Microsoft Mobile’s "Li-ion" "cartel" damages claim tamed in favour of arbitration; permission to serve other defendants out of the jurisdiction set aside

Introduction

Mr Justice Marcus Smith has recently handed down an important judgment in Microsoft Mobile OY (Ltd) v Sony Europe Ltd and others [2017] EWHC 374 (Ch), in which it was held that claims for various economic torts and breaches of competition law against Sony Europe Limited (D1) and Sony Corporation (D2) should be construed under the terms of a valid arbitration clause. As a result of this primary conclusion, he granted a stay of proceedings against D1 and D2 in favour of arbitration, pursuant to section 9 of the Arbitration Act 1996 (AA 1996). This conclusion also had important ramifications for the other defendants, which had been served out of the jurisdiction on the basis of being necessary and proper parties to the claim against the anchor defendant (D1). Once the judge had stayed proceedings against D1 and D2, the claimant, Microsoft Mobile OY (Ltd) (Microsoft Mobile), could no longer sustain the claims against the other defendants and permission to serve them out of the jurisdiction was set aside.

Although fairly fact-specific, the judgment contains an interesting discussion on the parameters between arbitration law and EU competition law. The judge held that the scope of the arbitration clause between Microsoft Mobile and D1 and D2 was wide enough to encompass the cartel-related economic tort claims brought by Microsoft Mobile. Having reached that conclusion, he further decided that the arbitration clause would not be held to be ineffective as being contrary to EU law. Parties who may be involved in cartel-related claims may want to pay very close attention to the scope of the relevant jurisdiction or arbitration clauses.

The judge was also critical of the way the opaque supply chains in the claim were pleaded and of various other non-disclosures of Microsoft Mobile. The judgment continues to demonstrate the challenges of bringing claims in England & Wales which have only a “nebulous connection” to the jurisdiction.

Factual summary

Microsoft Mobile (a subsidiary of Microsoft Corporation) was and is a manufacturer and distributor of mobile telephones, containing lithium ion batteries (Li-ion Batteries) which it purchased from third parties. In 2013, Microsoft Corporation acquired Nokia Corporation (including its subsidiaries) (Nokia), which was also previously engaged in the same activities. Microsoft Mobile brought the claim in its own right and as assignee of Nokia’s claims. The causes of action relied on torts based upon infringements of applicable competition laws (breaches of Article 101 Treaty on the Functioning of the European Union (TFEU) and/or Article 53 of the EEA Agreement) and other economic torts. It pleaded that as a result of various agreements/concerted practices between the defendants, the prices of the "Cartelised Li-ion Batteries" were increased for both Microsoft Mobile and Nokia. Further, it also claimed for umbrella damages in relation to its purchases of "non-Cartelised" Li-ion Batteries, which it alleged had also increased in price as a result of the "Cartel" arrangements, and for other additional costs.

By way of background to the claim, on 12 December 2016, the EU Commission announced that it had adopted a decision fining Sony, Panasonic, Sanyo and Samsung SDI (including a number of their subsidiaries) a total of €166m for their involvement in a cartel related to the supply of Li-ion Batteries, used in products such as laptops and mobile phones. Entities from the four addressees of this decision were among the original six defendants listed in the claim. The claim against two of the defendants was withdrawn, so the remaining defendants were D1, (incorporated in England), its parent company (D2) (incorporated in Japan), LG Chem Limited (D4) and Samsung SDI Limited (D6) (both incorporated in S Korea).

All defendants were challenging the jurisdiction of the Court. D1 and D2 contended that proceedings should be stayed on the basis that that the dispute between Microsoft and D1/D2 is subject to a valid arbitration clause. D2, D4 and D6 were served out of the jurisdiction and were seeking to set aside service (for D2 it was as a fall back option) on the basis that the requirements had not been satisfied, and there were material non-disclosures in Microsoft Mobile’s application.

Stay in favour of arbitration

Under section 9 AA 1996, a party to an arbitration clause may apply to the Court for an order staying any litigation brought against it unless the arbitration clause in question is null and void, inoperative or incapable of being performed.

In this case, the first issue was as to the scope of the arbitration clause. As part of his analysis, the judge initially considered a recent Court of Appeal judgment (Ryanair Ltd v Esso Italiana Srl [2013] EWCA Civ 1450) in which it was held that the contractual disputes clause was not broad enough to encompass Ryanair’s tortious competition law claims. In Ryanair the clause was narrowly construed as follows: “[F]or the purposes of the resolution of disputes under this Agreement, each party expressly submits itself to the non-exclusive jurisdiction of the Courts of England”. It was held that absent a prior valid contractual claim, the tortious competition law claims fell outside the scope of the non-exclusive jurisdiction clause. By contrast, in Microsoft Mobile, the material extract provided that “[A]ny disputes related to this agreement or its enforcement shall be resolved and settled by arbitration …”.The judge held that the scope of this clause was sufficient to include all the economic torts brought by Microsoft Mobile against D1 and D2.

