Back to the future? Does recent case on common law restraint of trade foreshadow how UK competition law might evolve?

18.12.2020

In August 2020, the Supreme Court handed down its ruling in Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd. This judgment is important in its own right, taking a new approach to common law restraint of trade and is a fairly rare example of the Supreme Court reversing a previous Supreme Court/House of Lords judgment. However, the judgment also invites consideration of the influence it may have on how, in a post-Brexit world, the English courts may interpret restraints on competition in other contexts.

Background

The case concerned a restrictive covenant in a lease granted initially by the developer of a shopping centre, and later by the respondent (Peninsula), to the appellant and anchor tenant (Dunnes) over part of that shopping centre. The covenant prevented Peninsula from leasing any part of the shopping centre to a business that would compete with Dunnes. Peninsula challenged the covenant as being unenforceable owing to the common law restraint of trade doctrine. Following precedent from the late 1960s, the High Court of Northern Ireland dismissed the claim, holding that the original developer had surrendered a ‘pre-existing freedom’ to use the land when it assigned the land to Peninsula, and that the doctrine of restraint of trade was therefore not engaged.[1] The Court of Appeal disagreed, holding that the restraint of trade doctrine could apply and thus potentially exposing Dunnes to competition as the covenant would fall away if it were held to be unreasonable.[2] Dunnes appealed to the Supreme Court.

Decision

The Supreme Court reassessed the ‘pre-existing freedom’ test. It concluded, on logic and public policy grounds, that the question of whether or not a pre-existing freedom has been surrendered is not the appropriate threshold test for the application of the restraint of trade doctrine. The Supreme Court instead favoured the ‘trading society test’, which had previously been proposed by Lord Wilberforce in a dissenting opinion in the leading case. Under that test a covenant to restrain the use of land is not an unenforceable restraint of trade at common law if the covenant is of a type which has “passed into the accepted and normal currency of commercial or contractual conveyancing relations” and which therefore has “assumed a form which satisfies the test of public policy”. In other words, has the type of transaction been found to be generally ‘acceptable and necessary’ as part of the appropriate ‘trading society’?

Having decided that the ‘trading society’ approach was the appropriate test, the Supreme Court
found that it was longstanding commercial practice that a long lease in part of a shopping centre should contain a covenant that limited the lessor’s ability to use other parts of the centre and consequently held that the restrictive covenant had at no time engaged the restraint of trade doctrine.

Implications for other restraints of competition

It will be interesting to see whether the Supreme Court’s new, less formalistic approach to common law restraint of trade might affect how UK courts address other restrictions on trading freedom once the UK leaves the European Union. Post-Brexit perhaps domestic competition law will once again be influenced by the courts’ approach to the parallel common law restraint of trade regime.[3]

At the moment, the interpretation and enforcement of UK competition law is tied inextricably to that of EU law. After Brexit, and over time, it is possible that on matters of interpretation (including fundamental questions such as when a contractual restraint constitutes a limitation of competition, and when a restriction of competition falls outside the scope of the prohibition in Chapter I) UK law may begin to diverge.

It is already the case that under EU law certain restraints may fall outside the scope of the prohibition in Article 101(1) TFEU (and by extension Chapter I of the Competition Act) so that the provision is not engaged. For example, under the EU ancillary restraints doctrine, a restriction may escape Article 101(1) if it is objectively necessary for the conclusion of an agreement of that type or nature. This will be the case if on the basis of objective factors it is clear that without the restriction, the main non-restrictive transaction would be so difficult or impossible to implement that the restriction can be regarded as objectively necessary for its implementation.

