On 29 March 2017, the UK Government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect on 29 March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period). Negotiation of a new trade agreement with the EU could take several years beyond 2019. The UK government has requested the EU's agreement to a two-year transitional arrangement between the scheduled exit date and the date on which a withdrawal agreement will be fully implemented.
This note examines the impact of Brexit on competition law, one of the most visible areas of EU enforcement. We address in turn each of the main pillars of competition enforcement – antitrust (rules prohibiting anti-competitive agreements and abuses of dominance), mergers and State aid.
The nature of the impact would depend on the model adopted by the UK for its future relations with the EU. However, the Prime Minister has made it clear, from her Lancaster House speech on 17th January 2017 onwards, that the UK government does not seek membership of the single market, but does seek a close trading relationship with the EU, involving a free trade agreement (which she would aim to conclude within the two-year notice period, with a phased implementation). Accordingly, for the purposes of this note, we are assuming that following Brexit the UK will be outside the single market (i.e outside the European Economic Area) and that a free trade agreement will be put in place.
It is important to note that the EU competition rules (Articles 101 and 102 Treaty on the Functioning of the European Union) will continue to apply post-Brexit to agreements or conduct of UK businesses that have an effect within the EU, in the same way as agreements or conduct of US and Asian businesses are currently subject to EU competition law where their agreements and conduct affect EU markets, and EU and US businesses are subject to the competition rules of Asian countries where there is an effect in those countries. A UK participant in a global cartel will therefore continue to face investigation and fines by the European Commission.
One key difference, however, is that the Commission will have no power to carry out on-site investigations (dawn raids) in the UK, nor to ask the UK competition authority, the Competition and Markets Authority (CMA) to do so on its behalf. The Commission's powers of investigation would be limited to making written requests for information, as it currently does on a regular basis to businesses based outside of the EU.
The impact will mainly be felt in relation to the enforcement of competition law by the UK authorities. The substance of UK competition law is very similar to that of EU competition law, and there is a statutory requirement (section 60 of the Competition Act 1998) to interpret the UK competition rules in a manner consistent with competition case-law of the European Court of Justice. There is a strong prospect that this link would be cut as a result of the vote to exit the EU. The effects will not be felt immediately as the CMA will look to the significant body of UK case law, which has developed consistently with EU law by virtue of section 60, as its main source of authority. EU competition case-law will in any event remain influential, even without the express statutory link, simply because of the similarity of the substantive provisions. It may therefore take some years for gaps to appear. UK courts will no longer have the facility of referring questions of interpretation of EU law to the European Court of Justice, currently an important driver of consistency in interpretation, and that is likely to gradually lead to divergence.
EU "block exemptions" for categories of agreements such as distribution and technology licences currently also give rise to a "parallel exemption" from the UK prohibition. This parallel exemption system will now need to be redefined and the government may take the opportunity to enact UK exemptions without the current strong single market focus of the EU rules, for example by permitting a greater degree of territorial restriction in these agreements than is currently the case under EU competition law. Under the EU (Withdrawal) Bill, which was introduced into Parliament in July 2017, such EU block exemption regulations will be safeguarded in UK domestic law subject to modifications to be made by the relevant minister in a period of two years following the Brexit date, and one possibility is that such Regulations will be adapted so as to become domestic UK block exemption regulations.
However, other effects of Brexit will be felt more quickly. Under EU law, the CMA is required to apply EU competition law where it applies national competition law and cannot take action where the Commission has opened a formal investigation. These requirements will fall away as a result of Brexit, and following Brexit there will be a greater chance of parallel investigations by UK and EU authorities, including the possibility of UK criminal investigations in parallel with European Commission cartel investigations. When the UK authorities are no longer required to apply EU law following Brexit, the UK government could potentially decide to diverge more significantly, for example by adopting a prosecutorial approach to competition enforcement. This is a longer term prospect, however.
Some procedural interactions will also no longer apply, so for example cartel members will not be able to safeguard their position in national queues for leniency by submitting "short form" national applications in conjunction with a full EU application.
There is currently close coordination between the European Commission and national competition authorities, and this will inevitably be weakened, as far as the UK is concerned, by Brexit. There is a strong prospect that the Commission and the UK will eventually negotiate a competition cooperation agreement of the type currently in place with a number of major competition jurisdictions such as the US and Japan, but any such cooperation would be much looser than the current arrangements.
Under current EU rules, mergers that satisfy the EU filing thresholds must be notified to the European Commission. In principle they require no clearance by national competition authorities of the EU Member States, although national authorities can seek to have specifically national aspects of mergers referred back to them, and retain a tightly circumscribed right to protect certain national interests. This "one-stop shop" will disappear in the UK, so mergers – whether of UK or foreign businesses – that met both UK and EU thresholds would be likely to face scrutiny under both systems. The UK will not be able to seek a reference back of the national dimension of an EU merger, so although it could apply its own merger control rules in such a case, it will do so in parallel with the Commission rather than in its stead. This effectively means that the CMA will have jurisdiction over much larger mergers than at present – most large mergers are currently dealt with by the Commission alone. Parallel reviews will also raise the possibility - probably in practice relatively rare – of one authority permitting and the other blocking a merger, or of diverging remedies. In this area, Brexit now appears certain to result in multiple filings, and therefore a greater burden for businesses.
Under the EU (Withdrawal) Bill, the EU Merger Control Regulation will initially be safeguarded in UK domestic law as a result of the blanket provisions in the Bill on retained EU law. However it is to be assumed that during the two years transitional period provided for in the Bill, the content of the Regulation will be adapted so as to remove any doubt as to whether, under UK law, the UK will be within the scope of the Regulation's provisions. However, this will not remove the need under EU law to notify and submit to EC investigation, even after Brexit, in respect of mergers caught by the EU Regulation's provisions as they apply in relation to the EU territory.
The third key pillar of EU competition law is State aid. The rules prohibit Member States from distorting competition by granting aid to specific businesses. There is no equivalent provision in UK competition law. The obligations apply only to Member States, so the UK outside the EU will be able (subject to WTO rules) to provide aid to businesses in the UK without fear of EU action. Conversely, the UK will have no scope to oppose the grant of unlawful aid by other Member States.
Whilst EU Regulations on State aid will initially be safeguarded in UK domestic law, it is to be expected that their contents will be disapplied as a matter of UK law during the two year transitional period provided for in the Bill (unless their retention were required by a UK-EU free trade agreement).
House of Lords enquiry into UK competition policy following Brexit
In July 2017, the House of Lords EU Committee (and its six Sub-Committees) launched a series of enquiries to explore UK competition policy post-Brexit. The period for written submissions closed on 15 September 2017 and oral evidence was to be heard during September and October 2017. The enquiry is covering:
- Re-shaping UK competition policy post-Brexit;
- The implications of Brexit for competition law in tehUK;
- Whether UK authorities have the capacity and resources to deal with an increased caseload post-Brexit;
- The potential State aid obligations in any UK-EU free trade agreement;
- Future co-operation between the UK and the EU concerning investigations and enforcement.
The full effects of Brexit in the field of competition enforcement will take some time to emerge. There will be an immediate risk of parallel investigations in both antitrust and merger fields, with an increased burden to businesses as well as some risk of inconsistent outcomes, although EU case-law is likely to remain highly influential in practice if not as a matter of law for some time yet. In the medium or longer term, there is an appreciable prospect of a degree of divergence between UK and EU rules. A key point to watch out for will be any decision on a post-Brexit approach to the current section 60, which determines how UK competition rules are to be interpreted.
We intend to update our guidance in this area as the implications on competition law in the UK become clearer.
This article is part of our Brexit series