CMA Can Require Overseas Companies To Produce Documents In Its Competition Law Investigations - Cartels, Monopolies - UK

[Gunnar Larson]

There are two RICOs happening in New York right now... and they can be
solved abroad if necessary.
-----

"The absence of such power would create a perverse incentive for
conspirators to move offshore in order to organise cartels directed at
harming the UK market, who would be more or less immune from investigation.
This would particularly be easy to achieve in the digital era."

https://www.mondaq.com/uk/cartels-monopolies/1417624/cma-can-require-overseas-companies-to-produce-documents-in-its-competition-law-investigations



UK: CMA Can Require Overseas Companies To Produce Documents In Its
Competition Law Investigations

30 January 2024

by Natalia Rodriguez , Kristien Geeurickx and Phoebe Hirst
Herbert Smith Freehills

View Natalia Rodriguez Biography on their website

In its ruling1 of 17 January 2024 the Court of Appeal allowed the CMA's
appeal against a joint judgment by the Competition Appeal Tribunal (CAT)
and the Administrative Court in the BMW and Volkswagen cases, relating to
the scope of the CMA's information gathering powers under Section 26 of the
Competition Act 1998 (CA98). The joint judgment held that the CMA's
decision to issue an information request to foreign-domiciled companies,
with no presence in the UK, for documents and information held outside the
UK was outside the scope of its powers under Section 26 CA98.

The Court of Appeal decided that the CMA's ability to conduct competition
investigations would be compromised if it is not able to obtain information
from overseas, which would create "a perverse incentive for conspirators to
organise cartels directed at harming the UK market". It also found that
nothing in the "logic, policy, case law or legislative history" supported
the restrictive interpretation adopted by the CAT.

The CMA has welcomed the ruling which, in light of the increasingly
cross-border nature of its work involving multi-national businesses,
strengthens its investigatory and enforcement powers.

Background
The case arose in relation to information requests issued by the CMA to BMW
AG and VW AG in the context of its end-of life vehicle recycling cartel
investigation. 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.

BMW AG and VW AG challenged the CMA's power to apply section 26 notices
extraterritorially and argued 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 the UK.

The CAT found that the CMA had acted beyond its powers in issuing section
26 notices to the German-domiciled parent companies of BMW and VW. In
reaching its decision it focused on the true meaning of "person" to whom
section 26 could apply. The CAT considered that it made no legal sense to
serve an undertaking with a notice, and that while the term of a "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. It 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.

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. It recognised
that their respective UK subsidiaries were legal persons sufficiently
connected to the UK and were subject to UK laws. The CAT also 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 Court of Appeal's ruling
The CMA appealed the joint judgment by the CAT and Administrative Court on
two grounds:

The extraterritorial application of the substantive prohibitions of the
CA98 in section 2 and section 18 and the CMA's powers to carry out an
investigation under section 25 would be frustrated if section 26 did also
not have extraterritorial effect.
The reference to "any person" in section 26(1) captures all documents held
by all members of an undertaking where any member of that undertaking is
present in the UK.
Ground I: Extraterritoriality
The Court of Appeal noted that in determining whether legislation has
extraterritorial effect a court must, so long as its language allows, apply
an interpretative presumption against extraterritoriality. This was
confirmed by the Supreme Court in KBR, which held the principle to be a
starting point for consideration of the scope of a legislative measure.

But an extraterritorial intent can also be implied, taking into account a
range of considerations such as the purpose, scheme and context of the
legislation, the practicality of enforcement, the legislative history and
the impact on comity. Based on a careful analysis of the following factors
the Court of Appeal concluded that in its judgment Parliament intended
section 26 CA98 to have extraterritorial effect.