The EU ancillary restraints doctrine is largely a creature of CJEU case law (although it has been reflected in competition enforcement through Commission practice, and is a regular component of merger analysis). For example, when the Court of Justice considered certain restrictions in a franchise distribution agreement in Pronuptia it determined that restraints of competition imposed on franchisees that are ‘essential’ and ‘strictly necessary’ to protect the operation of a franchise distribution network do not contravene Article 101(1) TFEU.[4]

Despite the apparent similarity between the ancillary restraints approach that currently applies under the statutory competition law regime and the test now adopted by the Supreme Court for the application of the common law restraint of trade doctrine, there are some interesting differences. As noted above, the trading society test (which might perhaps be likened to a ‘market norm’ test) appears to provide that once a restriction has become accepted commercial practice for the relevant type of transaction, it will fall outside the scope of the restraint of trade doctrine (as long as it continues to satisfy public policy requirements). This appears less demanding than requiring that the restriction must be directly related to, proportionate and essential to the implementation of a transaction. If UK judges were to approach the application of the Chapter 1 prohibition in the way the Supreme Court has now ruled to be correct for common law restraint of trade it may increase the number of restrictive clauses that are fall outside the scope of the Chapter 1 prohibition and lead to a concrete divergence from the position in the EU.

The Supreme Court’s adoption of the broader test perhaps also reflects a certain pragmatism. Referencing comments made by the High Court judge, the Supreme Court acknowledged the risks taken by an anchor tenant in investing its business in a previously untested location. It would have been “unpalatable and commercially offensive for the landlord to put direct competition on Dunnes’ doorstep”.[5] Here is a recognition that such restrictions are the natural product of the economic conditions under which parties to this type of transaction operate. Of course, similar considerations can also be seen in the EU courts’ approach in cases such as Nungesser where the Court of Justice, in reaching its conclusions, appreciated the commercial reality that a licensee might be reluctant to commit resources needed to bring a new technology to a new market without clauses that provided some element of protection in that market.[6]

Comment

The Supreme Court’s ruling may influence the UK courts’ post-Brexit approach to restraints of competition in contexts outside the common law restraint of trade doctrine. That influence might even extend beyond a more generous approach to ancillary restraints and could even potentially affect the balance between prohibition and exemption.

For a variety of reasons EU law requires a clear bifurcation between Article 101(1) and 101(3) TFEU, with the exercise of balancing the pro-competitive and anti-competitive effects produced by a specific restrictive agreement reserved solely for Article 101(3) TFEU. This requirement has always precluded an expansive approach to ancillary restraints.[7] Indeed the precise boundary between the application of the ancillary restraints doctrine and the exemption regime under Article 101(3) has sometimes been difficult to articulate clearly. The Supreme Court’s application of the trading society test involved a pragmatic weighing of the transaction’s effects that might be regarded as closer to a US style ‘rule of reason’ approach. It is interesting to note that in Lord Wilberforce’s original dissenting judgment, which now has its day in the sun after more than 50 years, he used the phrase ‘rule of reason’. The phrase has even found its way into the leading judgment in Peninsula v Dunne, where Lord Wilson observed that Lord Wilberforce said: “… that, even if it were possible, it would be mistaken to try to crystallise the rules of the doctrine into neat propositions; and that the doctrine had to be applied to factual situations with a broad and flexible rule of reason.[8]

While the legislative structure and context of Chapter I is very different from section I of the Sherman Act, it will be interesting to see whether UK competition law may move closer to the more unitary approach of US law, encouraged by the Supreme Court’s recent judgment.

[1] The ‘pre-existing freedom’ test, that previously determined whether the restraint of trade doctrine was engaged, was outlined by the House of Lords in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 (“Esso”) in a majority judgment of at least three in which Lord Wilberforce dissented.
[2] The Judgment does not address the actual application of the restraint of trade doctrine, but only whether it applied in principle to the type of covenant in question.
[3] This could permit a departure from the High Court’s previous ruling that once EU competition law has been engaged, the common law restraint of trade doctrine is excluded, see Days Medical Aids Ltd v Pihsiang Machinery Manufacturing Co Ltd and others [2004] EWHC 44 (Comm), para 266.
[4] Case 161/84 Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgalis EU:C:1986:41, see paras 16 and 27.
[5] Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (Northern Ireland) [2020] UKSC 36, para 51.
[6] Case 258/78 Nungesser and Eisele v Commission EU:C:1982:211, paras 57 & 58.
[7] Commission, ‘Guidelines on the application of Article 81(3) of the Treaty’ [2004] OJ C101/97, paras 30-31.
[8] Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (Northern Ireland) [2020] UKSC 36, (para 26).

Pat Treacy

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James Batsford

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