Court of Appeal confirms the CMA has the power to require overseas companies to produce documents and information

In a significant judgment the English Court of Appeal has recently confirmed that the Competition and Markets Authority (“CMA”) has the power to require overseas companies to produce documents and information when it is investigating suspected anti-competitive conduct.

In reaching its decision, the Court of Appeal stated that without such an extraterritorial power, the CMA would become “largely toothless when confronting international cartels”. Without this extraterritorial power there would be a “perverse incentive for conspirators to move offshore to organise cartels directed at harming the UK market and they would be more or less immune from investigation” – something that would be easy to achieve in the digital era.

In particular, the Court of Appeal recognised the covert and ever more international and digital nature of cartels in which competitors exploit modern technology and conduct illicit communications via burner phones and encrypted channels. The Court of Appeal concluded that the CMA’s power to request information which was located outside the jurisdiction was explicitly intended by Parliament and can be seen in key provisions containing explicit extraterritorial language.

Parliament’s intention when drafting the competition legislation was at the heart of the Court of Appeal’s judgment, which assessed the “scheme, context and purposes” of the competition legislation and concluded that the CMA’s power to request information was intended by Parliament to be extraterritorial.

The Court of Appeal also confirmed that in cases where a subsidiary does not independently determine its own conduct on the market, any formal separation between companies as a result of separate legal personality is not relevant for the purposes of applying competition rules. Under competition law, the concept of an “undertaking” is wide and covers any entity engaged in an economic activity, irrespective of the legal status of that entity and the way in which it is financed, even if in law that economic unit consists of several natural or legal persons. To that end, the Court of Appeal held that Parliament intended to impose an obligation upon the widest possible array of entities when drafting competition legislation.

Factual Background

As part of its investigation into suspected anti-competitive conduct in relation to the recycling of end-of-life vehicles, launched in March 2022, the CMA believed that certain important aspects of the alleged cartel were “agreed abroad before being implemented in the UK”.

The CMA therefore issued statutory requests for documents and information on the German parent companies of BMW and VW (respondents to the appeal), their indirect subsidiaries in the UK, and any other legal entities forming part of the same “undertaking”.

In December 2022, the CMA fined BMW AG for failing to comply with its request for information. BMW’s UK subsidiary had stated that it did not have the ability to access or call for any documents held by the parent company outside the UK.

The German parent companies of BMW and VW then challenged the notices at the Competition Appeal Tribunal (“CAT”) and the High Court respectively. This resulted in a joint judgment in favour of the car manufacturers and the statutory requests were set aside. According to the CAT and the High Court, the CMA’s submissions that requests for information can be served on entities physically located outside the UK was “obviously wrong” and “aggressively extraterritorial”.

The CMA appealed the decision to the Court of Appeal on two grounds: (i) whether the powers of the CMA can be exercised extraterritoriality, and (ii) the scope of the word “undertaking as the car companies claimed that they had no power to compel production of documents and information from entities in the wider undertaking. Overall, the appeal was of fundamental importance to the CMA.

Legal Background

The provision at the heart of the case was Section 26 of the Competition Act 1998 (CA 1998). Section 26 gives the CMA the power to require the production of documents or information by “any person” for the purposes of an investigation. A “person” is defined under Section 59 CA 1998 to include an “undertaking”. “Undertaking” has no statutory definition, but long-standing case law has established “undertaking” as meaning an economic entity or unit comprising all of the natural and legal entities within the unit. The defining characteristic of “undertaking” is joint and several liability or responsibility.

The other relevant provisions considered were Section 2 CA 1998 and Section 25 CA 1998.

• Section 2 is the prohibition of anti-competitive agreements or concerted practices which may affect trade within the UK or have the object or effect of preventing, restricting or distorting competition within the UK. It is common ground that the Section 2 prohibition is extraterritorial, because it explicitly covers, for instance, any agreements which “may affect trade within the UK”. As such, a cartel between undertakings in the USA, Canada and Japan, none of whom have any physical presence in the UK, which is “intended” to be implemented in the UK (but which has not yet been) is within the scope of Section 2.
  
• Section 25 is similarly explicitly extraterritorial, as it gives the CMA a power to conduct an investigation where there are reasonable grounds for suspecting that there is an agreement which, for instance, may affect trade within the UK.

Ground 1: Extraterritoriality of the CMA’s powers of investigation and enforcement

The Court of Appeal held that Parliament intended Section 26 to have extraterritorial effect. Despite acknowledging the general presumption against extraterritoriality, the Court of Appeal analysed the “scheme, context and purposes” of the competition legislation, which included the key provisions (sections 2 and 25) with explicitly extraterritorial language. The Court of Appeal concluded that the CMA’s power to request information was also intended by Parliament to fall under the umbrella of those explicitly extraterritorial provisions.

