Competition Section Seminar: The role of

disclosure in balancing rights of defence

and confidentiality

Tuesday 7 June 2016

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The Competition Section

Competition Section calendar

• 15 March: (webinar) Economics of horizontal mergers for competition law in

practice

• Speaker - Stephen Lewis, principal, RBB Economics

• 13 May: (webinar) Competition at the FCA: An update for lawyers

• Speaker - Deb Jones, director of Competition, FCA (Financial Conduct Authority)

• 28 June: European capital markets: Common rules for dispute settlement and

regulation

• 5 July: (seminar) The digital single market and the pay-TV case

• Speaker - Pablo Ibáñez Colomo, associate professor of law, London School of

Economics and Political Science

• 1 September: (webinar) Competition law and the future of the Block Exemption

in the insurance sector

• Speaker - Stephen Smith, partner, Bristows LLP

• Feedback/Suggestions - Competition Section LinkedIn group or email

competitionsection@lawsociety.org.uk

Tom SmithLegal Director, CMA

The role of disclosure in

balancing rights of defence

and confidentiality

Tom Smith, Legal Director, CMA

7 June 2016

Overview

6

● Striking a balance

● Disclosure rooms and confidentiality rings

● Relevant factors in deciding when to use them

● A recent example – retail banking market

investigation

Striking a balance (1)

7

Need to strike an appropriate balance between the need to disclose information

and the need to protect confidential information:

● Fair process: giving a party affected by a CMA decision sufficient information

(the „gist‟) to enable the party to make worthwhile/intelligent representations

and to enable the party to argue its case effectively

● Part 9 Enterprise Act 2002: the CMA may disclose information to facilitate its

functions (or with consent), having regard (inter alia) to the need to exclude

from disclosure commercial information whose disclosure the CMA thinks

might significantly harm the legitimate business interests of the undertaking to

whom it relates

● Robust decisions: parties‟ submissions make our decisions better

● Trust and credibility: mergers and markets cases rely on parties trusting

our handling of sensitive information enough to volunteer their information

● Public accountability: transparency and stimulating public debate

Striking a balance (2)

8

● Priority given to disclosure to achieve fair process:

- Umbro v OFT, para 33

- CMA6, para 4.24

- CC7, para 5.3

● If too sensitive to disclose even in a disclosure room, the

CMA shouldn‟t rely on it (Ryanair v CMA, CAT para 134

and Court of Appeal para 39)

Striking a balance (3)

9

● „The standards of fairness are not immutable‟ (Doody,

para 560)

● Revised approach needed following recent CAT

judgments (Private Healthcare, Ryanair, Eurotunnel)

● Disclosure strategy now planned from the start (and

reviewed regularly)

Disclosing information

10

● Only need to disclose information on which the CMA

proposes to rely, i.e. necessary to explain our reasoning

(s104 and s169 Enterprise Act) and sufficient to enable

affected parties to know the case and respond effectively

● Most of that information is published

● Most of the rest should not be disclosed at all (using e.g.

redaction, anonymisation, aggregation, summaries and

ranges)

● A subset of information might be disclosed in a

confidentiality ring or a disclosure room (data room)

What is a confidentiality ring?

11

● Limited number of named individuals (usually external legal and/or

economic advisers of the parties)

● Each gives individual undertakings to the CMA to keep the

information confidential (including from their own clients) and to use it

only for the defined specified purpose

● Undertakings are also required from the advisers‟ firms

● Unlike disclosure rooms, there are no physical limits placed on where

disclosure is provided as long as the information is secure

● Can include additional protections in some cases, such as additional

IT security and CMA checking non-confidential summaries before

they are shared with clients (e.g. Energy market investigation)

What is a disclosure room?

12

● Like a confidentiality ring, but with additional protections

● Access is provided only in a particular location, generally on

CMA premises, and for a limited period of time

● Restrictions are placed on the extent to which disclosed

information can be taken away from the location – CMA

inspects materials before allowing them to be taken away

● Individuals must agree to abide by the disclosure room rules as

well as provide confidentiality undertakings to the CMA

● Higher burden and inconvenience on parties and CMA than a

confidentiality ring

When we use them

13

● Confidentiality rings and disclosure rooms are not as good as full disclosure –

e.g. they exclude the company itself and the wider world (BMI, paras 40-45)

● Can be justified provided the sensitivity of the material warrants it and parties

are still able to make worthwhile representations (BMI, para 68)

● Therefore, we need to satisfy the following:

