Tribunal holds that regulator must take proactive steps to investigate impact of COVID-19

In JD Sports Fashion plc v Competition and Markets Authority [2020] CAT 24, the Competition Appeal Tribunal (“CAT”) quashed the Competition and Markets Authority's (“CMA”) final report on the Phase 2 investigation into the completed acquisition by JD Sports Fashion plc (“JD Sports”) of Footasylum plc (“Footasylum”) on the basis that the CMA had not sought to inform itself sufficiently on the impact of the coronavirus pandemic on the relevant market, the merging parties and their competitors and suppliers, resulting in the CMA having insufficient evidence for its conclusions.

Key points

• The CAT’s decision re-iterates that a regulator may be under a positive duty to take proactive steps to conduct further enquiries and ensure they have robust evidence on which to base their decisions, particularly in relation to a matter the regulator has explicitly indicated should be taken into account.
• A regulator cannot escape its duty to make informed decisions based on reliable evidence merely by reason of the fact that it is administratively constrained or that evidence already available to it is speculative or unreliable.

Facts

JD Sports and Footasylum are both UK-based retailers of sports-fashion footwear and clothing, conducting sales through their stores and online.

In 2019, JD Sports acquired Footasylum in a £90m deal. The CMA's Phase 1 investigation concluded that the merger had the potential to remove one of JD Sports' closest competitors, resulting in a worse deal for customers, through higher prices, reduced product ranges or lowering in service quality.

In September 2019, the CMA announced that it would refer the acquisition for a Phase 2 investigation unless suitable undertakings in lieu (“UILs”) were offered. JD Sports informed the CMA of its refusal to offer the UILs demanded.

In May 2020, the CMA published its final report, concluding that the merger would result in a substantial lessening of competition (“SLC”) in the retail supply of sportswear and footwear apparel in the UK. The CMA decided that only a full divestiture of JD Sports and Footasylum would avoid a SLC.

In reaching its decision, the CMA acknowledged that the coronavirus outbreak was clearly impacting the sports-fashionwear and footwear markets, but did not see evidence to suggest that either of the parties was more negatively impacted by COVID-19 relative to each other or to other market actors. It also did not consider that COVID-19 would reduce materially the extent to which Sports Direct and Footasylum are close competitors, or decrease the probability that the merger would result in an SLC.

However, taking into account the real economic pressures brought about by COVID-19, the CMA tempered its remedies process by not including overly prescriptive conditions for divestiture and by allowing for an extension of the divestiture period beyond the usual six months. In June 2020, JD Sports made an application under section 120 of the Enterprise Act 2002 for a review of the CMA's decision on three grounds, alleging that:

• Ground 1: the CMA erred in law and/or acted irrationality in the manner in which it conducted its assessment of the aggregate constraints posed by suppliers and retail rivals on the combined JD Sports-Footasylum group and of whether the merger was likely to result in a SLC.
• Ground 2: the CMA erred in law and/or acted irrationally in excluding COVID-19 from the counterfactual of Footasylum's competitive constraints, in particular by failing to seek more information from the principal suppliers and Footasylum's primary lender.
• Ground 3: the CMA failed, inter alia, to provide adequate reasons and made irrational findings in concluding that the ability and incentives of suppliers (in particular Nike and Adidas) to increase their direct-to-consumer (“DTC”) operations were not so significant as to disadvantage or sufficiently discipline the merged entity.

Section 120(4) states that in determining such an application, the CAT shall apply the same principles as would be applied by a court on an application for judicial review.

Judgment

On the first ground, the CAT dismissed JD Sport’s argument that the CMA erred in the manner in which it conducted its assessment of aggregate constraints and the likelihood of a SLC. The CAT noted that the CMA had very substantial evidence on which to base a reasonable decision relating to the aggregate effects of the competitive constraints and the question of SLC, and provided substantial reasons for its assessment.

The CAT reiterated in considering this ground that where there is a rationality challenge against a merger decision of the CMA, the hurdle which the applicant has to overcome is a high one and that the CAT must be wary of a challenge which is “in reality an attempt to pursue a challenge to the merits of the Decision under the guise of a judicial review.”

On the second ground, the CAT ruled that the CMA acted irrationally in that it came to conclusions as to the likely effects of COVID-19 that were of material importance to its overall decision, without having the necessary evidence from which it could properly draw those conclusions.

Although the CMA was acting within its wide margin of appreciation in finding that the evidence it had received from the applicants and third parties was insufficiently robust to form a view on the possible or likely effects of COVID-19, the CMA’s decision not to conduct further enquiries with suppliers or Footasylum’s primary lender to see if sufficiently reliable evidence had become available prior to the publication of the final report was found to be irrational. The CMA’s decision not to conduct further enquiries was rooted in administrative constraints and the perceived futility of searching for reliable and specific evidence. However the CAT considered that it had “closed its mind to the possibility that robust information on possible impacts was available”.

The decision was also irrational judged against the CMA’s own COVID-19 guidance, which required the impacts of the COVID-19 outbreak to be factored into the substantive assessment of a merger where appropriate. The guidance mirrored the general obligation in relation to conduct of CMA investigations to ensure that there is a sufficient basis for decisions in light of the totality of the evidence available, including evidence of some probative value on the basis of which the CMA could reasonably reach the conclusion it did.

The CAT concluded that the CMA, faced with uncertainty about the impact of the pandemic, failed to make reasonable inquiries, as they were required to do. Although the CMA has a wide margin of appreciation concerning its assessment of the predictive value of the information it received, that did not absolve the CMA from ensuring that it had sufficient information available before it made predictive judgments. JD Sports’ challenge in this regard did not therefore concern the quality or correctness of the CMA’s judgement in its assessment of the relevant information. It was that the CMA had not sought to inform itself sufficiently in order to exercise its judgement.

On the last ground, the CAT reached a similar conclusion. It found that the CMA had failed to investigate fully whether, and to what extent, COVID-19 would strengthen the suppliers' DTC offer as a result of consumers shifting towards online shopping. As with the second ground, the CMA did not have the necessary evidence from which it could properly draw such a conclusion.

It is worth noting that the CMA has applied for permission to appeal the ruling.

Comment

In the context of uncertainty surrounding the longer term impact of COVID-19, it is perhaps understandable that the CMA took the view that the evidence available to it was too generalised and speculative to shed light on its regulatory assessment.

However, this decision makes clear that public bodies must have sufficient evidence on which to base their decisions. This arises from the well-established principle of administrative law that a decision maker has to ask himself the right question and take reasonable steps to acquaint himself with the relevant information to enable him to answer it correctly (known as the Tameside duty). In circumstances where sufficient information has not been provided by third parties, particularly in relation to a matter the regulator has explicitly indicated should be taken into account, the public body may be required to take proactive steps to conduct further enquiries in order to reach a rational decision. Falling short of this obligation to ensure that their decisions are properly based on evidence provides scope to challenge the findings of a public authority decision maker.

However, as with other irrationality heads of challenge, the court will not interfere with a regulatory decision lightly and will not intervene simply because it considers that further enquiries would have been sensible or desirable. A judicial review on this ground will generally only be successful if no reasonable authority could have been satisfied on the basis of the enquiries made that it possessed the information necessary for its decision. This case must therefore be viewed in its particular context of attempting to assess the impacts of COVID-19.