The Competition Appeals Tribunal (the “CAT”) found in its ruling of 26 May 2017 that the Law Society of England and Wales (the “Law Society”) abused its dominant market position by requiring law firms accredited under its Conveyancing Quality Scheme (“CQS”) to buy the Law Society’s own training courses.
The CQS was set up as a result of mortgage lenders coming under pressure from the Financial Services Authority to do more to tackle mortgage fraud and related financial crime, which had increasingly come to light after the 2008 financial crisis. An increasing number of firms found that the CQS accreditation was a prerequisite to being included on provider panels for larger companies and that if they wanted to be accredited they had to pay for the Law Society’s training.
The case was brought by Socrates Training Limited (“Socrates”), an online training provider, when it found it was restricted from providing the training required under the CQS to law firms. Socrates claimed that the Law Society was engaging in anti-competitive behaviour by making it a mandatory requirement under the CQS to obtain the training courses exclusively from the Law Society itself and thereby preventing competitors from offering services of a similar nature. The Law Society argued that the requirement to use the training offered by it was objectively proportionate.
The key issues in the case were as follows:
- Market definition: The CAT considered both the upstream market, in which the Law Society supplies the CQS, and the downstream market, in which Socrates and others provide training courses:
- In relation to the upstream market, the CAT found the product market to be the supply of accreditation to law firms providing residential conveyancing in England and Wales. An increasing number of firms found that the CQS accreditation was a prerequisite to being included on lender panels, however the CQS served as a mark of quality which was of value more broadly, for example in marketing to the public. Therefore a restricted market definition in terms of facilitating access to lenders was not found to be justified.
- The CAT also considered it appropriate to define the downstream market, even though the Law Society was not alleged to be dominant on the downstream market. The CAT considered the market to be the supply of training courses in anti-money laundering, mortgage fraud and financial crime to entities such as accountants as well as law firms. The key factor was supply-side substitutability, as providers of the training to accountants could easily switch to providing training to law firms due to the low cost of supplying a new course.
- Dominance: On the upstream market, the Law Society held a market share of 100%, as there was no competing accreditation scheme to the CQS. However the CAT considered that this did not necessarily mean the Law Society was dominant, particularly as few solicitors initially signed up to the CQS. In the CAT’s view, the Law Society became dominant when membership of the CQS became a “must-have product” for conveyancing solicitors. The CAT found that on the balance of probabilities, the Law Society achieved a dominant position in April 2015, after Nationwide, a major lender, announced that membership of the CQS would be a condition of membership of its panel. This meant that 35% of overall mortgage lending was accounted for by lenders requiring CQS accreditation as a condition for membership of their panel.
- Abuse: The form of abuse alleged to have occurred was ‘tying’ or ‘bundling’, which occurs when a dominant company is prepared to supply a product in respect of which it has a dominant market position (i.e. the CQS accreditation) only if the customer also agrees to buy another distinct product (i.e. the training courses). The CAT found that the supply of accreditation and the supply of training courses were separate and distinct from one another, even though the CAT accepted that a requirement for training may be inherent in an accreditation scheme. Therefore a requirement to purchase the Law Society’s training courses amounted to a tie. Tying or bundling will only amount to an abuse if it may have an anti-competitive effect and the CAT determined that the applicable test was whether the conduct was “reasonably likely to harm the competitive structure of the market”. In finding that this was the case, the CAT relied on a number of factors including the following: the extent of the Law Society’s dominance on the upstream market, which meant that once the CQS became a ‘must-have product’, there was no alternative available; the absence of entry into the market by other suppliers; the requirement for CQS accreditation to be renewed annually and the consequent requirement to purchase training courses on an ongoing basis.
- Objective justification: The Law Society sought to argue that the requirement to purchase training courses exclusively from the Law Society was objectively justified because the CQS could not retain its value to lenders and members if the Law Society’s mandatory training did not form part of it. However the CAT considered that this objective could have been achieved less restrictively by permitting the training to be provided by third parties, with the Law Society ensuring that the training provided was of the required standard. The CAT therefore rejected the Law Society’s argument that there was an objective justification for the relevant conduct.
The CAT therefore held that the Law Society had abused its dominant market position, in breach of Chapter 2 of the Competition Act 1998, and that its actions had a detrimental effect on both the conveyancing firms buying its training courses and potential competitors unable to offer such services. The CAT also considered that the Law Society breached the Chapter 1 prohibition on anti-competitive agreements, on the basis that compelling law firms to buy the Law Society’s training courses amounted to a series of agreements with law firms accredited under the CQS that together gave rise to an appreciable restriction on competition.
This trial was the first to be heard under the new ‘fast-track’ procedure which was introduced in 2015 and is intended to assist SMEs in pursuing competition law claims. An order imposing the fast-track procedure requires the substantive hearing to be held within six months and provides for the CAT to impose a cap on the amount of recoverable costs. However, there are limitations, for example there is no time limit on adopting a final judgment, which in this case was handed down 6 months after the substantive hearing. In addition, the fast-track procedure is deemed only to be suitable for ‘clear-cut’ candidates and may not be considered to be suitable for more complex cases.