CMA costs case improves access to justice
On May 25, 2022, the UK Supreme Court (UKSC) handed down its judgment ([2022] UKSC 14) in the joint appeals of Pfizer and Flynn (the Appellants) against a costs ruling by the Court of Appeal (the COA Costs Ruling).
The Court of Appeal’s decision ([2020] EWCA Civ 617) had meant that public bodies and regulators such as the Competition and Markets Authority (CMA) would not typically be required to pay the costs of a party successfully appealing one of their infringement decisions.
However, the UKSC, with Lady Rose giving the lead judgment, allowed the appeal thereby confirming that the CMA is not as a matter of principle exempt from paying successful appellants’ costs. The judgment confirmed that the key criterion for assessing when a regulator may be protected from costs exposure is where requiring it to pay the successful party’s costs would give rise to a chilling effect on the regulator’s statutory activities.
Following this judgment, the courts will revert to the previous standard when considering costs appeals under the Competition Act 1998 (CA98), ie that the appropriate starting point is that costs “follow the event” (ie, are awarded to the party that has prevailed).
The Competition Appeal Tribunal (CAT) therefore remains entitled to make issue-based costs awards against the CMA where a company subject to a CMA infringement decision under Chapter I or II of the CA98 has succeeded in overturning that decision, in part or in whole, on appeal.
Background
This judgment arose out of a case of some importance for the pharmaceutical industry, as it draws into question the extent of companies’ pricing freedom for off-patent medicines.
In December 2016 the CMA ruled that the Appellants had abused their dominant position by charging excessive and unfair prices for the epilepsy drug phenytoin sodium. Pfizer and Flynn were fined £84.2 million ($101.9 million) and £5.2 million respectively and required to lower their prices.
Both parties appealed the infringement decision to the CAT which gave judgment in 2018 (the CAT Decision). The CAT set part of the CMA’s infringement decision aside; it agreed with the CMA that the Appellants were dominant in the relevant market but found the CMA made errors in its analysis of whether the Appellants had abused their dominant position. The CAT remitted the question of abuse back to the CMA, a decision that was largely upheld on appeal to the Court of Appeal (the Court of Appeal in large part dismissed the appeal and cross-appeal ([2020] EWCA Civ 339; [2020] Bus LR 803). The remitted CMA investigation is continuing.
This particular judgment however concerns a more general issue: namely the question of how costs are dealt with when a party successfully appeals a CMA decision. The CAT delivered its costs ruling in relation to Pfizer and Flynn’s (partially) successful appeal in March 2019 ([2019] CAT 9).
It took an issue-based approach in consideration of the relative successes and failures of the parties (the CAT Costs Ruling). The parties were each awarded a percentage of their costs: the CMA received its costs of defending the Appellants’ claims on market definition and dominance, and the Appellants received their costs on the issue of abuse (on a net basis, the CAT held that the CMA should pay Pfizer 58% of its allowable costs, and Flynn 55%. [2022] UKSC 14 at 8).
The decision followed the precedent in CA98 appeals that the starting point for assessing costs is that they should ‘follow the event’.
The CMA appealed the costs judgment to the Court of Appeal which set aside the CAT Costs Ruling, instead holding there should be no order as to costs against the CMA for the proceedings before the CAT. The Court of Appeal considered that a line of cases relating to a range of different regulators (referred to as the Booth line of cases) established a general rule that the appropriate starting point for cost awards in appeals involving a public body or regulator was no order as to costs against the body in question, absent a good reason. While inappropriate conduct by the regulatory body or the financial hardship of the appellant may qualify as a ‘good reason’, merely overturning an infringement decision is insufficient.
Pfizer and Flynn were granted permission to appeal the COA Costs Ruling to the UKSC (the UKSC Appeal). The hearing took place in March 2022 with the Appellants arguing no such general rule existed and several third parties intervening on either side (Ofcom and the Solicitors Regulation Authority (SRA) intervened in support of the CMA; and the Association of the British Pharmaceutical Industry (ABPI) and the British Generic Manufacturers Association (BGMA), and Oakridge Farms Limited intervened in support of the Appellants. Bristows represented the ABPI and the BGMA in their intervention.)
The UKSC Appeal
Existing case law
The UKSC Judgment confirmed that the CAT has an established general starting point for appeals brought under the CA98 that costs follow the event. This is in contrast to other types of appeals, for example dispute resolution decisions taken by Ofcom, where the CAT’s starting point is that there should be no order as to costs.
The case law emphasised that the CAT’s broad discretion may need to be exercised differently for different types of cases, although consistency and predictability are always necessary considerations for costs decisions.
Judgment
The UKSC confirmed first that “even where a statutory power conferred on a court or tribunal to award costs appears to be unfettered, it is appropriate for an appellate court to lay down guidance or even rules which should apply in the absence of specific circumstances”.
