Competition Economics Handbook 2019

United Kingdom

30 October 2018

Cornerstone Research

Busy times at the Competition Appeal Tribunal

A decision in the interchange fees litigation saga

The litigation around multilateral interchange fees (MIFs) resulted in three different and inconsistent decisions adopted by the Competition Appeal Tribunal (CAT) (in Sainsbury’s v MasterCard) and the Commercial Court (in Asda and others v MasterCard and Sainsbury’s v Visa).

In Sainsbury’s v MasterCard, the CAT found that MasterCard’s MIFs were a restriction of competition, by effect under article 101(1) of the Treaty on the Functioning of the European Union, and upheld Sainsbury’s claim against MasterCard. The counterfactual applied by the CAT was one of bilateral negotiations between issuing and acquiring banks to set interchange fees. Under this scenario, the CAT found that the MasterCard scheme leads to higher MIFs than would result from bilateral negotiations, and awarded damages of over £68 million plus interest. The CAT did not reduce the damages for pass-on, finding that MasterCard had failed to establish an identifiable increase in retail prices or any class of purchasers to whom the overcharge had been passed.

In contrast with the CAT in Sainsbury’s v MasterCard, in Asda and others v MasterCard in front of the High Court, Justice Popplewell found that a counterfactual scenario (ie, absent the MIF) in which issuers and acquirers engaged in bilateral negotiations was unrealistic. In his opinion, in the absence of MIFs, issuers would switch to the Visa platform (where they would still benefit from MIFs), and the MasterCard scheme would collapse in the resulting ‘death spiral’. Justice Popplewell thus found that MasterCard’s MIFs did not infringe article 101(1); and if they had, they would have been exempt under article 101(3) given that they were lower than the exemptible level of MIF (on account of the benefits merchants realise from accepting card payments). Justice Popplewell also held that, as part of the quantum exercise, the burden of proof in determining the level of exemption of MasterCard’s MIFs lay with the merchants.

In Sainsbury’s v Visa, Justice Phillips dismissed Sainsbury’s claim also on the basis that Visa’s MIFs did not infringe article 101(1). Like Justice Popplewell, Justice Phillips dismissed a counterfactual involving bilateral negotiations, and adopted one where there was no MIF. Justice Phillips found that the level of MIF had no effect on competition in the market, and therefore Visa’s MIFs did not infringe article 101(1). Furthermore, in contrast with Justice Popplewell’s judgment, Justice Phillips held that if Visa’s MIFs had infringed article 101(1), they would not have been exempt under article 101(3). Also, in contrast with Justice Popplewell, he held that the burden of proof in showing an article 101(3) exemption lays with the defendant.

On 4 July 2018, the Court of Appeal handed down a judgment that sought to resolve the differences between the three previous decisions. A key question the court addressed was whether the schemes’ rules for setting default MIFs restrict competition in the acquiring market. The court rejected both the ‘death spiral’ and the bilateral interchange fee counterfactuals. It held that the correct counterfactual was one of no MIFs; and found that MasterCard’s and Visa’s MIFs were a restriction of competition by effect and were not objectively necessary for the survival of the schemes. On quantum, the court, in agreement with Justice Phillips, found that the burden of proof in determining the exemptible level of the MIF lay with the defendant. The court also found that the CAT was correct in not reducing Sainsbury’s damages for pass-on; and that to establish pass-on there has to be a sufficiently close causal connection between an overcharge and an increase in the direct purchaser’s price. The court has remitted all three cases back to the CAT for reconsideration of the issues of article 101(3) exemption and damages. It remains to be seen if the defendants will appeal the decision to the Supreme Court.

The CAT on excessive pricing in Pfizer/Flynn v CMA

In December 2016, the Competition and Markets Authority (CMA) fined Pfizer and Flynn close to £90 million for excessive pricing abuse in relation to the epilepsy drug Phenytoin Sodium (sold as Epanutin). Following an appeal by the drug companies, in June 2018, the CAT published its judgment on Pfizer/Flynn v CMA. The CAT ruled against the CMA’s finding of abuse and sent the case back to the CMA for further consideration.

By way of background, until 23 September 2012, the price of Epanutin was regulated as part of Pfizer’s portfolio of branded drugs under the NHS’s Pharmaceutical Price Regulation Scheme (PPRS). In that same year, Pfizer transferred its ‘marketing authorisations’ for Epanutin to Flynn, but continued to manufacture Epanutin and supplied Flynn exclusively for distribution in the United Kingdom Flynn genericised Epanutin so that it was no longer subject to price regulation under PPRS. According to the CMA, as soon as Flynn commenced distribution of Phenytoin Sodium capsules on 24 September 2012, their prices increased significantly. For example, the CMA compared the average price Pfizer charged wholesalers and pharmacists for Phenytoin Sodium 100mg capsules sold between 1 March 2004 and 23 September 2012 with:

  • the average price Pfizer charged Flynn for the same capsule between 24 September 2012 and 30 June 2016; and
  • the average price Flynn charged wholesalers and pharmacists for the same capsule between 24 September 2012 and 30 June 2016.

On this basis it concluded that Pfizer’s prices for the capsule increased by more than 1,303 per cent and Flynn’s prices by more than 2,208 per cent.

