Neutral citation [2005] CAT 30 IN THE COMPETITION Case: 1008/2/1/02 APPEAL TRIBUNAL Victoria House Bloomsbury Place 2 September 2005 London WC1A 2EB Before: Sir Christopher Bellamy (President) Mr. Peter Clayton Mr. Peter Grant-Hutchison Sitting as a Tribunal in Scotland BETWEEN: (1) CLAYMORE DAIRIES LIMITED (2) ARLA FOODS UK PLC (formerly Express Dairies plc) Appellants -v- OFFICE OF FAIR TRADING Respondent -supported by- (1) ROBERT WISEMAN DAIRIES PLC (2) ROBERT WISEMAN AND SONS LTD Interveners Mr. Nicholas Green QC (instructed by Ashurst) appeared for the appellants. Mr. Jon Turner and Mr. George Peretz (instructed by the Treasury Solicitor) appeared for the respondent. Lord Grabiner QC, Mr. James Flynn QC and Mr. James Goldsmith (instructed by Herbert Smith) appeared for the interveners. Heard at the Sheriff Court, Chambers St, Edinburgh on 12, 13 and 14 January 2005. JUDGMENT (Non-confidential version) Note: Excisions in this judgment marked “[…][C]” relate to commercially confidential information: Schedule 4, paragraph 1 to the Enterprise Act 2002. TABLE OF CONTENTS I BACKGROUND .................................................................................................1 The Scottish milk market........................................................................................1 The parties .............................................................................................................1 Wiseman’s alleged reaction to the acquisition by Express of a stake in Claymore ...........................................................................................2 The reference to the Competition Commission......................................................4 The Scottish Milk Report........................................................................................5 The opening of the Chapter II investigation ..........................................................7 The opening of the Chapter I investigation............................................................8 Later developments ................................................................................................8 The Assurances ......................................................................................................9 The submissions by Claymore of 19 June 2002...................................................10 The Decision of 9 August 2002 ............................................................................11 The application under section 47(1)....................................................................14 The Chapter I proceedings...................................................................................14 II PROCEEDINGS BEFORE THE TRIBUNAL ..............................................15 III THE OFT WITNESS STATEMENT..............................................................16 IV THE PARTIES’ SUBMISSIONS ....................................................................24 A. CLAYMORE’S SUBMISSIONS ...................................................................24 Predatory pricing.................................................................................................24 Alleged errors in the calculation of cost..............................................................24 Omission of costs .................................................................................................26 Addition of 3 per cent financial administration and central selling costs...........26 Omission of cost of capital...................................................................................27 Calculation of run costs.......................................................................................27 Bottom up approach.............................................................................................28 Assessment of time over which costs are to be categorised as fixed or variable.29 Predatory pricing: intent .....................................................................................30 Price discrimination.............................................................................................32 Exclusionary and/or exclusive contracting..........................................................33 Standard of proof .................................................................................................34 B. THE OFT’S ARGUMENTS ...........................................................................34 General ................................................................................................................34 Predatory pricing.................................................................................................36 “Bottom up” v “top down” .................................................................................36 Below-AVC pricing ..............................................................................................37 Other errors in cost estimation............................................................................38 Below-ATC predatory pricing..............................................................................39 Price discrimination.............................................................................................40 Exclusionary exclusive contracting .....................................................................42 Standard of proof .................................................................................................43 C. WISEMAN’S ARGUMENTS ........................................................................43 i Scope and standard of review..............................................................................43 Relief ....................................................................................................................47 Predatory pricing.................................................................................................47 Time frame ...........................................................................................................51 Predatory intent ...................................................................................................52 Price discrimination.............................................................................................53 Exclusionary/exclusive contracting .....................................................................53 V THE TRIBUNAL’S ANALYSIS .....................................................................54 A. INTRODUCTION ..........................................................................................54 The revised notice of application.........................................................................54 The Tribunal’s approach .....................................................................................56 Some comments on procedure .............................................................................57 The focus of Claymore’s complaint .....................................................................59 B. THE RELEVANT CASE LAW......................................................................60 C. THE OFT’S APPROACH TO THE PREDATORY PRICING ISSUES .......64 The course of the investigation ............................................................................64 The result of the OFT cost analysis .....................................................................67 The problem of determining the costs..................................................................69 The OFT’s “bottom up” approach ......................................................................71 Costs apparently left out of account in calculating total costs............................72 Verification of cost information...........................................................................74 Variations in the figures.......................................................................................75 Bulk cream ...........................................................................................................76 Cost of capital......................................................................................................77 Allocation of costs by volume alone.....................................................................78 Conclusions on the OFT’s approach to total costs..............................................84 Issues relating to AVC .........................................................................................84 The issue of intent ................................................................................................87 Conclusions on the OFT’s approach to the predatory pricing issues .................91 D. “ALL OF SCOTLAND” CONTRACTS: CWS AND ABERNESS .............91 The CWS contract ................................................................................................92 Aberness...............................................................................................................95 Sales to Aberness below total cost after March 2000..........................................95 The arrangements with Aberness from 1999 to 2002 ..........................................96 The 2002 Arrangements with Aberness ...............................................................98 General conclusion on Aberness .........................................................................99 E. PRICE DISCRIMINATION ...........................................................................99 VI CONCLUSIONS AND RELIEF......................................................................99