Software Cellular Network Ltd v T-Mobile (UK) Ltd

This case concerns the provision of mobile telephone services. The Applicant’s trading name is Truphone. The Respondent (“T-Mobile”) is a major name in the sector.

Truphone wishes to launch a new mobile telephone service using technology known as Voice over Internet Protocol (“VoIP”) technology. The service is designed for customers who will already have a telephone service from a service provider, but enables those customers to route calls over the internet. This gives the potential to reduce costs.

To use the Truphone service customers will each need an additional telephone number. Truphone has been allocated the required telephone numbers by the Office of Communications (“Ofcom”). It is open about its desire to compete with T-Mobile, among others, on the retail mobile telephone market.

There are a number of Mobile Network Operators (“MNOs”) in the United Kingdom, and T-Mobile is one of them. If customers of Truphone are to be able to receive calls on their Truphone number from those using the network of an MNO the MNO must first “activate” the Truphone numbers.

With one exception, all MNOs in the United Kingdom have activated Truphone’s numbers. The one exception is T-Mobile. T-Mobile has, by contrast, activated numbers allocated to other communications providers.

Truphone says that T-Mobile’s refusal to activate Truphone numbers amounts to an unlawful abuse by T-Mobile of a dominant market position without objective justification. Interim orders requiring T-Mobile to activate Truphone numbers is sought as a matter of urgency. Without those orders, says Truphone, it cannot launch the new service, and time of launch is of the essence in the market for services using VoIP technology.

With the considerable assistance of Counsel I was able to hear oral argument within Wednesday of last week. That oral argument has been complemented by reasonably detailed written submissions prepared by Counsel before the hearing.

It is a feature of the way in which mobile telephone services work across different networks that several services are involved. These include the services of access, origination and termination. For present purposes the services of access and origination can be treated as providing a person with the ability to access a network and to originate a call from it. The service of termination can be treated as allowing a call to be terminated on another network, namely that used by the person receiving the call.

Charges are made for these services. Although activation will involve access and origination, one result that must be confronted is that requiring T-Mobile to activate Truphone numbers in order that Truphone customers can receive calls to their Truphone number from a T-Mobile subscriber will involve T-Mobile purchasing termination services for calls thus made.

Truphone and T-Mobile do not agree on the rates that should be charged for those services. Ofcom is to be asked by Truphone to determine the appropriate rates. For the present, however, Truphone are prepared to proceed with the rates put forward by T-Mobile. For the present this resolves what T-Mobile described, in a letter dated 13 June 2007, as the principal point of difference between itself and Truphone.

In any consideration of the commercial impact of the interim orders sought, it is material that T-Mobile at that point declared itself “willing … to negotiate a commercial arrangement with Truphone” (with rates being the principal point of difference) and, subject to contract, ready (if rates could be accepted) to “proceed to open Truphone’s numbers on its [T-Mobile’s] systems immediately”.

The Chief Executive Officer and co-founder of Truphone is Mr James Tagg. In a witness statement made on 3 July, Mr Tagg summarises the history and current state of development of the service as follows (at paragraphs 5, 6 and 44):

“The Truphone technology has been in development since 2000. It is the subject of 5 international patent applications, [and has won] industry awards in the telecoms sector. Truphone has invested significant time and expense in developing this technology. … The financial community showed its faith in our technology by making Truphone Europe’s largest A round venture capital investment of 2006. … Our survival depends on our ability properly to launch our product and to do so as early as possible, given that other parties are developing similar products. …

Given the rate of technological development, time is of the essence to us. …

Truphone is currently in the Beta stage of its launch phase which involves only providing the service to a select group of customers and not opening the service to the general public. … we have been ready to move to the next step, a formal launch of the service to the general public, since 12 June 2007 but we are being prevented from doing so because of T-Mobile. …

It is imperative that Truphone be permitted to launch immediately otherwise we would lose our key advantage in being one of the first VoIP services available to customers in the telecommunications sector. Unless T-Mobile routes our numbers and permits Truphone to launch then others will take the market including T-Mobile which have themselves invested in VoIP services. … We have already lost some 6 weeks in trying to negotiate with T-Mobile (negotiation being very much encouraged as a matter of course by Ofcom) ….”

