Decision Telecoms Regulator Challenged Successfully

08 December 2006

Richard Eccles, Patricia McDermott

Freeserve’s Challenge of Oftel

On April 16, 2003 the Competition Commission Appeals Tribunal (the “CCAT”) finally ruled on the substance of the long-running dispute between Freeserve, a leading ISP, and Oftel, the U.K. telecoms regulator.

The CCAT’s decision followed an appeal by Freeserve against Oftel’s dismissal in May 2002 of four allegations of anti-competitive behaviour by BT, the incumbent, in its broadband marketing activities. In its complaint to Oftel of March 26, 2002 Freeserve had alleged that BT Openworld, BT’s downstream broadband services provider, benefited from the following conduct by BT which, it claimed, amounted to abuse of dominant position by BT:

  • cross-marketing of the BT name and logo in favour of BT Openworld;

  • BT Openworld was given advance notice of price cuts in wholesale broadband access (this, Freeserve argued, enabled BT Openworld to organise its marketing campaigns, and more crucially, determine its price offers, in advance of its competitors);

  • use of a BT telephone census to the benefit of BT Openworld;

  • predatory pricing of retail broadband services by means of cross-subsidies within the BT group.

Freeserve’s complaint was essentially that BT was restricting competition in the residential broadband services market by abusing its dominant position in the closely related markets of residential retail voice-telephony and wholesale broadband access. According to Freeserve, BT’s actions amounted to “leveraging” its dominance in those “upstream” or neighbouring markets into the “downstream” market of residential broadband.

However, Freeserve’s claims were rejected by Oftel, which resulted in Freeserve appealing to the CCAT, on the basis that Oftel had dealt inadequately with its complaint. On appeal, the CCAT upheld Oftel’s decision in three out of four areas, that the evidence provided by Freeserve was not sufficient to establish anti-competitive behaviour by BT. However, regarding the predatory pricing allegation, the CCAT ruled that Oftel failed to adequately explain its decision, and remitted the issue for further consideration, with “an open mind”, within a period of three months. This has now been extended by a further three months expiring on October 16, 2003.

This decision is important in many respects, not least because it is the first time that a decision of a U.K. sector regulator has been successfully challenged under the Competition Act 1998. The decision also sets out minimum standards that must be met by any competition authority in arriving at its decision, and the steps to be taken by a complainant before its case will be taken seriously.

The CCAT outlined some general principles as to its approach in assessing an appeal against a rejection of a complaint of an infringement of Chapter II of the Competition Act. In referring to an appeal “on the merits”, the CCAT’s function goes beyond a mere judicial review of the administrative decision. Rather, the CCAT has full jurisdiction to make a finding on the facts, to make its own appraisals of the issues, and to determine the amount of any penalty. The CCAT can substitute a non-infringement decision with one of infringement. In hearing an appeal on the merits, the CCAT will decide whether Oftel has made an error of fact or law, an error of appraisal or procedure, or whether the matter has been sufficiently investigated.

However, the way in which the CCAT exercises its jurisdiction will depend on the circumstances of the case. As the CCAT is an appellate body, it may be more appropriate, where it appears that Oftel was inadequately informed in reaching its decision, for the CCAT to remit the case for reinvestigation rather than imposing its own decision. The onus is on a complainant to persuade the CCAT that a decision should be set aside. Whilst an appeal should not be used to launch a new complaint, there is no rule of law preventing a complainant from submitting fresh evidence to the CCAT that was not put before Oftel.

The CCAT reviewed Oftel’s practices to date in responding to complaints. The CCAT explained that brief reasons may suffice where Oftel is dealing with a poorly argued or manifestly unfounded complaint. However, as a general matter, Oftel’s reasons should be sufficiently reasoned to enable a complainant to assess whether a decision was well-founded or not, with a view to deciding whether or not to appeal. It should also contain sufficient detail to enable the CCAT to determine whether or not the decision is correct. Moreover, in rejecting a complaint on the grounds that there is no abuse, for clarity of analysis, it would usually be appropriate for Oftel to first briefly indicate which market(s) appear to be potentially relevant to its investigation, and whether or not it had made any assumption on the issue of dominance in those markets. Generally, whilst complaints of a short form type may be acceptable from small/medium companies with limited resources, the CCAT expects nothing less than properly argued complaints from companies with substantial resources available to them.

