Royal Mail Plc v Office of Communications
| Jurisdiction | England & Wales |
| Judge | Lord Justice Arnold,Males LJ,King LJ |
| Judgment Date | 07 May 2021 |
| Neutral Citation | [2021] EWCA Civ 669 |
| Docket Number | Case No: C3/2020/0151 |
| Court | Court of Appeal (Civil Division) |
| Date | 07 May 2021 |
[2021] EWCA Civ 669
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COMPETITION APPEAL TRIBUNAL
Peter Freeman CBE QC (Hon), Tim Frazer and Prof David Ulph CBE
[2019] CAT 27
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice King
Lord Justice Males
and
Lord Justice Arnold
Case No: C3/2020/0151
Daniel Beard QC and Ciar McAndrew (instructed by Ashurst LLP) for the Appellant
Josh Holmes QC, Julianne Kerr Morrison and Nikolaus Grubeck (instructed by Ofcom Legal) for the First Respondent
Jon Turner QC, Alan Bates and Daisy Mackersie (instructed by Towerhouse LLP) for the Second Respondent
Hearing dates: 20–21 April 2021
Approved Judgment
Introduction
This is an appeal by Royal Mail plc (“RM”) against a judgment of the Competition Appeal Tribunal (Peter Freeman CBE QC (Hon), Tim Frazer and Prof David Ulph CBE) (“the Tribunal”) dated 12 November 2019 [2019] CAT 27 (“the Judgment”) dismissing RM's appeal against a decision of the Office of Communications (“Ofcom”) dated 14 August 2018 (“the Decision”) finding RM guilty of an abuse of its dominant position in the wholesale market for bulk mail delivery services contrary to section 18 of the Competition Act 1998 and Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) by issuing Contract Change Notices (“CCNs”) which introduced discriminatory prices, although those CCNs were never implemented. Ofcom imposed a fine of £50 million for that conduct. RM appeals on two closely-related grounds concerning the treatment by Ofcom in the Decision and by the Tribunal in the Judgment of an “as efficient competitor” (“AEC”) test relied upon by RM. The Respondents to the appeal are Ofcom and Whistl UK Ltd (“Whistl”), which was the target of the conduct complained of and an intervener in the proceedings below.
The facts
Until the Postal Services Act 2000, RM held a statutory monopoly in the handling and delivery of the great majority of letters. After a process of gradual liberalisation, the UK postal service was fully opened up to the possibility of competition in 2006.
“Bulk mail” refers to high volume mailings, such as bank statements, utility bills and advertisements, which are sent to addresses across a substantial part of the UK. Suppliers on the retail market compete to offer customers a bulk mail service (which encompasses the collection, sortation and final delivery of bulk mail). Because RM has historically been the only supplier which undertakes the final delivery of bulk mail to individual addresses itself, it is able to offer a complete end-to-end (“e2e”) service. All other suppliers on the retail market for bulk mail services contract with RM, at a wholesale level, to provide the “final leg” of their e2e offering i.e. the delivery of bulk mail to individual addresses. The wholesale market for bulk mail delivery is the market on which RM was found to have a dominant position, with a market share at the relevant time of at least 98%.
Wholesale bulk mail delivery services are known as “access services”, and the purchasers of those services as “access operators” or “AOs”. AOs purchase access services from RM in accordance with the terms of the Access Letters Contract (“ALC”). Under the ALC, AOs can choose from three price plans.
AOs on National Price Plan One (“NPP1”) pay a nationally-averaged and uniform price, and are required to have a geographic posting profile similar to that of RM across all parts of the UK, which for these purposes is divided up into 83 areas known as Standard Selection Codes (“SSCs”). Deviation from that profile results in a surcharge broadly reflecting the increased costs to RM. A second national price plan (“APP2”) operates on the same principle, save that AOs using this plan are required to post mail in line with RM's posting profile across four broad zones (London, urban, suburban and rural) rather than at SSC level. An AO on APP2 is not required to post to all areas of the UK, as long as it achieves the appropriate split between zones. A third, zonal, price plan (“ZPP3”) does not require AOs to commit to any posting profile. AOs pay a price per item that reflects the cost of delivery in the zone in which the item is delivered (calculated pursuant to a metric called the “zonal tilt”). AOs can combine ZPP3 with either NPP1 or APP2.
