Peer panel: competition/regulatory
29 October 2012 | By Joanne Harris
21 October 2013
20 June 2014
7 April 2014
18 November 2013
12 June 2014
As the scrutiny and enforcement system is streamlined, antitrust regulation is at the top of many companies’ agendas
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The UK is reforming its competition regime, even as competition issues become increasingly important for businesses. This week, the sector’s top lawyers discuss
key issues including the new regime, the sectors of importance and how technology is affecting case handling.
What do you think the effect will be of merging the Office of Fair Trading (OFT) and the Competition Commission (CC) into the Competition and Markets Authority (CMA)?
Alastair Chapman, partner, Freshfields Bruckhaus Deringer: My constitutional law tutor used to say of government institutions: “If it ain’t broke, government will soon break it”. Surprise has been expressed about the desire to reorganise what was a world-leading competition regime. However, the merger represents an opportunity: the aim is that the new organisation will be swifter in reaching decisions, and that those decisions be more robust. Of course, there is a tension here, and I suspect the CMA will try to resolve this in favour of robustness.
That said, there should be some synergies and the opportunity to eliminate duplication. Ideally, we will see a more dynamic and flexible approach to enforcement, better use of public resources and greater potential to develop and retain talent.
How soon the CMA is able to resolve teething issues so it can get on will determine whether we see a drop-off in activity levels for a year or so after it becomes operational. But the OFT is showing signs of wanting to pass on a full case-load in 2014.
Simon Holmes, head of EU, competition and regulatory, SJ Berwin: After an inevitable bedding-in period we expect a combined authority to be more efficient and use its resources to greater effect. This should result in an increase in competition law enforcement activity. Further, we may see more publicity at the start of formal antitrust proceedings, with companies under investigation being named.
In relation to mergers and market investigations, the loss of a separate case team and resultant ‘fresh pair of eyes’ when a case is referred from phase I to phase II review raises the risk of confirmation bias. However, this is something we face when dealing with the European Commission (EC) and, in practice, we think can be managed.
Caroline Hobson, partner, CMS: The present regime has a number of benefits, especially the ‘fresh pair of eyes’ approach in merger investigations. However, we hope the CMA will reduce inefficiencies and speed up slow-moving merger and market investigations.
There is a concern that the proposed approach to mergers and the loss of the institutional separation between the OFT and CC will lead to confirmation bias. Under the new regime, mergers that go to a second phase investigation will stay within the CMA and there have been fears that concerns identified in the first stage review may not be examined as robustly as they are under the current regime. Proposals are in place to prevent this.
By creating a unified body, we hope some of the problems experienced by the OFT in recent years concerning Competition Act investigations are addressed. It should ensure a more consistent approach.
The merger is largely a result of government cost-cutting measures. A concern will therefore be to ensure the CMA is properly resourced with enough high-calibre staff.
Martin Coleman, global antitrust head, Norton Rose: The big strategic benefit is likely to be in the enhanced prominence and weight given to a single UK competition authority. However, the initial idea of cost savings through avoiding duplication will be minimal.
The danger of a single authority being investigator, prosecutor, judge and jury, without separation of powers or checks and balances, as under the current system, is minimised with separate teams for phase I and phase II in merger and market investigations. The result is an authority that will be better than the EC in terms of checks and balances – this is critical to fairness.
Elizabeth Morony, partner, Clifford Chance: To the extent that the merger is intended to allow a more flexible and efficient use of competition powers and processes it should be welcomed. It appears to make sense to combine phases I and II of the merger process under a single regulator and, similarly, for market investigation.
Parties will want to have confidence in the procedural integrity of the streamlined regime. In merger cases, the continued use of panels of independent experts will provide some comfort. The proposals to separate decision-makers from the investigation team for the purpose of civil investigations are welcome. However, the market investigation regime remains an area of concern in circumstances where the CMA will have powers not just to investigate but to impose wide-ranging remedies, including divestments.
Richard Eccles, partner, Bird & Bird: The merger will hopefully speed up competition processes and are expected to result in a smoother transition from phase I to phase II in both merger control and market investigation cases as documentation and data will be transferred between parts of a single institution rather than between two bodies, and this should reduce or limit the information requested from businesses in the early stages.
However, the amended time periods for merger cases and market investigations will be important. Competition Act cases will remain with the OFT team within the CMA and so will not be directly affected by the merger, although it is to be hoped that changes will be made to improve the speed and robustness of decisions.
Why do you think there is high demand for regulatory and pre-litigation advice in competition cases?
Chapman: Competition law is being applied by a growing number of regulators around the world, with tough penalties imposed on firms and individuals. Compliance with competition law is therefore high on the agenda of general counsel and their boards, and clients have a much more sophisticated sense of where competition issues might arise than was the case 10 years ago.
