Dogma in telecoms, cream for the CAT: 08- numbers in the Supreme Court

The Supreme Court yesterday handed down judgment in British Telecommunications plc v Telefónica O2 UK Ltd & Ors [2014] UKSC 42. Reversing the decision of the Court of Appeal (blogged on here by Emily Neill), Lord Sumption for a unanimous Supreme Court held that there had been no basis for Ofcom to disallow BT’s introduction of “ladder pricing” in wholesale termination charges for certain non-geographic telephone numbers (specifically 080, 0845 and 0870, whence the litigation’s popular name among telecoms lawyers: “08- numbers”).

This is the Supreme Court’s first foray into the arcana of the EU framework for telecommunications regulation and, in particular, the dispute resolution jurisdiction of national regulatory authorities under Article 20 of the “Framework” Directive 2002/21/EC and Article 5 of the “Access” Directive 2002/19/EC, exercised in the UK’s case by Ofcom under sections 185 to 191 of the Communications Act 2003. Always one of the deeper mysteries of the regulatory framework for a telecoms neophyte, dispute resolution has often been described as a “third regulatory restraint”: a member, together with ex post competition law and ex ante regulation of undertakings with Significant Market Power, of a regulatory trinity. Dispute resolution, according to orthodoxy, is one of the means by which national regulators are to achieve their regulatory objectives under Article 8 of the Framework Directive of promoting competition, the interests of consumers etc.; and the test in an interconnection dispute has been said to be whether interconnection terms are “fair and reasonable” in the sense of appropriate having regard to the regulatory objectives (see TRD [2008] CAT 12 and the decision of the Court of Appeal in 08- numbers itself).

Although not completely scotched by Lord Sumption’s judgment, the orthodox view now requires considerable adjustment. The starting point is that the regulatory framework takes a ‘market-oriented and essentially permissive approach’, relying principally upon free negotiation between operators in a competitive market to ensure interconnection between networks (paragraphs 10, 33, 43). The way that English law ensures that the regulatory objectives are given effect in operators’ contracts is by treating a contractual discretion to fix or vary prices, such as that enjoyed by BT, as being implicitly subject to those objectives (paragraph 37). When Ofcom comes to determine an interconnection dispute, its first role is “adjudicatory” rather than regulatory: to determine the parties’ contractual rights (paragraphs 31, 32, 34). If there is no contractual right to vary interconnection terms, Ofcom can only allow the variation if it is necessary to achieve end-to-end connectivity (e.g. if in its absence it would be impossible for O2 customers to call BT-hosted 08- numbers) or to achieve the Article 8 objectives; but if there is such a right, Ofcom cannot disallow the variation unless it finds that it would be inconsistent with the Article 8 objectives (paragraph 34, 43). In other words, Ofcom’s role is not to impose what it considers the best regulatory solution, but to adjudicate upon the parties’ contractual rights and then determine whether there is any positive regulatory reason to depart from the contractual position.

On that approach, there was no basis to interfere with BT’s introduction of ladder pricing. BT had a contractual right to introduce it, and Ofcom had not found that such pricing would be inconsistent with the Article 8 objectives (paragraphs 42 and 43), the economic effects being too complex to make a finding whether the changes would be beneficial or harmful to consumers overall; there is no burden upon an operator to justify variations to its charges. Although there may be cases in which the risk of an unproven adverse effect on (say) consumers may itself be inconsistent with the Article 8 objectives, this was not such a case (paragraph 44).

The Supreme Court’s judgment is in some respects surprising, particularly since (I am told) BT had not appealed from the Court of Appeal’s conclusion that the contractual variation clause did not “point in the direction of” allowing the new charges. It also expressly leaves open the ‘[d]ifficult questions’ which may arise ‘in a case where the Article 8 objectives neither preclude nor require a variation and the relevant party has no contractual right to require one’ (paragraph 41). The regulatory trinity does, however, survive for the time being. Lord Sumption was unconvinced by, but declined to determine, BT’s central and most heretical ground of appeal: that there is no “third regulatory restraint”, and that it is only on SMP grounds that Ofcom may disallow charges which a party has contractual power to impose (paragraphs 47 to 48).

BT is not the only victor emerging from the 08- numbers saga. The CAT can justifiably sport a Cheshire grin in light of Lord Sumption’s conclusion at paragraph 46 that the Court of Appeal had erred in “putting it back in its bag” (to use Emily Neill’s phrase). The CAT was hearing an appeal by way of rehearing on the merits, and as an expert tribunal with substantial evidence before it had been entitled to conclude and to take into account (as Ofcom had not) that preventing BT from introducing innovative charging structures was itself anticompetitive; it was not open to the Court of Appeal on an appeal on a point of law to reject these findings (paragraph 46). Having taken a few kicks recently (in Pay TV as well as 08- numbers), the CAT must find these welcome words. They are doubtless words of which the CAT – and indeed the Court of Appeal – will often be reminded by litigants seeking to challenge Ofcom’s, and other regulators’, decisions.

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One response to “Dogma in telecoms, cream for the CAT: 08- numbers in the Supreme Court

  1. Pingback: Fresh grounds and evidence before the CAT | Competition Bulletin