Whistl (formerly called TNT Post UK Ltd and at the relevant time a wholly-owned subsidiary of PostNL NV) is an AO which purchases bulk mail delivery services from RM on APP2 and ZPP3. By 2013 Whistl was the largest AO in the UK, involved in the distribution of around 3.8 billion addressed letters in the UK annually. In 2012 Whistl began to develop its own final delivery service, which it rolled out incrementally into certain SSCs, enabling it to provide an e2e service in those SSCs. Whistl continued to purchase access services from RM in respect of the remaining SSCs. Whistl intended to expand the geographical coverage of its e2e service.
In the course of 2013 RM formulated plans to respond to what it described as “the threat of Direct Delivery” competition. As the Tribunal found, Royal Mail knew about Whistl's intentions in sufficient detail to plan against them and clearly had Whistl in mind when preparing its plans. As one of its options, RM considered whether to cut prices as a competitive response, but decided not to do so because of the adverse impact on its revenues and profits. The Tribunal found that RM was most reluctant to engage in direct price competition with AOs.
Instead, RM set out to devise a strategy that would limit direct delivery competition from Whistl by deterring Whistl from expanding its own direct delivery operations. The mechanism which RM employed for achieving this purpose was to introduce a price differential between NPP1 and APP2. Whistl could not avoid purchasing a substantial portion of its delivery needs from RM following the launch of its own competing service because it could only practicably enter the delivery market in a gradual way, and only in certain parts of the country. The price differential would therefore face Whistl with an invidious choice. If it wished to roll out a competing delivery service at any scale, it could not do so on NPP1, given the commitment to a national profile of mail and the penalties applicable for failing to comply with that. But if it used APP2, which would allow it to launch a rival service in particular areas, it would have to pay higher prices to RM to deliver mail for it everywhere else. RM's intention was that Whistl would be forced to switch to NPP1, a move that would have constrained its ability to operate as an e2e competitor.
At the time that RM was formulating its plans to address the competitive threat posed by Whistl, RM did not at any point conduct an AEC test to see whether a competitor with its own costs could survive the price increase. Instead, RM modelled Whistl's costs, in order to work out the plan that would be most effective at curtailing Whistl's entry into the e2e market.
RM's internal documents dating from shortly prior to the notification of the price increase identified “significant legal and competition law risks should Royal Mail take commercial action to respond to the threat” posed by Whistl. While formulating its plans, RM worked with its economic consultants, Oxera, to prepare justifications for its proposed conduct, on the assumption that it was prima facie abusive, in order to be able to defend the proposals in the event of a regulatory or competition investigation. The Tribunal found that these justifications had all the hallmarks of an ex post facto exercise, and were unsustainable.
On 6 December 2013 RM informed AOs that it had decided in principle to introduce a price differential between NPP1 and APP2. On 10 January 2014 RM announced its intention to apply a price differential of 1.2% to APP2, amongst other pricing changes. It did so by issuing the CCNs which, after a notice period of over two months, would operate to alter the terms of the ALC. The ALC provided that any CCNs would be automatically suspended if Ofcom decided to open an investigation into RM's changes.
On 28 January 2014 Whistl complained to Ofcom about the package of pricing changes announced in the CCNs, including the price differential. On 21 February 2014 Ofcom announced that it was opening an investigation into the pricing changes. On that date the CCNs were automatically suspended in accordance with the ALC. The CCNs were ultimately withdrawn in March 2015. Thus the price differential was never introduced and had no effect on the prices actually paid by AOs.
Although the notified price increase was suspended before it took effect, the Tribunal found that it nonetheless caused Whistl's funding to be suspended and limited its ability to recruit customers. It was forced to put its market entry plans on hold. Whistl withdrew its bulk mail delivery service in June 2015. RM has remained in a position of near-monopoly ever since.
The proceedings below
Following a four-and-a-half year investigation, Ofcom concluded in the Decision that in issuing the CCNs RM had abused its dominant position on the bulk mail delivery market by introducing discriminatory prices in the form of the price differential between NPP1 and APP2. Ofcom found that the infringement lasted from the date of the issuance of the CCNs on 10 January 2014 until at least 21 February 2014, the date on which the CCNs...
To continue reading
Request your trial