The OFT is reeling, but it’s not out for the count

As I write, the Competition Appeal Tribunal (CAT) is mulling over a subject close the hearts not just of lawyers, but of just about every parent in the land: the price of football shirts.

When the Office of Fair Trading (OFT) announced last summer it was about to fine football shirt manufacturers and retailers £18.6m for price-fixing, Joe Public suddenly realised that the OFT existed. Perhaps it even speculated that the regulator was not an absolute waste of income tax.

Football shirts was a crunch judgment for the OFT, which until then had stuck to relatively low-profile targets. Cynics might even say the very fact that a story involving the ordinarily leak-proof OFT ended up in the Evening Standard shows just how keen the regulator was for the publicity. The OFT, of course, would deny an official leak.

On the behavioural side, the regulator is currently facing a slew of appeals, so much so that the CAT cannot keep to its six-month timetable for reviewing cases.

So far, however, only a few decisions have gone against it. Aberdeen Journals was a partial failure for the OFT, even at the second bite of the cherry, because the level of Aberdeen’s fine was reduced (probably by just enough to pay Herbert Smith’s legal fees). Plus, BetterCare Group and Genzyme have beaten the OFT on points
of law.

On the merger side, the OFT was recently hit hard by the CAT ruling in the IBA Health case. In a decision that was partly reversed by the Court of Appeal, the CAT seemed to suggest that the OFT should keep its hands off even marginally controversial decisions and leave them to the senior merger control body (the Competition Commission), which has the proper resources to deal with them.

This is an extreme interpretation, but there are two interesting schools of thought on why the CAT went down this route.

The first is that the legislation, which defines how the Competition Commission and OFT interract, is badly drafted, and Parliament demonstrably did not mean to castrate the OFT in this way, otherwise there would be little point in having a two-stage merger control process.

According to this theory, the tribunal’s president Sir Christopher Bellamy was right, according to black letter law, but bottled the opportunity to take a tough decision on its interpretation.

Under another theory, the CAT meant to send the OFT a strong message that its presentation of evidence was not up to scratch, and while it might have a case, the OFT had not proved sufficiently that it had a case.

What IBA and Aberdeen Journals have in common is that the CAT criticised the OFT not on its implementation of the law, but on its reasoning and evidence.

Poor case preparation was also at play in the Hasbro appeal over price-fixing in toys and games. In this case, the CAT said the OFT’s witness statements were poorly drafted, but allowed the regulator to redraft them. A decision in Hasbro is imminent.

Similarly in the football shirts appeal, both Allsports and JJB Sports attacked the OFT’s evidence, to some effect. JJB’s £3,000 per hour QC Lord Grabiner attacked one key aspect of the OFT’s case. “The OFT case is based on the premise that Umbro was in a position to put overweening pressure on Sports Soccer,” he claimed in his summing up. In simple terms, this is important, because the regulator suggested that some retailers, including JJB, put pressure on Umbro, which in turn pressurised other retailers, including Sports Soccer, to keep prices high.

Grabiner continued: “The truth of the position is that Umbro and Sports Soccer had an unusually close commercial relationship. It was not a question of which party pressurised the other. The reality is that they had an ongoing and mutually beneficial commercial relationship. Sports Soccer got the licence agreement that Mr Ashley [of Sports Soccer] acknowledged was highly beneficial to him. Umbro got funds up front.”

Umbro and Sports Soccer, which both cooperated with the OFT and received leniency, support the regulator’s story, but JJB’s and Allsports’ lawyers gave Ashley a two-day grilling at the appeal, when details of the OFT’s case finally emerged.

The method used by the OFT to calculate the fines – a whopping £8.4m for JJB and £1.35m for Allsports – is to be appealed at a second hearing. The CAT must decide whether the regulator was right to treble damages. A reduction in fines would be a real blow for the OFT, because it was the size of the fines that drew the eye of the general public.

There are too many variables to predict what the CAT will decide, but JJB’s management is publicly bullish about its chances of a reprieve. Given the CAT’s workload, a decision is not expected for several months.

The OFT can rightly contend that when it is implementing new law such as the Enterprise Act, its decisions will be challenged on a legal basis. But too many of the appeals against the OFT have been on issues of fact, reasoning and preparation of evidence.

The regulator recently poached Brian McHenry, a senior legal Competition Commission lawyer, to fill a powerful new role in which he will advise the OFT board directly. His appointment should make decision-making more robust.

Possibly the OFT could have done with somebody with private practice experience, and the rumour mill says a magic circle competition partner was in serious discussions about the role, but pulled out. Or perhaps the OFT needs a more rigorous decision-making process, with the type of devil’s advocate panel introduced by the European Commission.

In the grand scheme of things, the OFT is a well-regarded institution staffed by committed people who work without the incentive of magic circle salaries. But it needs to tighten up, because if JJB wins its case, the sports retailer will shout it from the rooftoops.

The last thing the OFT wants to be called is a waste of money.