The below article was written by Joachim Piotrowski, Simon Neill and James Lister for Law in Sport. You can find the original article, published on Law in Sport on Thursday 9th May 2024 here.
On 12 April 2024, the Competition Appeal Tribunal (CAT - a specialist UK tribunal constituted to hear competition law cases) refused to grant apparel retailer Sports Direct an interim injunction requiring Newcastle United FC to supply it with replica kit. The ruling (available here) means that Newcastle United’s decision to supply replica kit to only one (rival) retailer, JD Sports, will stand until final judgment at trial (or further order).
This article explains the background to the dispute and the CAT’s assessment of the merits of Sports Direct’s interim injunction application. It then provides some key learning points on competition law claims for in house lawyers:
Background to the dispute
There will be few sports fans unfamiliar with Mike Ashley, the controversial billionaire founder of Frasers Group plc. From 2007 – 2021, Ashley was the owner of Newcastle United FC, the respondent in this application. At best, Ashley's relationship with the club was tumultuous and over the course of his fourteen year ownership, it is fair to say that he generally lost favour with Newcastle's fans – not least over the decision to rename Newcastle's stadium to the Sports Direct Arena. Ashley's tenure also saw the collapse of several mooted "buyouts", leaving Newcastle fans to joke about "fake-overs".
Finally, in October 2021, Mike Ashley sold Newcastle United to a consortium headed by the Saudi Arabian Public Investment Fund, in a move which reportedly earned Ashley a profit of £195 million, and prompted Amnesty International to call on the Premier League to block the sale over concerns relating to human rights in Saudi Arabia.
As part of a strategy to drive its own sales of replica kit, the new owners have decided to change their kit supplier on expiry of the current supply contract. They have also made a decision to permit only one retailer, JD Sports (which is Sports Direct's main rival), to sell the new kit online in the UK. Prior to the sale, Sports Direct, which is the largest sports retailer in the UK (and owned by Mike Ashley), had been continuously supplied with replica kit by the current (exiting) manufacturer. If the new owners' decision is not held unlawful at trial, Sports Direct will not be able to sell Newcastle replica kit in its stores or online.
Legal basis for the interim injunction (Sport Direct’s allegations)
UK competition law contains two fundamental prohibitions, namely:
- agreements between undertakings that affect trade within the UK and are intended to (or will in effect) prevent, restrict or distort competition are unlawful. This is known as the “Chapter I prohibition"; and
- where an undertaking is in a dominant position in a market, it is unlawful for that dominant undertaking to abuse its position of dominance. In practice, there are many different ways in which such abuse may occur. This is known as the "Chapter II prohibition".
Sports Direct alleged that Newcastle United has infringed the Chapter I prohibition by entering into an exclusive agreement with JD Sports to resell Newcastle United replica kit online, with the effect of foreclosing Sports Direct from this market (the "Chapter I Infringement Allegation").
Sports Direct also alleged that Newcastle United has abused its dominant position in the market for Newcastle United replica kit by directly or indirectly refusing to supply Sports Direct with Newcastle United's replica kit (the "Chapter II Infringement Allegation").
In its application to the CAT, Sports Direct asked the tribunal to grant an interim injunction requiring Newcastle United to continue to supply it with replica kit until final judgment at trial (or further order). Sports Direct also claimed £1.5 million in damages – a relatively small amount considering the company's annual turnover in the billions. Arguably, this application was brought as a matter of "principle" rather than seeking compensation for actual loss suffered.
The merits of the application
Before delving into the merits, it is important to remember that this case concerned an application for an interim injunction – not a substantive (full) trial of the issues. There were a number of instances where the CAT referred to contentious (or likely contentious) matters, noting that these were matters that could only be considered at the full trial.
The legal test for granting an interim injunction
Before examining the application itself, it is worth noting that passing the test to be granted an interim injunction is a high hurdle. In practice, interim injunctions are rarely granted in competition law cases due to the complexity of the issues involved. The relevant test comes from the case of American Cyanamid Co v Ethicon Ltd and can be summarised as follows:
- The tribunal must be satisfied that there is a serious issue to be tried. Put another way, this means that the applicant has no real prospect of succeeding in their claim for a permanent injunction at trial.
