Appeal Judgment Derails CMA Mobile Ecosystems Market Investigation

In a significant judgement on 31 March, in Apple Inc. & Others v Competition and Markets Authority, the UK Competition Appeal Tribunal (CAT) overturned a November 2022 decision by the Competition and Markets Authority (CMA) to refer the supply of mobile browsers and mobile cloud gaming services for an in-depth market investigation. The CAT followed up this judgement on 20 April with an order that quashed the CMA’s decision and confirmed that it and the resulting market investigation are now “void, invalid and of no legal effect”. This outcome, which reveals a flaw in the basic architecture of the UK’s market investigation regime, creates a major headache for the CMA, which was made worse when the CAT refused permission to appeal on 3 May. It will come as some consolation to the CMA that the Government is finally moving ahead with legislation that will both substantially expand the CMA's powers to regulate large technology companies and remove the procedural snag that the CMA encountered in this case.

Background

The CMA justified its decision to open a market investigation by reference to concerns arising from Apple and Google’s “effective duopoly on mobile ecosystems”, which allowed them to “exercise a stranglehold over operating systems, app stores and web browsers on mobile devices”. Apple responded by applying to the CAT for a review, claiming the CMA’s decision did not comply with the statutory timetable and was hence unlawful.??

Notwithstanding the CMA’s substantial reasoning to justify the reference, a full market investigation was not always the plan. In the CMA’s December 2021 interim report on its ‘phase 1’ market study (which is typically the prelude for a ‘phase 2’ market investigation) it indicated that, although the statutory test for it to make a reference were met, it had decided not to proceed with a full investigation. Instead, it would treat the market study in this case as an input into the new digital regulatory regime, under its new Digital Markets Unit (DMU). The reasoning behind this decision was based on the fact that the newly constituted DMU was poised to acquire statutory powers to regulate technology companies with strategic market status, including Apple and Google, on an?ex ante?basis. Since the market investigation regime is essentially a tool to enable the CMA to implement sector-specific regulation – following in-depth investigations lasting 18 months – a decision to bypass a full reference, due to new regulatory powers for the whole technology sector seemingly within reach, seemed reasonable in the context.

Given the apparently definitive decision not to refer, it came as somewhat of a surprise that publication of the CMA’s final market study report on 10 June 2022 was accompanied by a separate document consulting on a new proposal to make a market investigation reference into mobile browsers and cloud gaming. As the CMA politely put it: although (after a painful delay and rumours that it might even abandon the planned legislation altogether) the Government had finally confirmed that it intended to legislate to give powers to the DMU, the bad news was that “this will not be in the current parliamentary session (i.e. within the next year)”.??Faced with this unexpected delay, the CMA changed its mind that the concerns identified would be better tacked through the exercise of its still non-existent regulatory powers and duly launched a full market investigation.?

Impact of Legislative Delays

While the CMA’s original decision not to make a reference was based on the assumption that it was about to acquire new powers, which would have rendered a market investigation wasteful and unnecessary, the Government’s interminable delay in bringing forward the legislation for those powers revealed that decision to be ill-founded.?

As in many other areas of British life, the cumulative impact of Brexit and the Covid-19 pandemic on the machinery of Government, coupled with the increasing dysfunction within the Cabinet in the run-up to Prime Minister Boris Johnson’s resignation in July 2022, threw a bag of spanners into the works, leading amongst other things to a log-jam of delayed legislation. While the CMA’s decision to change course in the light of events is understandable in this context, Apple correctly identified that the specific statutory framework governing the conduct of market studies preceding market investigations significantly constrained the CMA’s ability to do so.

In a crisp and well-reasoned judgement, the CAT examined the CMA’s decision to make the reference in the light of the specific statutory provisions governing references following a prior market study, namely sections 131A and 131B of the Enterprise Act 2002 (‘EA02’). As the CAT noted, the effect of these two sections (which it described as constituting a “clear code”) is that, once the CMA has published a market study notice, it has six months to decide either:?

(i)??????not to make a market investigation reference?or

(ii)?????to consult on a proposal to make a reference.?

As the CAT succinctly observed, in December 2021 the CMA opted for option (i).