- Information needs to be disclosed to parties (and possibly others) for fair

process

- Information is too sensitive to be disclosed without additional protection

- Other methods such as redaction, anonymisation, aggregation, ranges,

summaries would not give parties the sufficient gist without sufficiently

protecting the sensitive information

- The chosen method would be effective in meeting the need to disclose

● Confidentiality rings are generally preferred to disclosure rooms

Relevant factors

14

● Sensitivity and source of the information (including personal data under the Data

Protection Act)

● The importance of the information to the CMA‟s findings (HCA v CMA, para 31) –

potentially difficult to know pre-PFs

● Nature of the parties – desire to avoid unnecessary burden

● Nature and number of the advisors – need to assess risk of non-compliance (NB

lawyers are subject to professional conduct rules in a way that economists are not)

● Duration and timing

● Statutory timetable (merger or markets case) – s104(4)(a), s169(4)(a) Enterprise Act

● CMA resources – software licences, server and processing capacity, staff and IT

availability, room bookings (R (Eisai) v NICE, para 65)

● Consistency and precedent (NB independent Group process)

Retail banking – an example (1)

15

● Interested parties (and sources of information): 17 main banks, a

number of new entrant banks, FinTech companies and price comparison

websites, SME and consumer groups, trade associations, regulators and

public bodies (PRA, PSR, FCA, HM Treasury, BIS, Basel Committee,

Treasury Select Committee, Welsh Govt), academics, members of the

public

● Provisional findings: c.1300 pages (including annexes), plus subsequent

addenda on the bank levy and capital requirements

● Two disclosure rooms and four uses of confidentiality ring

● Disclosure rooms contained: raw data, cleaned data, CMA analysis and

coding programs together with a means of reproducing the full set of

results from the CMA analysis

Retail banking – an example (2)

16

General process to be followed for disclosure rooms:

● Notify data providers of proposed disclosure and invite representations

● Publish notice of intention to run a disclosure room (including the

proposed undertakings and rules), which asks parties to express an

interest in taking part

● Agree undertakings and rules with individuals and their firms

● Disclosure room supervised at all times

● Review and release materials being taken out of the room

● Limited remit of Procedural Officer in mergers and markets cases (and

no role whatsoever in confidentiality rings or disclosure rooms)

The role of disclosure in

balancing rights of defence

and confidentiality

Tom Smith, Legal Director, CMA

7 June 2016

Peter Davisexecutive vice president, Compass Lexecon

Peter DavisExecutive Vice President, Compass Lexecon

The need for and use of CMA Disclosure Rooms and

Confidentiality Rings

• Mr Sedley‟s criteria

• Why disclosure is vitally important: Recent examples

from practice

• Lessons/pleas for future

Outline

“It is hard to see how any of his [Mr Sedley‟s] four suggested requirements

could be rejected or indeed improved.” Supreme Court in October 2014 [Lord

Wilson] https://www.supremecourt.uk/decided-

cases/docs/UKSC_2013_0116_Judgment.pdf

1. The consultation must be at a time when proposals are still at a formative

stage.

2. The proposer must give sufficient reasons for any proposal to permit

intelligent consideration and response.

3. Adequate time must be given for consideration and response and

4. The product of consultation must be conscientiously taken into account

in finalising any statutory proposals.

R v Brent London Borough Council, ex p Gunning, (1985) 84 LGR 168 (page 189) . Emphasis added.

Mr Sedley‟s Criteria for a worthwhile

consultation

“Lord Reed in R(Osborn) v Parole Board [2013] UKSC 61 [2014] AC

1115. He observed [67] that fairness „is liable to result in better

decisions, by ensuring that the decision-maker receives all

relevant information and that it is properly tested‟, that it avoids

[68] „the sense of injustice which the person who is the subject of

the decision will otherwise feel‟, and that consultation reflects

the democratic principle at the heart of our society”

R. Clayton, „Fairness, Consultation, and the Supreme Court: There Is (Sometimes)

an Alternative‟ U.K. Const. L. Blog (16th Mar 2015) (available at:

http://ukconstitutionallaw.org)).

Fairness through transparency is a

route to better CMA decisions

• Increased acceptance and use at the CMA following the decision by the

Court of Appeal in R (Eisai Limited) v National Institute for Health and

Clinical Excellence [2008] EWCA Civ 438.

