From their unique position as legal advisers to BHB in relation to the OFT's four year investigation into British horseracing as run under the Orders and Rules of Racing (British Racing), Addleshaw Goddard competition partner Guy Leigh and associate Robin Morton-Fincham review the background to the OFT investigation; its origins, the OFT's principal concerns, the basis of the proposed final settlement and more generally its wider implications for sport governance.
Modernisation of British Racing
The OFT announced on 10 June 2004 that it was minded to close its four year investigation into the way British Racing is run and organised. This followed BHB's offer to the OFT of a number of legally binding commitments relating to the implementation of a programme of modernisation which will dramatically reform the sport.
The modernisation programme was the outcome of a comprehensive review of the sport, which BHB initiated in 2002. The recommendations of the review have now been published by BHB in a document entitled "The Modernisation of British Racing". The recommendations cover key issues such as governance, fixture allocation, race planning, prize money and central licensing of BHB's database rights. It is anticipated that all the recommendations will be fully implemented by 1 January 2006.
If, following public consultation, the OFT accepts the commitments offered and closes its investigation, as is anticipated, this will be an important endorsement of the right of BHB to govern British Racing, and consequently provides considerable comfort to other sporting bodies.
Interesting times for British Racing
The last four years have certainly been "interesting times" for British Racing with changes being brought about as a result of the call for the abolition of the Levy (the statutory levy on bookmakers and the Tote) the privatisation of the Tote (the UK's pool betting system), the racing review, modernisation and, of course, the OFT investigation.
The call for the abolition of the Levy has been particularly important as a spur to many of the changes that are being implemented. In March 2000, the Home Secretary announced that the Government intended to abolish the Levy. The Government therefore asked BHB, as the governing authority for British Racing, to propose a financial plan for the future funding of the sport to replace the Levy.
In response, BHB prepared the "Future Funding Plan". This identified British Racing's media rights, including particularly the database rights, which reside with BHB, and the picture rights, which reside with the racecourses, as the key assets of the sport which could be sold, on a commercial basis, to users such as bookmakers, replacing the revenues generated by the Levy. Shortly thereafter the Government issued a consultation document on both the abolition of the Levy and the privatisation of the Tote, the results of which are today contained in the Horserace Betting and Olympic Lottery Bill.
Competition Law reforms and the decision to notify
At around the same time that BHB's future funding plan was unveiled, the Competition Act 1998 came into force making substantial changes to UK competition law. In effect, Articles 81 of the EC Treaty, relating to anti-competitive agreements, and 82, prohibiting any abuse of a dominant position, were imported into national law, as the so-called Chapter I and II prohibitions.
Accordingly a review was conducted of the Orders and Rules of British Racing, and related governance agreements, to ensure competition compliance. A number of Orders did place limitations on those participating in the sport which could have some indirect commercial impact. However, BHB considered those Orders to be inherent to the sport and essential to the creation of the whole show that is "British Racing". It was, therefore, considered that the Orders did not raise any serious competition concerns.
In June 2000, BHB nonetheless decided jointly with the Jockey Club to make a pre-cautionary notification to the OFT of these governance agreements, seeking confirmation that either the governance agreements did not infringe competition law, or that they satisfied the criteria for exemption. This tactical decision was taken in order to place BHB in the best possible position to resist attack, whether from the OFT or from third parties. With the passage of time, the decision to notify proved correct and, possibly, critical to BHB's ability successfully to defend British Racing.
The First Hurdle: the OFT's investigation into the commercialisation of BHB's Database rights
A year later in June 2001, with the notification almost a distant memory, the OFT launched a separate and potentially devastating attack on the future funding of the sport by challenging BHB's licensing policy for the pre-race data to on-line bookmakers.
Presumably fuelled by a number of bookmaker complaints, that were made at that time, the OFT informed BHB that it suspected that the prices being charged for the pre-race data were discriminatory and excessive, and the licensing terms restrictive. Fortunately, however, BHB had always sought to operate an open, non-exclusive, non-discriminatory licensing policy, which at the time, was based on a royalty of 1.5% of bookmakers' turnover.
The OFT spent some twelve months investigating BHB's licensing policy. Following agreement between the major bookmakers and BHB on the licensing of the pre-race data, however, the OFT changed the focus of its investigation back to the governance agreements, and in particular the Orders and Rules. In its eventual statement of objections (Rule 14 Notice) the OFT merely purported to reserve its position in relation to the so-called "Chapter II" issues i.e. the allegations of abuses in the licensing of pre-race data. Whether it was entitled to reserve its position in this way, will no doubt, be resolved in subsequent cases.
