Success story?

We've got used to both sides claiming victory following court judgments. Just recently, some reports announced victory for Michael Douglas and Catherine Zeta-Jones in their claim for damages for improper use of photos of their wedding, while others had called it for Hello!. Following the judgment of the Competition Appeal Tribunal (CAT) in the Free-serve/Oftel case, the Director General of Telecoms (DGT) felt sufficiently aroused by the Financial Times' report of the judgment to write a letter to the paper objecting to use of words such as “defeat” and “embarrassment”. So, what really happened in the Freeserve case, and what are the wider implications?

Key events

In March 2002, Freeserve submitted a complaint to telecoms regulator Oftel, identifying four elements in what it claimed was “an orchestrated campaign of anticompetitive behaviour” by BT in the market for broadband. Freeserve, like all internet service providers (ISPs) that resell broadband, has to buy the wholesale product from BT. The cable companies do sell broadband services, but do not have a wholesale product. Freeserve claimed that: BT's 'Broadband Britain' advertising campaign had unduly preferred its own ISP, BT Openworld; BT Openworld had advance notification of cuts in the BT wholesale broadband price so that BT Openworld was able to launch an advertising campaign before other ISPs; BT Openworld's retail broadband price was not sufficient to cover its costs so that other ISPs could not compete; and BT also used its retail voice customer database to find out about ISP usage.

Following a limited investigation, Oftel rejected the Freeserve complaint in May 2002. In response to a formal request from Freeserve for Oftel to reconsider its views under the Competition Act 1998, Oftel claimed that the rejection of the complaint did not relate to the Competition Act and that, in any event, the rejection was not a decision which could be appealed to the CAT.

Freeserve did appeal. Oftel challenged the admissibility of the appeal, and there was an early hearing on this preliminary issue. In November 2002, the CAT ruled that Oftel's rejection in May 2002 was indeed a decision that could be appealed under the Competition Act. Freeserve's costs relating to that issue have now been awarded against Oftel.

The CAT judgment

Following a two-day hearing in January, on the substance of the appeal, the CAT handed down its judgment on 16 April. The body dismissed the appeal in relation to three elements of Freeserve's March 2002 complaint, largely on the basis that Freeserve's complaint did not have enough evidence of the impact of the activities on the market. The CAT gave a measure of freedom to Oftel in the way it pursued its own investigation of the complaint. For example, the CAT did not intervene even though Oftel had not asked for evidence from BT to justify its claim that BT Openworld did not have advance notification of the fall in the wholesale price.

However, the CAT did uphold the appeal in relation to the complaint that BT Openworld's retail price did not cover its costs, the issue on which the January hearing had focused. The CAT found Oftel's reasoning to be unclear and incomplete. The CAT added that Oftel should have revisited its conclusion that BT Openworld's three-month offer on connection fees did not infringe competition law when it discovered that the offer had been extended to six months – it was not clear when Oftel found about the extension, but Oftel itself conceded that it knew within an hour of rejecting Freeserve's complaint.

The CAT struck down the relevant part of Oftel's rejection of the complaint, and Oftel has undertaken to revisit the issue in accordance with a procedure laid down by the CAT. Freeserve, as well as BT, will be able to submit further information to Oftel in connection with the ongoing investigation of the issue. The CAT was careful to say that it had not commented on whether BT Openworld's pricing was an infringement of competition law, but the CAT has insisted that the further investigation is conducted with an “open mind”. If Freeserve, or for that matter BT, is not satisfied with the result of Oftel's further investigation, it will be entitled to appeal to the CAT.

Wider implications

The CAT's judgments to date in the Freeserve case will have a significant impact on the way in which competition law is applied by Oftel, as well its successor Ofcom, and the other specialist regulators which share powers with the Office of Fair Trading to apply competition law.

There is still scope for a regulator to reject an inadequate complaint, so sophisticated complainants must submit a fully argued case together with evidence sufficient to justify their allegations. The cost of complaining is likely to go up.

It will be difficult for a regulator to get away with investigating a properly argued and supported complaint based on competition law and then reject it without giving full reasons. Indeed, the CAT has said that the regulator must give some indication of its views on market definition and market power as well as its views on the particular activities being considered.

The traditional informal approach to ongoing discussions with the regulator, which the telecoms industry has enjoyed for many years, does not sit easily with the approach adopted by the CAT to appeals under the Competition Act. It follows that the CAT's decision is likely to lead to a more formal and adversarial process before the regulators. In parallel, at least where telecoms is concerned, the implementation of the new EU telecoms framework heralds a rather formal approach to regulation outside the field of competition law.

Robbie Downing is a partner at Baker & McKenzie and acted for Freeserve on its appeal to the CAT