Section 2(1) CA98 (the Chapter I prohibition) CA98 does have
extraterritorial effect. It includes agreements between undertakings
physically located in a third country with no physical presence in the UK
but which is targeted on the UK market. This is also confirmed by the
wording in section 2(3) which provides that the prohibition applies only if
the agreement is or is intended to be implemented in the UK.
Section 25 provides the CMA with the power to conduct an investigation
where there are reasonable grounds for suspecting that there is an
agreement that may affect trade within the UK and has as its object or
effect the prevention, restriction or distortion of competition within the
UK. The language of sections 2 and 25 indicates that both the prohibitions
and the investigation and enforcement regimes are extraterritorial.
Section 26 is one of the CMA's investigatory and enforcement powers and
enables it to request information and disclosure of documents for the
purpose of an investigation. It is related to and implements two provisions
which are extraterritorial and there is nothing in the wording of section
26 that indicates Parliament's intention to limit its territorial effect.
The CAT did not consider the role of section 26 in the context of the
combined effect of section 2 and 25 CA98. For section 26 not to be
extraterritorial there would need to be some clear indication that it was
intended to have a different territorial ambit to sections 2 and 25. That
is not the case and the Court of Appeal therefore concludes that it follows
that Parliament intended section 26 to have the same territorial effect as
section 2 and 25.
Similarly when considering the scheme of enforcement, context and purpose
of the legislation the Court of Appeal concluded that it is not possible to
infer that Parliament intended to avoid extraterritorial effect. Cartels
are typically covert and are often international in scope and competition
authorities around the world may have to target their powers on actors
located abroad when exercising their duty to protect their domestic markets
and consumers. This is achieved by competition authorities around the world
through broad extraterritorial regulatory and investigatory powers which
can be exercised with the necessary caution and pragmatism when dealing
with undertakings located outside their jurisdiction.
Taking into account the effectiveness and practicality of the regime, the
Court concluded that if the CMA is denied the power to exercise section 26
extraterritorially this would create "a gaping lacuna" in the effectiveness
of the CMA to exercise its statutory powers. The absence of such power
would create a perverse incentive for conspirators to move offshore in
order to organise cartels directed at harming the UK market, who would be
more or less immune from investigation. This would particularly be easy to
achieve in the digital era.
There is also nothing in the legislative history that points to
Parliament's intent to create a competition law enforcement regime with no
need for extraterritorial investigatory and enforcement powers.
The Court of Appeal also refused to accept the argument that the fact that
the CA98, as initially enacted, contained criminal sanctions for failing to
comply with information requests, supports the view that this power is not
extraterritorial. The current version of the CA98 no longer imposes
criminal sanctions and for the purpose of Parliament's intent it is
necessary to look at the version of the legislation as it stood as of the
date of the decision being challenged, when sanctions for failure to comply
with section 26 notices were civil sanctions.
Ground II: "Undertaking"
The Court of Appeal focussed on whether the meaning of an "undertaking"
under the CA98 excluded the legal concept of joint and several liability
and responsibility. In considering Parliament's intention and drawing
comparisons with the EU law concept of an "undertaking", the Court of
Appeal concluded that the inclusion of an "undertaking" as "any person"
under section 26 CA98 incorporates the legal concept of joint and several
liability and responsibility. As a result, the CMA can exercise its section
26 powers against an entity, whether it is located inside or outside of the
UK, which may be a natural or legal person, an undertaking, or a
combination thereof.

The Court of Appeal considered that the CMA had adopted a "sensible course
of action" by serving a notice on the UK subsidiaries and German parent
companies of both BMW and VW. According to the Court of Appeal, the CMA's
approach made it clear that the relevant section 26 notices and obligations
under them to produce documents and information, were brought to the
attention of, and applied to, the legal entities "comprising the
undertaking as a whole".

It is inferred from the statutory language in the CA98 that that where
Parliament adopted the use of "any person" or "undertaking", it intended to
impose an obligation upon the widest array of entities possible. The
expression of "any", which is adopted under section 26 CA98 is unlimited
and does not mean only persons with a territorial connection to the UK. The
Court of Appeal considered that "undertaking" did not need to be defined in
the CA98, since it is a "well understood" concept of EU law, and Parliament
intended to adopt a meaning that was consistent with EU law.
There is nothing in logic, policy, case law or legislative history to
support a contention that Parliament intended to reject the concept of
joint and several liability and responsibility, as established under the EU
law concept of joint and several liability of entities within the same
undertaking (as evidenced in recent EU cases such as Sumal). It was
"jurisprudentially inconsistent" to argue that serving a notice on a
subsidiary was legally insufficient to gain access to the documents of an
entity within the same undertaking over which the subsidiary had no
control. The principle of separate legal personality does not apply as an
undertaking is an "indivisible entity".
The CMA's obligation to act in accordance with fundamental rights when
exercising its section 26 powers does not mean that it can only ever
exercise its power against a discrete legal entity within a wider
undertaking. The Court of Appeal considered that, on the facts of the case,
there was no suggestion that procedural rights had been violated. Notices
were served to the UK subsidiaries and brought to the attention of the
German parent companies, who had "exercised their right of access to a
court and to a fair and objective adjudication of their challenges".
Looking at the legislative purpose of section 26 CA98, the Court of Appeal
considered that the CMA would become "largely toothless when confronting
international cartels" if it was unable to exercise its section 26 powers
over an undertaking and was restricted to requesting information and
evidence over which entities operating within the UK held physical or legal
control.
The Court of Appeal rejected the position alluded to by the CAT that
notices served on an undertaking as a whole, could risk notices being
brought to the attention of entities who do not know the full extent of the
undertaking to which they belong, meaning that notices are not properly
brought to the attention of the entities comprising the relevant
undertaking. The Court of Appeal considered this possibility to be
"theoretical" and an "improbable scenario" and noted its lack of awareness
of the CMA ever having exercised its powers in this way.
Changes under the Digital Markets, Competition and Consumers Bill
The Court of Appeal's position is also about to be endorsed further through
amendments to the CA98, which would effectively have reversed the joint
judgment by the CAT and Administrative Court if the Court of Appeal had not
overturned it. The competition enforcement provisions of the DMCC Bill,
which is currently before Parliament and is expected to receive Royal
Assent in April this year, will introduce new powers regarding the
extraterritorial application of information notices in competition, merger
and market studies investigations. The DMCC Bill provides that the CMA's
Section 26 powers may be used to give notice to a person outside the UK and
to require the production of documents and information held outside the UK,
provided that person's activities are being investigated under the CA98 and
they have a UK connection.

The Bill also extends the territorial scope of the Chapter I prohibition so
that the prohibition applies to agreements implemented outside the UK but
which have an effect within the UK. This amendment seeks to ensure that
conduct is within the scope of the CMA's investigative powers, even when an
agreement is implemented in another jurisdiction.

Footnote

1. Judgment made available on Brick Court Chambers website.
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