UK: Reconciling the CAT’s recent judgment on Compare the Market with the new hardcore status of wide MFNs under VABEO
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The UK Competition Appeal Tribunal (“CAT”)’s decision setting aside the CMA's decision to fine Compare the Market for imposing wide "most favoured nation" (“MFN”) clauses in agreements with providers of home insurance was published on 8 August 2022. The decision in contention however, relates to behaviour which predated the entry into force of the UK VABEO, and therefore the legal implications of the decision are far from clear-cut. In particular, the judgment does not now give businesses the go-ahead to include wide MFN’s in their agreements.
1. The CMA’s 2020 decision
Compare The Market (“CTM”) is a price comparison website, which allows consumers to view and compare offers on retail prices (premiums) from different home insurance providers. The CMA imposed a penalty of nearly £18 million on CTM in November 2020 for the inclusion of wide MFN clauses in its contracts with home insurers. You can read our full analysis of the decision here.
At the time, MFNs required an effects-based analysis under the previous retained VBER regime. The CMA found the effects of CTM’s MFNs on the market were:
- CTM was protected from being undercut by its MFNs;
- CTM’s rivals were unable to secure a price advantage over CTM, unless an insurer was willing to breach its agreement with CTM;
- CTM relied on this and the MFNs to ensure it had the lowest price, as opposed to competing on the merits;
- CTM’s network of wide MFNs entrenched its position of market power; and
- Because CTM’s rivals struggled to compete, overall competition was reduced between PCWs, leading to a general decline in competition on retail prices, to the detriment of consumers.
CTM appealed against the decision asking the CAT to quash all or part of the CMA’s decision.
| What are MFN clauses? MFN clauses (also known as ‘retail parity provisions’ or ‘price parity provisions’) can take many forms. They all have in common a supplier agreeing to offer a customer (in this case Compare the Market) terms as favourable as, or no less favourable than, those offered to other customers. MFNs are one of the most common competition law pressure points in the context of marketplaces (i.e. an online platform or price comparison website/ digital comparison tool). MFNs relating to price have been the main focus of investigations by competition authorities as, on balance, they are more likely to restrict competition than those relating to other conditions of business. An important distinction in the competition law assessment is made between ‘wide’ and ‘narrow’ MFNs: - Wide MFNs are agreements between a marketplace and a retailer, typically requiring retailers to publish on a marketplace the same or better price and conditions as those published on any other sales channel, i.e. the marketplace prevents the retailer from offering a better deal to another marketplace. - Narrow MFNs typically require a retailer to publish on a marketplace the same or better price and conditions as those published on its own (direct) website, i.e. the retailer is prevented from offering a better deal on its own direct to consumer website. |
2. The successful appeal
The CAT unanimously ruled in CTM’s favour, setting aside the CMA’s decision and the penalty imposed. You can read the full decision here. The CAT held that wide MFNs were not by-object restrictions, and therefore required the CMA to demonstrate sufficient anti-competitive effects. The CAT also found that the market definition adopted by the CMA in the decision was flawed. In its view, the CMA failed to show that CTM’s MFNs had anti-competitive effects and therefore failed to establish a competition law infringement as “[wide] MFNs would be inappropriately placed in a “by-object” box.” In the CAT’s view, there was no reliable evidence that the existence of the wide MFNs had any adverse effect on either insurance premiums or commissions. The CAT found that the anti-competitive effects described by the CMA of the CTM’s MFNs were not “by-object” infringements, because they were justified or explained in theoretical terms.
Indeed, the CAT stated that “the mere fact that these clauses were effective – in the sense that they were complied with – is not sufficient to demonstrate an anti-competitive effect. The CMA must show – and the burden is on it – that there was such an effect. That involves doing far more than simply asserting that the MFNs were “effective ”.
3. A new regime – the VABEO
Whilst the decision signals that the CMA failed to meet the required burden of proof in this instance when trying to demonstrate a by-effect infringement, it is however important to put the decision in context.
On 1 June 2022, the UK VABEO came into force, introducing a parallel UK regime for the analysis of vertical restraints. One of the more noteworthy changes, is that wide MFNs are now considered ‘hardcore’ restrictions of competition law. Their inclusion into any agreement will therefore: i) remove the benefit of the safe harbour established by the VABEO meaning an individual assessment of the agreement is required, and ii) will likely infringe competition law unless such restrictions can meet the high threshold for exemption set out under Section 9 of the Competition Act 1998. In legal terms this means that, by law, wide MFNs are highly likely to infringe competition law in the UK. Even though ‘hardcore’ restrictions are not inherently synonymous with ‘by-object’ restrictions, there is a good deal of overlap between the two concepts, and the judgment therefore clouds the law on this issue – certainly the CMA’s desire to bring wide MFN’s within the ‘by-object’ family has not been smooth sailing. Not least, the new UK assessment under the VABEO diverges with the new EU VBER regime, which in contrast opted for a less strict approach treating MFNs as excluded restrictions going forward.
Whilst it remains to be seen whether the CMA will appeal the CAT ruling (it has until 16 September 2022 to do so), going forward, it will be interesting to see how the CMA handles the judgment and reconciles the CAT’s view that wide MFNs are not restrictive of competition by object with its categorising of wide MFN’s as hardcore restrictions. Will the CMA now feel compelled to demonstrate actual anti-competitive effects when investigating the use of wide MFNs in vertical agreements? We will continue to watch this space, though absent the CMA appealing the decision, going forwards it may want to demonstrate wide MFNs are restrictive by both object and effect. What is clear, is that the judgment (in conjunction with the new UK VABEO) does not give businesses carte blanche on including wide MFNs in their agreements without carefully considering the competition law risks of doing so.
