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Print articleFull eMetal Jacket: CAT Slams OFT on Interim Measures Direction
December, 2006 - John Schmidt and Dawn Hendry
On 8 September 2006, the Competition Appeal Tribunal (‘the CAT’) gave judgment in favour of London Metal Exchange (‘LME’) to recover costs in respect of its appeal against an interim measures direction (‘IMD’) issued (and then withdrawn) by the Office of Fair Trading (‘the OFT’).
The OFT’s first IMD arose from a complaint against, inter alia, LME’s plan to extend its opening hours for its non-ferrous base metals trading platform, LME Select, to capture the Asian markets. The complaint was brought by LME’s competitor, Spectron Group PLC (‘Spectron’), which feared that such extended trading hours would force its trading platform, eMetals, out of the market.
The CAT ruling follows some to-ing and fro-ing, whereby the OFT invited Spectron to apply for an IMD, granted the IMD without third-party consultation and then withdrew the IMD following an uproar from customers. However, the OFT only finally withdrew the IMD after LME lodged its appeal to the CAT.
While on the face of it the ruling only deals with costs associated with LME’s appeal to the CAT, it also addresses the important question of how much evidence the OFT must possess before it can issue an IMD as well as the general procedural and evidential standards expected from the OFT.
In essence, the CAT held that the OFT must verify complainants’ submissions and data with third parties before proceeding with an IMD, unless the urgency of the situation prevented the OFT from doing so.
This article first provides an overview of the chronology leading up to the granting and then the withdrawal of the IMD before looking at the OFT’s reasons. This is followed by an overview of the CAT’s reasons and a discussion of whether, following the CAT’s decision, there is a future for IMDs.
Chronology of Events
The Complaint
On 1 July 2003 the OFT received a complaint from Spectron about alleged predatory and discriminatory pricing by LME in the provision of its electronic trading platform for non-ferrous base metals contracts, LME Select. Spectron is a competitor of LME and provides a competing electronic trading platform, eMetals.
On 23 November 2005 LME formally announced that it would extend its opening hours from 1 March 2006 to capture Asian trading and this was brought to the OFT’s attention.
Issuing the IMD
On 15 December, the OFT emailed Spectron indicating that interim measures may be applied for if it considered that the expansion into overnight trading seriously threatened the future ability of Spectron to re-enter the main daytime market.
On 2 February 2006, and following correspondence with the OFT, Spectron applied for interim measures.
On 13 February 2006, the OFT served LME with a notice proposing interim measures directions. This notice outlined that LME’s proposed extended hours were likely to result in the elimination of Spectron’s electronic platform and, given that Spectron was the only competitor, such elimination would not be in the interests of the consumer or in the public interest. It concluded that if LME extended the trading hours of LME Select Spectron would suffer serious and irreparable damage and that it would therefore be necessary, as a matter of urgency, to make an IMD to prevent such an expansion.
On 22 February 2006, LME responded to the OFT and objected to the fact that more than six months had elapsed since LME announced its plans and the OFT had taken no steps to investigate the situation to establish whether the risk to the public interest was such that the OFT ought to be taking interim measures on its own initiative.
Despite LME’s representations, on 27 February 2006 the OFT issued the IMD which prevented LME from extending its trading hours as planned.
Withdrawal of the IMD
On 1 March 2006, Spectron issued a statement to its customers (apparently without discussing any of this with the OFT in advance) indicating that it had requested the OFT to withdraw the IMD. This was as a result of a number of responses from its customers which indicated strong opposition to the IMD and the likelihood of an increase in trade as a result of the extension.
Following this the OFT sought further clarification on Spectron and LME which led it provisionally to reverse its view on the necessity for an IMD. However, by the final date for LME to appeal the IMD, the OFT still had not withdrawn it, so LME lodged an appeal at that date (26 April 2006).
The OFT circulated a draft decision on 2 May 2006 to LME and Spectron and finally withdrew the IMD on 15 May 2006 (the date of the first case management conference) but did not publish its full reasons until on 24 May 2006.
The OFT’s Reasoning
The OFT (and other sectoral regulators such as Ofgem) have the power to issue IMDs where (1) there is a reasonable suspicion that a breach of the Competition Act 1998 or equivalent provisions under the EC Treaty has occurred, and (2) the measures are necessary as a matter of urgency either to prevent serious, irreparable damage to particular person(s) or categories of persons, or to protect the public interest .
