The outcome of the 23 June 2016 UK referendum on whether the UK should remain in or leave the European Union ("EU") caught many unprepared, including those who advocated for the so-called 'Brexit'. There is no precedent for a Member State leaving the EU. If the UK does leave the EU, business could experience months – perhaps years – of legal uncertainty: those who led the Brexit campaign do not appear yet to have articulated clear proposals for what future relationship they want between the UK and the EU; and there is a risk that any forthcoming proposals may be rejected by the remaining EU Member States.
The UK is unlikely to be permitted to enjoy the benefits of EU membership, such as full access to the single market, without having to share at least some of the burdens of membership: for example, by making contributions to the EU budget and/or permitting free movement of persons. Were it to be otherwise, an incentive may be created for other countries also to break away, gradually eroding the very foundations of the European project. However, any kind of quid pro quo may be difficult to accept for those who voted last Thursday to leave the EU, on the basis of a leave campaign that promised to release the UK from the obligations associated with EU membership while at the same time assuring voters that access to the single market would not be affected.
WHAT IS GOING TO HAPPEN NEXT?
The outcome of the referendum has no immediate legal implications. The referendum was advisory only and has no legal effect. The UK Government and UK Parliament could, in principle, ignore its outcome.
Thus, for the time being, all EU regulations remain directly effective in the UK, and UK domestic legislation, based on EU legislation (e.g., EU directives), remain in force.
There continues to be some debate in the UK over what is required as a matter of English law in order for the UK formally to withdraw from the EU. The withdrawal process will only be triggered once the UK notifies the European Council of its intention to withdraw from the EU pursuant to Article 50 of the Treaty on European Union ("EU Treaty"). However, any decision to withdraw, which according to the outgoing UK prime minister, David Cameron, is unlikely to be taken before October 2016, must be in accordance with the UK's "constitutional requirements". Because the UK is a parliamentary democracy, this is likely to mean that the Prime Minister is unable to issue a declaration under Article 50 - triggering withdrawal from the EU - without having been first authorized to do so by an Act of the UK Parliament. Were he or she to attempt to do so before such a statute was passed, the declaration may be legally ineffective as a matter of domestic law and it may also fail to comply with the requirements of Article 50 itself.
Once the UK has formally given notification of its intention to leave the EU, work will have to start on four different fronts:
negotiations between the UK and the EU (consisting of the remaining 27 Member States - the "EU 27") on the terms of the withdrawal;
negotiations between the UK and the EU 27 on the future relationship between the UK and the EU 27;
internal UK legislation and regulation on, among other things, areas currently governed by EU law; and
negotiations between the UK and the rest of the world, in particular the approximately 50 countries with which the EU currently has free trade agreements.
This will be a monumental task, in particular for the UK, and it is doubtful whether it can be completed within the two-year time period contemplated by Article 50 EU Treaty.
Withdrawal agreement with the EU 27. According to Article 50 EU Treaty, once the UK has given formal notification to the European Council of its intention to withdraw from the EU, the UK will remain a member of the EU, and EU law will remain applicable in the UK, until the EU 27 and the UK have reached an agreement setting out the arrangements for the withdrawal, or two years have lapsed, whichever is earlier. On the EU side, any withdrawal agreement requires approval by a qualified majority of the EU 27 Member States after obtaining the consent of the European Parliament. If no such agreement can be reached within two years following the formal notification, the UK's membership will automatically terminate and EU law will cease to apply to and in the UK, unless all 27 Member States agree to extend the deadline.
It is unclear what exactly would have to be included in the withdrawal agreement. Financial issues, such as the UK's contribution to pension rights of EU officials or projects in the UK that are co-financed by the EU, will be a key subject matter.
Agreement on the future relationship between the UK and the EU 27. While the terms of the withdrawal and the future relationship between the UK and the EU 27 are likely to be closely linked, legally these are two separate issues.
At present, it is completely unclear what the post-Brexit relationship between the UK and the EU 27 will look like. The stated objectives of the pro-Brexit camp - take back control, escape from EU legislation and the rulings of the European Court of Justice ("ECJ"), cease contributions to the EU budget and restrict immigration on the one hand, and to have full access to the internal market on the other hand - seem to be irreconcilable in practice and unlikely to be accepted by the EU 27 as the basis for any deal. This becomes obvious considering the types of agreements that the EU has concluded with other third countries.
