Brexit: Competition law implications

By Peter Willis, Richard Eccles

10-2018

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. If a Withdrawal Agreement is agreed by the UK and EU and is approved by the UK Parliament, this will include provisions for a transitional or "implementation" period to the end of 2020, during which EU law will continue to apply in the UK. Any Withdrawal Agreement is expected to include an outline of a future UK/EU relationship agreement, in the form of a political declaration, to be negotiated during the transitional period. If no Withdrawal Agreement is concluded, i.e. in a "no deal" or "hard Brexit" scenario, EU law will cease to apply in and to the UK on 29 March 2019.

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. 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).

The European Union Withdrawal Act 2018 ("the EU Withdrawal Act") will repeal the European Communities Act 1972 ("ECA 1972") as from Brexit (or from the end of the transitional agreement if a Withdrawal Agreement is concluded) and will also include provisions to convert the existing body of currently directly applicable EU law into domestic UK law, by means of statutory instruments. This will mainly apply to EU Regulations which would otherwise cease to apply on Brexit, and also to statutory instruments implementing EU Directives, where the statutory instruments were adopted pursuant to the ECA 1972 and would otherwise fall away on repeal of that Act. See also our briefing note: The European Union (Withdrawal) Act 2018.

Antitrust
Merger Control
State aid
Conclusion

Antitrust

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 Under the EU Withdrawal Act, such EU block exemption regulations will be retained in UK domestic law subject to modifications to be made by statutory instrument in a period of two years following the Brexit date. The UK government published a notice on 13 September 2018 stating that (in a "no deal" Brexit scenario) it will preserve these regulations in modified form in UK law, so that agreements that currently benefit from such parallel exemption will continue so to benefit in the UK.

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.

An important effect of Brexit in the field of private enforcement of competition law is that companies will no longer be able to rely on European Commission infringement decisions as a basis for bringing follow-on claims for damages in the UK courts. However, such follow-on damages claims will in principle still be possible in the UK courts in respect of European Commission decisions made before Brexit.

Merger control

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.

State aid

The third key pillar of EU competition law is State aid. The rules apply only to Member States and prohibit Member States from distorting competition by granting aid to specific businesses. There is currently no equivalent provision in UK competition law.

The government has stated in a notice published on 13 September 2013 that, in a "no deal" Brexit scenario, the CMA will take over the role of State aid enforcement and supervision for the UK and that the EU State aid rules will be transposed into UK domestic legislation under the EU Withdrawal Act. This will include the enactment of similar State aid block exemptions to those which apply under EU law. The notice states that existing EU approvals of State aid and the application prior to Brexit of EU block exemptions will remain valid and will be carried over into UK law, but that State aid by a UK public authority to any undertaking will require notification post-Brexit to the CMA where it would previously have been notifiable to the European Commission. 

Conclusion

The full effects of Brexit in the field of competition enforcement will take some time to emerge. There will be an immediate risk and likelihood of parallel investigations in, respectively, the antitrust and merger control fields, with an increased burden to businesses. There will also be 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.

This article is part of our Brexit series

 
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