Competition Law and State Aid in the ‘Brexit White Paper’: sensible alignment or unworkable proposals?

(by Andreas Stephan) In a previous blog post, I wrote of the UK Prime Minister’s unexpected discussion of Competition and State Aid, as two areas of policy where the UK’s Laws might remain “identical” to those of the EU, and where UK courts would “continue to look at” the Court of Justice of the European Union’s (CJEU) judgements. Following a dramatic few weeks in which the UK Government finally set out an agreed approach to its Brexit negotiations with the EU, a 104 page White Paper was published putting some flesh on the principles agreed by ministers. In this blog post, I discuss the extent to which the proposals on Competition and State Aid are workable.

It is important to begin by saying that the White Paper represents an awkward political compromise. It aims to deliver on the 2016 referendum result (as interpreted by the Government) by ending free movement of people and the jurisdiction of the CJEU over UK courts, while seeking to avoid a hard border in Northern Ireland and protecting UK manufacturing, which is closely integrated with EU supply chains. The overall proposal is for a customs arrangement for goods (but not for services) so that goods can continue to move freely. In return, the UK would commit to a “common rulebook” for a number of areas of law, including State Aid, and keep other areas, such as Competition Law, closely aligned.[1] In this blog, I focus on how the Competition and State Aid proposals stack up.

EU and UK State Aid

At present, the European Commission has sole competence in applying Articles 107 and 108 TFEU, to determine if State aid is compatible. The White Paper proposes that the UK commit to a “common rulebook with the EU on state aid, enforced by the CMA” (para 111). This is not without precedent. For example, Switzerland is not directly subject to EU State Aid enforcement (it is in EFTA, but not part of the EEA). Instead, State Aid is captured by some of its many bilateral agreements with the EU – such as the Air Transport Agreement. Similarly, Turkey is required to apply EU State Aid rules as part of its Customs Union agreement with the EU.  In reality, State Aid enforcement has remained very weak within Turkey.[2] Soft State Aid obligations also exist in EU agreements with Ukraine and a number of Balkan countries. A third precedent is in Free Trade Agreements, such as CETA (EU-Canada Comprehensive Economic and Trade Agreement), which tend to include only a mechanism for reporting State Aid.

This suggests that the White Paper is offering a relatively strong alignment on State Aid.  However, it raises political, credibility and enforcement problems.

First, it is a concrete example of the UK going from a rule-maker to a rule taker. A commitment to the common rulebook essentially amounts to the UK continuing to follow the Commission’s approach and the precedent of the CJEU without having any direct influence over the evolution of policy or the development of case law. This is important because the UK is currently a clear net beneficiary of EU State Aid enforcement. For example, in the period 2000-2010, there was one negative judgement against the UK for State Aid, compared to 32 against Germany, 26 against Italy, 11 against Spain, 10 against France and 43 against the remaining EU states.[3]

Second, the EU is nevertheless unlikely to view the UK outside the EU as a low risk jurisdiction for unlawful State Aid in the future.  Brussels will further be concerned about the prospect of a future Labour government. Opposition leader Jeremy Corbyn has repeatedly pledged to scrap State Aid rules altogether and this in part explains the Labour party’s reluctance to come out in support of some form of EEA membership.[4]

Third, without oversight by the CJEU, the enforcement of any post Brexit common State Aid regime will be far weaker than the status quo. For example, it will be hard for UK citizens and businesses to make complaints about unlawful State Aid to the European Commission, or for EU parties to do the same to the CMA. There is also uncertainty over how remedies will be applied (e.g. will the CMA be able to force the UK government to pay compensation to EU firms affected by their illegal State Aid, despite the negative political repercussions?).  Also, what happens if the CMA and Commission disagree with each other’s application of State Aid rules?

EU and UK Competition Law Cooperation

In contrast to what the Prime Minister had suggested in her speech on 2 March, the White Paper does not call for competition rules to be ‘identical’, or part of the common rulebook. Instead, ‘it will be important to ensure that competition decisions are compatible’ (para 116). Consistency would be ensured by both parties ‘encouraging and facilitating dialogue between the judiciaries of the UK and the EU’ (para 33), ‘sharing confidential information and working together on live cases [in relation to enforcement]’ (para 116) and by the UK committing by treaty ‘that its courts would pay due regard to CJEU case law’ (para 35). The emphasis on compatibility through cooperation in competition cases, appears to be based on the highly questionable assumption that ‘There are currently no strict requirements that apply to national competition regimes’ (para 115).

Looking first at cooperation, the proposals mask the strong likelihood that any future cooperation will be far inferior to what the UK enjoys as a Member State. The CMA currently benefits from a free flow of confidential information through the European Competition Network and the ability to coordinate investigations with the Commission and other National Competition Authorities. In essence, this gives them access to case files of these national counterparts and allows these agencies to assist each other with inspections of premises throughout the EU.

