Extraterritorial reach of CMA information gathering powers: the fight continues?

The CMA issued information notices (under section 26 of the Competition Act 1998, 'CA98') in April 2022 to BMW and VW as part of its competition law investigation into end-of-life vehicle recycling (the 'Notices'). The CMA believed that important aspects of the suspected cartel were "agreed abroad before being implemented in the UK".

The Notices required the German parent companies of BMW and VW, their indirect subsidiaries in the UK and any other legal entities forming part of the same "undertaking" to produce documents and information relating to the alleged cartel.  Neither of the German parent companies had a UK branch or office: although they both owned and controlled indirect subsidiaries incorporated in the UK.

BMW and VW challenged the Notices on the basis that the CMA did not have the power to require the production of documents held outside of the UK, i.e. held by the German parent companies or by any other group company domiciled outside of the UK. It was not in dispute that, to the extent the UK subsidiaries had control of documents relating to overseas territories, the UK subsidiaries would be required to produce them. While BMW and VW issued challenges in different Courts on different legal bases, the UK Competition Appeal Tribunal ('CAT') and High Court heard both cases together, issuing a single joint judgment.

BMW and VW won at the CAT/High Court stage, with the judgment finding that the CMA's interpretation of section 26 CA98 was "aggressively extraterritorial" because the consequence would be that "a single section 26 notice, addressed to an undertaking, would trigger an obligation to respond in every single legal or natural person within that undertaking, provided only that a single legal or natural person within that undertaking had a UK territorial connection". That Court found that entities are required to respond to section 26 notices only if they have a UK territorial connection. The CMA was granted permission to appeal to the Court of Appeal.

The Court of Appeal overturned the CAT/High Court judgment, finding in favour of the CMA.

Extraterritoriality

The Court of Appeal concluded that, when drafting section 26 CA98, the UK Parliament intended the CMA's information gathering powers to have extra-territorial effect – nothing in that provision indicated an intention to limit the cross-border reach of the CMA.

It was relevant that the CMA's power to require the production of documents and information (under section 26 CA98) falls under the umbrella of both the UK's prohibition of anti-competitive agreements (the 'Chapter I prohibition') and the CMA's power to investigate suspected anti-competitive agreements (under section 25 CA98). The Court found that both the Chapter I prohibition and the general power to investigate potential infringements  must be extra-territorial in scope on the basis that they cover (1) agreements that are or are intended to be implemented in the UK and (2) agreements that may affect trade in the UK and restrict competition in the UK: both of which may be satisfied by entities that are wholly offshore.

The Court was persuaded that, if the CMA's specific power to request the production of information (section 26 CA98) was limited to legal entities physically connected to the UK, a "gaping lacuna" in the effectiveness of the CMA to perform its statutory functions would arise. It noted that competition authorities worldwide frequently have to focus their powers on actors located abroad in order to preserve the integrity of their domestic markets and consumers, and that this is achieved by conferring broad extra-territorial investigatory and enforcement powers: "Cartels are, characteristically, covert and ever more international".

The Court of Appeal also dismissed arguments relating to:

• The principle of comity (very broadly speaking, that the CMA needs to consider the impact of it exercising its powers on other authorities exercising their powers). The Court said that it cannot be inferred that Parliament intended to avoid extra-territorial effect simply because, in exercising investigative and enforcement powers, there was a "theoretical risk to comity".
  
  
• The presumption against the extraterritoriality of criminal sanctions. Whilst the CA98, when first enacted, introduced criminal sanctions for refusals to comply with information notices, those criminal sanctions have since been removed (with the consequences now being civil in nature). The Court said that the legislation, as it currently stands, reflects the relevant legislative purpose.

Undertaking

The Court of Appeal also concluded that the CMA can exercise its section 26 powers against an entity (whether located inside or outside of the UK – see above) which may be a natural or legal person, an undertaking, or a combination thereof.

In the Court's view, this is because the term "person" in section 26 CA98 is expressly defined to include an "undertaking", and therefore incorporates the concept of joint and several liability and responsibility. The Court found that, when the CMA serves a notice upon an entity, it does so on the basis that the entity has access to all the documents and information of the undertaking as a whole. It cannot, therefore, be argued that service upon a subsidiary is insufficient to enable that subsidiary legally to have access to documents held by an entity higher up or elsewhere in the corporate chain over which the subsidiary has no control. Contractual or other legal restrictions limiting a UK subsidiary from accessing documents held elsewhere within the group will not necessarily provide a defence to responding to a CMA request for information.

The Court of Appeal did not consider this position to be inconsistent with the fact that the CMA must act in accordance with fundamental rights (indeed, the German parent companies had exercised rights of defence by bringing the challenge). It also found that, if the CMA was unable to exercise its section 26 CA98 powers over undertakings (and thus was limited to requiring information from UK connected entities), the CMA would become "largely toothless when confronting international cartels" and "no rational cartelist would ever operate its conspiracy save from offshore locations and ensuring that no inculpatory evidence was to be found in the UK".

The Court of Appeal's findings were not undermined by a "theoretical" or "improbable" risk of notices not being brought properly to the attention of all the entities comprising the relevant undertaking (or being brought to the attention of entities who are unaware of the extent of the undertaking to which they belong). Indeed, the Court considered the CMA to have adopted a "sensible course of action" in ensuring that "those responsible for compliance with the notice had it brought to their attention" and in making "clear that the obligation of production related to documents, evidence and other material held by the undertaking as a whole".

A. Can the CMA require overseas entities to produce documents?

The Court of Appeal finds that it can. Nevertheless the fight looks set to continue, with Volkswagen indicating that it will seek permission to appeal to the Supreme Court.

The judgment (if it stands) is significant, particularly given progress on certain key international co-operation arrangements is slow. In terms of UK/EU cooperation, the CMA no longer has powers to enforce EU competition rules, and no longer benefits from the formal mechanisms for permitted exchanges of evidence and information via membership of the European Competition Network (ECN). Whilst the EU-UK Trade and Cooperation Agreement (TCA) foresees future cooperation between the EU and UK on competition law matters, no such arrangements have yet been finalised.

B. Potentially limited impact in practice?

The practical impact of this case in the medium to long term remains to be seen. The (final) judgment, even if the Court of Appeal were to be overturned, will not change the fact that there isn't a 'get out of jail free card' for all information held overseas. Information that is within the control of UK entities (for example where IT systems are common across an organisation's borders, or where UK subsidiaries otherwise have control over documents located overseas) is caught by section 26. Even for those cases where information is arguably outside the control of UK entities, the UK's DMCC Bill seeks to amend the CA98 to give legislative extra-territorial effect to information notices. The DMCC Bill is currently being considered by the House of Lords and is expected to come into force in Autumn 2024.

C. Is there a read across to merger and market investigations?

Given the definition of a "person" under the Enterprise Act 2002 (which provides the CMA's merger and market investigation powers) does not incorporate the reference to  "undertakings" in the same way as the CA98, the same outcome cannot necessarily be assumed. The DMCC Bill may make provision to 'fix' the issue in relation to merger and market investigations, as well as competition law cases.  The devil will be in the detail of the final wording.

D. Practical enforcement?

Key questions remain as to how the CMA will seek to enforce an information notice against an overseas entity that has failed to comply with it. Counsel for the CMA acknowledged that there could be difficulties in doing so during the BMW/VW appeal. The question of enforcement will likely come to the forefront before long, especially once the significantly higher financial penalties for non-compliance envisaged in the DMCC Bill come into force (and as the CMA's caseload continues in its international expansion).