A curb on extraterritoriality? The CAT finds in favour of BMW's and VW's challenges against the extraterritorial application of the CMA's investigatory powers

On 8 February 2023, the UK's Competition Appeal Tribunal (CAT) issued a joint judgment in two cases: BMW AG v CMA and R (on the application of VW AG) v CMA, relating to the territorial scope of the CMA's information gathering powers under Section 26 of the Competition Act 1998 (CA98). The CAT found that the CMA had acted beyond its powers in issuing Section 26 notices to the German-domiciled parent companies of both BMW and VW as part of the CMA's Chapter I investigation into the end-of-life vehicle recycling sector. The CAT also concluded that the issuing of a failure to comply notice and the imposing of a penalty (pursuant to Section 40A CA98) in respect of foreign-domiciled companies with no presence in the UK in relation to the production of specific documents and information held by such companies went beyond the CMA's powers.

This amounts to a significant clarification (and limitation) of the CMA's investigatory powers.  The CMA has indicated that it will appeal noting that the judgment risks undermining its ability to investigate, enforce and deter competition law infringements.

Background and overview

Under Section 26 CA98, the CMA may require "any person" to produce a specified document or information which the CMA considers relates to any matter relevant to an investigation. As part of its Chapter I investigation into the end-of-life vehicle recycling sector, the CMA had sent Section 26 information request notices to both BMW AG and VW AG, which are domiciled in Germany.

The notices were not only addressed to BMW AG and VW AG, but also to their respective UK subsidiaries and any other legal entity that fell within the same undertaking. Subsequently, VW AG applied to the UK High Court for a judicial review of the Section 26 notice sent to the VW Group. Separately, BMW AG refused to comply with the Section 26 notice sent to the BMW Group, and as a result was issued a penalty notice by the CMA in December 2022, imposing a £30,000 fixed penalty and a £15,000 daily fine. BMW AG then appealed this penalty in the CAT.

The principal ground in each of BMW AG's and VW AG's applications was the same; that Section 26 CA98 did not apply exterritorialy and that, as foreign-domiciled companies with no presence in the UK, the CMA had no power to require them to produce specific documents or information held outside of the UK. In light of the similarity between the two companies' challenges, VW AG's application was transferred from the High Court to the CAT and was heard together alongside BMW AG's appeal in late January 2023.

Submissions made at the hearing

At the hearing, both BMW AG and VW AG (the Applicants) referred to the UK Supreme Court's judgment in R (on the application of KBR, Inc) v Serious Fraud Office, which found a presumption against extraterritorial application of the UK Serious Fraud Office's investigative powers, unless otherwise explicitly stated. The Applicants argued that such a presumption against extraterritoriality applied, and was not rebutted, in the context of the CMA's powers under Section 26 CA98, as well as any resulting penalty. During the drafting and enactment of CA98 there was no evidence of Parliament's intention that Section 26 CA98 would apply extraterritorially. In addition, there were insufficient safeguards in place for the CMA's powers to have extraterritorial effect, given that wide-ranging extraterritorial powers could risk infringement of foreign laws (such as data protection), and potentially breach international law principles.

The CMA's submissions focussed on an argument that the definition of "person" included within the CA98 extends to cover an "undertaking". Therefore, according to the CMA, a notice pursuant to Section 26 could be issued in respect of an undertaking and could encompass natural or legal persons within that undertaking that were based outside of the UK. As a result, the CMA argued that its powers under Section 26 could be enforced against the Applicants as German-domiciled companies. Additional arguments raised by the CMA included that since the Chapter I and Chapter II prohibitions under the CA98 applied against undertakings, it made "good sense" that the CMA's investigatory powers under the CA98 would be applicable to undertakings too.

Immediately following the hearing, the CAT ordered a stay of the daily £15,000 penalty fine against BMW AG until it handed down a judgment, which it stated that it would provide as soon as possible. The CAT provided its judgment on 8 February 2023, finding in favour of both Applicants and declaring that the Section 26 notices served on each Applicant were ineffective and that the CMA had no power over the Applicants to make them respond to such notices.

Judgment of the CAT

In reaching its decision, the CAT focused on resolving the true meaning of "person" to whom Section 26 could apply. The definition of "person" under the CA98 does extend to "an undertaking". The CAT considered that although included under the definition of a "person", an "undertaking" is any entity that is engaged in economic activity, and according to the CAT an economic, rather than a legal concept.

The CAT drew on the fact that both BMW AG and VW AG were incorporated and domiciled in Germany and had no branch or office in the UK. The CAT recognised that BMW AG's and VW AG's respective UK subsidiaries were legal persons sufficiently connected to the UK and were subject to UK laws. Whilst expressing a desire not to be "overly-prescriptive" on the point, the CAT considered that should the UK subsidiaries have control of documents or information responsive to the CMA's Section 26 notices that were beyond the UK territory, there would be an obligation to produce them.

The CAT however disagreed with the CMA's position that addressing a Section 26 notice to an "undertaking" would trigger an obligation against legal persons (e.g., companies within that undertaking), even where such legal persons have no UK territorial connection. The CAT considered that such an approach could undermine laws in foreign countries and noted that it is often difficult for one legal person within an undertaking to actually know the true extent of other natural or legal persons within that same undertaking.

The CAT considered that it made "no legal sense" to serve an undertaking with a notice, and that whilst the term of "person" can extend to an "undertaking" this does not absolve the CMA from directing a Section 26 notice to a specific natural or legal person within that undertaking.   In its judgment, the CAT concluded that a Section 26 notice could be directed to an undertaking, but only via a natural person or legal person with a sufficient connection to the UK. Where such a natural or legal person does not have a UK territorial connection, the presumption against extraterritoriality applies and there is no obligation to respond.

Whilst not central to its assessment, the CAT also had regard to other arguments raised by the parties in their submissions. As to the intentions of UK Parliament when drafting the relevant legislation, the CAT considered it not "sufficiently clear-cut" either way to show the intention of the drafting to extend the definition of "person" to include "undertaking". As to the territorial scope of the Chapter I and Chapter II prohibitions, the CAT considered that whilst these prohibitions do have degrees of extraterritorial application, there was no necessary correlation between the powers needed to investigate an infringement and the infringement itself, and therefore this had no bearing on the extraterritorial application of the Section 26 powers.

Post-judgment, where does the CMA stand?

In its judgment the CAT has requested that any unresolved points relating to the Applicants' proceedings should be resolved through further submissions to the extent they remain live but hoped that any consequential matters could be resolved by agreement between the parties. The CAT reflected that the proceedings were "by no means straightforward" and said that it would be minded to grant the CMA permission to appeal the decision, should it seek it. Following the judgment, the CMA has publicly announced that it will be seeking permission to appeal the decision.

Subject to appeal, the judgment sets boundaries on the extraterritorial application of the CMA's Section 26 powers and limits the extent to which the CMA can serve notices against companies that do not have a sufficient connection to the UK. In its press release, the CMA noted that its investigations increasingly involve cross-border, multi-national corporations. The CMA stated its disappointment in the decision, and that the judgment "substantially risks undermining" its ability to investigate, enforce against and deter anti-competitive conduct.

During the hearing, the CMA raised concerns that a limited scope of its Section 26 powers could seriously hamper its investigatory powers, and that it had limited alternative routes to obtaining documents from overseas. Post-Brexit, the CMA no longer has the same ability to coordinate with its EU-based counterparts on cartel investigations, including the sharing of information. Therefore, the CAT's judgment, subject to any appeal, risks a further significant curb on the CMA's investigatory powers.