The CAT’s ruling is interesting because of its position on the implementation of the United Brands tests (UB test) for excessive pricing, which essentially has two ‘limbs’.

  • The excessiveness limb: is the difference between price actually charged and cost actually incurred excessive?
  • The unfairness limb: if yes to the above, has a price been imposed which is:
    • unfair in itself (Alternative 1); or
    • unfair when compared to other competing products (Alternative 2)?

In its decision, the CMA assessed the excessiveness limb test by comparing actual prices charged with measure of costs after allowing for a ‘reasonable rate of return’ of 6 per cent, which was based on the existing PPRS. Based on that comparison, it concluded that the average selling price of the Phenytoin Sodium capsules was excessive.

In implementing the unfairness limb test, the CMA first concluded that there were no non-cost-related factors that should increase the economic value of the products under question. The CMA argued that prices were unfair in themselves (Alternative 1 above) because, inter alia:

  • prices were significantly higher relative to what prevailed prior to September 2012 and those charged in other European countries;
  • there were no non-cost-related factors that would increase the economic value of products in this case above costs; and
  • the products under question were old, off patent, had been recently genericised and were not subject to any recent innovation.

The CMA also decided that because the prices set by the parties were unfair in themselves, it was not necessary to consider whether those prices were also unfair when compared to other competing products. In any event, it concluded no product could provide a meaningful comparison to the capsules under question. In particular, it concluded that Phenytoin Sodium tablets were not suitable comparators for the capsules as they are subject to the same ‘continuity of supply’ guidance, which limits inter-brand competition. Moreover, it noted that the main supplier of tablets in the United Kingdom, Teva, was making ‘supernormal profits’ on its sales.

The CAT on CMA’s excessiveness limb assessment

The CAT found that the CMA’s assessment of price excessiveness was overly reliant on the rate of return (or cost plus) approach and should not have excluded establishing a benchmark price range that would have prevailed under normal and ‘sufficiently effective competition’. It noted that in establishing the appropriate benchmark, the CMA should have considered a counterfactual world that was closer to the ‘real world’ rather than an ‘idealised competition’.

The CAT on CMA’s unfairness limb assessment

The CAT held that the CMA was wrong to entirely disregard Alternative 2, having found that prices were unfair in themselves. Specifically, the CAT stated that an authority cannot make an infringement decision by relying solely on one of the two unfairness limb alternatives if prices turn out to be ‘fair’ under the other alternative. It went on to clarify that it is not necessary that a price should be unfair under both alternatives for a finding of infringement, and that an authority can conclude there was an infringement if the two alternatives led to opposite conclusions. However, such a finding can be made only after considering whether ‘a prima facie case of fairness under one alternative undermines the basis for the finding of unfairness under the other alternative’.

The CAT on the CMA’s assessment of economic value

The CAT also disagreed with the CMA’s assessment that the drugs under question had no economic value in terms of benefit to patients. Curiously, the CAT also contended that the economic value assessment is best made after assessing unfairness. On that basis, the CAT seems to be drawing attention to a separate assessment of economic value (distinct from an assessment of ‘fairness’). It will be interesting to see how the CAT’s decision affects the CMA’s position in the other excessive pricing cases, particularly those related to pharmaceuticals in the United Kingdom (eg, Concordia and Actavis).

Collective proceedings start to take off

In the aftermath of the European Commission’s finding in 2016 that six truck manufacturers had participated in a price-fixing cartel for a 14-year period starting in 1997, there are nine follow-on damages cases currently in front of the CAT. Seven of those were transferred to the CAT from the High Court. The remaining two – Road Haulage Association Limited v Man SE and Others; and UK Trucks Claim Limited v Fiat Chrysler Automobiles NV and Others – are applications to commence collective proceedings. They are the latest applications for a Collective Proceeding Order (since the Consumer Rights Act 2015 was passed) after the first two applications – Dorothy Gibson v Pride Mobility Products Limited; and Walter Hugh Merricks CBE v MasterCard Incorporated and Others – were rejected by the CAT.

Collective proceedings in Scotland

On 5 June 2018 the Civil Litigation (Expenses and Group Proceedings) (Scotland) Bill passed into statute upon receiving Royal Assent. The statue has paved the way for both opt-in and opt-out class actions. Watch this space!

The FCA flexes its muscles with its first ever statement of objections

In November 2017, the Financial Conduct Authority (FCA) issued its first statement of objections in a competition matter to four asset management firms: Artemis Investment Management LLP, Hargreave Hale Ltd, Newton Investment Management Limited and River & Mercantile Asset Management LLP.

According to the FCA, the parties disclosed or accepted information on the prices they intended to pay for shares in two IPOs and one private placing, shortly before the bookmakers set the share prices. According to the sector watchdog, this allowed the firms to coordinate their bids when in fact they should have been competing for shares.

Interestingly, this is not the first time the FCA is investigating information-exchange between competitors. In April 2017, the FCA launched a series of coordinated dawn raids, seizing computers and information from Aon, Jardine Lloyd Thompson, Marsh and Willis Towers Watson. The FCA suspected that the four aviation insurance brokers ‘[had] been sharing competitively sensitive information’. The FCA reportedly closed its investigation after the European Commission opened proceedings.

The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research.