UK voluntary redress scheme – an alternative to litigation?

On 1 October 2015 the competition law reforms contained in the Consumer Rights Act 2015 entered into force.¹ These include measures which will make it easier for victims of anti-competitive conduct to obtain compensation for their loss including:  (i) new powers for the Competition Appeal Tribunal (CAT) to hear stand-alone claims² and to grant injunctive relief; and (ii) a new mechanism for opt-out collective claims to be brought for the first time in the UK.³

Although the Consumer Rights Act is likely to encourage claims, it also includes a mechanism by which companies under investigation for anti-competitive conduct can agree a settlement scheme with the Competition and Markets Authority (CMA)⁴ upon being found to have infringed competition law.  In principle at least, this should be a valuable tool for infringing companies looking to avoid lengthy and costly follow-on damages proceedings and to achieve finality.  It may also bring reputational benefits – offering compensation to victims at the same time as the infringement decision is published may help dilute the negative PR impact of the infringement.

Voluntary redress schemes also bring advantages to victims of anti-competitive conduct in allowing them access to compensation quickly without the need to resort to lengthy and expensive litigation.⁵  These schemes are likely to play an integral part in the new class action regime in the UK, with potential defendants at least exploring whether it might be preferable to seek to pre-empt costly class actions with CMA approved settlement offers.

The Consumer Rights Act introduces a new section 49C of the Competition Act 1998 which allows a person to apply to the CMA for approval of a redress scheme.  An application can be made before the infringement decision but can only be approved and made public at the same time as (or after) the decision.

The Competition Act 1998 (Redress Scheme) Regulations 2015⁶ have since been approved which describe how the CMA will consider applications for approval of redress schemes.⁷  This was followed by guidance published by the CMA on the operation of voluntary redress schemes.  The CMA has also published a standard application form to be filled out by companies requesting approval of a scheme.⁸

An application for a voluntary redress scheme can be made by a single entity or on a group basis (by multiple parties implicated in an infringement).  In practice, it will be challenging to agree a settlement scheme which does not involve all (or at least the majority) of participants in the infringement in any cartel investigation under Article 101 TFEU given that the cartelists are jointly and severally liable for the entire loss caused by that infringement.  This means that, even if a company agrees a scheme to compensate its customers, it will potentially be liable to be joined to proceedings either:  (i) as a primary defendant to a claim by a purchaser of the affected product even if that purchaser did not have any relationship with that company; or (ii) as a defendant to contribution proceedings, whereby the primary defendants look to recover a portion of the damages claimed or awarded against them.

The scheme can relate to an infringement found by:  (i) the CMA (in respect of which it is possible to make an application prior to the decision being reached); or (ii) by the European Commission (in respect of which applications can only be brought post-decision).

In the case of a CMA investigation it is possible to submit an outline scheme to the CMA at any time during the investigation although in practice it would be challenging to do so prior to the CMA issuing its statement of objections (setting out its case against the parties under investigation).  The CMA guidance makes it clear that it would not view an application for a compensation scheme as being an admission of liability or in any way inconsistent with the applicant continuing to exercise its rights of defence – although of course the reality is that it would be challenging for a party under investigation to simultaneously credibly defend its conduct while also entertaining a settlement scheme.

The first stage for a potential applicant is to present an outline scheme to the CMA.  The CMA will then consider the outline scheme and makes it clear whether it intends to prioritise assessment of an application.

If the scheme is to be prioritised, the next stage is to submit a formal application using the standard form.  The application form requires the applicant to set out:

• The start date, terms and duration of the redress scheme (which must be at least nine months);
• Persons entitled to claim compensation under the scheme (including:  (i) whether the scheme will compensate indirect purchasers as well as direct purchasers; and (ii) whether the scheme will extend to “umbrella” damages⁹);
• The scope and level of compensation to be offered under the scheme (including whether the scheme will only compensate for harm suffered in the UK or also elsewhere – this will be a particular issue where the scheme results from a European Commission investigation);
• The process for applying for compensation under the scheme (including the estimated time it will take to determine applications for compensation) together with:  (i) the evidence that applicants will be asked to submit in connection with their application for compensation; (ii) how the scheme is to be advertised; (iii) the complaints procedure; and (iv) the consequences of accepting compensation under the scheme.

An applicant will be required to appoint a chairperson who will be responsible for assisting in devising the terms of the scheme and deciding whether to recommend the scheme to the CMA.  There are strict requirements as to who can act as a chairperson – only senior lawyers and judges (ideally with experience and knowledge of competition law) will qualify for this role.

The chairperson is then responsible for appointing board members which must include:  (i) an economist; (ii) an industry expert; and (iii) a person to represent the interests of the victims of the infringement who will be entitled to claim compensation under the scheme.

The chairperson and the board will have the task of determining the methodology for assessing the level of compensation payable to each applicant.  In addition to the compensation payable under the scheme, the parties seeking to set up the scheme will also be required to pay the fees of the chairperson and the board members and the CMA’s costs in relation to the scheme.

Once the scheme is formally approved by the CMA, the infringing party has a statutory duty to comply with it.  Failure to do so could result in private legal proceedings or enforcement action by the CMA.

There are potential advantages to agreeing to a voluntary arrangement at an early stage, prior to claims being issued:

• It may allow the infringing company to make a clean break from past conduct, allowing it to present the scheme as part of a new culture of compliance within the organisation.  Any negative publicity which comes from being found to have infringed competition law may be diluted if the redress scheme is announced at the same time as the infringement.
• It allows the infringing company to make an open settlement offer to all of its victims at an amount that is acceptable to it.  In so doing, it may avoid many years of protracted litigation.
• The CMA has the power (but no obligation) to offer a reduction in the level of fine of up to 20 per cent to reflect the infringing party’s voluntary provision of redress.

However, there are also some negative considerations that companies will need to consider:

• Offering a voluntary redress scheme would be inconsistent with an appeal against the decision – it would be difficult for a company to maintain that its conduct did not breach competition law while simultaneously offering compensation on a voluntary basis to those that suffered loss as a result of its conduct.¹⁰  The voluntary redress scheme is therefore only likely to be suitable for a company that accepts its conduct is unlawful and wishes to proactively put that period behind it.
• Even once it is approved by the CMA (and the process described in the rules is detailed and likely to be protracted), the scheme cannot bind persons affected by the infringement.  It is up to those persons to actively opt in to the settlement.  They could choose to issue follow-on proceedings in any event.  However, the claimant would need to be confident that it would be awarded more than the offer under the scheme (which has been approved by the CMA as reasonable) at trial.  Failure to do so could expose that claimant to liability to pay the defendant’s costs.
• There are commercial risks of going down this route.  It crystallises the company’s liability in circumstances where there is a chance that – even with the introduction of the collective redress regime – a claim will not be issued.  The prospect of claims arising, and the potential size of those claims, will be a key consideration.  An application for a redress scheme also requires the company to pay the CMA’s costs together with the costs of administering the scheme.

Against the backdrop of the new collective actions regime introduced by the Consumer Rights Act and the associated expected growth in competition litigation, the new redress scheme will warrant careful consideration by companies implicated in anti-competitive conduct – particularly in those situations where there is a real commercial imperative for a company to put that conduct behind it.

Experience in other industries suggests that compensation schemes are not always successful and - given the opt-in nature of compensation schemes – it is possible that consumer take up will not be as high as anticipated.  However, the existence of a compensation scheme which has been approved by the CMA as reasonable is likely to significantly deter potential claimants to pursue the litigation route and on this basis brings key tactical benefits to potential defendants in bringing finality and discouraging claims before they are issued.