On 7 October 2010, the Competition Appeal Tribunal (CAT), dismissed an appeal brought by Telefónica O2 (O2) against Ofcom’s failure to liberalise its public wireless network licence to enable it to use its 900MHz and 1,800MHz band spectrum for 3rd Generation (3G) mobile technology. The CAT found, by majority decision, that the relevant EU legislation, which required member states to ‘make available’ these bands for Universal Mobile Telecommunications System (UMTS) (ie 3G) technology by 9 May 2010, did not create a directly effective right for O2 to deploy 3G services on these bands as of that date. In doing so, however, the CAT was highly critical of Ofcom’s conduct in the matter.
Background
Following the merger of T-Mobile and Orange earlier this year, the UK now has four mobile network operators (MNOs):
- O2;
- Vodafone;
- Everything Everywhere (EE); and
- Hutchison 3G (Three).
Each of the MNOs is licensed to use various segments of radio spectrum for mobile telephone communications. As a result of the piecemeal development of the industry, each of the MNOs holds a different allocation of spectrum.
At the risk of oversimplifying a complex situation, O2 and Vodafone both hold portions of 900Mhz spectrum and small amounts of 1,800Mhz spectrum. Following the combination of T-Mobile’s and Orange’s holdings, EE holds 1,800Mhz spectrum. All four MNOs hold 2.1GHz spectrum in varying amounts. As a result of European harmonisation, the terms of the MNOs’ licences restrict the technology that can be deployed on any given portion of spectrum. In broad terms, 900Mhz and 1,800Mhz spectrum are currently restricted to use for 2nd Generation (2G) services, whereas 2.1GHz spectrum is currently restricted to use with 3G mobile services.
To ensure harmonised services across Europe, UMTS (3G) technology has been restricted to the 2.1GHz band. However, following market developments and technical advances, in late 2009 the EU adopted Directive 2009/114/EC (the 2009 Directive) and Commission Decision 2009/766/EC (the 2009 Decision), which, in combination, required member states to ‘make available’ the 900MHz and 1,800MHz bands for UMTS services by 9 May 2010. The 2009 Directive recognised that the ‘liberalisation’ of existing spectrum licences in the hands of incumbent holders of spectrum could result in competitive distortions (principally this would be likely to occur as a result of certain mobile operators holding chunks of spectrum that would suddenly become much more useful). Member states were required to carry out a competition assessment to determine whether such distortions could arise. However, the text of the 2009 Directive is ambiguous as to whether this is to occur before, during or after liberalisation.
In the UK, the previous government’s ‘Digital Britain’ project, carried out over 2008 and 2009, sought to address the UK’s obligations under the 2009 Directive and the 2009 Decision. This culminated in a draft statutory instrument being laid before Parliament, which would have required Ofcom to liberalise the 900MHz and 1,800MHz spectrum in the hands of the incumbent owners, but which also sought to address perceived competitive distortions arising as a result, by way of a suite of conditions to be attached to existing and future mobile licences.
On 2 March 2010, O2 applied to Ofcom for a variation of its licence to enable it to deploy UMTS (3G) technology in the 900MHZ and the 1,800MHZ bands. A week later, a draft statutory instrument was laid before Parliament to implement the EU legislation. However, it never came into effect, as Parliament was dissolved on 12 April 2010. Ofcom subsequently responded to O2’s application on 22 April by saying that the Department for Business, Innovation and Skills (BIS) had asked it not to take any action in response to O2’s request before the next government had had the opportunity to consider the draft statutory instrument, and that it considered any action to be inappropriate pending the general election.
Two weeks after the deadline for implementation of the 2009 Decision and the 2009 Directive, O2 filed a notice of appeal under s192(1)(a) and (2) of the Communications Act 2003. O2 argued that it had a directly effective right to deploy UMTS in the 900MhZ and 1800MhZ bands pursuant to the EU legislation. In O2’s view, the terms of the legislation were unconditional and sufficiently precise to have direct effect, and could therefore be relied on against any incompatible national provision. Ofcom was obliged to give effect to that right by granting O2’s application for a licence variation prior to 9 May 2010. Subsequently, the CAT granted permission for the other MNOs to intervene. Vodafone intervened in support of O2 (its request, which was a similar variation to its licence, had been rejected on the same terms) and the others (whose licences are limited to higher frequencies) intervened in support of Ofcom.
