CAT considers dispute resolution whilst Ofcom publishes annual communications market review

Regular readers will have noticed that this blog has been rather quiet of late. Normal service will be resumed in September – for now my energies are being directed into writing up some original research on mobile money as well as a chapter on EU telecoms law for a textbook, so please bear with the rather lower frequency of blog post output than normal.

Last week the CAT published its core judgment in the linked ladder pricing cases. At 200 pages it is hardly a light read but contains some interesting observations on Ofcom’s dispute resolution powers and in particular builds on the CAT’s prior ruling in the MTR case that disputes should be resolved in a way that is fair (as between the parties) and reasonable (in light of regulatory framework). I’m still digesting the detail and implications of the judgment, but it looks like it will materially influence Ofcom’s approach to the resolution of future disputes.

This week Ofcom published their annual review of the UK communications market. It is an incredibly useful document – much more so than many paid for research reports and I find that it is well worth getting beyond the summary into the detail. The press have generally picked up on the headline story of smartphone adoption (hmm – first paragraph of first page…) but the detail shows the underlying market story of falling fixed line connections, fixed call volumes and fixed revenues, with that decline not even beginning to be offset by fixed broadband revenue whilst mobile call volumes and mobile data continue to climb (albeit that price reductions mean that mobile revenues has not risen in line with increased usage):

Ofcom consults on exercising discretion to not order repayment in LLU dispute

Last week Ofcom started a consultation in relation to LLU charges in which is intending to not exercise its discretion to order repayment of overcharges. The circumstances in which repayment is ordered is currently a very live issue with BT, the regulator Ofcom and the alternative fixed operators taking different positions on the issue in various cases.

The positions are of course more nuanced than those summarised below, but can be crudely characterised (I am sure readers will correct any mischaracterisation!) as:

  • BT: whilst repayment is possible, there should be both evidence of actual economic harm and (perhaps) other aggravating features before repayment should be ordered. Repayment is similar to a fine or penalty and is a windfall in the hands of the recipient, so should only be ordered in exceptional circumstances.
  • Ofcom: repayment is a a discretionary power and should be assessed on the basis of what is fair between the parties and reasonable in the light of Ofcom’s statutory duties. Ofcom should also consider the effect of any repayment on consumers and competition (including incentive effects).
  • Alternative fixed network operators. Whilst individual operators take somewhat different views, there is a broad consensus view that where there has been breach of a regulatory obligation repayment should ordinarily follow. Repayment is by way of restitution and so to not order repayment would require exceptional circumstances.  

I’ll take a quick whistle-stop tour of the statute and recent cases before coming to the consultation. Starting with the statute, Section 190 of the Communications Act 2003 provides:

“190(2)  [Ofcom’s] main power … is to do one or more of the following:

(d)  for the purpose of giving effect to a determination by OFCOM of the proper amount of a charge in respect of which amounts have been paid by one of the parties of the dispute to the other, to give a direction, enforceable by the party to whom the sums are to be paid, requiring the payment of sums by way of adjustment of an underpayment or overpayment.”

The Competition Appeal Tribunal (or CAT) is the UK appellant court for appealing certain Ofcom decisions (including those concerning the repayment of disputed amounts). Many telecoms disputes have rather complex factual backgrounds, so I’ll again summarise the background to focus on what the courts have said about the repayment issue.

As in many jurisdictions, the UK telecoms industry has fought long and hard over mobile termination rates. The relevant decision in the last cycle of cases to repayment was the core issues  ‘Termination Rates Dispute” or TRD judgment, where the CAT held:

“Section 190(2)(d) of the 2003 Act is a straightforward provision designed to ensure that OFCOM’s determination of what is a reasonable rate is backdated to the time at which that rate would have come into effect had the OCCN been accepted. It should ordinarily follow on from a determination that this kind of readjustment takes place. Otherwise the party which has wrongly resisted the proposed OCCN is in a better position than they would have been in had they accepted it without challenge.”

The CAT in the TRD case went on to reject as irrelevant arguments relating to whether the dispute rate had been passed onto (in this case wholesale) customers or not.

In the recent PPC decision (discussed here), the CAT held:

“338. We consider that OFCOM exercised its discretion properly under section 190(2)(d) for the following reasons:
(1) As we have noted, such discretion as OFCOM has under section 190(2)(d) is a “hard” discretion confined to requiring OFCOM to follow through on the conclusions it has drawn pursuant to the Dispute Resolution Process. Here, OFCOM concluded that there had been overcharging by BT in that its prices for 2 Mbit/s trunk were not cost orientated.
(2) Given this conclusion, it is plain that the Altnets have overpaid in respect of 2 Mbit/s trunk, and that BT has had the benefit of such overpayments. Repayment is simply putting the parties in the position they would have been in had Condition H3.1 been complied with. Failure to do so would undoubtedly signal that compliance with SMP conditions is not rigorously policed and that – we consider – is an inappropriate signal to send. Had BT carefully sought to apply Condition H3.1, but failed, then we consider that that should have been taken into account, and the amount BT would have to pay reduced. But that is not so in this case. This is a case where BT has comprehensively misconstrued the obligation on it, and
overcharged as a result. Any shift away from the restitutionary approach that we have described would, so we conclude, be unjustifiable.
(3) BT, on a number of occasions sought to characterise OFCOM’s direction as the imposition of a penalty (Notice of Appeal, paragraphs 34, 63(d), 218; Mr Read also referred to it as a “punitive measure” (Transcript, Day one, page 3)). We reject this characterisation. OFCOM’s direction, as we have noted, was not intended (and did not) penalise BT, but sought to rectify some (but probably not all) of the adverse effects of BT’s failure to comply with Condition H3.1. In so acting, OFCOM was acting consistently with a number of cases stating that where a person is given the power to levy charges, if that person charges excessively, then the excess is recoverable at the instance of the person who has overpaid: see, for instance, Corporation of Stamford v Pawlett (1830) 1 C & J 57 at 80- 81, 148 ER 1334.
(4) In these circumstances, we fail to understand BT’s contention that economic harm needs to be taken into account. This contention was summarised in paragraph 313(1) above. As we have concluded, we consider that establishing economic harm is not a pre-requisite for showing a breach of Condition H3.1, simply because Condition H3.1 is itself based on a strong assumption that SMP would be very likely to cause economic harm if the condition is not complied with…”

