UK: Early-Exit Fees Cause Misery For Virgin Media

CAT dismisses Virgin Media's appeal

At the end of 2018 Ofcom fined Virgin Media £7 million for breaching two regulatory obligations, when it overcharged its customers who wanted to leave its contracts early, under so called 'early-exit charges'. Ofcom's investigation discovered that Virgin Media had overcharged almost 82,000 customers a total of just under £2.8 million. Virgin Media appealed Ofcom's decision against it on three grounds and the case was referred to the Competition Appeal Tribunal (the "CAT"). Earlier this week the CAT dismissed the claim on all grounds. This article will consider in particular, the CAT's judgement in deciding whether the penalty was proportionate in relation to the new judicial review standard of review.

The appeal grounds

1. The finding of contravention:

Ofcom's decision against Virgin Media was based on the evidence that Virgin Media’s website wasn’t clear or up to date, and made it difficult for customers to know the cost of switching to another company which Ofcom found acted as a disincentive to customers' switching. This caused Virgin Media to be in contravention of its regulatory obligation, GC 9.3. GC 9.3 states that providers shall ensure that conditions or procedures for contract termination do not act as disincentives for customers changing their provider. Virgin Media's first ground of appeal against the decision was based on the argument that Ofcom erred in law in finding a contravention of GC 9.3. There was five strands to this argument which can be summarised as follows:

(a) Ofcom was incorrect to use GC 9.3 as a vehicle to penalise providers, when they have made a mistake in the calculation of early-exit charges. When the true position is that GC 9.3 does not regulate the level of early-exit charges at all;

(b) GC 9.3 should not be interpreted in a manner which duplicates existing rules of national law;

(c) GC 9.3 should not be applied in a way that is incompatible with the principle of legal certainty;

(d) Ofcom erred in law, in finding that materiality of effect on switching rates was required in order to establish a contravention of GC 9.3, and by making the finding of a material effect at all; and

(e) Ofgem's conclusion that the absence of any material effect on competition was irrelevant was a mistake. Virgin Media claimed the regime expressly intended to allow consumers to take full advantage of the competitive environment.

The CAT was not persuaded by any of these arguments and confirmed that the intention of the overlying conditions for providers was to ensure consumers can change providers “without being hindered.“

2. The decision to impose a penalty in the amount of £7 million was arbitrary and unfair and not adequately reasoned and in any event the penalty was disproportionate.

Virgin Media submitted that Ofcom had not adopted an adequate or transparent process of reasoning in determining the penalty. It claimed that Ofcom had failed to provide information explaining the starting point figure of the penalty and how that figure had been adjusted to reflect mitigating factors. Virgin Media asserted that it was left without the ability to understand the process adopted. It was therefore deprived of an effective ability to challenge the penalty. It further claimed that, in any event, the penalty was disproportionate as it had been caused by oversight, had been rectified quickly and had not caused Virgin Media any financial gain after refunds were made. Finally, Virgin Media argued that the penalty was disproportionate compared to a confirmation decision issued by Ofcom to EE on the same day as the Virgin Media decision. EE's fine was based on the fact 400,000 people were overcharged a total of £13.5 million, whereas Virgin Media overcharged 82,000 a total of £2.7 million. The fine imposed on EE was for £9 million (reduced to £6.3 million through settlement).

Ofcom's penalty guidelines states that it must have regard to precedents set by previous cases. In Ofcom's decision making process when coming to the fine it considered three other precedents relating to charges but not the EE case. The CAT said that strictly the EE decision was not a "previous" case, as they were issued on the same date. Ofcom confirmed the other precedents could be distinguished on the grounds that the scale of the contraventions and number of affected customers were substantially lower. The CAT ruled that although Ofcom did not technically breach their own guidelines in failing to consider the EE decision, it would have been preferable, and certainly best regulatory practice, for Ofcom to have considered the EE case when making the final decision. This would have been the best way of ensuring compliance with Ofcom's duties, in particular the duty to have regard to the principle of consistency.

Ofcom's argument that this was not possible to compare the cases because the decision maker in the case had actually made his decision on an earlier date, before the decision was made in the EE case was not accepted. The CAT stated "There is no indication that it was not practically or sensibly possible for a process of cross-checking to occur before that date. It therefore appears to us that it should in fact have been possible to ensure that the decision maker in the Virgin Media case did consider the proposed decision in the EE case before reaching a final decision. Consistency of decision making is obviously important, and ensuring a cross-check between the two decisions would have been the obvious, and best, way of ensuring that full regard was had to that principle."

The CAT concluded that, while Ofcom's failure to consider the EE case fell short of best regulatory practice, the failure was not sufficiently material to challenge the decision. The CAT stated that it had conducted its own comparison of the fines issued to the two companies and confirmed that the approach taken by Ofcom can be justified relative to the EE decision. The amount of the penalty had been decided with reference to the turnover of each company. In Ofcom's decision against EE, it had used an incorrect turnover figure which meant that EE benefited from paying a reduced level of penalty compared to its size. The CAT said it did not make sense to extend that benefit to Virgin Media.

Furthermore, Virgin Media had argued that the contravention by EE was more serious and showed a complete disregard for compliance, whereas its own decision was simply an error. The CAT said that in its view the material factors of the case actually pointed to the opposite of Virgin Media's 's argument of error, in that Virgin Media team members detected the breach but made no effort to do anything about it until after Ofcom started investigating.

Standard of review

The judgment is one of the first to apply s.194A of the Communications Act 2003, which provides that in appeals under s.192 the CAT should apply the same principles as would be applied by a court in judicial review. This contrasts with the pre-31 July 2017 version of s.195 CA 2003, which provided at s.195(2) that: "the Tribunal shall decide the appeal on the merits...". In its judgement the CAT discussed how the judicial review standard should apply to appeal cases. The judgement referred to the case of T-Mobile (UK) Ltd and another v Office of Communications [2008] which confirmed that the judicial review standard must be compliant with the requirement of an overarching EU Framework Directive which states that "merits of the case are duly taken into account and that there is an effective appeal mechanism".

The current judgement went on to state that the role of the CAT is not one of rehearing the case on its merits. It is of particular importance that the CAT stated: "as a specialist regulator, Ofcom's judgment, in particular as to the appropriate penalty to impose having regard to the facts of the case and to the principle of deterrence, must be accorded respect". As confirmed by R (Hutchison 3G UK Limited) v Office of Communications [2017], the focus of the appeal must be on Ofcom's decision and whether that decision was materially wrong. It is the decision itself which is to be challenged, not a question of what decision the CAT might have reached if it started afresh. The CAT also observed that errors in reasoning of a decision which do not affect the result will not be material.

Power to Ofcom

The CAT's approach to respect Ofcom's findings on the facts will be welcomed by the regulator. The judgement held that there was no breach of conduct by Ofcom, for failing to compare the decision against EE, it was merely not best practice. This decision raises the question of whether the outcome would have been different, if the standard for review was still based on the merits. This decision will be of concern for those regulated by Ofcom, as it may open the door for future inconsistency in decision making. Consistency in regulatory decision making has been long understood as a paramount factor in upholding administrative values. It will be interesting to observe how this decision affects Ofcom's process and approach to penalties in the future.

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