CAT judgment
O2’s appeal was dismissed by a majority of the judges. The court considered that the central question of the appeal was the interpretation of the requirement in the 2009 Decision and the 2009 Directive for member states to ‘make available’ the 900MHz and 1800MHz bands for UMTS systems by 9 May 2010. In O2’s view, this meant Ofcom was required to remove any licence restrictions by this date, and any competition issues that arose from this requirement could be resolved by amending or revoking the licence at a later date. However, Ofcom considered that it meant the UK was merely required to remove legal obstacles that might preclude it from proceeding to authorise the use of the bands for UMTS, ie take all the necessary steps so that an authorisation process can start if potential users requested it.
The court carried out a detailed examination of the relevant background legislation and noted that it distinguishes between harmonisation of the technical usage requirements and allocation or authorisation of usage rights (ie licensing). In the court’s view, the 2009 Decision and the 2009 Directive relate to technical harmonisation rather than to licensing. The structure of the background directives makes clear that there is a two-step procedure to liberalisation. The first step is making available the bands for different technological uses, which the 2009 Decision and the 2009 Directive does in respect of UMTS technology. The second step (to happen at a later date) would be to complete liberalisation by amending the relevant licences under the procedure set out in Article 14 of the Authorisation Directive (Directive 2002/20/EC), which outlines the conditions attaching to authorisation measures, including a notice period and consultation exercise. On this point, the court considered that O2’s argument contained a ‘fatal flaw’, as by arguing that Ofcom was required to remove the licence conditions rather than contending that the 2009 Directive takes effect without any action by Ofcom, Ofcom is ‘thrown inexorably back to Article 14 of the 2009 Directive’, which provides for mandatory procedural requirements before a licence can be amended. The court also concluded that this two-step approach ensures that liberalisation does not occur in a way that is likely to distort competition. A one-step approach, leading to a subsequent conclusion by the authorities that the licences distort competition, could potentially result in the licences being revoked shortly after their grant, which would have led to chaos for both service providers and consumers.
The court considered that, in view of their conclusion on the proper construction of the 2009 Decision and the 2009 Directive, O2 had no directly effective right to the removal of the conditions in its licences. This was because the UK did not need to put in place any harmonisation measures to ensure the relevant bands were available to be authorised for use, as Ofcom has always been able to licence usage of the bands for UMTS technology. Ofcom had simply to proceed with the process of liberalisation in accordance with the Authorisation Directive, which has been foreseen in the UK by a revised draft direction that is due to enter into force in October 2010.
Criticism of Ofcom’s conduct
Although O2’s appeal was formally dismissed, the court nevertheless criticised the way in which Ofcom handled the case. The court considered the dissolution of Parliament to be no excuse for Ofcom’s inaction. It also criticised Ofcom’s public consultation document, which contained an incorrect view of the meaning of the draft 2009 Directive and the fact that it did not tell Ofcom of its altered view of the law before its defence was filed. It encouraged Ofcom to ensure a speedy conclusion of the liberalisation process and noted that the two-stage test should not be an excuse for further delay.
Dissenting opinion
Professor John Pickering gave a dissenting opinion. According to his interpretation of the relevant legislation, the purpose of the legislation is harmonisation of procedural approach, as well as of technology. He considered that a single stage action of liberalisation is the appropriate interpretation, as the legislation requires the rights of use to be granted by lifting the restrictions on the use of UMTS in the relevant bands. The legislation also states that liberalisation is the possible cause of competition distortions, therefore the competition evaluation could only commence once the removal of the restrictions is in progress. The fact that O2 was authorised to use the relevant spectrum was described by Ofcom as ‘ownership’, which should be a property right, and, as such, should be respected and any amendments would need to be preceded by public consultation. The delay in liberalisation by the two-step approach fails to meet consumers’ needs and efficiency gains are lost while the spectrum is not being used for UMTS technology. Furthermore, in Pickering’s view, Ofcom exaggerated the significance of the competition assessment, and pointed out that Ofcom views the UK market as more competitive than in other member states and can address any ongoing concerns under its Competition Act 2010 powers.
Next steps?
This judgment comes in the same month that the draft statutory instrument implementing the liberalisation measures is due to come into force. When promulgating the draft statutory instrument, the Minister for Culture Communication and Creative Industries at BIS wrote a letter stressing that Ofcom should permit the ‘earliest possible release of this important spectrum’, and O2 is therefore likely to shortly receive the alterations to its licence that it originally requested, in spite of the ruling. However, it remains to be seen whether O2 will nevertheless lodge an appeal in light of the dissenting opinion and the court’s criticisms of Ofcom’s conduct, particularly as the draft statutory instrument, could itself potentially be subject to judicial review further down the line.
By Niamh Grogan, partner, Amy Barcroft, associate, and Neil Davies, associate, SJ Berwin LLP.
E-mail: niamh.grogan@sjberwin.com;
