What You Need to Know
- Key takeaway #1The exchange of information between competitors can raise antitrust concerns. For such exchanges to be legitimate, they must pursue an objective that has positive or neutral effects on competition and be limited to what is strictly necessary and proportionate in order to achieve that objective.
- Key takeaway #2In addition to bilateral or multilateral exchanges, the unilateral disclosure of information can be problematic, also for the receiving company. Companies receiving unilaterally disclosed commercially sensitive information should explicitly distance themselves from the disclosure.
- Key takeaway #3Businesses seeking to exchange commercially sensitive information with competitors must ensure that they have adequate compliance measures in place, such as the use of clean teams or third parties to handle the information on their behalf.
The European Commission recently revised its Guidelines on Horizontal Cooperation Agreements. This is the third in a series of alerts in which we provide practical guidance, in light of these revised Guidelines, on how to make antitrust-related assessments for various types of agreements between competitors.
Previously, we looked at sustainability agreements and joint venture agreements. In this alert, we take a closer look at the new guidance on the competitive assessment of information exchanges.
I. What kind of information exchange is relevant from an antitrust perspective?
The exchange of information between competitors (actual or potential) may be problematic from an antitrust perspective if the exchange involves commercially sensitive information. According to the revised Horizontal Guidelines, information is commercially sensitive if it creates or is likely to create conditions of competition that do not correspond to the normal conditions of the market in question, taking into account the nature of the products or services offered and the size and number of the companies involved. Such information reduces uncertainty as to the functioning of the market, regardless of any benefit to the consumer. While that definition remains rather abstract, concrete examples of commercially sensitive information include: information about pricing, costs, capacity, production, quantities, market shares, customers, and business strategy. This covers information exchanges that take place directly between competitors, but also exchanges that take place indirectly through a third party, regardless of the form of the exchange (e.g., physical or digital).
An information exchange can take place in a variety of contexts. It may be the main objective of the cooperation, for example, in the context of a trade association or a conference where representatives of competing companies meet to discuss industry-related issues. It may also be part of a horizontal cooperation agreement (i.e., an agreement between competitors, such as a joint purchasing agreement) or a vertical cooperation agreement (i.e., an agreement between companies active at different levels of the supply chain, such as a distribution agreement). If the underlying agreement is not anti-competitive, because it has neutral or positive effects on competition, the information exchange that accompanies such an agreement will also be legitimate, provided that it is objectively necessary for the implementation of the agreement and proportionate to its objectives.
In the context of a vertical agreement, the related information exchange may benefit from an exemption under the Block Exemption Regulations, provided it is directly related to the agreement’s implementation and necessary to improve production or distribution.
In addition, information exchanges may take place in the context of M&A transactions or regulatory requirements. However, even if regulation requires companies to share information, an exchange may still be considered restrictive of competition if it goes beyond what is required by the regulation in question.
II. How to assess whether an information exchange may restrict competition?
Not all information exchanges between competitors are anti-competitive. Information relating to the general functioning or state of an industry, or to public policy or regulatory matters is generally not considered problematic. However, when it comes to commercially sensitive information, caution is certainly warranted. The exchange of commercially sensitive information may lead to a collusive outcome by artificially increasing market transparency and facilitating coordination between companies. For instance, a company may provide information signaling how it would like its competitors to act or how it would itself act in reaction to their behavior. A collusive outcome may also result where the exchange of information allows companies to reach a common understanding on the terms of their coordination or on their behavior on the market, based on mutually consistent expectations regarding market developments. An increased level of market transparency may also make it easier for colluding companies to monitor each other and retaliate in case of deviation from the agreed anti-competitive behavior, or to identify potential new market entrants in order to try and frustrate their entry.
In addition, information exchange may also lead to anti-competitive foreclosure, either on the market where the exchange takes place or on a related market. Competitors not participating in the exchange may be placed at a significant competitive disadvantage by being denied access to the exchanged information. This is the case where the information in question is of strategic importance and covers a significant share of the market. Third parties on related markets may also be affected, for instance if the exchange in the upstream market takes place between vertically integrated companies and affects prices in the downstream market where these companies are competing with third parties.
According to the updated Horizontal Guidelines, the Commission will take the following factors into account when assessing information exchanges:
- The nature of the information exchanged. As mentioned above, the exchange of commercially sensitive information such as information about pricing, costs, capacity, production, quantities, market shares, customers, and business strategy may be of particular significance from an antitrust perspective. This is even more likely to be the case when such information is forward-looking and regards matters such as future pricing intentions, future production capacity changes or future commercial strategies.
Aggregation of commercially sensitive information can cause it to lose its sensitive character. Information from which it cannot be inferred to which company it belongs or information that encompasses different products (in particular when they belong to different product markets) has much less competitive value and is therefore of less concern.
Similarly, historical information will often not be of concern insofar as it is too outdated to be of competitive value. Assessing exactly when information becomes historical will often require a case-by-case analysis and depend, in particular, on the relevant market characteristics, such as the frequency of pricing cycles.