The next issue the judge had to deal with was whether the arbitration clause should be held to be inapplicable on the basis that it was in conflict with EU law as the existence of the arbitration clause impeded the effective protection of rights derived from EU competition law. D1 and D2 argued that an arbitration clause which caused the fragmentation of EU competition law rights was in breach of EU law. The judge considered relevant EU law and held that the arbitration clause was not in conflict with EU law.

Objections to jurisdiction

Having concluded that proceedings should be stayed against D1 and D2, the judge turned to consider the other objections to jurisdiction. He assessed the jurisdictional gateways relied on by Microsoft Mobile to serve D2, D4 and D6 out of the jurisdiction (being PD6B3.1(3) and PD6B3.1(9)(a)).

Given the judge’s prior conclusions about the scope of the arbitration clause, he held there was no real issue between Microsoft Mobile and D1 which it was reasonable for the court to try. On this basis, Microsoft Mobile could not rely on this gateway (PD6B3.1(3)) to join the other defendants.

In relation to the alternatively pleaded gateway (PD6B3.1(9)(a)), Microsoft Mobile was under an obligation to establish demonstrable damage within the jurisdiction (England & Wales). However, the judge concluded that Microsoft Mobile’s claimed damage in the jurisdiction did not appear to be significant or substantial, especially within the context of the wider claim; it could not disaggregate its claims to identify which (if any) of the Nokia entities had actually purchased the "cartelised" products within the jurisdiction; and it could not demonstrate whether any purchases were direct or indirect, and whether any damage was, therefore, “direct” or “indirect”.

Having concluded that the claims did not fall within either of the gateways, it was not strictly necessary to determine the forum questions raised by the defendants. However, the judge noted the persuasive factors provided by the defendants to signify that England & Wales should not be the proper forum, which he agreed with: the gravity of the pleaded torts and the alleged ‘Cartel’ activity pointed away from England & Wales (they argued it would primarily have pointed towards Japan or South Korea); the language and location of the parties’ witnesses and documents again pointed away from England & Wales; and there were suitable alternative found in favour of the defendants.

"Full and Frank"

Again, given his earlier conclusions, it was not strictly necessary for the judge to determine whether Microsoft Mobile had satisfied its duty to make full and frank disclosures in support of its ex parte application to serve the Defendants out of the jurisdiction. However, he considered the following non-disclosures identified by the Defendants to have been sufficiently serious that he would have struck out the claim on this basis: 1.) Microsoft Mobile’s pleaded damage within the jurisdiction was opaque and misleading; 2.) it had failed to identify the other credible fora; 3.) it had failed to identify there was a good argument that D1 was only sued to found jurisdiction against the other fefendants; and 4.) it had failed to draw the master’s attention to the fact that the defendants were likely to raise as a defence that the claim fell outside the scope of Article 101 TFEU.

Although these non-disclosures are clearly case-specific, they are also of general relevance in the context of cartel damages claims. By way of example, D4 cited the recent iiyama v Schott AG [2016] EWHC 1207 (Ch) case in which the last of these points was an issue and was also considered to be particularly problematic. In that case, the claimants were also heavily criticised for their improperly pleaded damages claim and, similarly, the non-disclosures were sufficiently serious that service would have been set aside on those grounds (had it not already been on the basis of others).

Commentary

The decision as to the scope of the arbitration clause has potentially wider ramifications. As will be seen in this case, the existence of a widely-drafted arbitration clause effectively prevented Microsoft Mobile from bringing an action against D1 and D2 in the English courts and further prevented companies outside the jurisdiction from being joined to that action as necessary and proper parties.

Companies which might potentially be parties to any cartel-related claims, whether as claimants or defendants, may want to pay careful attention to the dispute resolution clauses in their contracts. As will be seen, a widely drafted arbitration clause can have the consequence that competition law claims must be referred to arbitration. The existence of an arbitration clause effectively prevents third parties being joined to the arbitration, in contrast to the position to claims brought in the English courts. The existence of the arbitration clause between Microsoft Mobile and D1 and D2 brought the proceedings in the English court against all the defendants to a very sudden end. Of course it is possible (subject to appeal) that Microsoft Mobile might choose to bring a claim against D1 and D2 only in arbitration but this would be without the other two defendants to the present action.”

The judgment should also be instructive to claimants seeking to bring damages claims in England & Wales on the basis of unclear supply chains with only questionable nexus to the jurisdiction. In this case, the deficiencies of Microsoft Mobile’s pleaded supply chains were material to both the failure of its service out arguments and the judge’s conclusion that it failed in its duty of “full and frank” disclosure.