The Court has evidence from Truphone that since 26 February 2007 all MNOs have been able to interconnect with Truphone via BT. By 11 May 2007 each MNO in the UK, with the exception of T-Mobile, had activated Truphone’s number range on their network, using (it was confirmed to me) interconnection via BT. Mr Tagg offers the vignette of what happened with one MNO: “Orange for example, when asked why our numbers had not been routed, apologised and had the numbers routing within 48 hours”.

The way the technology works, from a customer viewpoint, is summarised as follows by Mr Tagg (at paragraph 4 of his witness statement):

Section 18(1) of the Competition Act 1988 (“the Act”) provides, in part and so far as is material, that “any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom”.

Truphone’s case is that the relevant market is “the provision of services by T-Mobile to its customers on the T-Mobile network, and the indirect provision of services to a Communications Provider which requires that T-Mobile’s customers should be able to access its network.”

T-Mobile on the other hand describes as the closest recognisable economically meaningful market the UK mobile telephone market or the call origination market in the UK. Of that market, T-Mobile considers that its market share is a little higher than 22% but well below 30%. For T-Mobile, Mr Pickford argues, drawing on O’Donoghue and Padilla, The Law and Economics of Article 82 EC, (2006) at page 115, that “market shares below 30% are … extremely unlikely to create dominance”. Mr Pickford also refers to a passage in Whish on Competition Law, 5^th edition (2003), at page 48 in support of the proposition that no finding of dominance in an Article 82 case has ever been made materially below the 40% threshold.

There are, necessarily, limits to the legal argument and economic evidence available to me at this interim stage in proceedings. T-Mobile has adduced a witness statement from an expert economist, Dr Mike Walker, and points to the current absence of expert evidence tendered by Truphone. Dr Walker expresses the following opinion (at paragraphs 20 and 24 of his witness statement):

“… there is a very close substitute available for the product offered by Truphone; calling a Truphone customer on their MNO/MVNO number is a very close substitute for calling a Truphone customer on their Truphone number. This means that these two products should be considered as part of the same relevant market because if one significantly raised the price for one service, consumers would simply swap to the other. The market definition question thus comes down to whether T-Mobile can profitably raise prices for outbound calls to Truphone customers above the competitive level.

The ‘market for the activation on T-Mobile’s network of another Communication Provider’s properly allocated numbers’ is not an economically meaningful relevant market for the purposes of this case. The product that is provided as a result of the activation of this number range is the ability for a T-Mobile customer to call a Truphone number. However, there is a very close substitute for this product: the ability for a T-Mobile customer to call a Truphone customer using the Truphone customer’s MNO/MVNO number. This latter product is part of the mobile call origination market and in my view this is the relevant market for considering the economic issues raised in the present case.”

The criticism levelled at Dr Walker’s opinion is that it does not deal or deal fully with the exclusionary effects of inability to call a Truphone number from a T-Mobile number. To my mind the opinion is open to question in its assumption that customers will indeed treat the ability for a T-Mobile customer to call a Truphone customer by using a different number to the Truphone number as a close substitute for the ability to call using a Truphone number. The matter may need to be examined not only from the perspective of the practical course that a T-Mobile customer might be expected to take when making a call, but also from the point at which customers decide whether or not to subscribe to the Truphone service at all.

My present view is that Truphone’s definition of the relevant market may be too narrowly drawn, and T-Mobile’s too widely drawn. Definitions of market in this area can be variously drawn. Although the present case is not concerned with termination on T-Mobile’s network it is notable that in concluding that each of five MNOs (including T-Mobile) has Significant Market Power “in the market for termination of voice calls on its network(s)”, Ofcom concluded that each MNO provided a separate market for wholesale mobile voice call termination (Ofcom Statement dated 27 March 2007 “Mobile call termination”).