• I‟ve long been a fan - encouraging their use when I chaired CC

inquiries. To the best of my knowledge:

– 2006: First use of a disclosure room by CC: Midkent/South East merger

inquiry– although much of the Ofwat data was already public

– 2010: First use in an MIR: Access to survey results granted in the PPI

Remittal

– 2011: First time CC survey data itself was actually sent to parties advisors

instead of being released in a disclosure room: DHFS/Stena merger

inquiry

A (partial) history of disclosure

rooms in competition system

Why disclosure is vitally important:

Recent examples from practice.

• In Private Healthcare, CMA used an econometric model for its Price-

Concentration Analysis (PCA)

price = a*cost + b*concentration + (other factors)

• In the disclosure room, we found an error in the cost data used in

the analysis. We traced the error back to a mistake deep in the

CMAs computer code (if hundreds or thousands of lines of computer

code underlying an analysis – programming mistakes can easily arise)

1. Quality Assurance is very important

Source: https://assets.digital.cabinet-office.gov.uk/media/5329dd2fed915d0e60000135/140124_bmi_annex_4_response_to_pfs_pca.pdf

• In Private Healthcare in the post-PFs Disclosure Room,

– Noticed there were no patients from BMI South Cheshire hospital in the

CMA dataset and tried to understand why that was – as we knew it had

been submitted

– Found the value of BMI‟s South Cheshire hospital for the variable

“CCL3” had been provided but was missing in the dataset being used

by the CMA - so the computer program had automatically dropped all

the patient observations at that hospital in CMAs Price-Concentration

Analysis

• CCL3 was a variable describing whether patients had attended a hospital

which had a Critical Care Level 3 (CCL3) operating theatre (believed

correlated with hospital quality and hence potentially prices).

– We filled in the missing data and re-ran the CMAs analysis.

– Showed part of the econometric analysis did not survive cleaning the

dataset – i.e., that the analysis at that stage was not robust

2. Access allows submissions on the

robustness of CMA analysis

2. Access allows submissions on the

robustness of CMA analysis

CC Analysis at Provisional Findings

Reports a finding of a statistically significant

relationship between price and concentration

The star (indicating statistical significance) goes away when correct

the error and add back the 30 patients from BMI‟s South Cheshire

hospital to the dataset. (Whether or not we also fix the cost data.)

Table of coefficients on CMAs Concentration measure - called

the LOgit Competition Index (LOCI)

• Need to check robustness to e.g., different regression

specifications, illustrates why it is important for the proper

exercise of rights of defence to be able to take own-client or

public data into a Disclosure Room.

• However, this has been ruled out in some more recent Disclosure

Room exercises (e.g., in Energy post-PFs) despite

objections/requests by the parties‟ advisors.

• Electronic versions of documents should also be allowed to go into

Disclosure Rooms – since draft initial version of a report can be

prepared outside using „in principle‟ arguments – with the actual

validity of the arguments tested inside.

Aside: Importance of allowing data and

documents to be taken in (electronically)…

•

3a. Developing new pieces of evidence: A possible

methodology for estimating switching costs if

potentially differentiated products and only have

price data

£160

NB: Recent

switchers are

found to be

apparently also

“leaving money

on the table” –

which is

consistent with

them having a

preference for

particular

products/brand

(or alternatively

with switchers

making

systematic

mistakes)

GFSCMA

Adjustment for

value of non-

price attributesGFSadjusted

Estimates of Gains from Switching

adjustment for value of

non-price attributes

NB: Could find this result if switchers made mistakes systematically – but CMA don‟t believe that - not the ToH

• Key messages from economic literature on switching costs:

– “See-saw” pricing the norm. Discounts on acquisition products arise

because firms compete to “lock -in” customers.

– If remedies reduce switching costs, see-saw will rebalance - so should

measure any benefits from intervention net of reduced discounts (RCBs)

3b. Developing new pieces of evidence

using market wide data

Retention

products

Acquisition

products

Some degree of

protection for truly

inert customers is

provided by those

customers likely to

remain on retention

products for shorter

periods

Automatic reversion if

don‟t switch

Many, but not all,

consumers move between

segments over time

Confidentiality Ring

allowed us to calibrate

an economic model of

“see-saw” pricing and

consider whether or not

there will be net gains

from intervention

Lessons/pleas for future

• CMA need to properly consider merits of the wider points being made in

submissions even if don‟t agree with some technical aspect of Authorised

Advisors submissions – e.g., the precise econometric specification used

• Parties Advisors have (at most) 3-4 weeks to produce their Reports (with a

hearing to prepare for and other aspects of the consultation to respond to as

well during that time). The CMA will have often taken months to produce its

own working paper of similar complexity.

