Price signalling through the hub and spoke

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25 August 2011 | Richard Flitcroft

If the price signalling prohibitions come to apply to your industry, then any disclosure of price or strategic information will raise the risk of contravention and require examination. The subjective purpose behind these disclosures will be critical. In distinction to information sharing prohibitions in other jurisdictions such as the UK and EU, in Australia it will not take two to tango.

The proposed price signalling amendments to the Competition and Consumer Act 2010 (Cth) (CCA) provide for the insertion of two novel prohibitions; a ‘per se’ or outright prohibition on the private disclosure of information between competitors and a ‘purpose’ prohibition on the public disclosure of price, capacity and strategic information if such disclosure is made for the purpose of substantially lessening competition. These prohibitions will only apply to specific industries, as identified by regulation. These amendments are being considered by the Senate in its current sittings  which commenced on 16 August 2011. No draft version of these regulations has been made available. We know the first application will be against the banking industry.  Other industries may follow.

The recent conclusion of an investigation by the UK Office of Fair Trading (OFT) brings into focus the types of conduct that may now be caught by these prohibitions, which previously may not have fallen foul of the CCA. This article looks at the UK example, considers how it would be analysed under existing Australian law and under the proposed prohibitions and how the Australian proposal applies even more broadly than the UK reforms.

Information sharing until now under Australian Law

But first, a little history.  In recent years, the ACCC has tried to prosecute price information disclosures between competitors on the basis that such conduct amounted to prohibited price fixing ‘arrangements or understandings’.  These prosecutions have failed, as Courts have held that the arrangements lacked the required commitment to act, and therefore were not an “arrangement or understanding”.  The ACCC expressed disappointment at these decisions on the basis that, at least in relation to the relevant prosecutions, sharing information had a similar damaging effect on competition as ‘true’ price fixing. 

The government and ACCC have approached this ‘shortcoming’ in the law from a few different angles.  Initially, the proposal was to massage the existing law, and permit an arrangement or understanding to be found in the absence of a commitment.  When this proposal failed to attract support, the focus was shifted to the prohibition of unilateral disclosures of information, in order to prevent disclosures which have the potential to facilitate collusion or coordination between competitors.  This focus has led to the price signalling amendments.

Information sharing in the UK

For some time, the UK OFT has, largely successfully, been prosecuting major supermarket chains in relation to co-ordinated price increases on a range of dairy products [i]. The co-ordination was achieved through “hub and spoke” arrangements between supermarket chains and common dairy processors, where the dairy processor acted as an intermediary receiving from one supermarket its pricing intentions and relaying them to the other supermarkets. The structure of these indirect information exchanges was as follows:



 

 

 

 

 

 

 

 

 

 

 

EU legislation prohibits any agreement between parties, or “concerted practice”, that has the “object or effect” of preventing, restricting or distorting competition”. The prohibition requires some level of co-ordination or consensus between the parties. The dairy industry information sharing arrangement amounted to a consensus whereby competition was knowingly replaced by collusion, and therefore amounted to a prohibited “concerted practice”.

Information sharing under the proposed price sharing prohibitions

It is unlikely that the UK Dairy industry information sharing would be a contravention of Australian law before the amendments take effect, due to the difference between the legal definitions of “arrangement or understanding” in Australia and “concerted practice” in the EU. An Australian court would be unlikely to hold that the participants to the dairy information sharing had the required price setting ‘commitment’ to make that information sharing a price fixing “arrangement or understanding”.

However under the proposed price sharing prohibitions the dairy information sharing would likely contravene the purpose prohibition, as it involves the disclosure of pricing information for the purpose of lessening competition in the market for dairy products (actual lessening of competition is not required).

Indeed, the proposed Australian purpose prohibition is more easily satisfied than the EU prohibition. As with the EU prohibition, conduct will be prohibited if it has an anti-competitive purpose or effect. However in distinction to the EU prohibition, whether supermarket C is ‘in on the game’ that supermarket A is playing is irrelevant. That is, there is no requirement for consensus between the parties. A unilateral disclosure, with the relevant purpose, is all that is required for the prohibition to be contravened.

A “purpose” based competition test is found in other provisions of the CCA. However, in many cases, the “purpose” is the purpose of a provision in a contract, arrangement or understanding – i.e. what provision seeks to achieve [ii] – rather than the overarching purpose of the organisation or person engaging in conduct. The CCA clarifies that the purpose test will be satisfied even if the relevant conduct was engaged in for more than one purpose, provided that a substantial purpose was to substantially lessen competition. In this context it is generally accepted that the person’s or corporation’s subjective purpose is relevant [iii].

If your industry is one which becomes covered by the price signalling regulations, then every disclosure of price or strategic information raises risks. Was the subjective intention of the staff member (whose conduct will be attributed to the corporation) to substantially lessen competition? This heightens the need for clear guidance and compliance training covering the types of disclosures that an organisation may make.

As with cartels, it may often be the desire of an individual to ensure that their business unit performs better, that draws the organisation as a whole into unwanted territory.


 [i] In fact the UK OFT and the European Commission regularly consider hub- and spoke- information exchanges in differing industries, as diverse as sporting kit; grocery retailing, private schools, and tobacco.

 [ii] Section 45 prohibits anti-competitive contracts, arrangements or understandings, where a provision of the contract will have the effect of substantially lessening competition.  The cartel prohibition s(s44ZRD (2) and (3) focus on the purpose or effect of a provision in a contract, arrangement or understanding.

 [iii] This was the approach accepted in ACCC v Baxter [2008] FCAFC 141 at [183] and [329] dealing with section 47 and 46 of the CCA.



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Richard Flitcroft

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+61 2 9210 6435

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