The Second Hurdle: the OFT's investigation into the Orders and Rules of Racing
The OFT claimed that the Orders and Rules placed unnecessary restrictions on the freedom of racecourses to stage what it considered to be "their races". This concern, however, was founded on what BHB considered to be a fundamental misunderstanding of the nature of British Racing, and more generally sport. In BHB's view, among other things, the OFT failed to have regard to the special cultural and social functions, and the unique characteristics of sport, which must be taken into account by competition authorities.
A sport such as British Racing has certain key characteristics such as integrity, interdependence, solidarity and competitive balance. In the case of British Racing, these characteristics are underpinned by the Orders and Rules which, in turn, deliver the British Racing product. By contrast the OFT took the view that racecourses were no different from any other group of separate and independent businesses, and as such the Orders and Rules restricted competition between them. This approach led, in turn, to concerns about such matters as market sharing (fixture allocation), price fixing (prize money Orders), and the commercialisation of BHB's Database.
In April 2003, the OFT issued a Rule 14 Notice against BHB and the Jockey Club. The Notice ran to over 200 pages plus some 70 lever arch files of supporting documentation. BHB wholeheartedly resisted the OFT's preliminary conclusions, which it perceived as threatening the global pre-eminence and, indeed, very existence of British Racing. In BHB's view, even though the investigation was already almost three years old at that time, the OFT still fundamentally misunderstood the nature of British Racing.
Consequently, BHB and the Jockey Club submitted a comprehensive response and sought a two day oral hearing for BHB, and a one day oral hearing for the Jockey Club. BHB's submissions at the oral hearing were spearheaded by top silk David Vaughan CBE QC, and supported by witnesses from within British Racing and representatives from numerous foreign racing authorities, as well as by PWC's Economics team, and further expert witnesses on economics and on econometrics.
The Home Stretch: settlement
Following the oral hearing the OFT reconsidered its preliminary conclusions, in light of the factual, legal and economic arguments put forward by BHB, and presumably the tremendous support for BHB from the domestic and international racing community. Also, BHB had left the OFT in no doubt that it would appeal any infringement decision.
The modernisation of competition law on 1 May 2004, was, coincidentally, also helpful in resolving the potential impasse with the original joint notification lapsing on that date.
Following months of negotiations with BHB, the OFT announced that it proposed to accept from BHB certain legally binding commitments. These would in essence bind BHB to implement certain changes BHB already proposed as part of its modernisation programme. These commitments are currently subject to public consultation allowing third parties the opportunity to comment before the OFT accepts them.
Implications for other sports
If the OFT had maintained its original position, as set out in the Rule 14 Notice, the consequences for British Racing, and other sports, would have been devastating. It would have struck at the heart of sport governance.
If one compares the OFT's concerns, as set out in its published summary of the Rule 14 Notice, and the press release issued in the context of the proposed settlement, it is evident that the OFT has very significantly revised its views. The OFT now accepts the need for strong central governance, limitations on those participating in the sport, and the centralised sale of data.
Furthermore, and equally as importantly, the OFT intends to close its investigation into the Jockey Club, accepting the need for an effective regulatory body with real powers.
This case poses a number of important questions for other sporting bodies including:
- Is their model sufficiently close to that of British Racing, to benefit from the approach which the OFT proposes to adopt in this case?
- If so, have those other sporting bodies got the balance right between the need for sports governance on the one hand, and the need to avoid unreasonable and therefore unjustifiable limitations on the conduct of those participating in the sport, on the other hand?
- Do they commercialise their assets in a way which can withstand scrutiny, and see off third party allegations of competition law infringement?
With the abolition of the notification system, and the introduction of criminal sanctions, and the possibility of disqualification of directors, these questions are, if anything, even more important after 1 May 2004.
By way of postscript, and as is now widely known, 49 of the British racecourses licensed their picture rights to Attheraces while the other 10 British racecourses licensed their rights to GG Media. The OFT recently issued an infringement decision alleging that the collective sale by 49 racecourses of those rights to Attheraces infringed competition law. This decision is currently under appeal to the Competition Appeal Tribunal. The CAT's decision, when it comes, is also likely to have important implications for the future sale of sports media rights.
For more information please contact Guy Leigh, Competition Partner at Addleshaw Goddard.