On 12 May 2020 the Court of Appeal (CA) handed down its judgment on costs in the CMA v Flynn Pharma and Pfizer case. The judgment arises in the context of the Competition Appeal Tribunal (CAT) rules, under which the CAT does not follow the Civil Procedure Rules on a number of procedural issues, including on costs. The judgment addresses the correct starting point for the CAT to adopt when considering an application for costs against a public body such as the CMA.

The CAT’s powers

The CAT has discretion to make any order it thinks fit in relation to the payment of costs in proceedings, by virtue of Rule 104 of the Competition Appeal Tribunal Rules 2015 (the “CAT Rules”). The CAT Rules include a list of factors which the CAT may take into account in exercising this discretion, including the conduct of the parties, and whether either party has succeeded on part of its case. Past practice has seen the CAT adopt a starting point for costs similar to that under the CPR; that it is for the unsuccessful party to pay the costs of the successful party, or “costs follow the event”.

The CMA investigation

The proceedings followed a CMA investigation into Flynn Pharma and Pfizer over the pricing of an epilepsy drug, phenytoin sodium (see our blog post on this here). The CMA had found that both parties held a dominant position in the UK market and that both had engaged in abusive conduct by charging excessive prices. The parties appealed to the CAT, which upheld the CMA’s finding that both parties held a dominant position. However it found the CMA had erred in its finding of abuse of dominance. The CAT set aside the penalties and remitted the question of abuse to the CMA.

Costs decision at the CAT

Following its decision on the substantive appeal (see our blog post on this here) the CAT considered the question of costs.

In approaching the allocation of costs, the CAT cited the CA’s decision in BT v Ofcom which had endorsed the principle that where a regulatory body performing its regulatory function had acted reasonably, there should be no presumption that it should pay the other party’s costs, even if it is unsuccessful. This echoed previous judgments in other areas of regulatory activity (e.g. Baxendale-Walker v Law Society). The CA did not hold that the CAT should be precluded from making an award of costs against a regulator performing its regulatory function, as the CAT has discretion in this regard. However the CA did reject the argument that “costs follow the event” should be adopted as the starting point in a costs decision against Ofcom when it is acting in a regulatory capacity.

In the Pfizer Flynn case, the CAT noted that it was established practice for it to use its discretion to adopt “costs follow the event” as the starting point when awarding costs in the context of appeals against CMA decisions. The CAT observed that the CMA has a measure of discretion in how it carries out its statutory duty to promote competition and it is not obliged to take infringement decisions, whereas such an obligation is imposed on Ofcom. Therefore the CAT reasoned that the CA’s decision in BT v Ofcom had not been intended to apply to competition law enforcement cases launched by the CMA and, moreover, that if the CA had intended the application of the BT v Ofcom principle to such cases, it would have said so. Consequently the CAT adopted “costs follow the event” as the starting point. Since all the parties had won and lost on various issues, it ordered the CMA to pay 50% of Flynn Pharma and Pfizer’s costs.

The CMA appealed to the CA. It argued that the correct starting point in an appeal of a CMA decision should be that no order for costs be made against a regulator exercising its statutory functions except for good reason. A good reason would include unreasonable conduct by the regulator, or financial hardship likely to be suffered by a successful party if no costs order is made. Unsurprisingly, Flynn Pharma and Pfizer supported the CAT’s position.

The Court of Appeal judgment

The CA (Lewison LJ, Floyd LJ and Arnold LJ) started by discussing previous case law. Lewison LJ summarised the principles as follows:

1. The fact that one of the parties is a regulator exercising functions in the public interest is important in approaching the question of costs.
2. The starting point is that no order for costs should be made against a regulator acting purely in its regulatory capacity.
3. That starting point can be departed from for good reason.
4. The mere fact the regulator has been unsuccessful is not a good reason.
5. A good reason includes unreasonable conduct by the regulator, or substantial financial hardship likely to be suffered by the successful party if a costs order is not made in its favour.
6. Additional factors may be considered which justify departing from the starting point.

Lewison LJ held that the CAT had misinterpreted BT v Ofcom, and that the CA’s intention was that the “no award as to costs” starting point should apply to appeals against the CMA’s decisions in competition law enforcement cases.  Lewison LJ clarified that a body is “acting in a regulatory capacity” when it is acting in pursuit of its public duty and in the public interest, which is how the CMA operates. Therefore when the CMA brings or defends proceedings in its regulatory capacity, the “no award as to costs” starting point should be adopted. The factors listed under Rule 104 of the CAT Rules ought to then be considered to determine whether to depart from this starting point.

What are the implications?

During the hearing both sides warned of the potential “chilling effect” of adopting a particular starting point. Lewison LJ recognised the need to balance the “twin objectives” of discipline in litigation on the one hand, and the public interest in encouraging regulators to make and stand by reasonable decisions without fear of exposure to undue financial prejudice on the other. This decision tips the balance towards the latter objective. The judgment makes it more difficult for a party which successfully appeals a decision of the CMA to recover its costs of the appeal. The CA was, of course, clear that the starting point it established can be departed from for good reason, but the onus is very clearly on the appellant.

The CA’s judgment has clear potential to make businesses less willing to appeal CMA decisions knowing that even if they are wholly successful the chances of recovering their costs from the CMA are fairly slim, while if they lose on any aspect they could be liable for some or all of the costs of the CMA. It may also encourage “kitchen sink” litigation on the part of the CMA, although Lewison LJ notes that this in itself may constitute such unreasonable conduct as to justify the CAT departing from the starting point.

It is also worth noting that within weeks of this judgment being handed down on 12 May, the director in the Auden Mckenzie case who faced disqualification as a result of a CMA investigation, withdrew his appeal against the CMA’s substantive decision on 3 June. It is not clear what part, if any, this judgment played in that decision, but it may be a sign that parties will be influenced against appealing a CMA decision for fear of a heavy costs burden. Given the public interest in a robust and legally sound application of competition law, particularly when settlement and commitment decisions can mean that fewer cases are fully reasoned even at CMA level, this may have long term consequences for the development of the law, post Brexit.

In his short concurring judgment Arnold LJ acknowledged the difficulty of developing a general principle on costs based on previous case law where each case has turned on its own facts. He noted that the courts have not been able to consider any wider policy considerations than those discussed in the individual cases. In that context, Arnold LJ suggested that this area might be worthy of consideration by the Law Commission. In making his observations, Arnold LJ may have had in mind the general importance of sound enforcement of competition law mentioned above.