However even if T-Mobile’s definition is used, it is to my mind seriously arguable that a percentage somewhere between 22 and 30% may be sufficient to create dominance in a market defined so widely and of this nature. I am very reluctant to accept that percentages taken from other cases, being examples confined to the disputes that happen to have fought, and from varying years, should be treated as a ceiling for what is seriously arguable and what is not. I also note that the passage in O’Donoghue and Padilla (above), cited by Mr Pickford, adds the rider “… but there is no presumption that a market share below 30% offers a ‘safe harbour’”.

Mr Pickford, for T-Mobile, pointed to a number of reference points in further support of his argument. Primary amongst these were the following:

I must however have regard to the date and context, both of the decisions and of the current set of circumstances. I am not persuaded that these decisions deprive Truphone of a seriously arguable case when in 2007 it finds T-Mobile holding, and alone among MNOs withholding, the key to the new service sought to be launched. The first decision addresses the wholesale market almost 6 years ago; the second addresses but one means of ensuring the objective of end-to-end connectivity.

The second decision does however help bring out the importance of end-to-end connectivity to competition. Thus at paragraph 2.1:

I turn next to the question of abuse of dominant position. The nature of abuse of dominant position that is alleged by Truphone against T-Mobile is by activating numbers allocated to other communications providers but not those allocated to Truphone. Those other providers include BT Fusion which, according to Truphone, provides services analogous to services using VoIP technology. Activation is, it is contended, an indispensable input without which an “each to any” telecommunications service of the sort that Truphone wishes to offer cannot be provided.

Part of T-Mobile’s answer to the allegation of abuse of dominant position involved explaining its refusal to activate numbers by reference to its view that excessive termination charges were proposed by Truphone. That aspect, for the interim period ahead, is now addressed by Truphone’s preparedness to proceed with the rates put forward by T-Mobile pending Ofcom’s determination of appropriate rates.

T-Mobile nonetheless argues that its refusal to activate numbers is explained and justified by its desire to have a contractual framework, in respects other than rates, that it regards as suitable. On its face this is a natural desire. The problem is that the longer the period that can be taken before these other respects are resolved the longer Truphone is held back from launching its competing service.

Truphone’s allegation amounts to a contention that T-Mobile is, in this respect, simply playing for time. On this application, it is neither possible nor appropriate to form a final view on that, but on the correspondence and evidence I have read, the allegation is properly and seriously arguable.

For T-Mobile, Mr Pickford understandably urged that it was undesirable on an interim application to force T-Mobile to contract in a particular way, or accept contract arrangements or terms that it did not want. Particular reference was made to T-Mobile’s preferences for direct contracting at lower rates rather than a contractual arrangement with rates that would involve refund arrangements. I understand these points, but think that the answer lies in the point that interim remedies in the present case would require action, on terms if appropriate, rather than contracting.

In this connection I have regard, amongst other evidence, to the evidence of Mr Maxwell Miller, Head of Carrier Services for T-Mobile. As I understand Mr Miller’s evidence (especially at paragraphs 26, 30 and 41) (a) the rates offered by T-Mobile in its letter of 13 June are “the same rates as T-Mobile pays British Telecom, as this was a yardstick for fixed termination in the market”, (b) T-Mobile does not have a line which runs into Truphone’s switch in Docklands, but British Telecom does, (c) everyone other than BT “pays a termination charge to [BT], which is Truphone’s charge plus a small margin for [BT]”.

Referring to the fact that any ultimate finding of conduct in breach of section 18 would involve a finding that T-Mobile was obliged to purchase termination services, Mr Pickford also urged that there was no precedent of a business being obliged to buy a service as opposed to make a service available. For my part, and as at present advised, I question whether this is not too narrow a view. Given the way in which mobile telephone services are delivered (with access, origination and termination) it would be particularly restrictive in this area. It involves treating money as a unique form of exchange in a business transaction (which will almost always involve an exchange of one thing for another). And it would largely restrict the reach of this aspect of competition law to those transactions that were sufficiently simple as to involve payment flowing one way only.