The OFT based its decision on the following two broad categories:
· Public interest. It was necessary as a matter of urgency to protect the public interest by maintaining as competitive a market as possible and to prevent damage to the relevant market. The OFT considered that there were two main public interest grounds, namely, (i) the extension would be likely to have an effect of extending or exacerbating existing abusive conduct as it would apply LME’s then current pricing structure to an additional category of transactions, and (ii) the extension would also harm the general competitive process and market conditions. In particular, if Spectron, the only operator currently competing with LME, were forced out of the market it was not in the interests of consumers or public interest more generally; and
· Serious, irreparable damage. It was necessary as a matter of urgency to prevent serious, irreparable damage to Spectron. The OFT considered the likely consequence of the extension of LME’s trade hours to be the elimination of Spectron and that it would be extremely difficult for Spectron to re-enter.
The OFT based its withdrawal of the IMD largely on additional facts that have come to light in view of customer complaints against the IMD. As a result the OFT came to the view that, although it still appeared likely that Spectron might be eliminated, Spectron was uniquely well placed to re-enter the electronic trading segment and it was no longer clear that it would be very difficult or impossible for Spectron to re-enter the market.
The CAT Judgment
The CAT underlined its wide discretion to make any order that it thinks fit in relation to costs, specifically rejecting the OFT’s argument that in accordance with the Hasbro decision costs should follow success.
Moreover, in LME, it was the OFT’s decision to withdraw the IMD which led LME to apply to withdraw its appeal (and unlike in Hasbro not for purely commercial reasons). Had the OFT withdrawn the IMD before the last date for appeal, no recoverable costs would have been incurred by LME.
This then led to consideration of whether the process which the OFT adopted in issuing the IMD was one which an authority acting with due appreciation of its responsibilities would have decided to adopt.
The CAT focused that discussion on the following three aspects, each of which are discussed in more detail below: (1) the quality of evidence generally required; (2) a discussion of the quality of evidence in the specific case; and (3) the requisite level of urgency.
Quality of Evidence Generally Required
The CAT specifically accepts that since the OFT is acting as a matter of urgency, the process it adopts before issuing an IMD must necessarily be flexible and must be proportionate to the particular circumstances of the case.
However, it goes on to hold that section 35 of the Competition Act 1998 gives the OFT significant power and compares it to the power of the High Court to grant an injunction in England and Wales. It therefore found that it is relevant to compare the quality of the evidence which the OFT has relied on for an IMD with the quality of evidence which the court requires in order to grant an injunction, particularly on an urgent basis. Similarly, it finds that a section 26 notice (that is, the OFT’s formal requests for information) has similar significance to a witness statement supported by a statement of truth which is required in injunctions.
The CAT held that, while there may be situations in which the OFT is satisfied that it has sufficient quality information on which it feels able to rely without a section 26 notice , the OFT should be circumspect about solely relying on uncorroborated evidence not contained in a response to a section 26 notice. But once it had obtained answers to a section 26 notice, the CAT did not expect the OFT to conduct further investigation and substantiation of the facts set out in responses, unless it has further information which causes it to question its reliability.
Quality of Evidence Required in the Specific Case
As a first point, the CAT noted its concern that the OFT demonstrated only a limited understanding of Spectron’s business, and by extension the market in general, and that it issued an IMD on the basis of information provided solely by Spectron without seeking information from the market, in particular from affected third parties. It highlighted the fact that its limited understanding was derived from information not provided pursuant to a formal section 26 notice and that the information was not obtained from an impartial source.
The CAT expected an authority acting responsibly to make at least some enquiries with the very customers in whose eyes Spectron’s reputation would be damaged and to cross-check facts. It also notes that such enquiries could have been made expeditiously by way of a section 26 notice well in advance of the IMD decision. Instead, the OFT did not issue any section 26 notices to parties other than LME and Spectron until around one month after adoption of the IMD.
The CAT therefore concluded that the evidence relied on by the OFT fell below the standard which should normally be required by an authority such as the OFT.