- Where the first condition is satisfied, the tribunal must be satisfied that damages would not be an adequate remedy.
- The tribunal will, almost always, require an undertaking In damages from the applicant as the "price" for the granting of interim relief. The rationale for this is to protect the respondent in the event that the applicant's claim fails at trial and the interim injunction having been "wrongly" granted. This condition is the converse of the second condition. If the undertaking in damages will adequately protect the respondent, then the interim injunction ought to be granted. If the injunction is not granted, the applicant will be inadequately protected should their claim succeed at trial, whereas if the injunction is granted, provided the third condition is satisfied, the respondent will be adequately protected.
- If the third condition is not met, the tribunal must consider the balance of convenience, weighing up the rival factors in favour of granting or refusing interim relief. There is no fixed list of factors and the tribunal must look at all the relevant facts of the case, and weigh them accordingly.
Now, we can move onto consider the merits of this application.
The definition of “replica kit” and the size of the market
An important feature of the application concerned the definition of "replica kit". This is important because a market limited to Newcastle United replica kit would make it much easier to establish that Newcastle United was in a position of dominance. Conversely, a wider definition of "replica kit" that encompassed other football clubs' kit would substantially increase the size of the market and would make it more difficult to establish that Newcastle United held a dominant market position.
For the purposes of this hearing, a wide definition of the term "replica kit" was adopted because the injunction sought by Sports Direct was widely framed, meaning that the term "replica kit" was used to encompass any form of sports clothing or kit to which Newcastle's trademark is applied – not solely the home, away and goalkeeper strip, as the narrow interpretation requires. While the CAT proceeded, solely for the purposes of the interim injunction decision, on the basis that Sports Direct was in a position of dominance, it noted that this was a contentious matter that would need to be determined at trial.
The tribunal first considered the Chapter II Infringement Allegation.
The Chapter II Infringement Allegation – was Newcastle United abusing a dominant position?
The CAT recognised that the source of Newcastle United's market power stemmed from its ownership of the intellectual property and branding rights that differentiated Newcastle United kit from other market products, in particular the replica kit of other football clubs. As referenced above, the CAT proceeded on the basis that Newcastle United held a dominant position in this market (as to presume otherwise would have significantly narrowed the interim relief available to Sports Direct had it succeeded in its arguments).
The tribunal approached the allegations of abuse of dominance from the starting point that even a dominant undertaking is entitled to structure its business as it wishes to maximise profits. The Chapter II prohibition does not preclude this.
Sports Direct's argument was that they found themselves excluded from the supply of replica kit, where this had not been the case previously. Sport Direct's Chapter II infringement allegation centred around an expectation that its supply of replica kit would continue, whether that be from the current (exiting) manufacturer or a successor.
The tribunal was critical of Sports Direct's position. While no adverse inference was drawn against Sports Direct (meaning no legal inference was drawn against Sports Direct as a result of their failure to provide evidence of their expectation) , the tribunal pointed to the lack of specificity and detail regarding the nature of the arrangements Sports Direct had with the current (exiting) replica kit manufacturer, stating that this lack of information was "surprising" and "telling". In other words, the tribunal expected to see more evidence of Sport Direct’s “expectation” of supply, if that indeed was their case.
Sports Direct's argument - as stated by the tribunal - was that, where a dominant undertaking has historically supplied a non-substitutable product, then it is an abuse of dominance to change the manner in which it supplies the market in the future if that change involves ceasing to supply a previously supplied entity. The tribunal did not consider this position to be arguable and stated that, to find an infringement of the Chapter II prohibition, something more needed to be shown.
In addition, the tribunal considered that the new owners of Newcastle United were entitled to revisit the supply arrangements for their replica kit and to change them.
