Competition law: the correct approach to costs awards

The question of whether a competition authority should pay the costs of a successful appeal against its decisions may not – for many readers – count as the most important judicial question of the age, but it is one that has recently occupied the UK Supreme Court (UKSC) and which is of considerable significance for the development of UK competition law.

On 25 May 2022, the UKSC handed down judgment in appeals brought by Pfizer and Flynn (the appellants) against a Court of Appeal judgment ([2020] EWCA Civ 617) that had the result of shielding the Competition and Markets Authority (CMA) from the payment of costs in most cases. By contrast, the UKSC held the CMA is not, as a matter of principle, exempt from paying a successful appellant’s costs. In so finding, it confirmed the Competition Appeal Tribunal’s (CAT) usual position that costs should be awarded to a party that successfully appeals a CMA infringement decision.

This is an important judgment for parties involved in CMA investigations and considering an appeal. Its wider significance is demonstrated by the number of interventions in the case (Bristows competition team acted on one intervention in the case). Had the UKSC confirmed the position of the Court of Appeal, parties could have been discouraged from pursuing meritorious appeals.

Background

In December 2016, the CMA issued a decision finding that Pfizer and Flynn had abused their dominant positions by charging unfairly high prices for phenytoin sodium, an epilepsy drug, contrary to Chapter II, Competition Act 1998 (CA98). On appeal in June 2018, the CAT maintained the CMA’s finding of dominance but set aside (pending re-investigation by the CMA) the fines of nearly £90m imposed on Pfizer and Flynn on the basis the CMA had erred in its analysis of abuse. The Court of Appeal subsequently largely upheld this judgment, albeit with somewhat different reasons.

In the meantime, in March 2019, after considering who had won and lost on various issues, the CAT ordered the CMA pay 55 - 58 per cent of the appellants’ allowable costs.

The CMA appealed the costs ruling, following Ofcom’s successful appeal in similar circumstances (BT v Ofcom (Business Connectivity) [2018] EWCA Civ 2542). In May 2020 the Court of Appeal overturned the CAT’s costs order ([2020] EWCA Civ 617), holding the correct outcome was no order for costs should be made, principally on the basis that the CAT had incorrectly disregarded the principle derived from a line of cases beginning with Bradford Metropolitan District Council v Booth [2000] 164 JP 485. That principle was a local authority “ought never to be ordered to pay costs…unless it has acted unreasonably, improperly or dishonestly”. The appellants were granted permission to appeal to the UKSC.

The UKSC appeal

The appellants argued there was no default principle of “no order for costs” in competition appeals. Referring to the development of the CAT’s wide discretion through cases such as GISC [2002] CAT 2, the appellants argued the CAT, unlike other tribunals or appeals (such as dispute resolution decisions taken by Ofcom), generally applied the starting point that “costs follow the event” for CA98 appeals. These cases also show how the CAT’s discretion is exercised differently depending on the case, striking a balance between avoiding rigid rules and providing consistency and predictability for costs decisions.

Judgment

After confirming it was “appropriate for an appellate court to lay down guidance or even rules” applicable to the CAT’s unfettered statutory discretion, Lady Rose (who gave the leading judgment) considered two principal questions. First, what the appropriate starting point for costs awards may be following a successful appeal against a public body and second, whether the CAT failed to give adequate consideration to the risk of a chilling effect on the CMA.

(i)               Starting point

The UKSC held “there is no generally applicable principle all public bodies should enjoy a protected status… where they lose a case… in the exercise of their public functions in the public interest”. The “Booth line of cases” simply supported the principle that the risk of a chilling effect on the conduct of a public body should be taken into account as an important factor when determining the cost order to be made. A chilling effect cannot be presumed, depends on the facts of the case but need not be considered afresh each time a court exercises its discretion. The UKSC held the CAT was best placed to determine the risk of a chilling effect in relation to the CMA.

(ii)              Chilling effect

The judgment noted the CAT has considered the chilling effect, both with and without reference to the Booth line of cases, on numerous occasions. There are previous examples of it declining to order costs against regulators, for example in certain appeals of Ofcom decisions. That said, the CMA, unlike Ofcom, can and does investigate infringements of UK competition law across any field of economic activity. The CAT recognises this distinction and starts at “no order as to costs” for some proceedings. However, the usual rule that “costs follow the event” for CA98 proceedings is well-established.

The UKSC considered the CAT’s discretion to award costs against the CMA to be important from a public policy perspective. The CMA takes a limited number of CA98 decisions each year and has a unique funding structure which reduces the impact of adverse costs orders. When the CMA wins an appeal, the costs award usually covers both internal costs and external disbursements. When unsuccessful, the CMA is able to fully offset litigation costs against penalty income collected that year. The fines it receives in turn pay for the cost of defending a successful appeal. The UKSC considered the CMA has an incentive to continue to investigate infringements by larger undertakings as the level of penalty is linked to company turnover. As a result, the CAT’s starting point of “costs follow the event” has not deterred the CMA from scrutinising substantial market players.

On this basis, the UKSC concluded the CAT was correct “to distinguish the nature of decisions taken by the public bodies concerned in the Booth line of cases from the decisions taken by the CMA” under CA98. The CAT had properly taken the chilling effect into account in exercising its discretion.

Implications

Costs awards are crucial to maintain the financial viability of appeals. As noted by both the CAT and UKSC, it is in the public interest for competition authorities to be accountable for their decisions. This judgment will support companies with meritorious cases to commercially justify appealing a CMA decision in the comfort the CAT’s well established cost rules will help manage the costs risk.

The benefit of the judgment is not only to the parties to the appeal, however: appeals of CMA decisions aid the development of UK competition law. The appeal process often results in greater legal clarity and increased confidence in the application of the law for market players. That may be so even where the appeal does not result in a CMA decision being overturned: judgments by the CAT and in further appeals to the Court of Appeal may clarify the CMA’s reasoning, often in more digestible form (bearing in mind that many CMA decisions run to hundreds of pages in length).

A recent example is Ping Europe v CMA [2018] CAT 13, where the CAT’s judgment upheld the CMA infringement finding but materially differed from the CMA’s reasoning as to what constitutes an object restriction, a central competition law concept. The substantive aspects of the case under appeal are also a case in point: the CMA has now adopted the reasoning from the appeal in subsequent decisions. Ensuring UK competition law continues to develop as the CMA takes on a more substantial caseload post-Brexit is crucial; this judgment ensures such development is not undermined.

Sophie Lawrance is a partner and Manon Rattle is a solicitor at Bristows LLP bristows.com