1 in the HIGH COURT of JUSTICE Claim No: CP-2018
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IN THE HIGH COURT OF JUSTICE Claim No: CP-2018-000038 BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES COMPETITION LIST (ChD) B E T W E E N: PHONES 4U LIMITED (in administration) Claimant - and - (1) EE LIMITED (2) DEUTSCHE TELEKOM AG (3) ORANGE SA (4) VODAFONE LIMITED (5) VODAFONE GROUP PUBLIC LIMITED COMPANY (6) TELEFÓNICA UK LIMITED (7) TELEFÓNICA, S.A. (8) TELEFÓNICA EUROPE PLC Defendants DEFENCE OF THE SIXTH, SEVENTH AND EIGHTH DEFENDANTS INTRODUCTION 1. This is the Defence of the Sixth to Eighth Defendants (collectively the “Telefonica Defendants”). 2. In this Defence: 2.1. References below to paragraph numbers are to corresponding paragraphs of the Particulars of Claim unless otherwise indicated. 2.2. Where they are adopted, definitions and headings in the Particulars of Claim are used for convenience alone and without making any admission thereby. 1 2.3. In this Defence, the Telefonica Defendants do not plead to allegations directed exclusively at other Defendants. 2.4. Unless expressly admitted or not admitted, the allegations contained in the Particulars of Claim are denied. SUMMARY 3. The Telefonica Defendants’ response to the facts alleged against them is summarised below. Overview 4. In overview: 4.1. Under the terms of an agreement concluded in 2009, P4U was authorised to procure connections to O2’s mobile network.1 That agreement was due to expire on 31 January 2013 for certain categories of connections, and on 31 January 2014 for the remainder. 4.2. From O2’s perspective, the terms of its existing relationship with P4U were commercially unsatisfactory. O2’s internal assessment at the time was that P4U was O2’s least profitable distribution channel for new “Post-Pay” connections and upgrades. 4.3. In 2012, P4U proposed terms for a renewal of the parties’ relationship. O2’s internal assessment showed that the suggested terms would be even less favourable to O2 than those of the existing agreement. Following a detailed internal analysis and extensive discussions with P4U, O2 therefore decided in autumn 2012 that it would not renew the rights that expired in January 2013, unless P4U offered satisfactory terms in the meantime. P4U did not do so. P4U also rejected terms proposed to it in December 2012 by O2. Certain categories of P4U’s distribution rights therefore expired on 31 January 2013. 4.4. From autumn 2012 onward, O2’s working assumption was that it would cease 1 To the extent that defined terms are used in this overview paragraph, the definitions are given where the said terms first appear in the paragraphs below. 2 selling mobile network connections via P4U completely after January 2014, when the remaining elements of the existing agreement expired, unless P4U proposed revised terms that were satisfactory to O2. P4U did not make any proposal that was satisfactory to O2, and so P4U’s remaining rights to sell O2’s mobile network connections expired in January 2014. 4.5. P4U’s allegation that the Telefonica Defendants colluded or co-operated with Vodafone and/or EE in respect of O2’s decision to stop using P4U as a distributor is wrong. None of the Telefonica Defendants discussed that decision with Vodafone or EE, or with any other company in those corporate groups. P4U’s contrary case against O2 is based entirely on two pieces of hearsay evidence. Neither of these is true. 4.6. O2’s decision to stop selling mobile network connections through P4U was taken unilaterally by O2, in its own commercial interests (with some routine internal discussion amongst O2, Telefónica Europe and Telefónica). 4.7. O2 stopped selling many categories of mobile network connections through P4U in early 2013, over a year-and-a-half before P4U went into administration in September 2014. P4U’s remaining rights to procure connections for O2 expired over seven months before P4U went into administration. O2’s decision not to enter into a new agreement with P4U did not cause P4U to go into administration. Background: direct and indirect sales 5. In 2011 and 2012, the Sixth Defendant (Telefónica UK Limited, “O2”) supplied voice (sometimes “airtime”) and data connections to its mobile network (“O2 Connections”) to consumers2 in the United Kingdom (“UK”) via the following routes: 5.1. first, O2 sold O2 Connections directly to customers, through O2-owned shops, O2-only franchise stores, online and over the telephone; these are referred to as “direct sales”; and 2 The present proceedings, and this document, relate to the supply of mobile network connections to retail customers (i.e. end consumers). References herein to “customers” and “consumers” should be construed accordingly. The supply channels for mobile network connections to business customers were different and are not relevant for present purposes. 