The Requisite Level of Urgency
The CAT rejected the OFT’s arguments that the urgency of the situation was such that the OFT had no alternative but to rely on such evidence, at least as a temporary measure. Instead, it held that the OFT had had sufficient time to obtain information of an appropriate quality prior to 1 March 2006, given that (1) it must have known of LME’s plans by late November 2005, (2) it raised the question of interim measures with Spectron on 15 December, and (3) it was aware early in January 2006 of Spectron’s desire for interim measures.
The urgency in this case was created by the OFT not taking any steps until it received Spectron’s application and therefore the urgency was entirely of the OFT’s own making. The CAT specifically rejected the OFT’s argument that it was entitled to await an application from the complainant and held that if the OFT fears that the public interest requires protection it must act of its own initiative.
Is there a Future for Interim Measures?
The tenor and content of the CAT’s judgment is very damming on the OFT and its way of proceeding in the case. However, much of the criticism is case specific and arises largely from the fact that the OFT had known about the intention to extend trading hours for some three months before making the IMD without making enquiries, or cross-checking parts of the complaint, with that segment of the market which it was intended to protect: customers of LME and Spectron.
Nevertheless, there are broadly three consequences of the CAT judgment:
· IMDs are unlikely to be granted in future without at least a limited amount of market testing through the issue of section 26 notices.
· In the case of extreme urgency, the OFT can proceed without such market testing, as long as the OFT acted expeditiously leading up to the IMD, and proceeds to verify the data expeditiously following the adoption of the IMD.
· If the OFT suspects that an IMD is necessary to protect the public interest, it has to act out of its own initiative and cannot simply wait until a complainant provides the relevant information.
Given that there have so far been only very few applications (and only one successful application) it is unlikely that the market testing requirement will dampen the availability of IMDs. At worst, it will add a layer of consultation that, as the CAT points out, can be undertaken relatively quickly.
In cases of genuine urgency, a potential complainant should consider how they can best provide a sufficient level of comfort to the OFT in respect of the quality of the adduced evidence. In markets which are known to the OFT, this may be less of an issue. In relation to unknown markets, such comfort could lie in third-party corroboration (for example, by customers).
The OFT’s obligation to act on its own initiative seems helpful to complainants, but given that in most cases the OFT will not even be able to suspect that an IMD is required to protect the public interest without complainants providing relevant information, this means that (potential) complainants need to provide a sufficient level of detail (or point to likely sources of that information) to have any chance of the OFT adopting an IMD.
The OFT’s first IMD arose from a complaint against, inter alia, LME’s plan to extend its opening hours for its non-ferrous base metals trading platform, LME Select, to capture the Asian markets. The complaint was brought by LME’s competitor, Spectron Group PLC (‘Spectron’), which feared that such extended trading hours would force its trading platform, eMetals, out of the market.
The CAT ruling follows some to-ing and fro-ing, whereby the OFT invited Spectron to apply for an IMD, granted the IMD without third-party consultation and then withdrew the IMD following an uproar from customers. However, the OFT only finally withdrew the IMD after LME lodged its appeal to the CAT.
While on the face of it the ruling only deals with costs associated with LME’s appeal to the CAT, it also addresses the important question of how much evidence the OFT must possess before it can issue an IMD as well as the general procedural and evidential standards expected from the OFT.
In essence, the CAT held that the OFT must verify complainants’ submissions and data with third parties before proceeding with an IMD, unless the urgency of the situation prevented the OFT from doing so.
This article first provides an overview of the chronology leading up to the granting and then the withdrawal of the IMD before looking at the OFT’s reasons. This is followed by an overview of the CAT’s reasons and a discussion of whether, following the CAT’s decision, there is a future for IMDs.
Chronology of Events
The Complaint
On 1 July 2003 the OFT received a complaint from Spectron about alleged predatory and discriminatory pricing by LME in the provision of its electronic trading platform for non-ferrous base metals contracts, LME Select. Spectron is a competitor of LME and provides a competing electronic trading platform, eMetals.
On 23 November 2005 LME formally announced that it would extend its opening hours from 1 March 2006 to capture Asian trading and this was brought to the OFT’s attention.
Issuing the IMD
On 15 December, the OFT emailed Spectron indicating that interim measures may be applied for if it considered that the expansion into overnight trading seriously threatened the future ability of Spectron to re-enter the main daytime market.