Sections 131A and 131B EA02 set out a binding timetable. This timetable requires that any notice of a proposal to launch a market investigation had to be published – and the mandatory consultation period commenced – within six months of the original market study notice (i.e. by 15 December 2021 in this case). While the CMA’s original decision not to make a reference was in time, the subsequent notice of its proposal to make a reference and to commence consultation on 10 June 2022 (i.e. almost a year after the market study notice) was well out of time.?

Herein lies the technical oversight: since the timetable was set by the date of the original market study notice, the decision not to make an investigation (which the CAT described as “unequivocal”) was binding “in relation to the matter specified in the notice”, and could not be substituted with a later decision to make a reference after all. The CAT therefore concluded that the decision was?ultra vires, rendering the entire market investigation void.?Following Apple’s successful demolition of the legal basis for the current market investigation, the urgent question for the CMA and all interested parties to address is: what happens next??

Following Apple’s successful demolition of the legal basis for the current market investigation, the urgent question for the CMA and all interested parties to address is: what happens next??

Future of Market Investigation in Doubt?

The CMA responded on the same day of the judgement with an update on its case page, in which a spokesperson noted its disappointment with the judgement and confirmed that the CMA would be “considering our options including seeking permission to appeal”. On 21 April it published a further case update, confirming that it had requested permission from the CAT to appeal.?

Given this appeal, the CAT has agreed to suspend the market investigation, so that it can be revived if the CMA is successful.??Unfortunately for the CMA, this outcome now seems even less likely, since the CAT issued an order on 3 May refusing permission to appeal on the grounds that the CMA’s appeal had no real prospects of success.

While it would be natural to assume that the next best alternative to a successful appeal would be for the CMA either to make a new standalone reference under its wider section 131 powers or to start again and publish a new market study notice, either course of action appears to be blocked.?

As noted above, the fact that the CMA has made a market study notice in relation to mobile browsers and cloud gaming (i.e. the “matter specified” in that market study notice) means that the procedure specified in sections 131A and 131B applies and a standalone reference is excluded. Although the CAT accepted that the CMA would have the?vires?to issue a “fresh” market study notice that built on an earlier notice, issuing one on the same matter as a previous notice (as would be the case here) in the absence of a change of circumstances may, in the CAT’s view, be challengeable on other public law grounds.

Although the CAT included some suggestions in its judgement for resolving what it accepted was an “undesirable” outcome that “without good reason” constrained the CMA’s ability to make a reference, its guidance is (possibly intentionally) somewhat gnomic.??It appears to suggest that, by attempting to caveat its original decision not to launch a market investigation, the CMA acted unlawfully. Thus, if the original decision not to refer was unlawful and hence void (or the CMA chose to treat it as such), the block on the CMA revising its conclusions created by that decision would be removed and the CMA would be able to proceed with a new market study notice and, ultimately, a new referral. Such a course of action would hardly be quick, however, and would likely be fraught with additional legal uncertainty.?

Alternatively, the CMA may seek to use new complaints as the basis for a new market study and investigation based on reframed concerns that are sufficiently different from those in the original market study and reference, albeit that would also be risky and time-consuming.??

New regulatory powers finally in sight

Fortunately for the CMA, the bill that will finally grant its long-awaited regulatory powers (the Digital Markets, Competition and Consumers Bill) will also repeal the six-month time limit that was the authority’s undoing in this case. There could be no better confirmation than the outcome of this case that the Government’s position was justified. The irony that the prospect of its new regulatory powers formed the original basis for it deciding not to make a market investigation in this case will no doubt not have been lost to the CMA.??

The Digital Markets, Competition and Consumers Bill was finally introduced to Parliament on 25 April. Assuming the Bill (which will itself be the subject of a future post) gets a relatively smooth passage through Parliament, the CMA may simply abandon its market investigation altogether and take forward its work on mobile browsers and cloud gaming under its new regulatory powers, as it originally intended.?

If that is the outcome, this case will serve as a warning for the future of the determination of at least some large technology platforms to use every means necessary to resist and delay regulation by the DMU, once it has its new powers.?

More widely, this case provides a salutary lesson of the unexpected consequences of legislating for binding timetables for competition investigations and the importance of good governance for the entire administrative ecosystem.??