In reaching this decision, the Court of Appeal applied the Supreme Court’s guidance from R (on the application of KBR, Inc) v Director of the Serious Fraud Office [2021] UKSC 2 (“KBR”), which similarly related to the power of the Serious Fraud Office (“SFO”) to compel a foreign company to produce documents held abroad. The Supreme Court in KBR stated that when Parliament intends legislation to have extraterritorial effect, provision to that effect is “frequently provided”. However, extraterritorial intent can be implied, but the threshold is relatively high. The Supreme Court in KBR also set out a range of relevant policy considerations such as the “purpose, scheme, context and subject matter” of the legislation and whether such purpose can be achieved without extraterritorial effect, as well the impact upon comity.

Despite acknowledging the interpretive presumption against extraterritoriality, the Court of Appeal analysed the “scheme, context and purposes” of sections 2, 25 and 26 and the choice of key words in those provisions. The Court concluded that Parliament intended that Section 26 should have extraterritorial effect.

In reaching this decision, it held that firstly, it was not in dispute that the Section 2 prohibition on anti-competitive agreements or concerted practices and the Section 25 power to conduct an investigation are extraterritorial, because they explicitly cover, for instance, any agreements which “may affect trade within the UK”.

Secondly, the Court of Appeal stated that Section 26 was one of the investigatory and enforcement powers in CA 1998, and “falls under the umbrella of Section 25 which is extraterritorial and facilitative of the prohibition in Section 2, which is also extraterritorial”. Therefore, due to the extraterritorial nature of Section 2 and Section 25, clear indication in the legislation would be required for Section 26 not to be extraterritorial.

Furthermore, when exploring the policy considerations behind the enactment of the CA, the Court of Appeal highlighted the “covert and ever more international” nature of cartels, in which competitors exploit modern technology and conduct illicit communications via “burner phones and across encrypted channels” and that Parliament is well aware of the “lengths cartelists …… go to in order to suppress evidence of connivance”.

Ground 2: Wide scope of “undertaking” – the CMA can request information from “any entity”

As mentioned, Section 26 gives the CMA the power to require the production of documents or information by “any person” for the purposes of an investigation, which includes an “undertaking”.

The Court of Appeal referenced the CJEU case of Sumal SL v Mercedes-Benz Trucks Espana SL, Case C-882/19 (“Sumal”) to set out the legal framework for the meaning of “undertaking”. The defining characteristic of “undertaking” is joint and several liability or responsibility. Under competition law, an “undertaking” covers any entity engaged in an economic activity, irrespective of the legal status of that entity and the way in which it is financed. The decisive element is the “existence of unity of conduct on the market”. This means that any formal separation between companies as a result of separate legal personality is not relevant for the purposes of applying competition rules.

It is also clear from case-law that a subsidiary’s conduct may be attributed to the parent company where that subsidiary does not determine independently its own conduct on the market – again, even if they have separate legal personalities.

In light of this competition law framework, the Court of Appeal held that when drafting the CA 1998, Parliament had intended to maintain joint and several liability as the defining characteristic of an “undertaking”, and that when considering the meaning of “any person”, Parliament intended to impose an obligation upon the widest possible array of entities.

Consequently, BMW AG and VW AG as the German parent companies were still considered the same undertaking as their UK subsidiaries and therefore jointly and severally responsible, and the argument that the UK subsidiaries were unable to access documents held by an entity elsewhere in the corporate chain was insufficient.

From a practical perspective, it’s also noteworthy that the Court of Appeal also found that the CMA had adopted a sensible course of action in serving the notice in a manner bringing it to the attention of the UK subsidiaries and the German parents making it also clear that it applied to the legal entities comprising the undertaking as a whole.

Looking ahead

Can the CMA exercise its extraterritorial power any way it likes?

The exercise of a Section 26 power is always subject to a requirement to respect fundamental rights including those relating to procedure in accordance with public law principles. Confirmation by the Court of Appeal of the CMA’s extraterritorial power does not mean the CMA would, for example, ever conduct a dawn raid at a premises physically located outside the jurisdiction. In fact, the CMA itself acknowledged this was “out of the question”. Nor does it mean that enforcement against foreign undertakings which fail to comply with requests for information will be straightforward for the CMA.

Safeguards against abuse of the CMA’s extraterritorial power includes:

(i) The fact that it is only a power, not a duty to act extraterritorially;
(ii) Before a Section 26 notice can be issued there must be reasonable grounds for suspecting an infringement;
(iii) Notice must be served which identifies the substance of the investigation and enables the undertaking to exercise rights of defence;
(iv) Reasonable excuse defence for non-compliance;
(v) Sanctions for non-compliance are civil, not criminal;
(vi) Notices/sanctions can be judicially challenged; and
(vii) Leave of the court would be needed for the CMA to seek to enforce abroad.

In KBR it was held that the existence of safeguards could indicate Parliament recognised the intrinsic difficulties of enforcing abroad and sought to ameliorate and overcome those obstacles, indicating an intention to make extraterritoriality work. Whether these safeguards are adequate was not considered by the Court of Appeal, as it was only required to consider whether such safeguards indicated Parliament’s intent that the provisions should have extraterritorial effect.

Will this decision be appealed?

Volkswagen has announced that it will seek permission to appeal the case to the Supreme Court. We will be keeping a close eye on this case to see whether permission to appeal is granted and provides updates on the Supreme Court judgment.

With thanks to Quinn Liang for her help in drafting this article.