On 13 November 2020, the UK Competition Appeal Tribunal ("CAT") published its judgment in relation to the merger of JD Sports and Footasylum. The merger was prohibited by the UK Competition and Markets Authority ("CMA") in May, but JD Sports appealed. The CAT partially upheld the appeal and the decision will now be referred back to the CMA.
| what you need to know - key takeaways |
- Appeals of merger decisions are rare. This case shows that the CAT can reach a decision quickly when such appeals do arise (five months in this case).
- The CAT's judgment provides support for the significant flexibility the CMA has in how it conducts its merger analysis.
- At this time it is unclear whether the appeal will ultimately lead to the CMA changing its decision in light of the developing COVID-19 pandemic.
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In May 2020, the CMA prohibited the merger of JD Sports and Footasylum, after finding that shoppers of sports-inspired clothing and footwear would be "worse off" as a result of the merger (see our previous newsletter article here). The CMA concluded that in order to remedy competition concerns, JD Sports must sell Footasylum in its entirety.
In June JD Sports challenged the CMA's decisions on three grounds, alleging that the CMA erred in law and/or acted irrationally in:
- determining whether any lessening of competition caused by the Merger was “substantial”, and in assessing the aggregate constraints on the merged entity;
- excluding from the counterfactual the effect of COVID-19 on Footasylum and in its assessment of the effect of COVID-19 on Footasylum; and
- assessing the competitive constraint imposed by: (a) the strategy of a competitor (Frasers Group); (b) suppliers; and (c) Nike’s and adidas’ own direct to consumer retail offer.
In relation to the first ground, the CAT found that the CMA has a "wide margin of appreciation" in how it conducts its merger analysis and also that the CMA had "substantial reasons for its assessment" that the merger would lead to a substantial lessening of competition. It also unanimously dismissed JD Sports' arguments in relation to the constraint from Frasers Group and suppliers.
However, the CAT upheld the appeal in relation to the likely effects of COVID-19. The CAT found that the CMA did not go far enough in its information gathering about the impact of COVID-19. In particular the CMA acted irrationally in its failure to follow up inquiries with suppliers on their incentives to increase direct to consumer sales due to COVID-19 and the failure to make direct inquiries of Footasylum’s primary lender as to the likely effects of the COVID-19 pandemic.
As a result the CAT has quashed those parts of the CMA's final report relating to the likely effects of the COVID-19 pandemic. At the time of writing the CMA is considering how it will address the CAT's decision, including whether it will appeal. Even if the CMA reassess the impact of COVID-19, it may not necessarily change its overall decision. However, the CMA has access to significantly more information on the impact of the pandemic than was available when it was conducting its review in April.
The CMA is appealing the CAT judgment.
