Partial win for JD Sports in the CAT on Covid-19 grounds

JD Sports has partially won its appeal against the CMA’s prohibition decision of its acquisition of  Footasylum, on a number of grounds which relate to the CMA’s failure to adequately take into account the impact of Covid-19 on the transaction.

In its ruling of 13 November the Competition Appeal Tribunal (CAT) concluded that these errors were sufficiently material to the CMA’s overall conclusions so as to require it to re-examine its final report as a whole, and it has remitted the case to the CMA for reconsideration of its findings in light of this ruling.

In a separate case JD Sports had also appealed a CMA penalty notice imposing a fine of £300,000 on JD Sports and its parent company Pentland Group, for breach of an initial enforcement undertaking  in the context of its completed acquisition of Footasylum. On 15 October 2020 the CMA has withdrawn this penalty notice “in light of issues raised on appeal”.

Background to the case

In August 2019 JD Sports, an international retailer of sports, fashion and outdoor products, acquired Footasylum, a retailer of fashionwear and sports casualwear. Following a detailed phase 2 investigation the CMA, in its final report of 6 May 2020, concluded that the transaction would lead to a substantial lessening of competition (SLC) in the retail supply of sports-inspired casual footwear and casual apparel at national level.

According to the CMA the parties to the transaction are close competitors and the merged entity would have the ability and a strong incentive to deteriorate price, quality, range and services (PQRS) across its sports-inspired casual footwear and apparel offerings post-merger. The aggregate constraint provided by other retailers and suppliers such as Nike and adidas who are also active at retail level would not be sufficient to prevent the SLC.

On the impact of Covid-19, the CMA decided that the extent and duration of the pandemic in the medium to long term was uncertain and that it could therefore not determine with sufficient certainty whether its effects were likely to have an enduring impact on the market structure, relevant to its substantive assessment. The CMA also noted that all retailers in the relevant markets would be subject to the same change in market conditions, and it did not envisage that the impact of Covid-19 was likely to reduce materially the extent to which JD Sports and Footasylum were close competitors, or would otherwise increase materially the competitive constraints exercised on the merging parties by their rivals, such as to reduce the likelihood of an SLC.

The CMA found that a full divestiture remedy, requiring JD Sports to sell Footasylum to a suitable purchaser, was the only effective remedy.

JD Sport’s appeal before the CAT

Grounds of appeal relating to the impact of Covid-19

JD Sports argued that the CMA erred in law and/or acted irrationally by excluding the effect of Covid-19 on Footasylum when considering the relevant counterfactual (i.e the competitive situation that would have prevailed absent the merger) or when assessing the competitive impact of the merger. In particular, the CMA did not follow up evidence in relation to Covid-19 provided by the principal suppliers, or from Footasylum’s primary lender, when there was still time to do so (see our e-bulletin on JD's appeal here).

The CMA defended its decision not to carry out further inquiries into the impact of Covid-19 as reasonable, based on the considerable uncertainty at the time of the investigation around the extent and duration of the pandemic’s impact in the medium and long term and referring to its statutory timetable which it said imposed unavoidable practical constraints.

The CAT concluded that the CMA had acted irrationally in not taking reasonable steps to factor the impact of Covid-19 into its investigation of the merger. Having taken the view that the evidence it had received on the impact of Covid-19 was too generalised and speculative to be reliable, it seems to have closed its mind to the possibility that robust information on the possible impact of the pandemic was available. The statutory timeline was also no bar to this, as the CMA was able to incorporate evidence submitted as late as end of April 2020.

The CMA’s decision not to seek further information, either in general, from the principal suppliers (Nike and Adidas) or from Footasylum’s primary lender, meant that it did not have the necessary evidence for making the assessments and reaching the decisions that it did.

The CAT also held that the CMA acted irrationally and therefore erred in law, in deciding not to request information from the suppliers on the impact of Covid-19 on their direct-to-consumer retail offers, in order to determine whether these would become a significantly stronger constraint on the merged entity in the foreseeable future.  Instead the CMA simply concluded, relying on the suppliers’ pre-Covid-19 forecasts, that this would not be the case.

Other grounds of appeal

JD Sports failed on its other grounds of appeal:

• That the CMA applied the wrong methodology for its assessment of the SLC and of the aggregate constraints on the merged entity. The CAT supported the CMA’s approach and did not find it erred in law simply because it did not adopt the parameter-by-parameter methodology preferred by JD Sports.
• That the CMA failed to consider Nike’s and adidas’ incentive to reallocate products to Frasers Group if the merged entity were to deteriorate aspects of its PQRS, which went against the key suppliers’ interests. The CAT held that the CMA had the necessary evidence available to come to its conclusions on this point.
• The CMA’s failure to investigate the impact of the principal suppliers on the opportunity for the merged entity to deteriorate any aspect of PQRS. The CAT held that the CMA’s investigation of the constraints exercised by the suppliers was more than sufficient to form the basis for its conclusion in this regard.

What next?

The CMA’s final report is quashed to the extent that its conclusions are based on the CMA’s assessment of the likely effects of Covid-19 on the relevant markets, on the parties and/or merged entity and on the competitive constraints likely to apply to the parties and/or the merged entity.  The CAT considered that the assessment of these effects is sufficiently material to the CMA’s overall conclusions so as to require a re-examination of the final report as a whole, and has remitted the case to the CMA for reconsideration in light of the judgment.

The CMA has welcomed the CAT’s endorsement of its analytical framework but said it was disappointed that the CAT disagreed with its approach to information gathering on the pandemic. The CMA argues that the pandemic started to have a serious impact in the UK only in the final week of its inquiry, and that its assessment of that impact on its decision about the likely future effects of the merger was therefore “undertaken in the context of great uncertainty about the longer term impact of coronavirus on the retail sector”.

The CMA has indicated that it is considering its approach including whether to appeal the CAT’s ruling. There is a right of appeal from the CAT to the Court of Appeal on points of law only.

Contacts