Download Brexit: what would it mean for the UK competition law

Brexit: what would it mean for the UK competition law landscape?
Introduction
“Negative, negative. Incredibly negative”1. This was the view of one City lawyer on the potential
impact of the UK leaving the EU. Whilst this comment was in the context of the impact on the whole
legal sector, the effect on competition law cannot be underestimated. EU law provides for specific
rules on anti-competitive activity, mergers and procurement. Without the EU, the UK competition
law landscape would look quite different, and it is difficult to find many positives in such a scenario.
The exit options
Much commentary has been devoted to the various exit options for the UK, and it is not necessary
for this essay to explore these in depth. Broadly speaking, the options are:
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European Economic Area (EEA): the UK leaves the EU but remains a part of the EEA.
The “Swiss” model: the UK becomes part of the European Free Trade Association (EFTA) and
negotiates treaties individually.
Moving towards a complete exit: the UK leaves the EU and either enters into a customs
union with the EU, a Free Trade Agreement, or simply relies on its membership of the World
Trade Organisation as a basis for trade.
It is difficult to predict what effect an exit from the EU would have without knowing what form the
exit would take. Rather surprisingly, the polarised nature of the “in/out” debate has lacked any real
focus on the terms of any exit.
Accordingly, it is impossible to declare authoritatively what the effect of the UK’s exit on competition
law would be without knowledge of the exit option. The two are inextricably linked. For example, if
the UK were to remain a part of the EEA, it would still be bound by EU competition law and the
effect of an exit would be less profound. Similarly, EU rules on procurement by public bodies would
continue to apply. Much of the analysis in this essay assumes that the exit option would mean that
the UK is no longer directly bound by EU competition law.
Dual investigation
Currently, the UK’s membership of the EU provides that EU law prevails over national law. It is a
well-established principle that a Member State’s participation in the EU “carries with it a clear
limitation of their sovereign right upon which a subsequent unilateral law, incompatible with the
aims of the Community, cannot prevail”2. EU law provides for this directly with regard to
competition law. Article 3(1) of Regulation 1/2003 states that where Member States apply national
law to anti-competitive agreements, decisions by associations of undertakings, concerted practices
or abuses of dominant position, they must also apply EU law.
1
The Law Society of England and Wales (2015),EU and the Legal Sector, available from
nd
http://lawsociety.org.uk/news/press-releases/the-future-of-britain-in-europe-legal-services/ [Accessed: 2
November 2015]
2
Costa v ENEL (6/64) [1964] E.C.R 585; [1964] C.M.L.R 425
If the UK was to leave the EU, the national authorities would no longer be obligated to apply such
supremacy to EU law. However in reality, even if the UK was no longer directly bound by EU
competition law, the fundamental principles of competition law would remain the same. Articles 101
and 102 of the Treaty on the Functioning of the European Union (TFEU) would still be covered by the
Competition Act 1998, which effectively mirrors the equivalent EU law.
That is not to say that the effect on competition law would not be appreciable if the UK left the EU.
An exit from the EU would undoubtedly result in a dual investigation system in the UK, where a claim
would have to be considered by both the Competition and Markets Authority (CMA) and the
Commission. For example, cases involving abuse of dominant market positions would infringe both
jurisdictions, resulting in claimants and defendants having to run two cases simultaneously.
Notwithstanding the inconvenience of running two claims, the resulting increase in costs would
significantly impact affected parties. Furthermore, the CMA would be faced with a huge increase in
workload, which would have to be adequately resourced and funded. The potential for conflicting
judgments issued by the Commission and the CMA would confuse the position on competition law,
and make it difficult both for clients to ensure compliance, and for legal advisers to give clear advice.
Damages
In a ‘Brexit’ scenario, the UK courts would no longer be bound by EU decisions on anti-competitive
activity. Currently, a vast number of claims are brought on the basis of EU decisions in order to
obtain follow-on damages. This course of recovery would all but cease to exist, given the number of
claims which directly relate to or rely upon EU decisions. Claimants would have to prove their claim
in the UK courts as well. Similarly, there would be no ability to rely on a decision to award damages
in another Member State in the UK courts.