Sports Direct also argued that it was excluded from continued supply due to being a well-known discounter of prices (much of Sports Direct’s appeal is based around offering deep discounts and the cheapest prices to consumers). They argued that this exclusion would harm competition as, if they were not supplied with replica kit, consumers would not benefit from lower prices. The CAT accepted this proposition for the purpose of the hearing (whilst noting there was no evidence produced and that it would be a matter for trial) but considered it to be immaterial. In the absence of unfair pricing by Newcastle United (which was not alleged), the tribunal concluded that there was nothing to this point.
Crucially, the CAT considered that there was no "reasonable or legitimate expectation on the part of Sports Direct of continuity of supply [from the current (exiting) manufacturer]. To suggest that there was such an obligation on Newcastle United to continue supplying Sports Direct would, in fact, have been a "significant fetter on competition, not an enhancement of it".
Therefore, the tribunal held that Sports Direct did not, for the purposes of the interim injunction application, succeed in respect of its Chapter II Infringement Allegation.
The Chapter I Infringement Allegation – prevention, restriction or distortion of competition?
If Sports Direct's claim in relation to the Chapter II Infringement Allegation was properly arguable, it could also be argued that Newcastle United's agreements with the new manufacturer of replica kit and JD Sports as the exclusive online retailer, were collusive and contrary to the Chapter I prohibition.
However, the CAT considered that, in the absence of an arguable claim in relation to the Chapter II prohibition, it could not discern any arguable infringement of the Chapter I prohibition.
It follows that Sports Direct's application for an interim injunction failed on both grounds.
Key points on competition claims for in-house lawyers
What are the key lessons of this case for lawyers?
While an interim injunction application is not in any way a trial of the merits, there are several points on competition law claims arising out of this hearing that are worth noting:
1. Evidence, evidence, evidence….
- When seeking to establish that a dominant undertaking has infringed the Chapter II prohibition by failing to supply a non-substitutable product in circumstances where they previously have done so, a comprehensive evidential picture is required. In particular, being able to point to the detail of current supply arrangements is critical in sustaining an argument that an entity is entitled to expect supply to continue upon a change of supplier.
- In this case, the tribunal observed that (i) no written agreement was produced in evidence by Sports Direct and (ii) leading counsel for Sports Direct was unable to say anything material about the terms that subsisted between Sports Direct and the current (exiting) manufacturer.
- Practical tip: Ensure that signed supply agreements are entered into and that an up-to-date repository of agreements with suppliers, distributors and retailers is maintained. A readily accessible repository containing documents that can (if necessary) quickly be deployed in evidence will save time and reduce wasted costs in the future.
2. Current arrangements matter
- The tribunal considered that the presence of prior arrangements regarding the supply by a dominant undertaking was "material". When faced with a change of supply from a dominant undertaking, analyse whether, how and to what extent the change alters the established structure. The greater the change, the more scrutiny it should attract and it is permissible to take a "long, hard look at that unilateral change".
- Practical tip: Seek as much information as possible relating to the reasons behind any change of supply by a dominant undertaking. This will save time and costs in the future and may help establish whether there is any arguable claim.
3. Does a change in established practice necessarily entail an abuse of dominance?
- Not necessarily. The tribunal pointed to a number of (non-exhaustive) considerations that it felt would "generally be material" to whether or not a change in established practice constituted an abuse of dominance. These considerations included: the reason for the change, whether it was truly unilateral or influenced by external factors, the degree of notice given, the extent to which the undertaking receiving the supply has a reasonable expectation of continuity, the length of the supply chain and the potential harm resulting from the change.
- Practical tip: When faced with a change of supply from a dominant undertaking, gather as much information as possible about the reasons behind the change. This will save future time and costs and may help establish whether there is any arguable legal claim.
In conclusion, while Sports Direct's application for an interim injunction against Newcastle United was unsuccessful, the case highlights the importance of evidence, the consideration of current arrangements and the need to assess whether a change in established practice constitutes an abuse of dominance. In-house lawyers should take note of these key takeaways and continue to monitor the developments of this case as it progresses to trial.
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