Norway rejected EU membership and instead became a member of the European Economic Area ("EEA") and the European Free Trade Area ("EFTA"). It has full access to the EU internal market, but must accept all EU laws without having any power to influence them. It must also allow free movement of persons, contribute to the EU budget, and accept the supervision and control of the EFTA Court.
Switzerland rejected EU and EEA membership but is a member of the EFTA. It has access to the internal market only in selected sectors for which it has concluded some 100 bilateral agreements with the EU and in which it must accept EU laws without having any role in their drafting. Switzerland also makes contributions to the EU budget and must allow free movement of persons.
Turkey has a customs union with the EU. It enjoys only limited access to the internal market for some industrial and agricultural goods, but not in services. Also, Turkey's external customs regime is in line with the one of the EU.
Canada is one of the numerous countries with which the EU has concluded a free trade agreement. Typically, these agreements remove tariffs in trade of goods as well as certain non-tariff barriers in trade of goods and services. Exports to the EU must comply with EU regulations.
As these examples show, there is a direct correlation between the breadth of access to the EU internal market, on the one hand, and the stringency of obligation of the non-member country to accept, without any say, the EU laws and regulations, allow free movement of persons, and contribute to the EU budget, on the other. It seems unlikely that the 27 remaining Member States would agree to deviate from this principle, as it would set a dangerous precedent and incentivize other Member States to break away from the EU or cause Norway or Switzerland to renegotiate their status. Indeed, senior Member State diplomats have already confirmed this.
It seems to us extremely ambitious to expect all required negotiations to be concluded within the two-year period set by Article 50 EU Treaty. If, however, no solution is agreed within that timeframe, and if just one Member State of the EU 27 refuses to agree to extend the time limit for concluding the withdrawal agreement, the UK would automatically become a third country with no special access to the internal market. Its relationship with the EU would then be governed by the rules of the Word Trade Organization. This Sword of Damocles is likely to play a crucial role in the negotiations.
Finally, the EU could not simply grant the UK preferential access in limited areas, since any agreement between the EU and the UK would have to be WTO-compliant.
Internal UK legislation and regulation. There are large areas of the law that are currently regulated by EU regulations, such as Passenger Rights, Data Protection, Customs Laws and Trade Defence. For the vast majority of them, the UK would have to adopt equivalent national legislation. The UK may also have to adopt national legislation on various transitional issues, such as whether EU decisions adopted prior to the UK leaving the EU continue to be legally binding. Finally, the UK has in the past adopted or amended national laws in order to implement numerous EU directives. Just determining where national legislation is required is likely to be a hugely time-consuming exercise.
Negotiations between the UK and the rest of the world. The EU currently has trade and other agreements in place with some 50 countries. Once the UK has left the EU, these agreements will cease to apply to the UK. Until the UK has its own trade agreements in place, its relationships with third countries post-Brexit will be governed only by the rules of the WTO, which are likely to have a negative impact on trade. It seems very unlikely that the UK will be able to conclude a meaningful number of trade agreements while at the same time negotiating its withdrawal from the EU. Trade negotiations are notoriously difficult and time-consuming. The recently concluded agreement between the EU and Canada, for example, took seven years to complete.
IMPACT IN SELECTED AREAS
As discussed above, it is currently wholly uncertain what future relationship the EU 27 and the UK may have. The impact of Brexit on areas such as competition, state aid, trade, and financial markets is, to a large extent, based on speculation and no clear answers can be provided at this time. Much will depend on what internal legislation the UK may adopt, and whether and to what extent it will declare void past legislation implementing EU law.
Brexit will affect the application of competition law both in the EU 27 and the UK. Some of the impact of Brexit on competition law - particularly in respect of merger control - could be mitigated if, for example, the UK were to end up in an EEA-type relationship with the EU, as is the case for Norway.
In the UK. Competition law in the UK is based heavily on EU law. The Competition Act 1998 and subsequent UK statutes effectively enshrine EU competition rules into domestic legislation, accompanied by a high degree of enforcement cooperation between the UK regulator (the Competition & Markets Authority ("CMA")), the European Commission ("EC"), and national competition authorities in other EU Member States.
