On 13 November 2020, the UK Competition Appeal Tribunal (“CAT”) upheld an appeal brought by JD Sports against the Competition and Markets Authority’s (“CMA”) decision to prohibit its already completed acquisition of rival retailer Footasylum. On 6 May 2020, the CMA had blocked the merger between the two sports-fashion retailers, concluding that the parties were close competitors and that the transaction would lead to a substantial lessening of competition nationally in the sports-inspired casual foot-wear and clothing market (see VBB on Competition Law, Volume 2020, No. 5). In order to restore competition, the CMA had ordered JD Sports to divest Footasylum to a suitable purchaser.
JD Sports challenged the CMA’s decision on several grounds. The core argument that the CAT sustained on appeal was that the CMA had acted irrationally by failing to properly assess the effect of the COVID-19 pandemic on the transaction. In particular, JD Sports argued that the CMA had not properly taken the pandemic’s impact into account, both when evaluating the competitive constraint that Footasylum would have exercised on JD Sports in the counterfactual scenario, and when considering whether the parties’ major footwear suppliers would exercise an increased competitive constraint on the merged entity due to the growth of their own direct-to-consumer (“DTC”) retail channels in the future.
The CMA had acknowledged that the pandemic was a relevant and important factor in its analysis, and in the course of its investigation it had sent questionnaires about the effects of COVID-19 to the parties’ suppliers and to Footasylum’s lender. However, the CMA described the responses it received from the market as being “wholly unilluminating”, as the suppliers and lender were not able to offer any concrete predictions about how the pandemic would likely affect their businesses and/or interactions with the parties. The CMA therefore concluded that it would not be fruitful to conduct any follow-up with the suppliers or lender on this issue.
The CAT faulted the CMA for failing to ask further COVID-19 related questions of the suppliers or lender. In particular, the CAT noted that the CMA’s original questionnaires were sent out in early March 2020, just as the UK was beginning to enter the first wave of the pandemic. While the effects of the pandemic were uncertain at that time, it was entirely possible that before the end of the CMA’s statutory deadline to examine the transaction in May, the suppliers and lender might well have formed a clearer idea of what the effects of COVID-19 might be. The CAT found that the CMA acted “irrationally” by refusing to do any follow-up in April and instead summarily concluding that any responses it would have received to such follow-up would not have any probative value.
In essence, the CAT concluded that the CMA had established the importance of the pandemic to its analysis but then failed to put itself in a position to have sufficient evidence to assess the question before it. Notably, in quashing the CMA’s decision on procedural grounds, the CAT did not determine that the suppliers and lender’s feedback on the pandemic would have altered the outcome of the decision, merely that the CMA did not take adequate steps to gather sufficient feedback from them on this issue.
While JD Sports prevailed on procedural grounds, the CAT dismissed JD’s substantive grounds of appeal. The CAT has now remitted the case to the CMA for reconsideration with regard to the effects of the COVID-19 pandemic. It has noted that this question is sufficiently material to bear on the CMA’s assessment of the transaction as a whole.