Truphone argues that it will be impossible to quantify the loss that it suffers as a result of its inability to launch a full service. It makes a credible claim that its commercial survival will be in doubt if it must await trial, even a speedy trial, before it can (if successful at that trial) launch a full service.

T-Mobile urged that Truphone can launch a service, even of not a full service. Indeed some publicity material suggested that it had already, although Truphone emphasised that this material had been issued prematurely. To my mind however, the size of T-Mobile’s share of the UK mobile telephone market or the call origination market in the UK must mean that it is realistic that a service launched now without the ability to receive calls from a T-Mobile number to a Truphone number would be the launch of a materially compromised service.

On any view the loss suffered should Truphone show at trial that it was throughout entitled to be able to launch a full service, and not simply a compromised service, would be very hard to quantify reliably. Quite possibly, in a rapidly developing market and taking into consideration customer loyalty, the losses would reach forward as well as lie in the past.

The point was made by T-Mobile that customers with a T-Mobile number can call Truphone customers on a number other than their Truphone number because all such customers will have to have a second number. I am not persuaded that I can assume that those considering becoming Truphone’s customers will accept this arrangement rather than be deterred by it. On the evidence of Mr Tagg of Truphone (at paragraph 8 of his witness statement dated 3 July 2007) the current situation is as follows:

“If you attempt to call a Truphone number [from a telephone on T-Mobile’s network] you get a recorded message stating ‘You have dialled an incorrect number, please check your number and dial again.’ … The number is not ‘incorrect’ – it is the correct number but is just not being routed by T-Mobile. So, however many times you try to dial, it will never work.”

The ability of a Truphone customer to make a return call efficiently may also be compromised, adding to the risk of customers being deterred.

I was pressed, for T-Mobile, with argument that the effect and the fact of interim orders would cause reputational damage to T-Mobile that would be impossible to quantify in damages. I was not impressed with these points. The effect of interim orders will be that T-Mobile is doing what other MNOs are doing, and with termination fees that it proposed. The fact of interim orders can be explained, and there is no suggestion that damage would threaten T-Mobile’s existence (in contrast to the possibility that would be there for Truphone’s business). Subject to argument, it is still open to T-Mobile to offer undertakings to the Court in place of interim orders.

The evidence is that all other MNOs have activated Truphone’s numbers. T-Mobile has activated numbers allocated to other communications providers. It does not contend that any technical, safety or other like issue makes it more difficult or problematic to activate Truphone’s numbers than those allocated to other communications providers.

The rates that will apply over any period that T-Mobile is required by interim order to activate the numbers allocated to Truphone will be the rates proposed by T-Mobile (unless and until Ofcom determines that different rates are appropriate). The cross undertaking in damages offered by Truphone as a price of the interim remedy sought will further enable the Court, if it thinks just, to make some economic correction in the event that Truphone does not make out at trial its entitlement to the remedies it claims now.

In combination these factors, mentioned in the last two paragraphs, together with the conclusion that without interim remedy either no service or only a materially compromised service could be launched by Truphone, with attendant consequences, weight the balance of convenience towards the grant of interim remedies.

In reaching this assessment I have regard to the short passage in the decision of the EC Commission in Sea Containers Ltd v Stena Sealink Ports and Stena Sealink Line [1995] 4 CMLR 84 at paragraphs (57) to (59) in these terms, and to which I was referred by Ms Carss-Frisk QC for Truphone:

Even where the operator of an essential facility is required to provide access of non-discriminatory terms, interim measures to enable a new competitor to enter a market require stronger justification than measures maintaining the establishment of an already existing competitor.

Where an undertaking is denied the opportunity to provide a new product or service to a market and that opportunity is likely to diminish considerably in value in the absence of interim measures, there is sufficient urgency to justify interim measures if the other conditions for granting them are met.

Otherwise, a final Commission decision prohibiting an abuse of a dominant position which hindered the “growth of competition” would be rendered “ineffectual or even illusory”.”

