Royal Mail stamped a first class penalty: advice from economic advisers is not privileged

The Competition Appeal Tribunal (the “CAT”), has handed down its decision in relation to an appeal by Royal Mail against a decision of Ofcom, concerning discriminatory pricing in relation to the supply of bulk mail delivery services in the UK.

7 January 2020

The Competition Appeal Tribunal (the “CAT”), has handed down its decision in relation to an appeal by Royal Mail against a decision of Ofcom, concerning discriminatory pricing in relation to the supply of bulk mail delivery services in the UK, which was issued in August 2018. 

The background to the case is that on 10 January 2014, Royal Mail announced that it was introducing differential prices for bulk mail operators for access to its final delivery service, without which operators could not operate.

Whistl UK Limited (“Whistl”) had intended to compete with Royal Mail by setting up its own final delivery service and establish an end-to-end bulk mail service.

Following the announcement, however, Whistl complained to Ofcom that the new differential access prices made its plans uneconomic.

Ofcom decided to investigate the changes on 21 February 2014 and so the new prices were suspended, in accordance with their terms, and were formally withdrawn the following year.

Ofcom found that Royal Mail had abused its dominant position contrary to the Chapter II prohibition under the Competition Act 1998 and Article 102 of the Treaty on the Functioning of the European Union (“TFEU”). Ofcom imposed a fine of £50 million on Royal Mail.

Royal Mail appealed to the CAT on six grounds, all of which the CAT refused to accept and the decision by Ofcom was upheld.

On 4 December 2019, Royal Mail announced that it is seeking permission to appeal the decision.

This case is thought-provoking for a number of reasons, but above all the use and treatment of the advice given by Royal Mail’s economic advisers, Oxera, is of particular interest.

Oxera's Evidence

Oxera was brought in to advise on Royal Mail’s proposed access contract changes and the CAT reports that it worked closely on these plans.

It is interesting to consider the role of the documentary evidence relating to Oxera’s assistance in formation of this case.

For example, the Oxera proposal said that Royal Mail was considering a number of options to restructure the existing access contracts to “respond to the threat of direct delivery competition.”

In a separate exercise, Oxera referred to the preparation of “a robust case to defend the proposals in the event of a regulatory or competition investigation”.

In the first draft of Oxera’s advice note for Royal Mail, in relation to one of the proposed changes that was not chosen in the end, Oxera observed that it that the proposal represented “a rational response to a competitive threat… [was] not free of competition risks” and was possibly “abusive”.

The note also referred to a leading competition law authority for abuse of dominance and went on to say it understood that Royal Mail was considering removing the discounts once “the threat had been averted”.

The two main objectives of this change was said to be to maximise the probability of Whistl not rolling out or even scaling out its operations. In Oxera’s note in relation to the price differentials, it set out a possible methodology for the approach but was silent on regulatory and competition issues. However, it did make a comment about what the ideal outcome of the cost justification would be.

Email exchanges show that Royal Mail asked Oxera to “soften the wording” of both these preliminary notes to make it clear the intention was to “achieve pricing which is compliant with competition law”.

Royal Mail informed Oxera that legally its advice would not be protected by privilege. Some amendments were made but the note continued to refer to objective of maximising the probability of restricting Whistl’s roll out.

In its final note, the CAT felt that Oxera’s language showed that it approached the price differential issue on the basis that the proposal was clearly a restriction of competition, but one that might have an objective justification. Oxera’s note showed that it was less optimistic than it had previously been in previous documents on the prospect of convincing Ofcom on the novel concept of the value justification.

The CAT observed that rather unusually Dr Helen Jenkins,  a managing partner of Oxera, was offered as a factual witness of Royal Mail’s case, rather than to provide expert evidence.

On cross examination, Dr Jenkins defended Oxera’s advice saying that it was unfairly cited by Ofcom in a bid to show that Royal Mail had an anti-competitive strategy.

She claimed that it was not Oxera’s position that the price differential would have an exclusionary effect, rather that Oxera was engaged with giving advice about how to reduce the impact of Whistl’s entry on Royal Mail’s business.

