11 December 2016 by Robert Bell
Are companies that have paid a fine to a regulator entitled to repayment if the decision is overturned?
The ongoing appeal in the case Gallaher and Somerfield v CMA is important as its determination will establish whether a regulator has to pay back settlement fines if its original decision is overturned.
For all its seemingly mundane nature, the judgment in this case, made on 15 July 2016, is important. So much so that on 27 October 2016, the Competition and Markets Authority (CMA) stated that it was seeking permission to appeal this Court of Appeal ruling to the Supreme Court.
This case examines the position of companies that have accepted liability and have paid a fine to UK competition regulators as part of an early settlement deal, but later find that liability and fines imposed arising out of the same facts are overturned on an appeal by third parties. Are those companies entitled to repayment?
On the one hand, is the important principle that the regulator’s findings need to be legally certain and finite? This allows investigated parties to settle early and to obtain a lesser fine but in the knowledge that they cannot appeal or take advantage of a successful appeal.
It actually undermines the incentive of the regulator to reach expeditious settlements if it fears these settlements will later be reversed by another appealing party. Such an environment encourages a culture where the regulator is incentivised to litigate till the bitter end in each case.
Yet set against that in this case is the manifest unfairness of a competition regulator applying different treatment to parties who have accepted early liability when an appeal by others is ultimately successful. Surely the principle that all early settlers should be treated equally is an essential part of procedural fairness? This is the choice the Courts had to grapple with in addressing Gallaher and Somerfield’s complaints.
On 16 April 2010, the Office of Fair Trading (OFT, the predecessor to the CMA) announced that it had imposed a record fine of £225 million on two tobacco manufacturers (including Gallaher) and 10 retailers (including Somerfield) for breach of the Chapter I prohibition of the Competition Act 1998.
The fine came after a seven-year investigation. The OFT found that a number of tobacco manufacturers had struck deals with retailers that linked the price of their tobacco with rival brands, restricting the retailer’s ability to set its own prices.
The OFT managed to reach settlements called early resolution agreements (ERAs) in July 2008 with Gallaher, Asda, First Quench, One Stop Stores, Somerfield and TM Retail after a statement of objections (SO) was issued. The SO is the formal start of competition proceedings by the regulator against the parties. Sainsbury’s received full immunity from any fine as it had blown the whistle on the alleged anti-competitive practices.
Appeals were lodged with the Competition Appeal Tribunal (CAT) against the OFT’s decision by a number of affected manufactures and retailers. However, Somerfield and Gallaher, having previously accepted the OFT’s decision, did not seek to appeal the OFT decision at that stage.
Following legal arguments, which centred on the OFT’s theory of harm, the appeals were allowed and on 12 December 2011, the OFT’s decision was quashed in relation to the initial appealing companies. The OFT did not proceed further to reopen its investigation or reissue its statement of objections. The decision (and settlements) remained against the parties who did not appeal, including Somerfield and Gallaher, as well as their liability to pay the fines agreed.
From the point of view of Somerfield and Gallaher, the case then took a highly controversial turn. On 13 August 2012, the OFT published a statement confirming that it had agreed to repay the amount of the penalty that TM Retail had paid under the decision, plus certain other costs.
The statement said that this was in accordance with assurances given by the OFT to only TM Retail during its early resolution negotiations, that in the event of any successful appeal brought by another party the OFT would pay back the fine.
Gallaher and Somerfield challenged the OFT’s conduct before the High Court, alleging that the OFT had breached the requirements of fairness and equal treatment by giving assurances to one party (TM Retail) that it would be able to take advantage of any successful third party appeal but not others in a similar position.
The High Court found that the OFT had acted wrongly in giving the assurances and, in doing so, had failed to apply relevant legal principles, which established the need for finality and legal certainty in competition cases.
However, it also decided it was appropriate to apply the principle that, as a general rule, a mistake should not be repeated where public funds are involved. It concluded, therefore, that this provided an objective justification for the OFT’s refusal to make a payment to Gallaher and Somerfield.
In light of the High Court ruling, Gallaher and Somerfield appealed to the Court of Appeal, which handed down its judgment on 15 July 2016. The Court of Appeal disagreed with the High Court and took the view that the OFT’s refusal to repay Gallaher and Somerfield on the same basis as TM Retail was a plain breach of the principle of equal treatment and was unfair.
It did not agree with the High Court’s rationale that this unequal treatment was objectively justified on the basis that a mistake should not be replicated as it impacted the public purse. There was no justification, according to TM Retail, as the substantial benefit that the OFT failed to accord to Gallaher and Somerfield and the others were in materially comparable positions.
The Court of Appeal ruled that the appropriate relief was for the CMA to pay Gallaher and Somerfield a sum equal to the penalties they paid pursuant to the decision, together with interest and costs. In this way, they will be placed in the same position as TM Retail.
Having carefully considered the Court of Appeal judgment, the CMA on 27 October 2016 stated it was seeking permission to appeal this Court of Appeal ruling to the Supreme Court on the grounds that important public policy principles are involved.
The Court of Appeal’s view is likely to instinctively find favour with the Supreme Court, upholding the principle of equal treatment. Generally it would be a dangerous road to travel down to approve sweetheart deals for some but not others in the CMA’s enforcement of its responsibilities.
Nevertheless, in specific terms, this case is likely to turn on its facts as it arose from a mistake on the part of the OFT.
However, the case does carry a serious salutary warning for those companies that are the subject of competition investigations. If you settle early with a regulator, accepting liability and agree to pay a fine, do not expect to take advantage of, or benefit from, a third party’s successful appeal.
Even if the appeal legally overturns the authority’s findings upon which your settlement is based, you are still legally liable. This follows the important legal principle that a regulator’s findings need to be certain and finite. So you cannot run with the hare and hunt with hounds, hoping to capitalise on the best deal available.