T-Mobile does say that customers risk being confused if they are able to call Truphone numbers from T-Mobile numbers for a period, and then (if T-Mobile succeeds at trial), can no longer do so. This seems to me a consideration of small weight. If T-Mobile succeeds at trial it will be T-Mobile’s decision whether it wishes to remove this customer facility.

In any event services do change over time. And the risk of customer confusion to which T-Mobile refers is arguably matched by the risk of customer confusion if interim orders are not granted, a compromised service is launched (because for example T-Mobile contends that even if it loses at trial it should not be liable for losses caused by a decision by Truphone not to attempt a service without activation of its numbers by T-Mobile), and throughout that service Truphone customers must arrange to take calls from T-Mobile customers on the alternative number that they have rather than (as for calls from all others MNOs) on their Truphone number.

T-Mobile adds two further points, each based on a different type of perceived risk. First it says that it should not be obliged to accept any credit risk from Truphone in relation to termination charges. Second it says that there is a risk that its non-discrimination obligations may be breached if it enters into a contract with Truphone that it does not want to and is not offering to others.

To my mind, the first is of little weight on the present application. There is evidence before the Court indicating sufficient strength in Truphone’s covenant so far as concerns the cross undertaking in damages that will be required as a price of any interim orders. Given that, I do not see why I should assume that Truphone’s covenant presents an undue credit risk in relation to termination charges.

The short answer to the second point may be that T-Mobile will be acting in accordance with interim orders rather than a contract. Leaving that answer to one side, I am not satisfied on the evidence that activating the numbers allocated to Truphone, in the way all other MNOs have, with termination charges being those proposed by T-Mobile (or in due course determined by Ofcom), presents any true risk of breach of non-discrimination obligations.

Throughout my consideration of this application I have taken particular account of the mandatory (rather than prohibitory) nature of the interim orders sought, the fact that the interim orders are intrusive, and the consequences it if turns out that orders of this nature should not have been made.

In AAH Pharmaceuticals Limited and Others v Pfizer Limited and Another [2007] EWHC 565 (Ch) at [49]- [57]) David Richards J accepted the relevance in applications under section 18 of the Act of the guidance available from the decision of the Court of Appeal in Zockoll Group Limited v Mercury Communications Limited [1988] FSR 354 and of Chadwick J (as he then was) in Nottingham Building Society v Eurodynamic Systems [1993] FSR 468 at 474.

In the latter decision Chadwick J said (in a passage from a summary that Phillips LJ was to “commend as being all the citation that in future should be necessary”):

“Thirdly, it is legitimate, where a mandatory injunction is sought, to consider whether the court does feel a high degree of assurance that the plaintiff will be able to establish this right at a trial. That is because the greater the degree of assurance the plaintiff will ultimately establish his right, the less will be the risk of injustice if the injunction is granted.

But, finally, even where the court is unable to feel any high degree of assurance that the plaintiff will establish his right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory stage. Those circumstances will exist where the risk of injustice if this injunction is refused sufficiently outweigh the risk of injustice if it is granted.”

In the present case whilst I am satisfied there is a seriously arguable case, I see reason why I should hesitate to find “a high degree of assurance” as described by Chadwick J. However I am quite satisfied that the risk of injustice if these interim orders are refused outweighs the risk of injustice if they are granted. The reasons for this will be apparent from this judgment taken as a whole, but (in broad summary) include the following. On the one side there is the risk of injustice to Truphone in the form of potential destruction of its viability as a business, and permanent damage to its time-critical attempt to introduce a new service based on technology that has been in development over several years. On the other side there is the risk of injustice to T-Mobile in the form of its being forced to do what all other MNOs are doing.

T-Mobile submitted that there was not the urgency claimed by Truphone, and instanced the fact that Truphone had threatened to seek interim relief as long ago as 25 May.

Unsurprisingly in a dispute of this nature, correspondence on 25 May was followed by further exchanges, including T-Mobile’s letter of 13 June referred to above. By letter dated 22 June Truphone attempted to “accept” T-Mobile’s “subject to contract” offer, albeit also attempting to add some “terms of acceptance”.