On 2 February 2006, and following correspondence with the OFT, Spectron applied for interim measures.
On 13 February 2006, the OFT served LME with a notice proposing interim measures directions. This notice outlined that LME’s proposed extended hours were likely to result in the elimination of Spectron’s electronic platform and, given that Spectron was the only competitor, such elimination would not be in the interests of the consumer or in the public interest. It concluded that if LME extended the trading hours of LME Select Spectron would suffer serious and irreparable damage and that it would therefore be necessary, as a matter of urgency, to make an IMD to prevent such an expansion.
On 22 February 2006, LME responded to the OFT and objected to the fact that more than six months had elapsed since LME announced its plans and the OFT had taken no steps to investigate the situation to establish whether the risk to the public interest was such that the OFT ought to be taking interim measures on its own initiative.
Despite LME’s representations, on 27 February 2006 the OFT issued the IMD which prevented LME from extending its trading hours as planned.
Withdrawal of the IMD
On 1 March 2006, Spectron issued a statement to its customers (apparently without discussing any of this with the OFT in advance) indicating that it had requested the OFT to withdraw the IMD. This was as a result of a number of responses from its customers which indicated strong opposition to the IMD and the likelihood of an increase in trade as a result of the extension.
Following this the OFT sought further clarification on Spectron and LME which led it provisionally to reverse its view on the necessity for an IMD. However, by the final date for LME to appeal the IMD, the OFT still had not withdrawn it, so LME lodged an appeal at that date (26 April 2006).
The OFT circulated a draft decision on 2 May 2006 to LME and Spectron and finally withdrew the IMD on 15 May 2006 (the date of the first case management conference) but did not publish its full reasons until on 24 May 2006.
The OFT’s Reasoning
The OFT (and other sectoral regulators such as Ofgem) have the power to issue IMDs where (1) there is a reasonable suspicion that a breach of the Competition Act 1998 or equivalent provisions under the EC Treaty has occurred, and (2) the measures are necessary as a matter of urgency either to prevent serious, irreparable damage to particular person(s) or categories of persons, or to protect the public interest .
The OFT based its decision on the following two broad categories:
· Public interest. It was necessary as a matter of urgency to protect the public interest by maintaining as competitive a market as possible and to prevent damage to the relevant market. The OFT considered that there were two main public interest grounds, namely, (i) the extension would be likely to have an effect of extending or exacerbating existing abusive conduct as it would apply LME’s then current pricing structure to an additional category of transactions, and (ii) the extension would also harm the general competitive process and market conditions. In particular, if Spectron, the only operator currently competing with LME, were forced out of the market it was not in the interests of consumers or public interest more generally; and
· Serious, irreparable damage. It was necessary as a matter of urgency to prevent serious, irreparable damage to Spectron. The OFT considered the likely consequence of the extension of LME’s trade hours to be the elimination of Spectron and that it would be extremely difficult for Spectron to re-enter.
The OFT based its withdrawal of the IMD largely on additional facts that have come to light in view of customer complaints against the IMD. As a result the OFT came to the view that, although it still appeared likely that Spectron might be eliminated, Spectron was uniquely well placed to re-enter the electronic trading segment and it was no longer clear that it would be very difficult or impossible for Spectron to re-enter the market.
The CAT Judgment
The CAT underlined its wide discretion to make any order that it thinks fit in relation to costs, specifically rejecting the OFT’s argument that in accordance with the Hasbro decision costs should follow success.
Moreover, in LME, it was the OFT’s decision to withdraw the IMD which led LME to apply to withdraw its appeal (and unlike in Hasbro not for purely commercial reasons). Had the OFT withdrawn the IMD before the last date for appeal, no recoverable costs would have been incurred by LME.
This then led to consideration of whether the process which the OFT adopted in issuing the IMD was one which an authority acting with due appreciation of its responsibilities would have decided to adopt.
The CAT focused that discussion on the following three aspects, each of which are discussed in more detail below: (1) the quality of evidence generally required; (2) a discussion of the quality of evidence in the specific case; and (3) the requisite level of urgency.
Quality of Evidence Generally Required
The CAT specifically accepts that since the OFT is acting as a matter of urgency, the process it adopts before issuing an IMD must necessarily be flexible and must be proportionate to the particular circumstances of the case.