Where a regulator has already started an investigation there is growing scope for challenging any subsequent decision. But only thinking about an appeal or judicial review when that decision is published puts clients at a disadvantage. Anticipating an appeal at an early stage allows us to recognise and protect procedural and substantive grounds of challenge, and gives clients the best chance of overturning a decision.
Suyong Kim, partner, Hogan Lovells: The implications of falling foul of competition law are now so huge – in terms of fines, liability for damages, reputational harm and potential criminal sanctions – that companies want to make sure that they are acting within the law.
However, companies are not only taking advice in relation to risks, they are also beginning to understand how competition law can be used to achieve commercial aims or act as a source of revenue. Companies are more frequently seeking advice on making or threatening complaints, or positioning themselves so they can act swiftly in relation to potential damages claims.
Holmes: The high demand is due to a variety of factors. Clients are increasingly aware of the risks of competition law. This is in part due to globalisation - there are now very few countries that do not have competition laws or merger control regimes. These regimes can differ both substantively and procedurally and can raise the risk of civil and/or criminal sanctions. Clients are increasingly aware that their commercial strategies need to comply with these varying requirements.
Competition authorities are also courting maximum publicity for their enforcement activity, resulting in a high risk of reputational damage. Coupled with this, penalty fines are steadily increasing.
On the other side, clients are more alert to harm caused to them by the anti-competitive conduct of others. They are increasingly willing to consider private damages actions in the knowledge that out-of-court settlements are a realistic prospect.
Morony: There is an increasing recognition of the need to have an eye to the risk of litigation throughout a competition case. For example, in the context of a CC inquiry, parties will be considering the need to bring an appeal. This will have a knock-on effect throughout the handling of the inquiry, most obviously in the context of possible breaches of procedural requirements and the need to retain privilege over materials created in the course of the inquiry.
Litigation risk in a cartel case is becoming a near-certainty in circumstances where follow-on damages claims are increasingly the norm. It is crucially important throughout a cartel investigation that a party under investigation factors in the likelihood of a damages action if a decision is made. The need to retain privilege over legal documents created in the course of the inquiry is crucial.
Eccles: There are two questions here. Regulatory advice is important in most competition cases affecting regulated sectors. The powers of regulators to control prices, whether through specific price controls or cost-orientation conditions, have a far-reaching effect on competition in those sectors. Price controls for network access directly affect competitive conditions in downstream markets and the approach to retail price controls likewise affects the nature and extent of competition in supplies to users and consumers.
In terms of pre-litigation advice, the focus of enforcement is moving from the public to the private sphere. The OFT conducts very few Competition Act investigations other than cartel investigations. Often, a business wishing to take control of its competition claim will need to consider action in the courts. Businesses need lawyers with a presence in the main European jurisdictions to be able to take informed decisions on procedural matters.
Do you use technology to help in the race for leniency in cartel matters, and if so, what sort of technology?
Chapman: With greater protection offered to those first through the competition authority’s door, time is of the essence in the race for leniency. However, an applicant needs to add value to the investigation. One of the main ways of doing so is providing documentary evidence of cartel conduct.
Searching for such evidence can be onerous. Manual searches are not quick, nor are they appropriate when key evidence is typically sitting in electronic document management systems.
With an ever-increasing volume of data involved we bring technology to bear as a matter of course to enable data to be reviewed in a quick, cost-efficient and targeted manner. The ‘next big thing’ is likely to be predictive coding.
Kim: In a race for leniency, every hour is vital. We therefore advise clients to use technology where it is clear this will speed up the process.
Technology designed to conduct forensic searches of IT systems is the most frequently used. This allows us to identify any key documents at an early stage. Whether other technologies are used much depends on the client and the nature of the allegations.
However, the use of technology can create its own delays, and may not always be possible in a race for leniency. In particular, if searches cannot be tightly focused they can result in thousands of records that have to be reviewed for relevance. Careful thought has to be given as to whether and how technology is used, and in particular how focused the searches are at the early stage. Input from individuals that allows a more focused approach is therefore invaluable.
Hobson: Our forensic IT teams have access to software that covers the three critical areas of assessment in a matter: rapid and forensically sound capture of information; the ability to host and quickly index and analyse data to help provide the broadest picture of our client’s position related to specific documents; and specialist tools to identify documentary evidence that is not too obvious but may indicate patterns of behaviour and lead to further interviews and related evidence gathering.
Using these tools enables us to identify issues rapidly, thus placing our client in a much stronger position to assess its options.
