TalkTalk v Ofcom – the Court of Appeal stresses that market definition is a tool not an end

The Court of Appeal, in TalkTalk v Ofcom [2013] EWCA Civ 1318, recently gave an important reminder to all competition practitioners that market definitions are a tool rather than an end: what matters is substance not form.

The facts of the case were relatively simple.  Ofcom conducted a market review for wholesale broadband access and, in December 2010, issued a decision defining three relevant markets.  Market 1, which was the only market in which a charge control would be imposed, comprised “…exchanges where only BT is present or forecast to be present”.  In relation to its forecasts, Ofcom stated that in “…assessing forecasted plans we have only counted operators as present where they have firm plans to deploy in specific exchanges”.  Ofcom conducted an assessment by reference to those criteria and identified 3,389 exchanges which fell in Market 1.  Ofcom deliberately included 700 exchanges in Market 1 on the basis that although TalkTalk had announced an intention to rollout into such exchanges (in competition with BT), the plans were not yet “firm” or “committed”.  By July 2011, however, when Ofcom came to issue its decision on the precise form of the charge control for Market 1, the factual position had changed.  In particular, in the seven months since the market definitions were adopted, TalkTalk had either deployed, or now had firm plans to deploy, in all 700 of the exchanges which had been included in Market 1.

Did Ofcom have to conduct a new market review, so as to change the ambit of Market 1, by removing the 700 exchanges in which TalkTalk was now “present”, using Ofcom’s own definition?  The answer to that question lay in section 86(1)(b) of the Communications Act 2003 (the “Act”), which entitles Ofcom to set a charge control at a later stage than the relevant market is defined only if that market is one “…in which OFCOM are satisfied there has been no material change since the determination was made”.

Was the change in TalkTalk’s plans, so that they became firm and committed, a “material change” in Market 1?  On one view, the answer could only be “yes”.  Ofcom had originally defined Market 1 as being 3,389 exchanges in which there were no firm plans for rollout by any competitor of BT.  If the same exercise had been conducted in July 2011, only 2,689 of those exchanges would have been included in Market 1.  TalkTalk’s plans had firmed up in respect of the 700 exchanges which formed the difference between those numbers.  That was a “material change” because it went to the heart of the market definition.

The Court of Appeal, however, disagreed.  Sir Timothy Lloyd recognised that if the market definition exercise had been carried out in July 2011 instead of December 2010, the outcome would have been different (para 113).  But, he ruled, that was to put form over substance, because “…it was in the nature of the relevant market that its economic and competitive circumstances were likely to change over time, in the course of the review period, and it was also inherent in the actual review carried out that it included an assessment of how those circumstances were likely to change” (para 126).  On that basis, he reasoned, TalkTalk’s rollout to the 700 exchanges would have constituted a “material change” in Market 1 only if it was unforeseen and thus “falsified” Ofcom’s “…forecast of the way in which competitive conditions in the market would change” (para 130).  Since Ofcom had known that TalkTalk was likely to rollout, that was not a material change.  Lord Justice MacFarlane agreed.

This is a helpful restatement of the basic principle that competition law is all about substance rather than form.  Market definition is a tool in competition analysis, but a black letter analysis must be avoided wherever possible.

The case is also notable for a forceful dissent from Sir Bernard Rix, holding that there had indeed been a material change.  Sir Bernard considered that “…what Ofcom has done in its charge control determination is to change its definitions while purporting not to do so” (para 40).  The Competition Appeal Tribunal was also not spared: it had put forward an analysis which “…repudiates Ofcom’s own market 1 definition (“is wrong”), and reformulates a new market 1 definition for itself, while saying that it is not doing so and accepting that it is not entitled to do so” (para 52).  In this regard, Sir Bernard was not alone, with Sir Timothy agreeing that “…by and large, the observations of the Tribunal are not helpful in resolving the issue before us” (para 146).  Ouch.