Competition Appeal Tribunal's judgment in Tesco's appeal against the outcome of the Competition Commission's Groceries market investigation

06 May 2009

Katharine Annesley, Tessa Finlayson

On 4 March 2009, the Competition Appeal Tribunal (CAT) upheld the appeal of Tesco plc (Tesco) in relation to the Competition Commission’s (CC) groceries market investigation, specifically its recommendation for a “competition test”, aimed at preventing the market dominance of large retailers. On 3 April 2009, the CAT quashed the CC’s decision relating to its recommendation of the competition test and ordered that the matter be referred back to the CC.

The final report and remedies

On 30 June 2008, Tesco made an application to the CAT for review under section 179 of the Enterprise Act 2002 (the Act) of part of the CC’s final report in its groceries market investigation, which was published on 30 April 2008. The CC undertook a wide-ranging market investigation, collating a dataset of more than 14,000 UK grocery stores, receiving approximately 700 submissions and holding approximately 80 hearings with interested parties. After the two-year investigation, the CC found that competition in the UK groceries industry was effective in many important respects. However, the CC also found three features of certain local markets which prevented, restricted or distorted competition, namely: (i) high levels of concentration in a significant number of local markets, which have persisted over several years; (ii) barriers to entry or expansion caused by the planning regime in certain local markets, which limit the construction of new, larger stores and impose greater costs and risks on smaller retailers and new entrants than others; and (iii) barriers to entry caused by the control of land by incumbent retailers.

Amongst other remedies, the final report recommended that a competition test should be implemented within the planning system for new stores over 1000 square metres and developments of existing stores resulting in stores over 1000 square metres, with the Office of Fair Trading (OFT) acting as statutory consultee. Applications would pass the test if, within a 10 minute drive of the developed store: (a) the retailer would operate as a new entrant to the local area; (b) the total number of “fascias” (i.e. grocery retailer brands) operating larger grocery retail stores in that area is four or more; or (c) the total number of fascias in that area is three or fewer, but the relevant retailer would operate less than 60 per cent of grocery sales in the area (including the new or extended store).

Tesco’s application

Tesco did not challenge any of the CC’s findings of fact or its conclusion on the features of the market.  However, Tesco sought an order quashing the parts of the final report which set out remedies relating to the competition test, on the following grounds:

  1. the CC failed properly to take into account that the competition test itself would have detrimental effects on competition and customers, by preventing an incumbent retailer from expanding to meet demand and making developments which would otherwise enhance the welfare of customers; and

  2. the CC failed properly to take account of the relevant considerations when considering the proportionality of the test.

The CAT’s judgment

The CAT had to apply the same principles which a court would apply on an application for judicial review; it concluded as follows:

  1. Tesco was correct in its submission that there was a significant gap in the CC’s analysis in relation to the “costs” of the competition test. The final report does not fully take into consideration the risk that the test may result in adverse effects for consumers, including the leaving of demand “unmet”.

  2. The CAT noted that the CC’s proportionality assessment seemed to have been based on an assumption that the whole of the estimated consumer detriment would be remedied by the competition test, in combination with the other remedies; there was no recognition or consideration of the possibility that the adverse effect on competition might not be remedied or mitigated for many years. Unanimously, the CAT found the proportionality analysis was flawed.

The CAT did not, however, conclude that the competition test would be ineffective, unreasonable or disproportionate, nor does its decision preclude the possibility that the test may ultimately be lawfully recommended by the CC and implemented.  

On 3 April 2009, following a hearing on the appropriate relief, the CAT quashed the CC’s decision relating to its recommendation of the competition test. The CAT referred the matter back to the CC, with a direction for the CC to reconsider and make a new decision in accordance with the CAT’s judgment. Tesco had argued that the CAT could not refer the matter back to the CC as the statutory two-year time limit for reporting on a market investigation had passed, but that the OFT could then decide to make a new market investigation reference. The CAT was not convinced by this line of argument, and also refused Tesco permission to appeal to the Court of Appeal. The CC has undertaken to reach a decision within a period of six months, ending on 5 October 2009. It has published an administrative timetable and a consultation document, setting out its proposed approach to reconsidering the competition test.

Significance of the judgment

This is the first time that one of the CC’s market investigation final reports has been appealed. By upholding the appeal, the CAT has given a strong signal that it is prepared to question the CC’s approach, notwithstanding the CC’s wide margin of appreciation in market investigations. The judgment is therefore likely to have wider significance for other parties involved in recent or future market investigations to challenge the CC’s final report who may be considering appeals. Indeed, Barclays has since appealed against certain of the CC’s findings in its payment protection insurance market investigation.

It remains to be seen whether the CAT’s judgment and referral back to the CC will have any substantive impact on the outcome of the CC’s investigation, or merely delay implementation of a competition test.

Source: CAT judgments, 4 March and 3 April 2009