Two main issues were raised by the Appeal: first, what is the appropriate starting point for cost awards in cases where an appellant successfully appeals against a decision taken by a public body, and was the Court of Appeal correct to find that the general rule is that no order for costs should be made unless the public body has acted unreasonably?
Second, if there is no such general rule, was the CAT wrong to adopt a starting point that costs follow the event in CA98 appeals? Would such an approach fail adequately to account for the chilling effect this may have on the CMA’s ability to prosecute and stand by decisions in the fulfilment of its public duty?
(i) Starting point in successful appeals against a public body
The UKSC held there is “no generally applicable principle that all public bodies should enjoy a protected status as parties to litigation where they lose a case”. The risk of a chilling effect on the conduct of a public body (if cost rulings are regularly made against it when it has acted reasonably) is an important factor for the courts to consider.
However, this should be part of an overall assessment taking account of the type of public body and nature of the decision it is defending. The existence of a chilling effect cannot simply be presumed. The relevant court or tribunal, in this case the CAT, is best placed to consider the risk of any such chilling effect.
(ii)The CAT’s assessment of a possible chilling effect on the CMA
The UKSC pointed out that the CMA and Ofcom have previously sought to resist adverse costs orders in appeals before the CAT by relying both on their public interest role and the risk of being deterred from standing behind infringement decisions.
The CAT has therefore considered the likelihood of a chilling effect on numerous occasions. Although in some instances the CAT has made no order as to costs against Ofcom when it has lost an appeal, this does not mean appeals against CMA decisions are necessarily analogous. The UKSC pointed out that, unlike Ofcom, the CMA does not have a narrow-regulated community as its jurisdiction, but can pursue possible infringements of UK competition law in any field of economic activity.
The judgment illustrated the lack of any chilling effect on the CMA by reference to the way penalty income is treated: it is permitted to offset litigation costs against that income. (During the hearing, it was pointed out that penalties levied by the CMA in just two investigations into companies in the pharmaceutical sector in 2021 totalled in excess of £367 million.) The CMA thus has an incentive to continue issuing infringement decisions and corresponding fines against significant firms even where such firms are more likely to appeal against any such decision.
The CAT, when considering a costs ruling, is also entitled to have regard to the substantial and irrecoverable costs incurred by parties whilst responding to a CMA investigation. The investigatory phase, which can last several years, allows the CMA an extended opportunity to refine its case and decide whether to proceed to an infringement decision. If, following an appeal, the CMA’s reasoning is found to be unjustified, the CMA should be subject to the “discipline associated with having to pay the successful appellant’s costs”.
The UKSC held that the CAT was correct to distinguish the decisions taken by the public bodies in the Booth line of cases from those taken by the CMA under the CA98. The UKSC held that the factors considered in Booth can still be reflected in a costs award even if the starting point is costs follow the event.
The CAT will have due regard to the nature of the public or regulatory body appearing before it and has developed a sophisticated approach to dealing with costs awards. It provides detailed reasoning for its decisions and takes account of a range of factors when considering whether to depart from the traditional starting point, including the speed with which the appeal has been brought, the importance of not deterring small undertakings from bringing reasonable appeals and whether the work done would be useful for the appellant in a separate investigation of the same conduct.
It is aware of the need to balance flexibility with predictability so that parties know what to expect if they win or lose an appeal, as well as the importance of not undermining the effectiveness of the competition or regulatory regime involved.
Implications of the UKSC Judgment
The UKSC Judgment is directly significant for any company considering an appeal against a CMA infringement decision. Had the court not overturned the COA Costs Ruling there was real potential for companies to be deterred from bringing meritorious appeals due to an inability to recover their costs even if they succeeded in that appeal. Smaller firms with fewer financial resources may particularly have struggled to gain access to justice.
Nor would this only have affected individual firms that find themselves the subject of a CMA investigation: competition law is to a large degree developed through case law, and all market players benefit from the clarity brought by reasoned appeal judgments.
Although it is over 20 years since CA98 came into effect, and considerably longer since the inception of EU competition law, issues fundamental to the application of the competition law prohibitions continue to be addressed in appeals.
The pharmaceutical sector—which is the relevant industry in this case—has seen more than its fair share of knotty competition law issues, with important judgments in recent years clarifying issues such as market definition and the way in which settlement agreements should be analysed.
Without judgments resulting from appeals, companies and their advisors would be less well informed when seeking to ensure that their conduct complies with competition law.
In a period where the UK is in the process of untethering itself from EU case law, which has previously dominated competition law analysis, any other outcome would have been to the detriment of UK competition law.
Sophie Lawrance is a partner at Bristows. She can be contacted at: sophie.lawrance@bristows.com
James Batsford is an associate at Bristows. He can be contacted at: james.batsford@bristows.com