At least by that stage it was clear that Truphone had moved to a position of reluctant interim acceptance of the rates proposed by T-Mobile rather than allowing a dispute over rates to prevent activation of its numbers. This proved insufficient as the dispute simply moved to other terms. The hostile tone of some of the correspondence does neither side credit, and was unlikely to achieve prompt commercial results for either.

Overall I cannot detect delay on the part of Truphone of a nature that should deflect me from treating the question of the grant or refusal of interim orders as commercially urgent.

T-Mobile say that if it has to allow calls to Truphone numbers, it would wish to price those calls for customers at “separate (but reasonable) rates” rather than include them in price “bundles” along with calls to Vodafone, O2, H3G and Orange numbers. The current application for interim orders does not ask me to prevent this, and T-Mobile urges it has pricing discretion in this respect.

However there is a consequence that does arise for the purposes of the orders I am asked to make. This is that T-Mobile estimates that it would take approximately 8 weeks to re-adjust all of its tariffs and systems to ensure that calls to Truphone numbers were not automatically treated (for customer pricing) as calls to the other MNOs. T-Mobile refers to potential customer confusion and resentment if it allowed calls now on one basis only to change in 8 weeks time when it could be sure that it had fully “unbundled” calls to Truphone numbers.

I am not prepared to delay the commencement of interim orders for this period and for this purpose. I do not overlook Mr Miller’s evidence that T-Mobile does price some other numbers separately (ie outside a “bundle”) but I have had no explanation that I regard as full and satisfactory as to why it is commercially important for T-Mobile to price separately for Truphone. It is for T-Mobile to take carefully into account the consequences, in terms of customer satisfaction, business reputation and otherwise, of a decision to price calls to Truphone numbers separately. I express no view on its legal freedom to do so in the current context, where the thrust of Truphone’s allegation is that T-Mobile is motivated to keep Truphone (broadly speaking) out of the market.

In the circumstances, and on an undertaking by Truphone to the Court to issue proceedings forthwith, and a cross undertaking in damages by Truphone to the Court, I propose to grant the interim orders set out below until trial or further order in the meantime. If the matter remains contested from this point, so that a trial is necessary, in my view the Court should strive to ensure that the directions given will enable the matter to get to trial with the minimum delay.

The terms of the interim orders are as follows, subject to any further argument and discussion from Counsel as to their precise terms:

“(1)

The Respondent, by itself of its agents, on or before 0001 hrs Monday 23 July 2007 open the Applicant’s number range (as allocated to the Applicant by the Office of Communications) on the Respondent’s systems.

(2)

In respect of the purchase by the Respondent of termination services from the Applicant, the Respondent will pay the Applicant the rates specified at paragraph 1 of the letter to the Applicant from the Respondent dated 13 June 2007 (Day: 0.3536 pence; Evening: 0.1619 pence; Weekend: 0.1275 pence), unless and until the Office of Communications or the Court hereafter determines otherwise.”

I express my gratitude to all Counsel, and Solicitors, for helping ensure that the argument on this application was conducted concisely, thoroughly and courteously. This enabled the application to be dealt with rather than delayed, and thus the commercial parties to know promptly where they stand.

I asked Ms Carss-Frisk QC, for Truphone, why Truphone had not taken the present dispute to Ofcom first, rather than the Court. Ms Carss-Frisk referred in answer to the resource limits at Ofcom and to the urgency in the present dispute.

I am quite satisfied that it was appropriate to bring the matter before the Court. Moreover the matter is obviously one that the Court is equipped to deal with. The matter is however of a nature such that Ofcom might have views, and which has inevitably involved reference to some published Ofcom material (including material published what is now some years ago).

If there had been the opportunity to ascertain whether Ofcom had any relevant view it wished to express, or (for example) to ascertain whether Ofcom wished to draw attention to the fact that it was or was not in the process of updating existing published material, my own view is that it would have been desirable for that opportunity to be taken.