Close cooperation will continue to be possible in merger control, but only because it is an area of regulation where firms willingly consent to information being shared, so that merger clearance can be completed in a timely manner.[5] Competition enforcement is a very different ball game. Businesses are being investigated for alleged breaches of the law that can carry with them fines of up to 10% of worldwide turnover and, increasingly, private follow-on damages of equal or greater magnitude. Competition authorities are particularly reluctant to exchange information gained through the leniency programme, as this is a key investigative tool that is built very heavily on trust and predictability. The only example of the EU agreeing to exchange confidential information with a foreign competition authority, is the 2013 Cooperation Agreement with Switzerland, but I understand this was only possible because Switzerland has very strict data protection laws in relation to business secrets. An equivalent agreement with the UK (where protection is significantly weaker) as a non-EU Member is very unlikely.

Turning next to compatibility, it is naïve to suggest that cooperation and paying due regard to CJEU case law will be enough to ensure UK and EU rules remain aligned. The first problem is that ‘pay due regard’ is not the same as binding precedent and so courts will treat it as persuasive, at best. It is far weaker than the obligation that currently exists under s.60 Competition Act 1998 (‘dealt with in a manner which is consistent with the treatment of corresponding questions arising in Community law’). Even if UK courts read ‘pay due regard’ as being equivalent to s.60, it would not prevent divergence in the law where the courts are faced with a new or novel situation. As a member of the EU, UK courts currently deal with such uncertainty through preliminary references to the CJEU under Article 267 TFEU. Yet, the White paper states that ‘such references would no longer be appropriate or necessary’ (para 35) because the UK courts would be guided by EU case law. This appears to misunderstand the purpose of preliminary rulings, which are there precisely to deal with situations that are not covered by existing case law.[6]

Concluding Remarks

The White Paper marks a very significant shift in UK policy on Brexit and does provide a strong starting point for negotiations on the future relationship between the UK and the EU on Competition, State Aid and many other vital areas. In order for the weaknesses identified above to be ironed out during the course of those negotiations, the UK must be prepared to accept further political compromise on its future relationship with EU institutions and with the European Courts. In particular, the White Paper’s dismissal of the need for preliminary references to the CJEU puts out of play a potentially vital mechanism for ensuring UK and EU case law remain broadly aligned. On State Aid and the ‘Common Rulebook’, the EU are likely to require more robust measures for ensuring the UK honours any future State Aid commitments – especially if there is any prospect of a Labour government that is strongly opposed to such constraints being placed on the UK at all. Finally, it may be necessary for the UK to legislate special protection for information received from EU competition agencies, if it is to replicate the type of cooperation agreement enjoyed by Switzerland.

[1] This approach has serious problems.  For example, it wrongly assumes goods and services are divisible (in reality they are often integrated) and it ignores the imbalance, in that the EU would continue to benefit from the UK’s sizeable trade deficit in goods while being protected from the surplus currently enjoyed by the UK’s service sector.  More widely, in terms of compatibility with existing external agreements, if the EU were to accept the common rulebook proposal in return for free movement of goods, it would mark a significant departure from the status quo. Although Turkey is in a Customs Union, there is still a hard border with the EU and anyone who has driven across that border will have noticed the long queues of lorries waiting to clear customs checks. Although Switzerland is not part of the EEA, it only enjoys free movement of goods with the EU by also accepting free movement of people. When Switzerland tried to depart from this in 2016, the EU took a hard line that is unlikely to be relaxed in relation to Brexit. See ‘EU tells Swiss no single market access if no free movement of citizens’ (3 July 2016) The Guardian, London. https://www.theguardian.com/world/2016/jul/03/eu-swiss-single-market-access-no-free-movement-citizens

[2] See D-G External Policies: Workshop on Bringing EU-Turkey trade and investment relations up to date? (2016) p17. Available: http://www.europarl.europa.eu/RegData/etudes/STUD/2016/535014/EXPO_STU%282016%29535014_EN.pdf

[3] See Department for Business, Innovation and Skills, ‘State Aid: Frequently Asked Questions’ (May 2012) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/31705/12-747-state-aid-frequently-asked-questions.pdf

[4] See ‘Corbyn reignites Labour debate over EU rules on state aid and socialist manifesto (29 Sept 2017) The Guardian, London. https://www.theguardian.com/politics/2017/sep/29/corbyn-reignites-labour-debate-over-eu-rules-on-state-aid-and-socialist-manifesto

[5] See for example this document by the US-EU Merger Working Group: http://ec.europa.eu/competition/mergers/legislation/best_practices_2011_en.pdf

[6] This point was made by Angus MacCullch (Lancaster University) on his Twitter feed: @AngusMacCulloch (12 July 2018).

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