Importance of Evidence of Intent

Amongst other things, the evidence relating to Oxera’s instruction was a factor in forming the basis that led to the CAT’s conclusions on Royal Mail’s strategic intentions. The CAT stated that:

“the existence or otherwise of a strategic intention to exclude competitors is a very relevant factor in law in assessing the conduct of a dominant undertaking. Its possible existence must therefore be examined, even if it is not in itself determinative of abuse.”

The decision draws on the written and oral evidence by Oxera at multiple points throughout the findings of intent, which concludes that Royal Mail planned and intended to take actions which it either knew would harm Whistl’s direct delivery plans or was reckless as to whether they would. Further Royal Mail knew about Whistl’s intentions in sufficient detail to plan against them and clearly had Whistl in mind when preparing its plans.

The evidence relating to and the finding on intent, is referred to throughout the CAT’s reasoning in relation to the grounds of appeal.

Most notably under the sixth ground of appeal relating to the penalty imposed.

The CAT considered that the Competition Act 1998 provides that a penalty may only be imposed if the infringement has been committed intentionally or negligently by the undertaking.

Royal Mail alleged that such a breach was not intentional or negligent, as it had sought expert advice to avoid this outcome.

The CAT rejected this on the basis of the contemporaneous evidence provided, which it said showed that Royal Mail was fully aware that it risked a breach of Article 102 and it was at least reckless to that. Economists will maintain the argument that there is a need for clear economic analysis in coming to decisions, however, in cases such as this it is evident that this kind of advice is a highly relevant factor for a court to make a finding of intent in a case.

The finding of intent in this case is at the crux of the decision of the court and as such for future matters, parties must be conscious that competition authorities will be relying on evidence of intent for driving their decisions.

One of Royal Mail’s grounds for appeal was that the price differential did not result in a competitive disadvantage.

The CAT stated that the fact that the degree that the conduct had, had an anti-competitive effect (i.e. that Whistl did scale back its investment in direct delivery) was important in this case particularly due to the evidence of intent discussed. Nevertheless the CAT confirmed that in accordance with case law the actual effect of the conduct is only evidential and that demonstration of a potential anti-competitive effect is sufficient.

When looking at the evidence, the CAT found that Ofcom’s earlier analysis of the likely effects of the conduct in question and its finding on competitive disadvantage were fully justified.

Risk of unprotected economist advice

The CAT confirmed that Ofcom was clearly assisted in its assessment by having obtained sight of a considerable volume of advice provided by Oxera to Royal Mail and documents prepared and discussed between them.

This helped to prove that Oxera “warned Royal Mail in very clear terms that what it was proposing was surrounded with legal risk, would be quite hard to justify objectively, and was almost certain to provoke complaint.”

Royal Mail’s assertion that is was unaware of the fact that its actions could be illegal and that it had tried its utmost to comply with the law were judged in light of this.

This case highlights the importance of continually remembering that economists are not covered by legal advice privilege, nor litigation privilege and so all documents and correspondence is at risk of being discovered in legal proceedings, including by regulatory investigation.

Royal Mail had instructed lawyers but the judgement appears to show that they were working in a silo from the economic advisers. Royal Mail ought to have properly engaged  their solicitors for advice in relation to the legal risks related to their proposed plans and allowed their advisers to talk together to avoid overlap causing unprivileged evidence.

The lawyers work would likely have been protected and unrecoverable, which could potentially have led to quite a different finding on intent and conceivably the decision overall.

Importance for businesses

This case serves as a reminder to businesses to ensure that they adequately distinguish between economic and legal advice from their advisers, bearing in mind only solicitors are afforded privilege.

As part of the decision making process, businesses must be prudent with their board minutes and internal communications on the matter.

In particular, when the decision poses a potential competition law issue, a business should call on its solicitors to conduct a real time review to ensure the materials being produced do not appear to evidence an intent of infringement.

Royal Mail’s case aptly demonstrates that this sort of material can be incredibly significant in a court’s finding on intent and as a result important on their final decision on liability.