The loser still pays – The Supreme Court’s judgment on costs in Phenytoin

The UK Supreme Court issued an interesting judgment yesterday involving the question whether the CMA should cover a party’s litigation costs when that party successfully appeals the CMA’s decision under the Competition Act.

The judgment is related to the CMA’s decision to impose penalties on Pfizer and Flynn Pharma for hiking up the prices of phenytoin sodium capsules, an epilepsy drug. This was a high-profile decision that sought to set a standard for determining when prices charged for drugs that had gone off-patent were excessive and unfair, and therefore in breach of the Chapter II prohibition (i.e., the UK prohibition on the abuse of a dominant position).

The CAT’s costs ruling

The CMA’s decision against Pfizer and Flynn was overturned on appeal by the Competition Appeal Tribunal (CAT) (and parts of the CAT’s judgment were, in turn, successfully appealed by the CMA in the Court of Appeal). The CAT issued a cost order at the end of the appeal, ordering the CMA to pay part of Pfizer and Flynn’s litigation costs.

The basis for the CAT’s order is currently rule 104 of the CAT’s Rules, which holds that the CAT may at its discretion make “any order it thinks fit in relation to the payment of costs”. The Rules add that in doing so, the CAT may take account of a number of factors, including whether a party has succeeded on part of its case and whether costs were proportionately and reasonably incurred and were proportionate and reasonable in amount. There is however no presumption that “the loser pays”.

In this respect the CAT’s costs rule differs from the generally applicable rule under the Civil Procedure Rules (“CPR”) that govern costs in litigation in the High Court. This is because CPR rule 44.2(2) explicitly provides that “the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party”, though the court may make a different order.

The CAT’s costs rule has been broadly the same since its inception. In applying it, the CAT has since its judgment in The Racecourse Association v OFT in general applied a starting point that “costs follow the event”, meaning that the starting point would be that the successful party would have its costs paid by the unsuccessful party. In practice, the CAT’s policy is therefore much closer to the approach taken in the CPRs. The CAT has approached its discretion in a careful way, and has in some cases decided to make no order as to costs. Nevertheless, the CAT has also stressed the importance of having a starting point, explaining in Federation of Independent Practitioner Organisations v CMA that having a known and reasonably uniform starting point is important for reasons of fairness, to promote a disciplined approach to complex litigation, and to allow parties to understand the position with reasonable clarity.

Consistent with its rules and this starting point, the CAT had regard in the Phenytoin case to “the relative successes and failures of the parties”, and therefore awarded the CMA its costs of defending successfully Pfizer’s and Flynn’s claims in respect of market definition and dominance (which the CAT dismissed) and awarded Pfizer and Flynn a percentage of their costs in respect of the appeal relating to abuse (where they were successful).

Court of Appeal judgment

The CMA appealed the CAT’s cost order, relying on the 2018 Court of Appeal judgment in BT v Ofcom (Business Connectivity). This was a regulatory appeal under the Communications Act, in which the CAT had held that Ofcom had wrongly defined the relevant market and ordered Ofcom to pay 50% of the bulk of the costs incurred by BT. The Court of Appeal, however, allowed Ofcom’s appeal against that costs decision. It held that “if Ofcom has acted purely in its regulatory capacity in prosecuting or resisting a claim before the CAT and its actions are reasonable and in the public interest, it is hard to see why one would start with a predisposition to award costs against it, even if it were unsuccessful”.

On the same basis, the CMA contended that when it was involved in proceedings in the exercise of its statutory functions, the default position (or starting point) should be that no order for costs should be made against the CMA, except for good reason. Being unsuccessful should not of itself be a good reason, but a good reason would include unreasonable conduct by the CMA.

Both the CMA and Pfizer and Flynn argued, for different reasons, that there was a risk of a “chilling effect” resulting from the Court of Appeal ruling in one way or the other. The CMA argued that the principle that “costs follow the event” may make the authority worried that it might face a significant costs bill, which might stop it from bringing cases that would be in the public interest. Pfizer and Flynn submitted that any principle whereby the CMA would not have to pay their costs unless it acted unreasonably would be unfair and would deter firms from bringing legitimate appeals.

The Court of Appeal analysed the case-law that it had relied on in the BT/Ofcom case, starting with a 2000 case called Bradford Metropolitan District Council v Booth (“Booth”) and referred to as the Booth line of cases. According to the Court of Appeal, the case law had developed in such a way that the starting point or default position in cases involving a public regulator should be that no order as to costs should be made. The Court of Appeal therefore allowed the CMA’s appeal and did not refer the case back to the CAT but instead substituted the CAT’s order with an order for no costs, meaning that Pfizer and Flynn Pharma would have to bear their own costs.

Supreme Court judgment

Pfizer and Flynn Pharma took the case to the Supreme Court. According to the Supreme Court, the case comes down to two questions. First, was the Court of Appeal right to hold that a court exercising a discretion in relation to costs should adopt as its starting point that it will not make an order for costs where the unsuccessful respondent is a public body defending a decision taken in the exercise of its statutory functions in the public interest, unless there is a good reason to do so? Second, if there is no such principle, has the CAT nonetheless erred in adopting a starting point of “costs follow the event” in Competition Act appeals by giving insufficient consideration to the risk of a “chilling effect” on the CMA?