• May get the CMA opinion of the post-PFs Disclosure Room Reports only 6

months later at PDR stage – when very very late to reply (e.g., Energy)

• Time pressures mean there is a risk of incorrect rejection of submissions

– in hope of avoiding taking on arguments that would require

complications to be dealt with that don‟t sit comfortably with the CMA

direction of travel (NB: Not only a risk with Confidential Submissions)

• This happened in my view in Private Healthcare and when CMA finally

accepted arguments extremely late in the process it had to change its

analysis (and was too late to consult properly => successful HCA appeal)

1. The product of consultation must be

conscientiously taken into account in finalising

any report

• “In consulting the person concerned, the relevant authority shall, so

far as practicable, give the reasons of the relevant authority for the

proposed decision.” s169 Enterprise Act

• No documents disclosed in Energy (even in Confidentiality Ring)

• In Private Healthcare, only extremely limited selections – e.g., single slides from

presentations that actually appeared in the working paper – definitely not the whole

slide deck and certainly not the whole file to which the CMA had access.

• Example to show why this may be problematic:

– Suppose CMAs provisional findings quote from an apparently “hot document”

– Typically there is very little to nothing about the context in which parties might

understand what that document means in the material disclosed by the CMA. Yet

we all (including CMA staff at most events like this) agree context is important for

proper interpretation of documentary evidence.

– Just suppose hypothetically that the CMA did inadvertently quote from another

party‟s documents selectively – how could parties‟ advisors pick it up?

2. Currently CMA disclosure of

documents is extremely sparse

• Current inappropriate timescales:

• PFs 6-12 months for CMA then 3-4 weeks for parties to respond

• PDR 4-6 months for the CMA then 3-4 weeks for parties to respond

• Not obvious that as CMA get more comfortable using Confidentiality Rings,

the data needs to only be available during a 3-4 week consultation period

• Irrespective of duty to consult, in the interest of speeding up the MIR

process - the economic analysis on MIR cases would ideally be much

more of a bi-weekly or monthly discussion rather than a (bi-)annual one

• As an economist, the ideal situation would be for parties‟ advisors to have

access to the relevant data and/or documents for much of the period of

the case – which would allow pieces of analysis to be tested/developed

far more dynamically/interactively than is currently the case

• All sides could then prepare careful submissions for the Panel – much as one

could for a judge with material obtained via a discovery process

3. Disclosure and inquiry timescales

• Move towards CMA use of Confidentiality Rings on Energy is welcome

since avoids the 9am-5:30pm constraint

• Confidentiality Rings do move the practical obligation to protect

specified information to advisors – so would be very useful to have some

clear guidance on what CMA actually wants advisors to do in practice:

• For example, text of CMA undertakings suggest probable parties advisors

cannot use networked computers. Eg., IT staff are not Authorized Advisors

and might have actual or potential access to computers if on a corporate

network – so even if no explicit prohibition, it may not be allowed.

• In Energy we put the team in a separate office with computers connected to

each other but disconnected from the intra/internet (i.e., very similar to

CMA Disclosure Room setup).

4. Practical guidance on CMA view of correct

advisor approach in Confidentiality Rings

• A random selection of practical issues to give a flavour - how far do CMA

actually intend us to be going in ensuring no access? • Do CMA intend to be ruling out using computers on corporate networks? Normal laptops would

ordinarily be ok for confidential information for most clients/issues. Raises practical issues that

need to be overcome - eg licenses for statistical or mapping software are often network licenses – we

sometimes need to acquire stand-alone licenses – e.g., we did this in Private Healthcare for mapping

software – Arcview – because we had network licenses and cannot check the licences are valid if

computers are not networked. (Undertakings expressly said computers could not be networked.)

• IT staff and Secretaries (are not Authorized Advisors) may have actual/potential access to ordinary

laptops and/or email accounts. CMA could confirm they do actually intend to be ruling out use of

own laptops/email accounts for these reasons.

• If use a separate office with set of connected machines in - need to lock at night/when not in use -

so no access for eg., cleaners. How to deal with facilities departments/security staff? Similarly,

how far do CMA intend us to go to block-out risk of sight by non-authorised advisors – eg., need to

paper over internal glass walls? Some IT secure rooms would have no windows.

