UK Supreme Court Blog

EDITORS: Dan Tench, Emma Cross, Zainab Hodgson, Francesca Knight, James Warshaw and Natalie Haefner (CMS)
Hugh Tomlinson KC, Matthew Ryder KC, Nandini Bulchandani and Daniel Rudd (Matrix)

Introduction

This is the first judgment of the Supreme Court on the EU Common Regulatory Framework (“CRF”) for the telecommunications sector, provided for by the suite of four Directives issued in March 2002. In reversing the decision of the Court of Appeal, the judgment of Lord Sumption, with whom Lords Neuberger, Mance, Toulson and Hodge agreed, contains an important analysis of the principles underpinning the CRF and of the nature of Ofcom’s dispute resolution functions within this scheme.

The Common Regulatory Framework

Before proceeding to the facts, it is necessary to summarise certain aspects of the CRF scheme as it arose for consideration in the judgment.

A primary objective of the CRF, as provided for by Article 8 of the Framework Directive, is to promote competition in the telecommunications market by maximising consumer benefit and avoiding distortion or restriction of competition. Absent cases in which a communications provider (“CP”) possesses significant market power (“SMP”), the telecommunications market is assumed to be competitive and promotion of competition is predominantly to be achieved by means of intercommunications agreements between the CPs.

Where necessary, national regulatory authorities (“NRAs”) are empowered to impose terms in interconnection agreements between CPs that are calculated to achieve the Article 8 objectives. Although an NRA may not impose price controls on a CP unless it possesses SMP, it may, in other cases, intervene to prevent the imposition by a CP of interconnection terms likely to hinder the emergence of a competitive market.

These powers may be exercised on the initiative of the NRA, or at the behest of a party to a dispute. A decision reached by an NRA is binding on the parties, subject to a right of appeal on the merits.

In the UK the Directives are implemented by the Communications Act 2003, in which Ofcom is the designated NRA. As held by the Supreme Court, the generally permissive nature of the CRF scheme set out in the Directives is reflected in s 3(3) of the Act which requires Ofcom to have regard to the principle that regulatory activities must be “transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed”.

The facts

Background

The case concerned “termination charges” paid by mobile network operators to BT where mobile calls are put through to “non-geographic” fixed-line numbers operated by BT, containing the “08” prefix. In 2009 BT informed the mobile network operators of a new scheme of termination charges by which it would charge the operator at a rate which varied according to the level at which the operator charged the caller for the call. This variation was effected in accordance with powers in the interconnection agreement between BT and the operators.

The Ofcom decision

These changes were disputed by the operators and referred to Ofcom, which decided in 2010 that BT should not be permitted to impose them. For present purposes, the key test applied by Ofcom in support of its decision was whether the new charges provided benefits to consumers (“the welfare test”).

The application of the test was informed by Ofcom’s conclusions on three distinct effects on consumers resulting from the changes. First the “direct effect” would probably favour consumers because mobile operators were likely to reduce their charges to consumers for calls to 08 numbers. Second the “indirect effect” was also likely to be favourable because increased revenue to BT would probably be passed on to service providers using 08 numbers. However, the third conclusion, as to the “mobile tariff package effect”, was that the changes were likely to disadvantage consumers because mobile operators would probably attempt to recoup higher termination charges by raising other charges.

Weighing up these effects, Ofcom concluded that it was not possible to determine whether an overall benefit to consumers would accrue. In light of its overriding duties to consumers, it was appropriate for greater weight to be placed on the potential risks, rather than the potential benefits, to consumers. On that basis Ofcom decided that BT’s price changes were impermissible.

The Competition Appeal Tribunal decision

The CAT allowed BT’s appeal against the Ofcom decision. Its starting-point was that BT was prima facie entitled to change its charges because: (a) it had a contractual right to do, subject to any Ofcom determination, (b) the introduction of an innovative charging structure was in itself a mode of competing and (c) price control is an intrusive form of control which elsewhere under the Act can be imposed only on a party with SMP (in the present case, it was accepted that BT did not possess SMP in the relevant market). Although the CAT agreed with Ofcom that the overall effect on consumers of the changes could not be clearly established, this was insufficient to override the factors set out above.

The Court of Appeal decision

The CAT decision was in turn reversed in the Court of Appeal. The Court held inter alia that the CAT ought not to have adopted as a starting-point BT’s contractual right to vary its charges and should not have given weight to the view that restricting this right would distort competition. In addition weight should not have been attached to the observation that since BT lacked SMP it could not be subject to price controls.

Consequently the Court proceeded on the basis that it was for BT to establish that consumers would benefit from the changes and that Ofcom had a general regulatory power to override BT’s rights under the interconnection agreement. As such Ofcom’s determination should be maintained unless it had erred in principle. No such error having occurred, its decision was restored.

The analysis of the Supreme Court

Lord Sumption set out a more finely nuanced view of Ofcom’s functions under the CRF scheme. Where, as in the present case, Ofcom was resolving a dispute about a variation of charges under an existing agreement, its role was not merely regulatory, but was both adjudicatory and regulatory, with the terms of the interconnection agreement as the necessary starting-point in its analysis. The question was whether, in varying the charges, BT had acted outside the scope of its contractual discretion, which was required to be exercised consistently with Article 8 of the Framework Directive.

The answer was no. It was not consistent with the scheme of the Directives to reject charges solely because they might adversely affect consumers where there was no reason to consider that the Article 8 objectives would be contravened. This would be to apply an unwarranted version of the precautionary principle to a scheme which is essentially permissive in nature.

In addition the Court of Appeal had erred in rejecting the CAT’s conclusion that innovative pricing structures are in themselves an effective mode of competing. These findings by an expert tribunal was not open to being reversed in an appeal on points of law.

Lord Sumption doubted the relevance, to this case, of the submission that price controls could not be imposed on a party in the absence of SMP. Without deciding the point, he noted the important distinction between the imposition of price control and deciding whether a proposed tariff charges advances consumer welfare.

Comment

This is an important decision in a field which is becoming an increasingly prominent battleground between BT and other telecommunications operators in a range of sectors. Lord Sumption’s free market approach to Ofcom’s dispute resolution functions and the weight accorded to the CAT’s role as an expert tribunal are likely to be of far-ranging impact.

The judgment leaves some tantalising issues undecided, however. Lord Sumption acknowledged that difficult questions remained in respect of price changes which are not underpinned by a contractual right and neither clearly justified nor prohibited by the Article 8 objectives. Also of pressing interest is whether, and to what extent, Ofcom’s permissive role in the context of this case should apply to disputes in markets where an operator possesses SMP. This question is likely to acquire real significance in the circumstances of the pending disputes between BT and other operators such as Sky and TalkTalk in markets where BT holds SMP.