It seems unlikely post-Brexit that the UK would opt to change substantially the basic parameters for competition law in the UK. What may change, however, is the way in which the basic laws on anticompetitive behavior and dominance are interpreted and implemented and that the CMA and UK courts would arrive at divergent interpretations from those of the European Commission and the EU Court. It is entirely possible that differences in interpretation between the UK and EU could lead to an increase in uncertainty for businesses operating across the two jurisdictions, as well as a simple increase in administrative burden where, for example, a company is subject to an investigation both in the UK and the EU in respect of the same alleged antitrust violation.
Brexit is also likely to affect London as the preferred forum for cartel damages litigation in Europe. It seems unlikely that a post-Brexit London could still be a forum for damages litigation covering damages in the EU 27, particularly as EC decisions finding an infringement of EU competition law will no longer be binding on UK courts. Thus, this type of litigation may move to other Member States, notably Germany or the Netherlands.
In the EU. While Brexit will not affect EU competition law as such, it does raise issues with respect to the application of EU competition law. Some of these issues are immediately relevant.
Merger control. In the absence of any adjustment to the EU Merger Regulation revenues thresholds, the number of national merger filings in various EU Member States may increase since merging parties' UK revenues - often substantial in large, cross-border mergers - would no longer count towards the EU thresholds. Also, transactions involving parties with significant revenues and activities in both the EU 27 and the UK could be subject to notification requirements in both jurisdictions, leaving open the possibility of divergent outcomes in parallel merger reviews (and an inevitable increase in time and cost for business).
Cartels. After the UK has left the EU, investigations by the EC would be limited to the effect cartels have in the EU 27. The CMA could start its own investigations, in so far as the cartel affects the UK, including for cartels for which EC cartel investigations are pending at the time of Brexit. Leniency applicants may wish to consider lodging, even prior to Brexit, as a matter of precaution, an application both with the EC and the CMA, as it is uncertain whether the CMA will recognize leniency applications lodged with the EC.
Other investigations and settlements. The territorial scope of other competition investigations concerning both Article 101 and 102 Treaty on the Functioning of the European Union ("TFEU") will be limited to the EU 27 as soon as the UK leaves the EU. If the EC finds an infringement, the addressees of the decision would have to comply with the decision in respect of their activities in the EU 27 but not in the UK. The same applies if the alleged infringer entered into a settlement with the EC. Any commitments given in that regard would apply only within the EU 27 but not within the UK.
Post-Brexit the EU state aid rules would no longer apply in the UK. The UK would, in principle, be free to hand out state aid to undertakings operating in the UK. State aid investigations by the EC that are pending against the UK may have to be terminated and recovery orders may no longer have to be complied with. However, it must be assumed that the EU 27 will insist that any arrangement allowing the UK access to the internal market of the EU 27 will require the UK to comply with EU state aid rules and contain provisions as regards pending investigations and recovery orders.
Brexit will have only a limited effect on trade law in the EU 27. Specifically, it does not affect the application of EU customs law or trade agreements that the EU has concluded with third countries. It may, however, affect pending EU anti-dumping or anti-subsidy investigations which would then be limited to assessing imports into the EU 27.
Brexit is likely, however, to have far-reaching effects on UK trade policy and law. The UK would have to adopt its own customs code and schedule of tariffs. As mentioned, the preferential trade agreements concluded by the EU with numerous third countries would no longer apply to the UK. Until the UK has concluded with those countries its own trade agreements, which must meet the requirements of the WTO, the UK could not grant preferential treatment to imports from those countries without violating its most favoured nation obligation under the WTO. In these circumstances, many imports of goods into the UK, and exports from the UK that currently are duty-free, would become subject to customs duties.
Any anti-dumping or anti-subsidy duties imposed by the EU, including duties on steel imports from China, would cease to apply post-Brexit to imports into the UK. The UK would have to adopt its own anti-dumping and anti-subsidy laws.
Economic sanctions and export controls
Economic sanctions. In recent years, the EU has imposed sanctions and embargoes in relation to several countries and individuals to further its Common Foreign and Security Policy ("CFSP") objectives. Currently, EU sanctions legislation is directly effective in the UK, although it is commonly enforced through local UK secondary legislation. Once the UK leaves the EU, EU sanctions legislation will no longer apply in the UK. However, it is likely that the UK will want to mirror the existing EU sanctions regime, which it will do by passing fresh legislation or, where possible, by amending existing legislation. The practical position should remain the same in terms of the scope of the sanctions regime. The UK will, however, be free to pass sanctions legislation that differs from the EU regime if it so wishes. After leaving the EU, the UK would implement United Nations Security Council ("UNSC") sanctions through UK secondary legislation (currently these are implemented by EU legislation which is then enforced through UK secondary legislation).