We increasingly use these tools in a compliance context, deploy them in routine competition law audits, and include presentations by our forensic IT experts in compliance and dawn raid training sessions. Frankly, such a presentation can be a real wake-up call.
Coleman: Technology assists greatly. Leniency applications will either follow someone within the business coming forward with knowledge of involvement in a cartel, or be a response to a dawn raid or information request from an authority. In both cases the most important evidence that the authorities will want to see is contemporaneous documents that back up oral statements. That makes it vital that e-disclosure tools can be deployed quickly to find needles in the haystack to support leniency applications and, generally, to be able to advise the company on the extent of the potential infringement and the alternative option of defending the case.
Recently, the technology has become more sophisticated, and there are tools that can be used to apply smart searches to assign probability ratings to documents based on samples of relevant documents. This can reduce the time needed to review documents, the number of documents to be reviewed and the time to perfect a leniency marker.
Eccles: We use electronic document analysis and management tools to prepare cases – indeed, they are vital for sifting large volumes of material, identifying key documents and data, and providing the basis for preparing a chronology of events.
Such tools can only be expected to become more prevalent, and are important for all types of competition law and behavioural regulatory cases, not just cartel and leniency matters.
In terms of document disclosure, an electronic document management system can be used both to identify documents that need to be disclosed either in court proceedings or in response to a competition authority’s information request and also to produce key documents that will support the case that the company believes it should make.
If such tools are deployed promptly, they could generate key evidence to help the company fulfil the requirements of type A or type B immunity.
What are your views on clients collecting their own data for competition cases as opposed to an independent forensic collection of the data?
Kim: In some cases, careful liaison with the client’s IT function can produce the necessary data quickly and effectively. The need for independent forensic collection grows the larger and more complex the organisation; the more detailed the information; the greater the volume of the data being searched; and the speed with which results are required.
Clients are often not equipped to conduct detailed searches of the type and scale required, or within the required timescale.
One further issue is that clients do not always appreciate what data is or could be relevant. Independent forensic teams often pursue fruitful avenues that clients would not have identified.
Holmes: This may be a viable option, particularly if the data is discrete and of low volume, assuming the client has the relevant expertise within its in-house IT department. The key is to ensure that all relevant data is identified and preserved. This is becoming difficult as more data is stored on mobile phones and portable data storage media.
Furthermore, the investigation team must be seen to be independent and objective. We would also need to ensure the client has the tools to keep such sensitive data secure.
Hobson: It is difficult to make a generalisation. The key factors are the structure of the organisation and reporting lines, the nature of the client’s IT systems and the size of the legal team, and their knowledge of a client’s business units.
Large in-house legal team usually have the knowledge of how best to structure the search for data and can form an effective bridge between business personnel and external advisers. However, in many cases where legal teams have been small, we have had to take the leading role in gathering information.
We use sophisticated IT support in conducting an independent forensic collection of data and this is the benefit when data collation is our responsibility. Because the tools are sophisticated we can look at patterns and relationships from the data that may be missed by more conventional searches, or exposed only after a considerable time reviewing the data.
Coleman: This depends on the sophistication of the clients’ systems and what you are looking for. Generally, if you are looking at collecting in-boxes and clearly identified files it will not be a problem to have the client secure the data. But, regardless of who ends up collecting the data, the key thing in any investigation is to make sure at the outset that all potentially relevant systems are secured, with relevant files mirrored if possible, and document and IT hardware destruction procedures suspended.
Morony: Generally speaking, the answer to this question would depend on the reasons why the data is being collected and what it is. Some clients have their own internal investigation teams that will be highly experienced in this area and may be able to gather documents internally. Cost concerns may drive a voluntary internal investigation and this approach will reduce costs in the short term. The dangers of such an approach are that documents may be missed or created in the course of the investigation which are not privileged.
In the context of a cartel investigation, particularly if acting for a potential leniency applicant, the risk of missing relevant documents for the sake of reducing costs is unlikely to be one worth taking. However, if an investigation requires the production of a client’s data in the form of sales figures, for example, such data will most likely have to be gathered by the client in the first instance.
Eccles: It is a question of resources available in-house, both in terms of the quality of any available in-house electronic document management system and the personnel resources to conduct the document review, which is typically a time-intensive process even with the benefit of the technology. The process could be less efficient if less sophisticated electronic document management systems are used, whether the task is conducted internally or externally.
What is important is that companies keep and do not periodically delete their electronic document records, so that they can refer back to old documentation to support the position they wish to adopt. It is also important that document records are sufficiently complete and accessible at a later stage to enable prompt responses to requests by the lawyers to find materials to cover a particular point, whether to assert a claim or in response to a disclosure requirement.