In support of its allegations of an “orchestrated campaign” of abuse by BT, Freeserve complained of four alleged abuses (as listed above):

  • Concerning its allegations of cross-marketing, on appeal, Freeserve did not contest Oftel’s view that BT is not prohibited from advertising its brand collectively and that BT is entitled to trade on its brand awareness to promote its Internet services. Rather, Freeserve had complained that BT’s “Broadband Briton” advertising campaigns had a foreclosure effect as regards other ISPs, because they benefited BT’s Openworld business more than other ISPs, and therefore Openworld should be required to carry in its budget some allocation of the cost of that campaign. However, the CCAT considered Freeserve had failed to support its claim with any concrete evidence and that it had made a number of factual errors, and that the campaign benefited broadband as a product, to the ultimate benefit of BT’s wholesale business, not Openworld. The CCAT added that, even if it had been proved that use of the BT logo was advantageous to Openworld, other ISPs, including Freeserve, had strong brand names and the capacity to undertake major marketing campaigns themselves.

  • Freeserve claimed that BT had committed an abuse of dominance by giving Openworld advance notification of a 40 per cent reduction in BT wholesale broadband prices, on the basis of the speed with which Openworld organised its follow-up marketing campaign. Freeserve had persisted with its allegations despite the fact that imminent broadband price cuts had been made known when BT had announced its quarterly results a few weeks previously, and that Freeserve had announced its own price reductions on the same day as BT Wholesale, and a day before Openworld. Oftel obtained an account from BT of events surrounding its price cuts, and on that basis held there to be no abuse. The CCAT stated that there was no absolute obligation on Oftel to seek verification of all facts presented to it, and again noted that several factual assertions by Freeserve were unsubstantiated by the evidence. The CCAT therefore saw no reason to doubt the facts put forward by BT. Oftel had acted reasonably in basing its decision on the evidence before it, in concluding that BT had simply planned ahead.

  • Freeserve alleged that BT had used a census of its retail clients in the voice-telephony sector in which it is dominant, to obtain marketing information for the benefit of its broadband services, amounting to an abuse of its dominant position in the retail telephony market. Freeserve claimed that other ISPs could not replicate this information which could be used by BT to target customers. The CCAT held that no rule of law prevented a dominant undertaking from conducting a market survey of its customers with a view to seeking general information about the services they used or might use in the future. Freeserve had not produced any evidence establishing any anti-competitive or exclusionary effect of such conduct, nor had it shown that BT had used the information so obtained, for targeted marketing. Moreover, other ISPs could conduct similar surveys on the basis of mailing lists they had access to. On this basis, the CCAT concluded that there were no grounds for setting aside Oftel’s decision to reject this allegation.

  • Freeserve also alleged that BT was unlawfully cross-subsidising Openworld’s activities. A hypothetical business case on a one year basis which Freeserve drew up and submitted as evidence of its complaint, forecast a £24 million loss. It further briefly alleged that Openworld was not generating sufficient revenues to cover its variable and incremental costs, a prima facie case of predatory pricing. Oftel had only recently closed detailed investigations into cross-subsidy and margin squeezing allegations by Openworld, and in the absence of compelling evidence from Freeserve, it declined to undertake a further investigation. In particular, Oftel argued that several ISPs were undercutting Openworld’s new monthly broadband rental price, indicating that there was sufficient retail margin to allow competition; an alternative conclusion which the CCAT considered could be drawn was that other ISPs were constrained to set their prices within the parameters set by Openworld, as the largest supplier of retail broadband. Oftel swiftly disposed of the allegations of predatory pricing, by merely stating that it was common for a business to make a loss in its first year.

The CCAT held that whilst Oftel might have been correct in its findings related to cross-subsidy, it had not adequately dealt with Freeserve’s distinct allegation of predatory pricing. Whilst the three concepts of “margin squeezing”, “cross-subsidy” and “predatory pricing” might to some extent overlap, they were not identical, and indeed Oftel’s own Guidelines treated them as separate forms of abuse. The concept of “predatory pricing” was quite separate to the other two concepts and subject to different tests. Oftel’s reasoning was open to criticism in three respects: (1) its decision did not sufficiently describe the analytical approach it had taken; (2) even in the light of Oftel’s elaboration of its reasons before the CCAT, its analysis still remained unclear in important respects; and (3) it had not sufficiently explained why the principles applicable to cross subsidies were transposable to the issue of predatory pricing, or why earlier decisions concerning margin squeezing and cross subsidies, decided under Condition 78.12 of BT’s licence under the Telecommunications Act 1984, were relevant to its rejection of the complaint of predatory pricing.

Nonetheless, the CCAT considered that the complaint on predatory pricing was at least supported by some materials which justified a substantive answer. The CCAT declined to make a finding on the question of whether BT had committed predatory pricing, but set aside Oftel’s rejection of that part of the complaint concerning cross-subsidy and predatory pricing, due to inadequate reasoning.

Oftel is currently investigating the claims of predatory pricing and cross-subsidies afresh, and is required, by October 16, 2003 either to reject Freeserve’s complaint by means of a reasoned decision, or to open infringement proceedings against BT. Most recently, Oftel has published on its website a draft “Analytical Framework for New Framework Case” on 14 August 2003.

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