CAT Sets Aside CMA Infringement Decision On Wide MFNs

On 8 August 2022 the Competition Appeal Tribunal (CAT) set aside the CMA's infringement decision in its Compare The Market investigation relating to the use of wide MFN clauses. The CAT concluded that the CMA's definition of the relevant market in the decision was materially wrong and that the CMA had failed to show, to the requisite standard, that the wide MFNs had any appreciable anti-competitive effects. The CAT was highly critical of the lack of quantitative and econometric evidence in the CMA's decision which was one of the main reasons for overturning the decision.

The Compare The Market decision was the CMA's first Competition Act 1998 infringement decision involving wide MFNs. The CMA 's 2015 market investigation into private motor insurance identified that wide MFNs cause competitive harm, and resulted in an order prohibiting their use in the market for private motor insurance. This approach was confirmed in the CMA's market study on digital comparison tools, which concluded that wide MFNs are likely to restrict competition and result in higher prices for consumers. These developments informed the CMA's approach to wide retail MFNs in the new UK vertical agreements block exemption Order (VABEO), where they are expressly listed as a hardcore restriction.

The Compare The Market decision predates the VABEO and it is unclear to what extent the CAT's ruling will impact the CMA's approach to wide MFNs going forward. The ruling is clearly a setback for the CMA, which lost on five of the six substantive grounds of appeal, and should provide helpful guidance for anyone who is trying to justify the use of wide MFNs.

Key takeaways

• The CAT's ruling takes an interesting approach to market definition in relation to multi-sided platforms. It rejected the CMA's single two-sided market approach which it replaced with two separate markets, one on each side of the platform (a market for the supply of customer introduction services to home insurance providers and a market which includes all direct and indirect channels for the purchase of home insurance products for consumers). The CAT considers this to be the correct approach for the assessment of multi-sided platforms.
• The case was run as an infringement 'by effects' and the CAT held that the CMA had failed to demonstrate any appreciable adverse effects on competition to the requisite legal standard. It provides a useful reminder that the CMA must produce sufficiently precise and consistent evidence to support its decision that the alleged infringement took place.
• Wide retail MFNs are now listed as hardcore restrictions under the UK VABEO and although the case precedes the new VABEO, the CAT's approach and analysis can be expected to have an impact on any parties trying to justify the inclusion of such MFNs in their agreements. The CAT held that wide MFNs should not be classified as 'by object' restrictions as they can have a range of outcomes, not all of which are anti-competitive. Whereas they may restrict intra-brand competition or the ability to price differentially, they do not restrict inter-brand competition, where different products compete against each other, and it is therefore necessary to consider their anti-competitive effects on a case by case basis.

Background

Most favoured nation clauses (MFNs) are restrictions that limit the price (and other terms and conditions) at which the supplier can offer its products or services through other sales channels. In the context of price comparison websites MFNs are often used to ensure that sellers do not free-ride or undercut the price comparison website by enabling consumers to access the product or service through another channel.

An important distinction is drawn between narrow MFNs, which are less likely to be seen as problematic, and wide MFNs, which are considered more likely to be harmful. Narrow MFNs require the supplier to offer the same or better terms and conditions on the price comparison website as those offered through its own direct sales channels, but does not stipulate conditions for sales via other channels. Wide MFNs specify that a supplier sets a price on the price comparison website which is no higher than the price offered through its own website or through any other sales channel.

In November 2020 the CMA fined Compare The Market £17.9 million for imposing wide MFNs on a number of home insurers, preventing them from quoting lower prices on other competing price comparison websites.

The CMA concluded these wide MFNs had the appreciable effect of preventing, restricting or distorting competition, in breach of the Chapter I prohibition of the Competition Act 1998, by

• Reducing price competition between price comparison websites,
• Restricting the ability of competing price comparison websites to expand (enabling Compare The Market to maintain or strengthen its market power; and
• Reducing price competition between home insurance providers competing on price comparison websites.

