On 26 October 2018, Ofcom published a non-confidential version of its decision imposing a fine of GBP 50 million on Royal Mail for conduct amounting to abusive price discrimination (the "Decision"). The Decision found that by issuing Contract Change Notices on 10 January 2014 which introduced discriminatory prices, Royal Mail abused its dominant position. Royal Mail filed an appeal against the Decision at the Competition Appeal Tribunal ("CAT") on 12 October 2018. Ashurst are acting for Royal Mail.
| what you need to know - key takeaways |
- Under Article 102(c) TFEU, "applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage" may constitute an abuse of a dominant position.
- Ofcom has imposed a fine of GBP 50 million on Royal Mail for abusive price discrimination, in circumstances in which the relevant prices were announced but never charged and paid. Ofcom has also concluded that it is not necessary to assess whether Royal Mail's conduct would have foreclosed an equally-efficient operator.
- Royal Mail has appealed Ofcom's decision and fine to the CAT.
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Ofcom's Decision followed a 4½ year investigation which was triggered in January 2014 by a complaint by Whistl. Whistl is a Royal Mail wholesale access customer and, at the time of the complaint, had started to roll out its own network to deliver business bulk mail letters to addresses in parts of the UK.
On 10 January 2014, Royal Mail announced price changes under its access contract, which included a price differential between the different price plans available to its access customers. These price changes were due to enter into effect at the end of March 2014. On 21 February 2014, following Whistl's complaint, Ofcom opened an investigation into whether Royal Mail had abused a dominant position. As a result of Ofcom's decision to open an investigation, the price changes were suspended in accordance with provisions in Royal Mail's access contract.
On 14 August 2018, Ofcom announced that it had decided that Royal Mail had abused a dominant position in breach of the Chapter II prohibition of the Competition Act 1998 and/or Article 102 of the Treaty on the Functioning of the European Union ("TFEU") and imposed a fine of GBP 50 million. In particular, Ofcom concluded that:
- the price differential announced by Royal Mail amounted to discrimination against operators that sought to compete with Royal Mail;
- its analysis of profitability, prices and costs showed that the price differential would have had a material impact on the profitability of an end-to-end entrant (which was particularly evident in the case of Whistl). As a result, entry or expansion in bulk mail delivery would become significantly more difficult and therefore less likely to occur. The Decision concluded that it was neither necessary nor appropriate to assess whether the announced price differential would have foreclosed an equally efficient competitor ("EEO");
- the price differential was therefore reasonably likely to distort competition from the point at which the CCNs were issued. The Decision states that its conclusions on competitive disadvantage are supported by the finding that the introduction of the differential materially contributed to Lloyds Development Capital's ("LDC") (a proposed investor in Whistl) decision not to complete its proposed investment in January 2014 and Whistl's decision to reduce and then suspend its roll out; and
- Royal Mail's conduct reflected a deliberate strategy to limit competition from its first and only significant competitor.
Royal Mail's appeal raises a number of legal, economic and factual grounds against the Decision, including that:
- for an allegation of abusive price discrimination contrary to Article 102(c) to be established, the prices must be actually "applied" (i.e. charged or paid) and that the Decision errs in law in finding that the announcement of future price changes constituted the application of unlawful discriminatory pricing, in circumstances where the industry knew that they would be suspended if Ofcom opened an investigation, and were in fact suspended;
- the Decision errs in finding that the price differential was likely to place end-to-end direct delivery competitors at a competitive disadvantage. The Decision's conclusions on competitive disadvantage, which rely on a finding that the price differential would have reduced the profitability of end-to-end competitors, irrespective of whether such rivals were as efficient as Royal Mail are inconsistent with established precedent;
- the Decision errs in concluding that the announcement of the price differential was a material contributing factor to LDC and Whistl's decision making, and that such a finding supports a conclusion that the price differential was likely to give rise to a competitive disadvantage; and
- the fine of GBP 50 million was manifestly disproportionate given the novelty of the infringement, its short duration (six weeks, from announcement to suspension), and the efforts Royal Mail made to comply with its legal and regulatory obligations.
The appeal therefore raises a number of fundamental questions of law and economics as to how allegations of abusive price discrimination should be assessed. In particular, the CAT will need to consider whether Ofcom is correct to maintain that abusive price discrimination can arise simply as a result of price announcements, even where the announced prices were never charged or paid. In addition, the CAT will need to consider whether, in particular in light of the European Court of Justice's recent judgements in Intel and MEO, Ofcom is correct to conclude that it was neither necessary nor appropriate to assess whether Royal Mail's conduct would have foreclosed an EEO.