This would mean an extra hurdle for claimants to surmount to recover losses as a result of decisions
in the European courts. This will no doubt force claimants to try and bring claims in other
jurisdictions that are able to rely on this principle. This would result in a loss for those practicing in
the UK, as clients looked elsewhere for recovery.
Merger control
Currently the European Commission acts as ‘one-stop shop’ for EU merger control3. Transactions
that have a ‘Community dimension’ must seek prior approval from the Commission. Where EU law
does not apply, transactions may be caught by national merger control rules. Notification to the
Commission is mandatory and the transaction cannot take place until approval has been given.
In the UK, transactions that are not notifiable to the Commission are governed by the Enterprise Act
2003, as amended by the Enterprise and Regulatory Reform Act 2013. This is a voluntary notification
process, and approval does not need to be sought prior to the transaction taking place.
EU legislation governing mergers applies to all mergers, regardless of where the companies are
based. If the UK left the EU, clearance would have to be sought both under the national regime and
by the Commission if a ‘Community dimension’ was present. The ‘one-stop shop’ principle would
3
Regulation (EC) 139/2004 on the control of concentrations between undertakings, art 21(1)
cease to apply and the burden on companies to run a dual approval process would increase time and
management costs. It would potentially affect M&A activity in the UK, given that an EU-based
company might make a more attractive target if there is no need to seek such dual approval.
Whether the UK regime would continue to be voluntary and retrospective would be an issue for
legislators to consider, as it might be seen as too lenient if the EU rules ceased to supersede the
national rules.
State aid
One potential advantage of the UK leaving the EU would be the removal of EU state aid rules. To
date, state aid rules have restricted investment in large projects, such as Hinkley Point4. In a ‘Brexit’
scenario, the government would be free to intervene in business. It will be interesting to note
whether this is used by Eurosceptic and left-wing campaigners ahead of the referendum to
encourage an exit. However, the UK would still be subject to WTO rules in this area even if it did
completely exit the EU.
Influencing legislation and policy
What is clear from an analysis of how a ‘Brexit’ would affect competition law is that much of the
UK’s economic activity would still be governed by EU law. In a global market, it is impossible and
undesirable to only operate at a national level, and so the influence of EU law will still be felt
strongly by businesses in the UK.
Particularly under the EEA/EFTA models, the UK would still largely be governed by EU competition
law. In fact, the biggest change would be that the UK would no longer have a say in the law-making
process, and would lose the ability to influence legislation and EU policy. The UK would be subject to
laws it has no say in. The perception that a ‘no’ vote in the referendum would afford more legislative
control to the UK is a myth; rather, it would only serve to extinguish the UK’s ability to have a say in
the laws it must comply with.
A study examining 125 pieces of EU legislation showed that the UK’s position was on average the
fourth closest to final policy outcomes5, a higher position than any other large EU Member State. If
the UK loses its ability to influence policy, there is a risk that the outcome could move further away
from the UK’s desired position and more towards the position of other influential Member States.
Working relationships
Many of the UK’s largest law firms have offices in Brussels, with the offices working closely together
on competition law matters. Every law firm ranked in bands 1 to 4 of the Chambers & Partners guide
to competition law6 has a Brussels office and enjoys the ability to move lawyers across offices, and
work flexibly across both jurisdictions. Many City firms offer a seat in Brussels to their trainees, to
enable them to work in the de facto capital of the European Union. Such experience is invaluable for
learning about competition law. Easy access to the European Commission and the Council of the
European Union is vital for competition lawyers.
4
(Case T-356/15) Austria v Commission [2015]
Robert Thompson (2011), Resolving Controversy in the European Union, Cambridge University Press
6
CHAMBERS & PARTNERS, Competition Law (London Firms), available from:
http://www.chambersandpartners.com/11814/2529/editorial/1/1 [accessed 3rd November 2015]
5
An exit from the EU would mean an end to such flexible arrangements. Whilst this is not a problem
unique to competition lawyers, the nature of the work makes it very common for competition
lawyers to travel across the EU. The requirement to obtain a visa or any other restriction on
travelling to Brussels would discourage such flexibility, and make it harder for UK competition
lawyers to work in Brussels. Similarly, the ability to offer clients legal services across the internal
market would be restricted. The knowledge-sharing and co-operation that currently takes place
between UK and Brussels offices would be harder to achieve, and would be to the detriment of
competition law in the UK. Furthermore, at a time when UK firms are seeking to employ the
brightest and most able graduates from across the EU, a ‘Brexit’ scenario would make the UK a less
attractive option if graduates could not work across the EU as easily. This would disadvantage
competition law in the UK, as it may be more difficult to attract top talent to work in UK (particularly
City) firms.
