light of the crisis and determined that it would not. The CMA granted a degree of ‘flexibility’ in its remedy implementation process due to the pandemic, since it might be difficult to find a buyer for a large retail business in the current climate.
On 13 November, the Competition Appeal Tribunal (CAT) found that the CMA had failed to gather sufficient information about the effects of COVID on the retail sector and remitted the case back to the CMA for a further review. The CAT concluded that the CMA had failed to follow-up enquiries with suppliers or to make direct enquiries of FootAsylum’s primary lender. This meant that the conclusions reached by the CMA about the impact of the pandemic and the competitive constraints to the merged entity were carried out without materially important evidence necessary to draw such conclusions properly. On 1 December 2020, the CMA announced it has applied for permission to appeal the CAT judgment on the grounds that it misapplied the law in reaching its decision. The CAT will now decide whether it will grant the CMA permission to appeal.
Similarly, in its examination of Amazon’s investment in Deliveroo, the CMA initially accepted that the impact of the pandemic was that Deliveroo would have gone out of business without Amazon’s investment. However, this provisional decision relating to Deliveroo’s viability was later reversed and the Amazon investment was eventually cleared on competition law grounds.
Both the JD Sports/FootAsylum and Amazon/Deliveroo decisions demonstrate the difficulty for the CMA in conducting forward-looking assessments when understanding the future state of the market, with and without the transaction in question, is highly uncertain.
What comes next?
Despite these challenges, competition law remains unchanged and in spite of the flexibility in the application of competition law rules, the CMA has been steadfast that the rules have and will continue to apply fully throughout the crisis.
One issue that may yet arise concerns information exchange in discussions between competitors that was initially brought about by the pandemic but strayed too far from what was permissible to address the crisis, for example exchanging commercially sensitive information or sharing customers or markets between competitors. If such issues come to the attention of the regulators, they will certainly be a priority for investigation.
In the UK, it should be expected that the CMA will continue to seek stronger consumer law powers to address deficiencies in the current framework highlighted in the pandemic. Indeed, the CMA Chair, Lord Tyrie, resigned from his post in June to more forcefully advocate for such reforms.
As Mr. Sunak’s Spending Review sets out, it remains unclear what shape the post-COVID economy will take and how global businesses will operate in response - an issue magnified by continued uncertainty around Brexit. The authorities will have to continue to show flexibility and caution in their assessment of mergers and co-operations, whilst ensuring that the pro-competitive effects of competition law enforcement are fully appreciated. However, what is certain is that the effects of the COVID crisis will continue to linger and are something that the authorities will have to manage for a considerable period to come.
Client Alert 2020-609
