CN04 - CMAs first infringement finding on most favoured nation clauses set aside

On 8 August 2022, the UK Competition Appeal Tribunal ("CAT") set aside the Competition and Markets Authority's ("CMA") first infringement finding against Compare The Market for the use of most favoured nation clauses ("MFN clauses").

Key takeaways

• The CAT has reinforced that where anticompetitive effects are alleged, those effects must be demonstrated, and a properly defined market can serve as an appropriate testbed for the anti-competitive effects alleged.
• A more detailed 'effects-based analysis' will likely be required from the CMA in future cases.
• This case repeats the warning that the CMA's assessment of market definition should not pre-determine a finding of anti-competitive effect.

The CMA's infringement finding

On 19 November 2020, the CMA announced that it had issued an infringement decision and imposed a GBP 17.9 million fine against Compare The Market (a price comparison website) for infringing both UK and EU competition law by implementing so-called "wide" MFN clauses in its contracts with 32 home insurance providers (the "Decision", see our December 2020 newsletter).  For background on the distinction between "wide" and "narrow" parity clauses, see our June 2022 newsletter.

The CMA's Decision found that the wide MFN clauses in question were found to have imposed a market-wide constraint on differential pricing, by preventing home insurance providers from undercutting the prices quoted on Compare The Market's price comparison website via other direct marketing channels, including the home insurance provider's own website and any other price comparison websites that the home insurance provider is subscribed to. 

The CMA concluded that the imposition of 32 wide MFN clauses by Compare The Market infringed both Chapter I of the UK Competition Act 1998 and Article 101 of the Treaty of the Functioning of the European Union by:

• reducing price competition between price comparison websites;
• restricting the ability of rival price comparison websites to expand in the market, thereby enabling Compare The Market to maintain or strengthen its market power; and
• reducing price competition between home insurers on price comparison websites.

The CAT's annulment of infringement ruling

On 8 August 2022, the CAT set aside the CMA's Decision, including the GBP 17.9 million fine imposed on Compare The Market.

In its judgment, the CAT upheld five of the six grounds of appeal advanced by Compare The Market. In summary, the CAT decided that the CMA had made the following errors:

The Decision adopted a flawed market definition 

The CAT found that the market definition in the CMA's Decision was "materially wrong" and the process by which the CMA arrived at the market definition was flawed. In particular, the CAT concluded that the CMA:

• adopted an inaccurate and incomplete definition of the consumer side of the market by finding that consumers “buy” price comparison services from price comparison websites. However, the CAT found that the CMA's definition was incomplete because price comparison websites additionally provide an efficient and convenient means for consumers to conclude a contract of insurance with a chosen home insurance provider, if they wish to do;
• failed to properly consider the significance of other channels for the purchase of home insurance by consumers (e.g. underwriters' direct channels, brokers' direct channels, retail partners' direct channels) as potential substitutes to price comparison websites;
• erred by adopting an approach to market definition that was not “outcome neutral”. The CAT has stressed, on a number of occasions, that it is important that market definition does not pre-determine a finding of anti-competitive effect, but the CAT found that the CMA "fell precisely into this trap";
• failed to properly test for demand side substitutability on the consumer side of the market by assuming that the channels available to purchasers of home insurance products are the same as, or can be equated to, the channels available to home insurance providers; and
• incorrectly included "narrow" MFN clauses in the market definition assessment.

The CAT ultimately rejected the CMA's market definition used in the Decision as an "unfit tool" for conducting an assessment of anti-competitive effects.  However, rather than setting aside the CMA's Decision at this stage (on the basis of a flawed assessment of market definition), the CAT provided its own market definition so that the analysis of anti-competitive effects could be properly evaluated.

The Decision failed to establish the existence of anticompetitive effects 

The CAT also held that the CMA failed to establish that Compare The Market's wide MFNs had the anti-competitive effects articulated in the Decision. 

The CMA's Decision is an infringement “by effect” case (i.e. where anti-competitive effects must be demonstrated), and not an infringement "by object" case (where anti-competitive effects may be presumed).  However, the CAT found that a great deal of what is said in the CMA's Decision to justify the findings of "by effect" infringements operates "at the level of theory, supplemented largely by qualitative materials" and with no significant reference to quantitative evidence.  In this context, the CAT noted that it was extremely difficult for Compare The Market (and the CAT), to identify the evidential basis for the effects stated to exist in the CMA's decision. 

In particular, the CAT found that:

• there was no reliable evidence upon which to conclude the existence of any adverse effect of wide MFNs on either (i) the price quoted or charged for home insurance products by a home insurance providers to consumers, or (ii) the price charged by price comparison websites to home insurance providers;
• the evidence adduced by the CMA was anecdotal and lacked depth and consistency with the CMA's theory of harm; and
• it was not possible for Compare The Market (or the CAT) to test the evidence relied upon in the CMA's Decision. Whilst the CMA adduced some evidence in relation to its findings relating to promotional discounts, the CAT did not consider that the competitive structure of the market was harmed, even potentially, through an effect on promotional discounts.

Comment

First, the judgment confirms a "framework" for the assessment of infringements where anticompetitive effects are alleged, which requires the demonstration of both a competitive counterfactual and where the existence of anticompetitive effects are demonstrated based upon objective and robust qualitative and quantitative evidence.  Secondly, the importance of market definition, which must not only be based upon clear objective evidence and should not pre-determine the outcome of the investigation.  Thirdly, important findings in the context of the extent to which a price comparison website may compete in the retail of financial products with other channels.  Finally, where the conclusion in the case concerning the rejection of an effects based condemnation of a  "wide" MFN, arguably creates tensions with the developing tendency in some other jurisdictions and guidance to examine and condemn wide MFNs through the prism of an object, rather than a more nuanced effects, based doctrine.

With thanks to Victoria Beswick of Ashurst for her contribution.