In relation to the first question, the Supreme Court held that the Court of Appeal was wrong to read into the Booth line of cases a generally applicable principle that all public bodies should enjoy a protected status where they lose a case they brought or defended in the exercise of their public functions in the public interest. Rather, a court or tribunal should take into account, as one important factor, the risk that there will be a chilling effect on the conduct of the public body, if costs orders are routinely made against it in those kinds of proceedings.

Furthermore, it would be wrong to make the jump from a conclusion that in some circumstances the potential chilling effect on the public body indicates that a no order as to costs starting point is appropriate, to a principle that in every situation and for every public body it must be assumed that there might be such a chilling effect and hence that the body should be shielded from the costs consequences of the decisions it takes. The assessment as to whether a chilling effect is sufficiently plausible to justify a starting point of no order as to costs in a particular jurisdiction is an assessment best made by the court or tribunal in question, subject to the supervisory jurisdiction of the appellate courts.

In relation to the second question, the Supreme Court considered whether the CAT erred in rejecting the analogy with the Booth line of cases by adopting a starting point of “costs follow the event”. The Supreme Court views the CMA’s decision making in Competition Act cases as entirely different from the local authorities involved in some of the judgments in the Booth line of cases. The CMA adopted just eight infringement decisions in the financial year 2020/21. It is moreover not funded in a way where adverse costs orders would reduce the resources it has available to it, as is the case for the SRA (who intervened in this appeal). Indeed, the CMA’s financial statement includes a line for “litigation costs”, but this shows a zero. This is because the CMA has approval to offset litigation costs against Competition Act penalty income. Provided the CMA recovers a sufficient amount in penalties, its litigation costs are funded.

The Supreme Court draws two conclusions from this. First, there is no adverse effect on the CMA’s finances arising from a liability to pay the costs of a successful appellant, provided that it is successful at least some of the time in imposing and recovering penalties. Second, the CMA is incentivised to investigate and sanction infringements by substantial undertakings, because the level of penalty the CMA can impose depends on the turnover generated by the undertaking. In this context, the Court points out that the costs follow the event starting point does not appear so far to have deterred the CMA from pursuing major market participants, referring to a number of recent pharma investigations and cases against Google and Apple. The CAT was therefore right to distinguish the nature of decisions taken by the public bodies concerned in the Booth line of cases from the decisions taken by the CMA under the Competition Act.

The Supreme Court also considers that there are good policy reasons for costs following event. The prospect of an adverse costs order may encourage better decision making. It is also important that private parties are protected from being wronged by the state. Finally, the addressees of a CMA infringement decision will incur substantial costs during the investigation phase, which are not recoverable from the CMA, even if its decision is set aside. In that investigation phase, the CMA has the ability to consider in great detail whether it should take action, and has an extended period in which to test and refine its justifications for any action it decides to take. It is right in this context that the CMA is subjected to the discipline associated with having to pay a successful appellant’s costs.

Finally, the Supreme Court considers that the CAT has shown that it is well aware that starting point is only starting point. CAT has developed a balanced approach to cost awards, on many occasions ordering reductions in costs or disallowing certain costs to be claimed.

For these reasons, the Supreme Court allowed Pfizer’s and Flynn Pharma’s appeals.

Comment

This Supreme Court judgment is a ringing endorsement of the CAT’s long-standing approach to have “costs follow the event” as its starting point in Competition Act cases.

It is important to recognise that this does not mean all costs of successful litigants like Pfizer and Flynn will fall to the CMA from now on – costs follow the event is only the starting point. Nevertheless, the CMA will be in a position where it will need to challenge costs claimed in individual cases, and in most cases that it loses, it will at least need to pay part of the litigants’ costs from public money. Even if this is offset against successfully recovered penalties in other cases, this reduces the money going into the Consolidated Fund and therefore still comes at the taxpayer’s expense.

The costs of litigation in the UK are high, and this is implicitly recognised by the CAT, which takes a detailed approach to costs orders and often applies reductions to the costs claimed by successful appellants. If it wants to manage costs further, another step the CAT could take is to not leave the analysis of costs completely to the end of the case, but to require parties to provide cost updates at Case Management Conferences.

Even with necessary adjustments made, the costs are still significantly higher than costs faced by the CMA’s peers in other European jurisdictions. This is perhaps not something the Supreme Court should have taken into account in this case, but it may be an issue for the Government to consider. Appeals in the CAT are detailed affairs with weeks of hearings, that are costly even if the CMA only has to bear its own costs. As a matter of policy, the Government may want to consider whether the policy objectives identified by the Supreme Court could also be achieved with a bit more moderation, for example by imposing a cap on costs or a points-based system awarding standard costs to certain parts of the CAT’s procedure.

Finally, whether adverse costs awards will end up having a chilling effect on the CMA’s willingness to take on novel competition cases probably depends on how the authority fares in a number of high-profile cases making their way through the courts now, and in investigations against digital giants like Apple and Google. Win most of those, and this Supreme Court judgment will be relatively speaking inconsequential. Lose the majority, and the watchdog may lose its appetite for meaty Competition Act cases.

Stijn Huijts is a partner at Geradin Partners. Photo by Francais a Londres on Unsplash.

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