Impact on legal sector
A recent Law Society report estimates that the annual loss for the legal sector in the event of an exit
could be as much as £1.7 billion; the equivalent of the current combined annual UK revenue of
Linklaters, Freshfields Bruckhaus Deringer, Clifford Chance and Allen & Overy7. Although the report
does not break down the strong negative effects by sector, they would of course be felt by
competition law departments.
The scale of the impact felt by the legal sector would depend on which ‘Brexit’ scenario was
adopted, but the research acts as a warning call to those working in law. It is clear that leaving the
EU would have a deeply detrimental effect on revenue. Competition lawyers may feel the effects
more strongly than other departments, given that much of their work involves advising clients across
the single market. A client looking for advice in relation to all of its trade in the EU would inevitably
seek to instruct a firm in the jurisdiction, and carve-out only its UK-specific work for those in the UK.
Practical considerations
Article 50 of the Treaty on European Union states that “any Member State may decide to withdraw
from the Union in accordance with its own constitutional requirements”8. Should the result of the
referendum result in an exit from the EU, the UK would have to give two years’ notice to the
European Council. During that time, an exit agreement would have to be negotiated. Unless an
extension was agreed, the UK would leave the EU at the end of the notice period or upon the
conclusion of the exit agreement.
Practically therefore, an exit would be a lengthy process and the competition law landscape would
not change overnight. However, law firms and their clients would no doubt see an initial uplift in
work due to the uncertainty caused by the result and the need to prepare in advance of the eventual
exit.
Conclusion
7
The Law Society of England and Wales (2015), The UK Legal Services Sector and the EU, an analysis by Oxford
Economics, commissioned by the Law Society of England and Wales, available from:
th
http://lawsociety.org.uk/news/stories/the-uk-legal-services-sector-and-the-eu/ [accessed 29 October 2015]
8
Consolidated Version of the Treaty on European Union [2008] OJ C115/13, art 50
Prime Minister David Cameron’s promise to hold an EU referendum by the end of 20179 has ignited
the debate over a decision that could result in the biggest political change in decades. An exit from
the EU would have far-reaching political, economic and social consequences. However, even in
restricting the analysis to just UK competition law, it is clear that the effect of an exit would be
profound. Competition law presents some unique challenges. Although the substantive law would
largely remain unchanged, as the equivalent UK law is derived from its principles, there are a
number of practical difficulties which would arise.
Exiting the EU does not remove its influence. UK businesses wanting to trade in the EU would be
subject to its rules, including those on competition. . The myth that exiting the EU would allow the
UK more flexibility in its legislation needs to be addressed. Practically, an exit would increase the
burden on those trading in the EU and increase the cost of trading in the UK for businesses.
An analysis of the effect of a ‘Brexit’ on competition law highlights very few positives. The potential
changes to the competition law landscape are overwhelmingly negative, and seem to punish those
wishing to trade in the single market.
Competition lawyers are right to be worried about a “no” vote in the referendum. Although there
would likely be a surge in short-term work, with clients seeking advice on the ramifications of an exit
on their business, this would not be sustainable. In the long term, there is a real risk that
competition law work would be less lucrative, as clients look elsewhere for advice on the single
market, and M&A activity moves to other jurisdictions which can take advantage of the EU’s ‘onestop shop’ approach.
Finally, the competition law landscape in already changing in anticipation of the referendum. The
uncertainty surrounding the referendum is making it necessary for businesses to seek the advice of
their competition lawyers now to manage risk and plan for the future. The success (or failure) of the
government’s negotiations with the EU prior to the referendum will be the biggest indication of
whether the landscape will be irrevocably changed in 2017.
Jasminder Chaytor
Trainee Solicitor, Berwin Leighton Paisner LLP
9
GOV.UK (2013) EU Speech at Bloomberg, available from: https://www.gov.uk/government/speeches/euspeech-at-bloomberg [Accessed: 20th October 2015]