What sectors offer the most potential for competition work and why?
Chapman: The financial sector will remain the subject of scrutiny, as will those network industries that seem always to be in the spotlight – energy, telecoms and transport. Fast-moving or hi-tech sectors, particularly those where IP rights are an important feature, will continue to throw up issues.
That said, one slight change of emphasis may be in competition authorities’ attempts to focus their firepower on issues that are most likely to affect small business, vulnerable consumers and the ‘squeezed middle’ in an effort to be seen to be responsive to economic difficulties. We have already seen, for example, the OFT’s call for information on petrol prices and the CC’s investigation into motor insurance, and can expect more of the same.
Kim: It is no coincidence that regulators have focused on sectors that are politically high-profile.
The financial services sector will increasingly be the focus of regulatory activity, while activity in relation to the pharmaceutical sector is also likely to increase. The retail sector periodically becomes a focus for enforcement activity, and this looks likely to continue.
Holmes: The aviation, energy, financial and pharmaceutical sectors have traditionally been subject to intense competition scrutiny. Other areas that offer significant potential for growth include telecoms and digital media. Not only are these sectors growing significantly, they are hugely important to the UK and EU economies. The OFT has also given a steer as to where it will focus its activities, with public services and markets that affect the UK’s ageing population flagged as high priorities.
Hobson: We consider that financial services will remain under scrutiny. As technology develops, the authorities are stepping up their activity in this sector.
More generally, with the poor economic climate continuing and with many businesses coming under pressure to lower prices and compete vigorously, conditions are ripe for some companies to resort to co-ordinating their behaviour to respond to market pressure. Competition authorities should be on the look-out for such behaviour. All companies therefore need to ensure they have properly implemented compliance programmes.
Coleman: In the UK one can expect to see a continued interest in those sectors that impact most on the economy and consumers – areas such as retail, energy, insurance and financial services. There also seems to be more interest in professional services and an area of increasing focus is likely to be liberalised public service markets.
Morony: The EC appears to be focusing on the financial sector, online selling and consumer electronics. Naturally, its focus will change over time. For example, the EC has recently announced inspections of railway companies.
It is possible that the commission’s investigation into Libor may spread to other industry benchmarks and indices. The OFT is already considering whether the system of oil price reporting could be susceptible to manipulation or distortion.
Healthcare and pharmaceuticals is another growth area. The UK authorities are already increasing their scrutiny of this area.
The provider’s view
We agree with the panel that the formation of the CMA will bring greater efficiency and that it should raise the profile of competition law and regulatory investigations and we certainly agree that this legal sector is enjoying greater prominence and greater activity. These were major factors in our recruitment of a specialist in the field when Patrick Rowan joined us earlier this year, after working with Ernst & Young and FTI Consulting.
The use of technology is essential in this arena, never more so than in the race for leniency. Forensic technology is an invaluable part of the initial competition search. We use a variety of software solutions for this through our labs in London and Manchester, including the global leader Encase. Once the data is collected, further software is required to cull, filter and interrogate the data.
As the panel members have rightly said, it is simply not possible, due to time and financial constraints, to review each and every document and the various techniques available now, including, email threading, clustering and concept searching, all play valuable roles.
The two major “players” in this market, that we use frequently, are Clearwell and Relativity. Either of these solutions may play a key role and lawyers need to consider the most appropriate solution at the outset, depending on the types of data collected and filtering options selected.
It is interesting to see that one lawyer mentioned predictive coding, which is comparatively new to the UK market but has already found favour in some high-profile cases in the US. We think use of predictive coding will certainly increase in the UK. Relativity launched its version, Relativity Assisted Review (RAR), a little while ago and Symantec have just incorporated it into the Clearwell application. We have recently used RAR in a litigation case very successfully, and indeed the very fact that we could offer this was a major factor in securing the case. It enabled us to maintain a great deal of preparatory work undertaken by senior people within our client company, and also meant their decisions could be applied to vast numbers of documents within the case, thereby avoiding unnecessary document review.
The question of data collection is an interesting one and each case is different and there needs to be flexibility in working patterns to suit the client and the case. Collection by independent forensic experts means nothing is missed and it is transparent and defensible through chain of custody. However, we are often involved in cases where the clients have excellent IT systems and people who can point immediately to what is required. Furthermore, we often have cases where our forensic people work with the company’s IT department on the data collection, and our chain of custody commences when the agreed data is handed over.
As more industry sectors face scrutiny, competition work can only grow and the partnership of specialist lawyers alongside service providers with the appropriate innovative technological solutions, will always be the best way to handle these matters.
Terry Harrison, managing director; Patrick Rowan, director
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