- The characteristics of the information exchange. The Guidelines categorize information exchanges based on (1) whether the disclosure is unilateral or not; (2) whether the exchange is direct or indirect; and (3) the frequency of the exchange.
Unilateral disclosure of commercially sensitive information can be problematic not only for the disclosing company but also for the receiving company, as the recipient is presumed to take the disclosed information into account in adapting its own market behavior. The fact that a company discloses commercially sensitive information through a public announcement does not in itself exclude that such an announcement may restrict competition, as it may facilitate collusion between competitors by signaling future intentions to behave on the market in a specific way.
Indirect information exchange refers to an exchange via a third party, such as a customer, supplier, or trade association, that transmits the commercially sensitive information between the competitors involved. In such cases, the third party may itself also be held liable.
The frequency of the exchange may increase the risks of a collusive outcome, although a case-by-case analysis will be required since the effects will depend on the market environment (stable or more dynamic).
The Guidelines also discuss the use of algorithms. The Commission sets out two principles. First, if pricing practices are illegal when implemented offline, they are likely also to be illegal when implemented online. Second, companies cannot avoid liability on the basis that prices were determined by an algorithm, as the algorithms remain under their control.
- The characteristics of the market in which the exchange takes place. Relevant characteristics include the level of transparency in the market, the number of active companies and whether they are similar, the existence of entry barriers, the complexity of the market and the stability of the supply and demand conditions on the market. As such, an information exchange will usually be more problematic the higher the market transparency, the more concentrated a market is, the higher the entry barriers are, the less complex a market is and the more stable a market is.
III. What if there are still good reasons to exchange commercially sensitive information?
An exchange of commercially sensitive information that would otherwise be restrictive of competition may, on balance, be acceptable if its pro-competitive effects outweigh its anti-competitive effects. For this purpose, the following criteria must be cumulatively fulfilled: (1) the information exchange must lead to efficiency gains; (2) the exchange must be indispensable to achieving the efficiency gains; (3) the efficiency gains must be passed on to consumers to an extent that outweighs the restrictive effects of the exchange; and (4) the exchange between the competitors must not lead to the elimination of competition.
In the updated Horizontal Guidelines, the Commission has included a number of additional scenarios to assist companies in making a self-assessment concerning their information exchanges. These relate, inter alia, to benchmarking, data sharing arrangements, or the use of public announcements. For example, the Guidelines note that for the purpose of competitor benchmarking, an exchange of individualized data would generally not be considered to be indispensable, since data aggregation, e.g., via an industry ranking, should lead to the same results. For data sharing arrangements, the example refers to an arrangement set up by an industry association to counter supply shortages of its members. The example explains that participating companies need to make sure that the underlying purpose is indeed legitimate, that only data that is indispensable for achieving the purpose is collected and shared, that data is aggregated as much as possible, that the entire project is well documented and that it should be ensured that others (companies that are not members of the industry association) have access to the data to avoid foreclosure effects. Concerning the use of public announcements, the Guidelines’ example illustrates that such announcements are particularly problematic if they relate to future information that is commercially sensitive, such as intended pricing information. Where such announcements do not have a legitimate goal, e.g., to inform consumers, they are likely to be concerning.
IV. How can companies mitigate the risks of improper information exchanges?
Companies wishing to exchange information, and, in particular, commercially sensitive information, with a competitor should ensure that:
- The exchange pursues a legitimate (i.e., not anti-competitive) objective;
- There is a clear framework in place that sets out what kind of information is exchanged, why the exchange of such information is necessary and proportionate to achieving the objective, and how such information will be handled;
- There are measures in place to reduce the risks of a competition law infringement, including, that no information be collected that is not strictly necessary, that, where possible, information be aggregated before it is exchanged, and that there be information barriers in place to prevent received information from being used for any purposes outside the defined scope. Information barriers can include clean teams or trustees (independent third parties). According to the Guidelines, clean teams should consist of individuals not involved in commercial operations and who are bound by strict confidentiality protocols. Trustees can handle commercially sensitive information on behalf of the parties and act as a sort of black box, so that companies have no direct access to each other’s commercially sensitive information;
- The more sensitive the information is (with forward-looking information being the most sensitive), the more careful companies need to be and the stricter the measures have to be; and
- The parties are transparent and have a clear paper trail, including, a written cooperation framework, agendas for and minutes of every meeting held between them and lists of the employees who have access to the exchanged information.
When in doubt about the legitimacy of an information exchange, a company should always distance itself from the information disclosed by its competitors. In the case of public disclosure, a public disavowal may be required. In the case of a disclosure in the context of a private meeting, the company representative should openly disagree with the disclosure of the information and, if the disclosure nevertheless continues, the representative should leave the meeting after having recorded the disagreement and the departure in the meeting minutes.
For further information, please contact:
Karel Bourgeois, Partner, Crowell & Moring
kbourgeois@crowell.com