• How best to securely destroy the information on the hard disks of the laptops at the end of the

process (and for moment this needs to be done by an authorised advisor - not a person from IT -

since cannot grant access to laptops with the data on). US Defence Department grade destruction –

software that writes over the hard disks thousands of times – but there are various standards – I‟m

told…. (in practice – get a disk from IT and an Authorised Advisor runs the program…)

• Without clear guidelines, different Authorised Advisors will make different choices…

4. Various practical issues need to be thought

about by advisors – CMA might wish to

consider/consult so expectations are clear

• The requirement that parties should be informed of the gist of the

case to answer comes from Lord Mustill in R v Home Secretary, ex

parte Doody [1994] 1 AC 531 at 560. In the CATs judgement in

BMI, it decides that the following proposition is „clear‟

“….what constitutes the “gist” of a case is acutely context-sensitive.

Indeed, “gist” is a peculiarly vague term.” Paragraph 39(7) in the BMI judgement http://catribunal.org/files/1218_BMI_Judgment_021013_1.pdf

• Sometimes the „gist‟ will be very detailed

“Competition cases are redolent with technical and complex issues,

which can only be understood, and so challenged or responded to, when

the detail is revealed. Whilst it is obviously, in the first instance, for the

Commission to decide how much to reveal when consulting, we have

little doubt disclosing the “gist” of the Commission‟s reasoning will often

involve a high level of specificity.” Paragraph 39(7) in the BMI judgement http://catribunal.org/files/1218_BMI_Judgment_021013_1.pdf

• But in other cases, interpreted more narrowly…

5. The joys of the „gist‟

• CMA undertakings now lay out a process for reviewing (not „gist‟) but a

Non-Confidential Summary of the Confidential Submission. In

particular:

1. Authorised Advisors write Confidential Submission

2. Authorised Advisors submit Confidential Submission to CMA at end of

process (separately from other response of client)

3. Authorised Advisors prepare Non-Confidential Summary and show it to CMA

who must confirm that it is indeed a Non-Confidential Summary before it

is released to client.

4. Contents of Non-Confidential Summary are restricted by undertakings

5. The joys of the gist and how it relates

to Non-Confidential Summaries?

….

1. In Private Healthcare, there were „gist‟ versions of Advisor Reports

given to Parties. Does the excised Provisional Decision plus the

Non-Confidential Summary envisioned by the CMA in the Energy

undertakings fulfil the CMAs obligations to provide parties with the

„gist‟ of the case against them?

2. How do CMA say Authorised Advisors can/should get client „sign

off‟ for actual submission of the Confidential Version of the

Report? Should there be an actual submission only after the client

has seen the Non-Confidential Summary and confirmed they want

it submitted?

3. Does/should the CMA treat Confidential Submissions as Privileged

until submission (by client) is „signed off‟?

5. Process to show Confidential Submissions to

CMA very welcome for Advisors. But questions on

CMA process remain:

• Significant progress during the last 10 years has moved us towards a

genuinely fair MIR process - with advisor access to market wide data

that no single party has. But CMA are not there yet.

• Much less progress in relation to proper access to documents/file.

• Experience suggests CMA not universally conscientious in fully

absorbing responses to consultations into final report.

• The current timescales on access to the data on market inquiries is

a significant issue for the market regime – that the CMA should

consider carefully irrespective of the demands of the duty to

consult.

• Improving transparency situation would be a much better change to

the regime than current government/BIS consultation proposal to

slash timetable to 12 months irrespective of practical realities and

changes that risk undermining the independence of the Panel.

Conclusion

Keith Jonespartner, Baker & McKenzie LLP

Competition Section calendar

• 15 March: (webinar) Economics of horizontal mergers for competition law in

practice

• Speaker - Stephen Lewis, principal, RBB Economics

• 13 May: (webinar) Competition at the FCA: An update for lawyers

• Speaker - Deb Jones, director of Competition, FCA (Financial Conduct Authority)

• 28 June: European capital markets: Common rules for dispute settlement and

regulation

• 5 July: (seminar) The digital single market and the pay-TV case

• Speaker - Pablo Ibáñez Colomo, associate professor of law, London School of

Economics and Political Science

• 1 September: (webinar) Competition law and the future of the Block Exemption

in the insurance sector

• Speaker - Stephen Smith, partner, Bristows LLP

• Feedback/Suggestions - Competition Section LinkedIn group or email

competitionsection@lawsociety.org.uk

Competition Section Seminar: The role of

disclosure in balancing rights of defence

and confidentiality

Tuesday 7 June 2016