However, it goes on to hold that section 35 of the Competition Act 1998 gives the OFT significant power and compares it to the power of the High Court to grant an injunction in England and Wales. It therefore found that it is relevant to compare the quality of the evidence which the OFT has relied on for an IMD with the quality of evidence which the court requires in order to grant an injunction, particularly on an urgent basis. Similarly, it finds that a section 26 notice (that is, the OFT’s formal requests for information) has similar significance to a witness statement supported by a statement of truth which is required in injunctions.
The CAT held that, while there may be situations in which the OFT is satisfied that it has sufficient quality information on which it feels able to rely without a section 26 notice , the OFT should be circumspect about solely relying on uncorroborated evidence not contained in a response to a section 26 notice. But once it had obtained answers to a section 26 notice, the CAT did not expect the OFT to conduct further investigation and substantiation of the facts set out in responses, unless it has further information which causes it to question its reliability.
Quality of Evidence Required in the Specific Case
As a first point, the CAT noted its concern that the OFT demonstrated only a limited understanding of Spectron’s business, and by extension the market in general, and that it issued an IMD on the basis of information provided solely by Spectron without seeking information from the market, in particular from affected third parties. It highlighted the fact that its limited understanding was derived from information not provided pursuant to a formal section 26 notice and that the information was not obtained from an impartial source.
The CAT expected an authority acting responsibly to make at least some enquiries with the very customers in whose eyes Spectron’s reputation would be damaged and to cross-check facts. It also notes that such enquiries could have been made expeditiously by way of a section 26 notice well in advance of the IMD decision. Instead, the OFT did not issue any section 26 notices to parties other than LME and Spectron until around one month after adoption of the IMD.
The CAT therefore concluded that the evidence relied on by the OFT fell below the standard which should normally be required by an authority such as the OFT.
The Requisite Level of Urgency
The CAT rejected the OFT’s arguments that the urgency of the situation was such that the OFT had no alternative but to rely on such evidence, at least as a temporary measure. Instead, it held that the OFT had had sufficient time to obtain information of an appropriate quality prior to 1 March 2006, given that (1) it must have known of LME’s plans by late November 2005, (2) it raised the question of interim measures with Spectron on 15 December, and (3) it was aware early in January 2006 of Spectron’s desire for interim measures.
The urgency in this case was created by the OFT not taking any steps until it received Spectron’s application and therefore the urgency was entirely of the OFT’s own making. The CAT specifically rejected the OFT’s argument that it was entitled to await an application from the complainant and held that if the OFT fears that the public interest requires protection it must act of its own initiative.
Is there a Future for Interim Measures?
The tenor and content of the CAT’s judgment is very damming on the OFT and its way of proceeding in the case. However, much of the criticism is case specific and arises largely from the fact that the OFT had known about the intention to extend trading hours for some three months before making the IMD without making enquiries, or cross-checking parts of the complaint, with that segment of the market which it was intended to protect: customers of LME and Spectron.
Nevertheless, there are broadly three consequences of the CAT judgment:
· IMDs are unlikely to be granted in future without at least a limited amount of market testing through the issue of section 26 notices.
· In the case of extreme urgency, the OFT can proceed without such market testing, as long as the OFT acted expeditiously leading up to the IMD, and proceeds to verify the data expeditiously following the adoption of the IMD.
· If the OFT suspects that an IMD is necessary to protect the public interest, it has to act out of its own initiative and cannot simply wait until a complainant provides the relevant information.
Given that there have so far been only very few applications (and only one successful application) it is unlikely that the market testing requirement will dampen the availability of IMDs. At worst, it will add a layer of consultation that, as the CAT points out, can be undertaken relatively quickly.
In cases of genuine urgency, a potential complainant should consider how they can best provide a sufficient level of comfort to the OFT in respect of the quality of the adduced evidence. In markets which are known to the OFT, this may be less of an issue. In relation to unknown markets, such comfort could lie in third-party corroboration (for example, by customers).
The OFT’s obligation to act on its own initiative seems helpful to complainants, but given that in most cases the OFT will not even be able to suspect that an IMD is required to protect the public interest without complainants providing relevant information, this means that (potential) complainants need to provide a sufficient level of detail (or point to likely sources of that information) to have any chance of the OFT adopting an IMD.
