Was the CAT right to limit the CMA’s extraterritorial reach?

On February 8, 2023, the UK’s Competition Appeal Tribunal (the CAT) published a judgment on the Competition and Markets Authority’s ability to gather information from non-UK companies in competition law investigations. As the CMA prepares to appeal the decision to the Court of Appeal, we ask whether the CAT may have got it wrong (*spoiler alert: we don’t think so*).

Background

Section 26 of the Competition Act 1998 (CA98) gives the CMA, in the context of a competition law investigation, the power to issue in writing a notice/request requiring “any person” to produce a specified document or information relevant to the investigation. In April 2022, as part of an investigation into the end-of-life vehicle recycling sector, the CMA issued two such section 26 notices/requests to: (i) BMW AG and its subsidiary BMW (UK) Ltd; and (ii) VW AG and its subsidiary Volkswagen UK. The notices set out the consequences of not complying which included civil financial penalties.

BMW AG and VW AG are both German domiciled companies with no presence in the UK and both chose not to respond to the section 26 notice/request on the basis that the CMA did not have the power to compel a response. VW AG applied to the UK High Court for judicial review of the CMA’s decision to issue a Section 26 notice to the VW Group. BMW AG did not seek judicial review, but appealed the CMA’s penalty notice for non-compliance with a s.26 request/notice to the CAT (that penalty notice, imposing a £30,000 fixed penalty and a £15,000 daily fine for each day of non-compliance).

In a first for the CAT, VW AG’s judicial review application was heard alongside BMW AG’s appeal given the similarity between the two challenges. The former was a matter for the President of the CAT, Sir Marcus Smith (who also sits as a Justice of the High Court), while the latter was considered by the full three-person Tribunal.

An “aggressively extraterritorial effect”

The CAT’s approach to the matter was legalistic. It focused on the meaning of the word “any person” in section 26(1). In particular, the CAT examined whether the meaning extends to cover an “undertaking” such that a section 26 notice may be addressed to an undertaking and that particular undertaking is required to respond.

The concept of an undertaking is well-understood in Europe. It forms the basic “unit of account” for EU and UK competition law – undertakings commit breaches and undertakings are penalised. However, as the CAT points out, the term “undertaking” is undefined in the CA98, but may be best defined as an economic entity, which can comprise a number of persons (both legal and natural). In the CAT’s view, that leads to there being a mismatch between the notion of an economic entity (or undertaking) and the law of persons. For example, while section 2(1) CA98 preludes anticompetitive agreements between undertakings, an agreement between two persons (natural or legal) within the same undertaking does not constitute an infringement.

The CAT therefore focused on whether construing the meaning of “person” as including “undertaking” results in unintended consequences as regards the potential extraterritorial application of section 26. This was important because there is a presumption against extraterritorial application of all UK legislation, a principle enshrined in international law and comity. Referring to the UK Supreme Court’s judgment in R (KBR Inc) v Director of the Serious Fraud Office, the CAT found that in the absence of an explicit intention to rebut this presumption, a legal provision cannot be construed to apply to persons outside of the jurisdiction.

According to arguments advanced on behalf of the CMA, the practical implication of its preferred construction would be to allow the CMA to address a section 26 notice to a single undertaking with the effect that every legal or natural person within that undertaking would be under an obligation to respond. On the CMA’s interpretation, it would be necessary that only a single legal or natural person within the undertaking to which the notice was addressed had a UK territorial connection.

However, the CAT considered that such a construction would render section 26 “aggressively extraterritorial” given that economic entities inevitably straddle and cross territories and borders. The CAT set out a non-exhaustive list of examples demonstrating why the extraterritorial implications of the CMA’s contention were considerable and concluded the presumption against territorial effect to be fully engaged

Implications for CMA investigations

This judgment leaves the CMA’s competition investigations with a potential evidence gap, in instances where that evidence can only be collected from a non-UK company which has no UK territorial connection. Indeed, there is a potential disconnect here between the well-established exterritoriality of the Chapter I and Chapter II prohibitions, (and the associated power of the CMA to fine in respect of infringements of those prohibitions), and an inability on the part of the CMA to fully investigate those infringements.  

Prior to the UK leaving the EU, the CMA would have had the option under Article 22 of Regulation 1/2003 to request a national competition authority (NCA) of another EU Member State to issue a request for information under its national law on behalf of the CMA. Likewise, the CMA has previously issued section 26 notices to UK-based companies on behalf of other EU NCAs. Without a formal agreement between the UK and the EU on competition matters, this type of cooperation is no longer possible.

The evidence gap will not apply in the case of companies which hold a UK territorial connection. or companies who have access to information from the entity with a UK connection. The CAT did not delineate for all purposes what constitutes a UK territorial connection and recognised that there will be borderline cases which require further consideration. However, the CAT did clarify that any relevant evidence held by a UK company outside the jurisdiction would need to be provided in response to a CMA section 26 notice. As such, there may be only limited circumstances in which this evidence gap will be felt.

On March 8, 2023, the CAT published an Order quashing BMW’s penalty and granting permission to the CMA to appeal its ruling. In granting permission to appeal, the CAT expressly referred to the issues of construction raised in the proceedings as being by no means straightforward but noting their significant implications for the CMA’s investigatory powers.

However, our view is that the CAT’s judgment is convincing and there appears little doubt as to its legal accuracy.