Last week, the CAT refused BT permission to appeal the PPC decision. One of BT’s grounds related to section 190(2)(d), in relation to which the CAT found:

“…we are not persuaded by BT’s Request for Permission to Appeal that there was any incorrect exercise of discretion by OFCOM pursuant to its powers under section 190(2)(d), nor that [the para quoted above] of the Judgment is wrong on a point of law.”

Ofcom was of course mindful of these prior judgments when considering the LLU dispute.

Ofcom therefore carefully analyse the factual background in their consultation and they distinguish the LLU dispute from both TRD and PPC on a factual basis. The key distinctions they draw is that at the relevant time, BT was:

  1. not in breach of a relevant regulatory obligation (although as this was a result of Ofcom’s error, it is interesting to speculate as to where the disputants might go next if Ofcom succeed with this line); and
  2. that as a result of ‘passing on’ there was no ‘economic harm’ to consumers or competition.

The watcher looks forward with interest to the responses to the consultation.  Whilst the first contention is true as a factual matter, it is by no means obvious that it leads to the conclusion Ofcom draws. On the second issue, given the unsettled position of the ‘passing on’ defence within European Competition jurisprudence (and the clearer US position), I wonder if Ofcom are ready to deal with the can of worms they have stumbled against, kicked over and will now have to deal with?

The Watcher needs to declare an interest: he has represented the altnets in many of these proceedings, so readers should ‘filter’ this post accordingly.

Lenders over-exposed to real estate move into TMT

I was lucky enough to chair Olswang’s semi-annual CPD catch-up day for in-house lawyers today. It was a very interesting set of talks (for those who are interested I commented using twitter, see: #olswangcpd), which covered a wide range of topics:

Session Speaker

Employment update: the latest red tape changes and other hot topics
(Daniel Aherne, Partner, Employment)

Daniel Aherne

Click for Slides

Commercial tax update post Finance Bill 2011
(Natalie Coope, Senior Associate, Tax)

Natalie Coope

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Dispute resolution: What are my options – which one should I choose?
(Anna Caddick, Associate, Commercial Litigation)

Anna Caddick

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Bribery Act 2010 – When? What? Why?  A practical look at what businesses need to do to comply
(Steven Corney, Partner and Oliver Gayner, Associate, Commercial Litigation)

Steven Corney
Oliver Gayner

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Click for Practice Note

Hot topics for borrowers: what increased regulation means for you (including the cost of borrowing, Basel III and accounting for leases)
(Charles Kerrigan, Partner and Jane Innes-Jones, Associate, Finance Group)

Charles Kerrigan
Jane Innes-Jones

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Social media marketing and the law: an overview of the relevant legal principles and risks,  including the new ASA CAP Code provisions effective from 1 March 2011
(Ashley Hurst, Senior Associate, Media Litigation)

Ashley Hurst Click for Slides

Commercial boilerplate quiz:  a practical look at recent case law developments and how these impact on day to day drafting
(Rob Bratby, Partner and Claire Walker, Head of Commercial Know How, MCT)

Rob Bratby
Claire Walker

Click for Slides
Click for Guide

Convergence: does it add up?  Highlights from Olswang’s 2011 Convergence Survey
(John Enser, Partner, MCT)

John Enser

Olswang Convergence Survey 2011

Rather than attempt to summarise everything, I thought I’d pull out from the morning a couple of take-away issues that impact telecoms and technology.

The first was the observation that as banks were diversifying their lending books that some banks with historic over-exposure to real-estate were nevertheless open for business to borrowers from the TMT sector. The second was the impact of the extension of the CAP code to social media – the full impact of which has yet to play out. The final thought was the continued life of linear TV programming – isn’t it interesting that although technology may enable us to watch whatever we like, whenever we like, human psychology still prefers watching programmes with friends so you have someone to chat to?

Ofcom has wide jurisdiction and discretion to accept and resolve disputes

The CAT today rejected BT’s arguments that Ofcom has a narrow jurisdiction to accept and resolve disputes referred to it by Communications Providers pursuant to Section 185 of the Communications Act 2003.

The CAT joined two cases (one relating to ‘ladder pricing’  and one to charges for ethernet services above DSAC) in both of which BT alleged that Ofcom had no jurisdiction to determine the alleged disputes because:

  1. No dispute existed. BT contended that whilst there remained any scope for resolution of issues through, inter alia, future negotiation, no dispute existed. It relied on (i) the 32nd recital of the Framework Directive as modifying the meaning of ‘dispute’ in article 20 of the Framework Directive and article 5 of the Access Directive so as to require that all negotiations have been exhausted; (ii) Ofcom’s 2004 Disputes and Complaints Guidance; and/or; (iii) a ‘floodgates’ policy argument.  The CAT rejected all BT’s arguments.
  2. Alternative dispute resolution means were available. BT argued that (i) future negotiation constituted alternative means; and/or (ii) Ofcom should have used its Condition enforcement powers. The CAT again rejected both arguments.

The Watcher needs to declare an interest: he represented an intervener in this appeal, so readers should ‘filter’ this post accordingly.