3 5.2. second, O2 appointed a number of third parties to offer O2 Connections to consumers through retail channels; these are referred to as “indirect sales”. In addition to P4U, the said third parties included The Carphone Warehouse Limited (“CPW”), Tesco Stores Limited (“Tesco”) and A1Comms Limited (“A1”). These parties offered both O2 Connections and connections to the mobile networks of other mobile network operators, including mobile virtual network operators (“MVNOs”). In paragraph 13 of the Particulars of Claim, the term “MNOs” is defined as referring only to the four largest mobile network operators in the UK. That is inapt, because there were other mobile network operators, namely the MVNOs. In this Defence, the Telefonica Defendants use the term “MNOs” to refer to all mobile network operators, including MVNOs. 6. In 2011-2012, O2 conducted an internal review of the profitability of its sales channels in the UK. This demonstrated that: 6.1. indirect sales were, in general, substantially less profitable for O2 than direct sales; and 6.2. certain indirect sales partners (including P4U) were materially less profitable for O2 than other indirect sales partners (including CPW). 7. O2 therefore wished to increase the number and proportion of direct sales that it made. It also wished to reduce the number and proportion of indirect sales that were insufficiently profitable from O2’s perspective to be commercially justified. 8. O2 recognised that certain customers would prefer to purchase O2 Connections via indirect sales channels, in particular because this would enable them to compare mobile network connections (“MNO Connections”) offered by a number of MNOs. O2 therefore expected and accepted that it would continue to sell O2 Connections via a mixture of direct and indirect sales channels. The key issue that O2 had to consider was which indirect sales channels were sufficiently profitable and efficient for it to be commercially attractive for O2 to make sales through them. 2009 Agreement: distribution of O2 Connections by P4U 9. O2’s existing agreement with P4U (the “2009 Agreement”) was due to expire on 31 January 2013 for certain types of O2 Connections (referred to as P4U’s “Post-Pay/Pre- 4 Pay Rights” to procure “O2 Post-Pay Connections” and “O2 Pre-Pay Connections”), and on 31 January 2014 for others (referred to as P4U’s “Upgrade/SIM-only Rights” to procure “O2 Upgrade Connections” and “O2 SIM- only Connections”).3 10. As at 31 December 2012, using O2 Post-Pay Connections as an illustration: 10.1. O2 was providing O2 Post-Pay Connections to approximately 7.3 million customers in the UK. 10.2. 613,458 of these Post-Pay Connections (i.e. approximately 8.4%) had been sold through P4U (the “P4U Post-Pay Customer Base”).4 10.3. In or around 2012, there were approximately 43.4 million customers for MNO Post-Pay Connections in the UK.5 10.4. It follows that, as at the end of 2012, the P4U Post-Pay Customer Base accounted for approximately 1.4% of UK Post-Pay customers. 10.5. By way of comparison, at the same date, 1,198,061 of the 7.3 million O2 Post- Pay Connections had been sold through CPW (i.e. approximately 2.8% of UK Post-Pay customers, double the number delivered by P4U). 11. There was a relatively high “churn” rate amongst customers who had purchased O2 Connections via P4U (“P4U-acquired customers”). This means that, on average, P4U-acquired customers were more likely to terminate their relationship with O2 at the end of their current “Contract cycle” (i.e. the minimum term of a mobile phone deal) than the average O2 consumer. P4U-acquired customers were also characterised by relatively high levels of fraud and credit default. It may be that these characteristics were associated with the young adult market segment, which P4U alleges (e.g. at paragraph 3(b)) was its key customer base. 12. These factors were amongst the reasons for which customers that bought O2 3 The meanings of the terms “Post-Pay”, “Pre-Pay”, “Upgrade”/“Upgrades” and “SIM-only” are stated at paragraph 66 below. 4 Due to the passage of time, it is no longer possible for O2 to be sure whether the data referred to here and below in respect of the P4U Post-Pay Customer Base relates to customers within the said group as at 31 December 2012 or as at 31 January 2013. The difference is not believed to be material to any issue raised by the claim, since the 2009 Agreement remained fully in force until 31 January 2013. To be concise, the said data is referred to below as relating to 31 December 2012. 5 Without prejudice to footnote 2 above, this figure includes MNO Post-Pay Connections supplied both to end consumers and to business customers. Data disaggregating the total number of MNO Post-Pay Connections by customer type is not readily available.