Export controls. Dual-use items listed under Annex I to Council Regulation (EC) 428/2009 (commonly known as the 'Dual-Use Regulation') may be exported without a license to the UK from another EU Member State, and from the UK to another EU Member State; but a license is required where the same dual-use items are exported outside the territory of the EU. Post-Brexit, exports of dual-use items from the EU 27 to the UK could require a license, although it is likely that the EU would decide that exports of certain dual-use items would be covered by one of its global licenses.
Post-Brexit, the Dual-Use Regulation would no longer apply in the UK. The UK would need to amend some of its existing secondary legislation on export control, and may need to pass fresh legislation to plug any gaps in current legislation, including to regulate exports of dual-use items to the EU 27.
Brexit will affect the European Intellectual Property landscape. The impact will be in two main areas: European Union trade marks and registered designs, and the proposed Unitary Patent and Unified Patents Court.
European Union trade marks and registered designs. These are EU-based rights. Post-Brexit, they will no longer receive protection in the UK. It is likely that there will be transitional provisions which allow existing EU trade marks and registered designs to be registered as UK national trade marks and registered designs without a loss of filing or priority date. For new applications, it is advisable to file for protection in both the EU (as an EU trade mark or registered design) and in the UK. Allied to this, reviews of licensing arrangements need to be conducted, for example where the territory definition refers to the EU, as post-Brexit, the UK may not be covered.
Unitary Patent and Unified Patents Court. Post-Brexit, the UK will not have the right to participate in either the Unitary Patent or the Unified Patents Court. The likely course at present is that the launch of the Unitary Patent and the Unified Patents Court will be put on hold until Brexit, as there will be little desire to commence the system with the UK included, and then have to reform on Brexit. The life sciences division of the Central Division, which was to be sited in London, is likely to move to Paris, Munich or The Hague. In enforcement terms, this means that, post-Brexit, infringements in the UK will continue to be enforced through the UK domestic courts, and not through the Unified Patents Court.
Existing European Patent System. The UK is an independent signatory of the European Patent Convention. This is an international treaty, not an EU-only initiative. Therefore, Brexit will not affect the ability of patentees to obtain patent protection in the UK as an EP (GB) through the European Patent Office and the procedure will be unchanged.
There is no change to the existing data privacy regime, with its basis being national implementation of the directive. There will be change post-Brexit because the new regulation with its increased scope and penalties will no longer apply to the UK. The UK, therefore, will be faced with a choice. It can implement the new regulation, in full, into its domestic legislation in place of the 1998 Data Protection Act; it can reject the new regulation and maintain the 1998 Data Protection Act in force; or it can formulate its own new data privacy legislation, which would likely be based on the existing 1998 Data Protection Act with a cherry pick of pieces of the new regulation. The key for the UK would be to ensure an adequate level of protection consistent with the new regulation and thus to protect the movement of personal data between the UK and the EU 27.
Commercial litigation and arbitration
Commercial litigation. Brexit may impact pan-European cross-border commercial litigation as the Brussels I Regulation, governing the allocation of civil and commercial jurisdiction among EU member state courts and the recognition and enforcement of their judgments, will no longer apply in the UK. The UK has various options to replace it. The UK could (i) conclude an agreement with the EU 27 providing for the continued application of the Brussels I Regulation; (ii) sign and ratify the Lugano Convention (which extends the application of the old Brussels regime to EFTA states); (iii) sign and ratify another treaty (such as the Hague Convention on Choice of Court Agreements 2005); or (iv) return to the Brussels Convention regime. Although outdated in many respects, the Brussels Convention might be the most likely fall-back position and seems clearly to be preferable to a return to applying the common law in disputes with a pan-European element.
Arbitration. Most leading practitioners in the international arbitration market in the UK appear to take the view that Brexit will not diminish London's status as one the world's preeminent arbitration centers. They argue that the reasons for its success - its highly respected arbitration bar, the outstanding facilities, the arbitration-friendly judiciary - will not be affected by Brexit. Arbitration in London might even benefit from Brexit as certain restrictions under EU law (e.g., the restrictions on anti-suit injunctions) might no longer be applicable to London arbitrations post-Brexit.
Please contact one of the authors below or your Baker Botts relationship attorney with any questions.