CMA imposes record fine for breach of IEO in JD Sports/Footasylum merger

On 5 August 2020 the CMA published a penalty notice imposing a fine of £300,000 (the highest fine to date for a single breach of an initial enforcement order (IEO)) on JD Sports and its parent company Pentland Group, for breach of an IEO in the context of its completed acquisition of Footasylum.

In October 2019 Footasylum served a break notice on one of its stores, terminating the lease without prior consent of the CMA, in breach of the IEO imposed in May 2019.  Footasylum had notified the monitoring trustee that it planned to serve the notice and was advised that it should notify the CMA prior to taking such action, but failed to do so. In a subsequent compliance statement Footasylum mentioned the break notice, referring to its discussion with the monitoring trustee, and stating that the decision was taken in the ordinary course of business and prior to the transaction.

The CMA dismissed the parties’ arguments that no prior written consent from the CMA was required, that the store closure was effected in the ordinary course of business and that the decision to close the store was part of the pre-merger plan and was therefore a decision taken before the merger. It referred to a previous case, Electro Rent, in which Electro Rent was fined £100,000 for having served a break notice on the lease of its UK premises without first seeking the CMA's consent. The CMA considered that serving the break notice did constitute pre-emptive action which made it harder to take remedial action and was therefore in breach of the interim order. The CMA’s approach in this case was upheld on appeal before the Competition Appeal Tribunal (CAT), which confirmed that the service of a break notice in this context does not fall within the ordinary course of business.  The CAT also held that the mere fact that there might be a good commercial reason to serve the break notice does not remove the requirement to seek prior consent from the CMA.  The Judgment in this case also made it clear that in the context of a merger investigation a reasonable person would consult the CMA, or at least obtain advice from the company’s legal advisers, before serving a break notice.

The CMA concluded that the parties were in breach of the IEO imposed in May 2019, by failing to ensure that none of the assets of the Footasylum business were disposed of without the CMA’s written consent or in the ordinary course of business.  It also held that neither of the parties had a reasonable excuse for the failure to comply.

Level of the fine

This is the highest fine imposed by the CMA to date for a single breach of an IEO and signals its determination to ensure that parties to a merger comply with the interim orders it imposes in the context of its merger control review process.  The CMA has the power to impose a penalty of 5% of global turnover, which in this case would have amounted to £315 million, but the CMA did not consider the breach to be so serious as to justify a penalty at the upper end of the scale.

The CMA’s interim measures powers

The voluntary nature of the UK merger control regime means that merging parties may already have begun the process of integrating when the CMA launches its investigation.  In order to address the risk that it may be extremely difficult to 'unscramble the eggs' and implement effective remedies if the CMA identifies competition concerns which need to be addressed, the CMA has the powers to prevent (or reverse) any so-called 'pre-emptive action' by the merging parties pending the conclusion of its investigation. The CMA's powers include:

• the power to impose an 'interim enforcement order' ('IEO') at Phase 1 of its investigation (section 72(2) EA 2002); and
• the power to impose an 'interim order' at Phase 2 of its investigation (section 81(2) EA 2002).

Such orders are jointly referred to as 'interim measures orders'.

Previous cases

The CMA has to date imposed fines for failure to comply with these interim measures orders in a number of cases and this is a trend that looks set to continue.  Examples of previous fining decisions include:

• Electro Rent/Microlease: £100,000 fine for serving a break notice on the lease of its UK premises
• Ausurus Group/Metal & Waste Recycling (MWR): £150,000 fine for directing customers of MWR to make payments into Ausurus’ bank account and £150,000 fine for failing to give MWR’s managing director a clear delegation of authority
• Vanilla Group Ltd/Washstation Ltd: £120,000 fine for selling laundry machines used in Washstation business to the former owner of Washstation
• Nicholls/DCC Energy: £146,000 fine for relocating staff and using Nicholls-owned and branded tankers and drivers employed by Nicholls to make deliveries to customers of ex-DCC business
• PayPal/iZettle: £250,000 fine for conducting cross-selling pilot campaigns intended for France and Germany but leading also to contacting potential UK customers

Practical tips for merging parties

The following general practical guidance can be drawn from the various cases:

• Seek derogations upfront rather than subsequently trying to rely on arguments as to reasonable excuse
• If formal derogations are obtained take care not to go beyond them or to take action before the derogation is formally in place
• Remember that the possibility of pre-emptive action is sufficient to trigger a requirement to seek CMA consent
• Discussions with a monitoring trustee do not bind the CMA
• Implementation of a contract agreed before an IEO has been issued may still amount to a breach
• Enforcement of IEOs is independent of the substantive outcome of a merger investigation

See here and here for our blog posts on some of the previous cases.

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