The Impact of Covid-19 on Competition Law

The leading case JD Sports Fashion plc v Competition and Markets Authority [2020] highlights the importance of regulators taking proactive steps to investigate the impact of Covid-19 on competition.

Background

• Following the merger of JD Sports and Footasylum in a £90 million-pound deal in 2019, the Competition and Markets Authority (CMA) investigated the deal.

• In May 2020, the CMA published its final report, concluding that the merger resulted in a "substantial lessening of competition" (SLC) within the market in which the companies operated and required JD Sports to divest Footasylum in full. The CMA found that the merger had the ability to remove one of JD Sports' competitors, which in turn could lead to higher prices and reduced product ranges, negatively impacting customers.

• In making its' decision, the CMA considered the impact of Covid-19 and found that whilst the pandemic was having a clear effect on the sports-fashion clothing and footwear market, they did not consider that it was impacting one company more than the other, or that it removed the fact that these two companies were close competitors.

• In June 2020, JD Sports made an application under section 120 of the Enterprise Act 2002 for a review of the CMA's decision on three grounds. These included:

1. the CMA erred in law in failing to apply the Merger Assessment Guidelines in deciding whether any SLC was "substantial" and failed rationally to assess the aggregate constraints on the combined JD Sports/Footasylum group;

2. the CMA erred in law and/or acted irrationally in excluding the counterfactual effect of Covid-19 on Footasylum and in finding that Covid-19 would not materially affect Footasylum's competitive constraints; and

3. the CMA failed to provide adequate reasons and made irrational findings in concluding that the constraints posed by suppliers was not so significant to sufficiently disadvantage the merged entity.

Judgement

• The Competition Appeal Tribunal (CAT) found in the CMA's favour in respect of the first ground.

• Looking at ground 2, the CAT found that the CMA did not have the required evidence to support its conclusion as to the likely effects of Covid-19 and that it had acted irrationally as a result.

• On the third and final ground, the CAT found that the CMA had failed to fully investigate the impact of Covid-19 in respect of whether it would strengthen the suppliers' ability to increase their sales directly to consumers, as a result in the increase in online shopping due to the pandemic.

Impact

• The CAT's decision means that merger has now gone back to the CMA for review and the order forcing JD Sports to divest Footaslym has been suspended whilst the report is reconsidered.

• The decision makes clear that the CMA must conduct a sufficient information gathering exercise and have the necessary evidence on which to base their decisions.

• However, businesses should be aware that whilst the CMA may have been pulled up on its errors in this particular case, they have affirmed that they will not tolerate anticompetitive conduct which goes beyond what is necessary to relieve a legitimate concern caused by the pandemic. The CMA have set up a dedicated Covid-19 task force to provide advice to the UK Government, scrutinise market developments to identify harmful sales and pricing practices, and to take enforcement action where competition breaches have occurred.