UK Comp Appeal tribunal criticises OFT investigation procedure

13 November 2006

Richard Eccles

London Metal Exchange v the Office of Fair Trading represents the first judgment of the Competition Appeal Tribunal dealing with a costs application in the context of an appeal against an interim measures direction adopted by the OFT under the Competition Act 1998. In its judgment awarding the costs of the London Metal Exchange against the OFT, the CAT severely criticised the OFT’s procedure for carrying out its investigation to determine the necessity of such an order. This was the first, and to date the only, time the OFT has issued an interim measures direction.

In July 2003 Spectron Group Plc (“Spectron”) submitted a complaint to the Office of Fair Trading (“OFT”) against its competitor The London Metal Exchange (“LME”), alleging predatory and discriminatory pricing in LME’s provision of its electronic trading platform in non-ferrous base metals contracts, LME Select. Spectron provides an equivalent electronic trading platform called eMetals. In August 2005, the LME announced that as of 1 March 2006 it intended to extend the trading hours of LME Select by opening at 1.00 am GMT; it wished to do this in order to capture Asian market hours.

The OFT carried out an investigation and found sufficient grounds for issuing an Interim Measures Direction (“IMD”) pursuant to its powers under Section 35(2) of the Competition Act (“the Act”). The IMD was served on the LME on 27 February 2006; it ordered the LME not to increase LME Select’s trading hours outside of 07:00 to 19:00 (London time).

The OFT claimed that the IMD was required as a matter of urgency in order: (i) to protect the public interest; and (ii) to prevent serious and irreparable harm to Spectron.

The LME appealed against the imposition of the IMD on 26 April 2006. At the first case management conference on 15 May 2006 the OFT announced that it had withdrawn the IMD as it had received significant new information and considered that the public interest no longer favoured the maintenance of the IMD. The LME immediately lodged an application for its costs; the costs hearing was held on 28 June 2006.

The Competition Appeals Tribunal (“CAT”) considered the quality of the evidence required before an authority can issue an IMD in exercise of its functions under Section 35 of the Act. The CAT noted that the OFT should be circumspect about solely relying on uncorroborated evidence not contained in a Section 26 Notice, particularly when, as was the case here, the information is not considered to be impartial. The CAT expressed concern that the OFT had considered itself competent to adopt the IMD after it had acquired only a limited understanding of Spectron’s business and the relevant market, especially given the fact that it had not sought information from affected third parties.

Furthermore, the CAT criticised the OFT’s findings on the possible barriers to re-entry if Spectron were forced out of the market. The CAT noted that the OFT had simply relied on Spectron’s assertion about potential damage to its reputation. The CAT, by contrast, would have expected an authority acting reasonably to seek the opinion of third parties by way of a Section 26 Notice. The CAT thus concluded that the quality of the evidence relied upon by the OFT when it adopted the IMD “fell below the standard which should normally be required by an authority such as the OFT when carrying out its functions under the Act”.

The CAT then considered the procedure adopted by the OFT in carrying out its Section 35 function. The OFT argued that the urgency of the situation meant that it had no choice but to rely on such evidence. The CAT did not accept this. The LME had first announced the extension of its trading hours in November 2005; indeed, the original Article 82 complaint had been received in July 2003. Therefore, the OFT had had adequate time to gather information of the requisite quality.

According to the CAT, the perceived urgency in this case had arisen because the OFT had decided to wait until 2 February 2006, the date when it received Spectron’s application for interim measures, before it began its investigations.

The CAT also dismissed the OFT submission that this had been the first time it had exercised its power under Section 35 and so was on a learning curve, noting that it could have considered the essential features of the procedures under the Civil Procedure Rules for urgent injunctions.

Source: Case: 1062/1/1/06, 8 September 2006, [2006] CAT 19