On the other hand, the CMA regarded the narrow MFNs imposed by Compare The Market as either beneficial or necessary, as they were seen as preventing the home insurance provider from undercutting, on its direct channels, the premiums quoted on the price comparison websites, thereby preventing the insurance provider to free-ride on the price comparison website's efforts to attract customers.

Compare The Market appealed the CMA's infringement decision before the CAT on six substantive grounds, relating to the market definition adopted by the CMA and its failure to show, to the requisite standard, that the wide MFNs had anti-competitive effects.

The CAT's ruling

Market definition

In its decision the CMA had defined the relevant market as a single, two-sided market of price comparison website services for home insurance in the UK, involving the supply of (i) customer introduction services to home insurance providers and (ii) price comparison services to consumers.

The CAT found that the CMA's market definition was materially wrong and that the process by which it arrived at that market definition was flawed. The CMA had failed to properly consider the consumer-side of the market and was wrong to assume price comparison sites just supply price comparison services.

It concluded that the CMA should have defined two separate markets, one on each side of the platform: a market for the provision of customer introduction services to home insurance providers by price comparison websites and a market which includes all direct and indirect channels for the purchase of home insurance products for consumers. To treat them as a single market runs the risk that the analysis of the degree of substitution will be incomplete, and that a single SSNIP test on one side of the market is insufficient to test the competitive constraints on the other.

As a result of its failure to assess each side of the platform separately, the CMA had failed to consider the significance of other channels for the purchase of home insurance products by consumers. The insurance market is marked out by the use of intermediaries or a whole series of different interfaces, particularly involving the use of brokers. Price comparison websites are a relatively late addition to this list of indirect channels to acquire insurance and the CMA was wrong to limit the market definition to price comparison websites for home insurance.

Anti-competitive effects of the wide MFNs

The CAT held that the CMA had failed to establish that the wide MFNs had the anti-competitive effects articulated in its decision. The case was an infringement 'by effects' case, and while the CMA was under no obligation to quantify the extent of the anti-competitive effects, it was required to demonstrate that the adverse effects on competition occurred on the balance of probabilities.

The CAT concluded there was no reliable evidence to conclude that the existence of the wide MFNs had any adverse effect on premiums or commissions. In fact, the CAT went further and considered it unlikely that the wide MFNs had any effect on keeping premiums or commissions at a higher level than they would otherwise have been.

The CAT was extremely critical of the evidence relied on by the CMA, which had based its decision entirely on qualitative evidence and not at all on quantitative/econometric evidence. The CAT described that evidence at best as anecdotal, lacking depth and consistency with the CMA's theory of harm. Much more seriously, according to the CAT the evidence was untestable by both Compare The Market and the CAT, and it was never clear exactly what qualitative evidence the CMA was actually relying on.

The CAT upheld five of the six grounds of appeal advanced by Compare The Market and set aside the CMA's infringement decision. The CMA has until 16 September 2022 to apply for permission to appeal the CAT's ruling.

Wide retail MFNs under the new UK VABEO

Under the new UK vertical agreements block exemption Order (VABEO) that came into force on 1 June 2022, wide retail MFNs are now expressly listed as hardcore restrictions and are therefore presumed to restrict competition by object. This means that the CMA is not required to carry out a detailed assessment to demonstrate an adverse effect on competition. It also gives rise to the presumption that the agreement is unlikely to fulfil the conditions for exemption from the Chapter I prohibition, which is why the VABEO does not apply. The burden will be on the parties to substantiate any efficiencies resulting from the inclusion of wide retail MFNs in their agreement and to demonstrate that all the conditions for individual exemption (under section 9(1) CA98) are met.

Whereas it is unclear at this stage to what extent the CMA can be expected to adjust its approach to wide MFNs in light of the appeal, the CAT's analysis in this case should at least provide a helpful framework for parties seeking to demonstrate the possible pro-competitive effects of the use of wide retail MFNs.

It is worth noting that narrow retail MFNs and non-retail MFNs do not qualify as hardcore restrictions under the new VABEO and will continue to benefit from the block exemption, provided the market share thresholds and other conditions of the VABEO are met.

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