On 4 March 2009, the Competition Appeal Tribunal (CAT) published
its judgment on an appeal by Tesco against the Competition
Commission (CC) findings in its final report on the UK groceries
market. The CAT concluded that the CC had failed to take account of
relevant considerations when recommending the competition test be
incorporated into the planning regime, and will now hear
submissions on appropriate relief.
The CAT's judgment is focused on the narrow issues directly
raised by the Tesco case. The CAT has declined to enunciate general
principles, or to prescribe precisely how the CC should address the
task of formulating remedies in a market investigation case. It has
declined to answer some of the questions of statutory
interpretation raised by Tesco in the formulation of its
case.
But, whilst emphasising the narrow scope of judicial review, and
the wide margin of appreciation available to the CC, the CAT's
judgment is more likely to be remembered for its result –
namely, that the CAT ultimately decided that the CC had not applied
the proportionality test properly.
Background
Tesco's appeal challenged the recommendation in the CC's
report that a "competition test" should be incorporated
into the planning regime as part of a package of remedies to
address the adverse effect on competition the CC had found in its
inquiry. The competition test would generally prevent local
authorities from granting planning permission for the construction
of a new large supermarket, or the extension of an existing
supermarket, where the relevant local market for the supply of
groceries was already highly concentrated in favour of, among
others, the applicant or would become highly concentrated as a
result of the grant of planning consent.
The competition test was designed to prevent additional local
markets becoming highly concentrated. During the course of the CAT
proceedings, it became apparent that the CC also saw the test as
facilitating new market entry, on the basis that, if a large
incumbent operator was unable to secure planning consent to build a
new or extended store, that would enhance the prospects that others
could secure planning consent for a rival store.
In its judgment the CAT concluded that the CC had failed to take
account of certain relevant considerations in deciding to recommend
that the competition test should be adopted, and those matters
could not be dismissed as incapable of affecting that
recommendation. However, the CAT reached no conclusion as to
whether the CC could lawfully have adopted the competition test, if
it had had due regard to these additional relevant
considerations.
The parties will address the CAT as to specific relief to be
granted at a separate hearing. Under the provisions of the relevant
legislation the CAT may quash the whole or part of the decision in
question and refer it back to the CC with a direction to reconsider
and make a new decision in accordance with the CAT's
ruling.
Key issues
Tesco argued that, in observing its obligations to act
proportionately, the CC had failed properly to take into account
the "economic costs" of the competition test (i.e.
detriments to consumers which would arise where there was local
demand for additional supermarket services, an incumbent
supermarket's application for planning consent was refused by
virtue of the competition test, and no alternative proposal was
presented to meet the relevant demand.)
The CAT held that the CC's report did not properly address this
potential detriment of the proposed competition test, but should
have done so.
Tesco also argued that the CC had failed to consider how effective
the competition test would be in addressing the adverse effects on
competition which it had identified as arising from local market
concentrations. In defending its report, the CC argued that the
competition test had two aspects: it would prevent new
concentrations from arising in local markets; and it would
facilitate competitive market entry by third parties. This
"facilitative" aspect of the proposed remedy was,
according to the CC, an important element of its
effectiveness.
The CAT held that, in the same way that the CC had failed properly
to address the possibility that there would be cases where the
competition test might block one new supermarket development, where
there was no alternative development in prospect, the CC had
likewise failed to assess how effective the competition test would
be at facilitating, or ensuring, competitive market entry. The
CC's report was deficient in this respect.
Whilst the CAT's judgment focuses, in many respects, on the
particular issues raised by Tesco's appeal, the judgment also
sets out some principles of wider application as to how the CC
should carry out the proportionality exercise in the context of the
statutory framework of a market investigation and the scope of the
CAT's powers of review in relation to the test.
CAT's consideration of the principle of proportionality
Principles to be appliedThe CAT identifies, in its judgment, the main aspects of the
proportionality principles to be applied in assessing remedies to
be imposed in the context of a market investigation, namely that
"the measure: (1) must be effective to achieve the
legitimate aim in question (appropriate), (2) must be no more
onerous than is required to achieve that aim (necessary), (3) must
be the least onerous, if there is a choice of equally effective
measures and (4) in any event must not produce any adverse effects
which are disproportionate to the aim pursued".
In the case under examination, the CC had failed to examine how
effective the proposed competition test would be (compared with
other possible remedies, such as store divestments) and what scale
of adverse effects it might produce (issues (1) and (4)).
Margin of appreciation
The CAT specifically notes that the application of the principles
is likely to give rise to many questions of judgment and appraisal
and that this is particularly so when the CC is required to balance
the aims of the proposed measure on one side and any adverse
effects it may produce on the other. The CAT confirms that, in
resolving these questions, the CC has a very wide margin of
appreciation and makes it very clear that a Tribunal carrying out a
judicial review process will not easily interfere with this.
The CAT goes on to make clear that the margin of appreciation to be
exercised by the CC extends to the methodology that it decides to
use to investigate and estimate the factors to be considered in any
proportionality analysis (as well as in the determination of
statutory questions of comprehensiveness, reasonableness and
practicability). It notes that neither the relevant legislation nor
the general law impose any requirements as to the formal procedure
or methodology to be followed when it considers the effectiveness
of a possible remedy or its relevant costs, adverse effects and
benefits: ultimately the CC can "tailor its investigation
of any specific factor to the circumstances of the case and follow
such procedures as it considers appropriate". In
particular, a methodology may be appropriate, even if it does not
entail any precise quantification of the effects of a particular
remedy.
"Double proportionality approach"
However, the CAT also states that, in tailoring its investigation
of a specific factor to the circumstances of a case, it may well be
"sensible" for the CC to "apply a
double proportionality approach", so that the more
important a particular factor is likely to be, or the more
intrusive, uncertain or wide ranging a remedy is likely to be, then
the more detailed the investigation of that factor may need to
be.
The CAT states that the CC must "do what is necessary to
put itself in a position properly to decide the statutory
questions", including examining and taking into account
relevant considerations such as the effectiveness of the remedy,
the time period in which it will achieve its aim and the extent of
any adverse effects that may flow from its implementation.
Assessment of proportionality in the groceries report
In this case, the CAT found the CC's assessment of
proportionality to be flawed. In addition to the deficiency in
relation to the consideration of welfare losses or
"economic" costs which were also relevant to the
assessment of proportionality, the CAT noted that:-
- The CC did not attempt to estimate the competition test's contribution to the achievement of the aim of the test (in particular, the extent to which it would facilitate further entry), describe how or to what extent the remedy might be expected to achieve those aims or indicate the timescale over which the remedy might be expected to have effect;
- The report did not include any of the specific considerations of the question of timescale or effectiveness generally which would be expected in a report as "detailed and painstaking" as the groceries report. The CAT considered this to be particularly significant given that the competition test would be capable of having widespread effects in the sector;
- Whilst the CC had put in front of the CAT a number of arguments as to why it could not assess the effectiveness of the test or the timescale within which it could be expected to introduce more competition into concentrated markets, none of the CC's arguments appeared in the text of the report and had merely been produced in a "forensic" context.
"The assessments and the weighing must take
place"
The CAT concluded that "Whilst the precise methodology
adopted for assessing these matters, and the weight to be
attributed to such assessments are (subject to rationality or
questions of law) likely to fall within the margin of appreciation
of the Commission, the assessments and the weighing must take
place.
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