Follow us

On 25 May 2022 the Supreme Court overturned the Court of Appeal's ruling on costs in Pfizer and Flynn Pharma and concluded that the Competition Appeal Tribunal (CAT) had applied the correct test when awarding a proportion of their costs against the CMA.

The Court of Appeal had held that, despite Pfizer and Flynn's successful appeals before the CAT, no order of costs should have been made against the CMA as it had been acting in its capacity as a regulatory body.  According to the Court of Appeal the starting point should have been that no order for costs should be made against a regulator who has brought or defended proceedings in the CAT acting purely in its regulatory capacity.  It held that this starting point can be departed from for good reason, but the mere fact that the regulator has been unsuccessful is not enough.

The Supreme Court concluded that there is no general principle that all public bodies should enjoy a protected costs position where they lose a case brought or defended in the exercise of their public functions.  It held that, instead, the relevant principle established by the case law is that an important factor to consider (amongst other factors) when determining costs awards is the risk that there will be a chilling effect on the conduct of the public body if costs orders are routinely made against it when unsuccessful.

Whether there is a real risk of such a chilling effect depends on the facts and circumstances of the public body in question and the nature of the decision, and the Supreme Court held that this is an assessment best made by the relevant court or tribunal.  In this case, the Supreme Court concluded that the CAT had carried out a proper analysis consistent with its costs jurisdiction, taking into account all relevant factors.

Background to the case

In December 2016 the CMA imposed fines totalling £89.4m on Pfizer and Flynn Pharma for abuse of a dominant position through excessive and unfair pricing in relation to the capsule form of an anti-epilepsy drug, phenytoin sodium.

On appeal, the CAT set aside the CMA’s conclusions on abuse (and therefore also on penalties). In particular, the CAT held that the CMA had not applied the correct legal test when concluding that the prices charged by Pfizer and Flynn Pharma were unfair, that it had not established the right economic value of the drug, and that it had failed to sufficiently take into account comparable products.

The CAT's ruling on costs

Pfizer and Flynn Pharma both claimed their costs on the basis that they substantially won their appeals, and in its ruling on costs of March 2019 the CAT held that the CMA should pay a proportion of their costs.  The CAT has a wide discretion in relation to cost awards and in appeals against Competition Act 1998 decisions its practice has been to adopt the starting point that the successful party should obtain a costs award in its favour.

The CAT referred in its costs ruling to the Court of Appeal's judgment in BT v Ofcom ([2018] EWCA Civ 2542), where the Court of Appeal held that Ofcom should not be subject to adverse costs orders where it is acting purely in its regulatory capacity in prosecuting or resisting a claim before the CAT, even if it was unsuccessful.  However, it decided that that principle did not apply in this case as the two legal frameworks are very different.  In contrast with Ofcom under its regulatory regime, the CMA has discretion whether to bring an infringement case under the Competition Act 1998 and is not obliged to do so in any particular case.  It also has extensive powers including the ability to impose substantial financial penalties of a quasi-criminal nature.

Given the differences in the two legal frameworks the CAT concluded that it was justified in applying its normal approach in Competition Act 1998 appeals that the starting point in assessing costs is that the successful party should obtain a costs award in its favour.

The Court of Appeal's ruling on costs

On appeal by the CMA, the Court of Appeal held that the CAT had misinterpreted the decision in BT v Ofcom and considered that the CAT's reasons for singling out competition infringement cases were not convincing.  The Court of Appeal held that the CAT had failed to give weight to the position of the CMA as a public authority carrying out its functions in the public interest, which it considered to be the relevant feature in considering if any order of costs should be made.

The Court of Appeal concluded that the starting point is that no order for costs should be made against a regulator who has brought or defended proceedings in the CAT acting purely in its regulatory capacity.  That starting point may be departed from for good reason, but the mere fact that the regulator has been unsuccessful is not enough.

The Court of Appeal confirmed that it is for the CAT to develop its own approach to an award of costs.  That approach could include, the degree of success or failure achieved by a party, hardship suffered by a successful applicant if an order of costs were not made, or the conduct of the parties.  But the Court of Appeal held that whatever the approach adopted by the CAT, it must always take into account the fact that the CMA is a public body, carrying out functions in the public interest.  It considered that there is a public interest in encouraging public bodies to exercise their public function of making reasonable and sound decisions, without fear of exposure to undue financial prejudice if the decision is successfully challenged.

The Court of Appeal set aside the CAT's ruling on costs and concluded that there should be no order as to costs of the appeal before the CAT.

The Supreme Court's ruling

Pfizer and Flynn Pharma appealed to the Supreme Court, challenging the Court of Appeal's finding that there is a starting point that no order of costs should be made against a regulator if it has been unsuccessful.  The Supreme Court unanimously allowed the appeals and reinstated the CAT's costs ruling of March 2019.

The Supreme Court concluded that there is no generally applicable principle that all public bodies should enjoy a protected costs position where they lose a case brought or defended in the exercise of their public functions.  The principle established by the case law is instead that an important factor to consider when determining costs awards is the risk that there will be a chilling effect on the conduct of the public body if costs orders are routinely made against it when unsuccessful, even where it acted reasonably in bringing or defending the application.

Whether there is a real risk of such a chilling effect depends on the facts and circumstances of the public body in question and the nature of the decision, and the Supreme Court held that this is an assessment best made by the relevant court or tribunal.

The Supreme Court considered the CAT's approach to the award of costs in appeals under the Competition Act 1998 and the extent to which the risk of a chilling effect is considered.

Compared to other bodies such as local authorities, the police and professional disciplinary bodies, the CMA takes a limited number of decisions each year under the Competition Act.  In addition, the way the functions of the CMA are funded dispels any concerns that its conduct will be influenced by the risk to adverse costs orders:

  • When the CMA has to pay the appellant's costs it is able to offset the litigation costs against its Competition Act 1998 penalty income, so the costs are fully funded;
  • The CMA is incentivised to investigate and sanction infringements by large undertakings, even though they may be more likely to appeal against a decision, as the level of penalty is linked to the turnover of the company.

The Supreme Court also concluded that the CAT in exercising its costs jurisdiction has generally taken into account the nature and the functions of the respondent body in many other ways.  The Supreme Court surveyed the CAT's costs rulings and concluded that these demonstrated that, in cases where the CAT adopted a starting point that costs follow the event, the result was usually very different from that likely to have been arrived at in the High Court applying CPR rule 44 (the general rules about costs in the Civil Procedure Rules):

  • The CAT provides detailed consideration and reasoning in its costs decisions;
  • The CAT has been much readier than the High Court to make issues-based orders where a significant deduction is made from the winning party's costs award to reflect costs spent by both parties on issues which were either decided in favour of the overall loser or were not dealt with in the judgment;
  • The CAT often makes substantial reductions in the costs the CMA or Ofcom is ordered to pay, for example where the costs were manifestly disproportionate or had been incurred unnecessarily;
  • The CAT takes into account a wide variety of factors when considering costs and in particular whether to depart from the starting point.

The cases demonstrate that the CAT is well aware of the many competing factors pulling it in different directions in the different jurisdictions in which it operates and has developed a sophisticated approach to costs awards.

The Supreme Court concluded that in this case the CAT's analysis in its costs ruling and subsequent costs order was a proper exercise of its costs jurisdiction, arrived at after considering all the relevant factors.

Contacts

Stephen Wisking photo

Stephen Wisking

Partner, London

Stephen Wisking
Andrew North photo

Andrew North

Executive Counsel, Melbourne

Andrew North
Kristien Geeurickx photo

Kristien Geeurickx

Professional Support Consultant, London

Kristien Geeurickx

Key contacts

Stephen Wisking photo

Stephen Wisking

Partner, London

Stephen Wisking
Andrew North photo

Andrew North

Executive Counsel, Melbourne

Andrew North
Kristien Geeurickx photo

Kristien Geeurickx

Professional Support Consultant, London

Kristien Geeurickx
Stephen Wisking Andrew North Kristien Geeurickx