Renewed scrutiny of information exchanges by competitors has led to an uptick in private and government challenges. Latham & Watkins partner Mandy Reeves recently spoke on a panel on the topic titled “Information Exchange Update: Steely Nurses and Iron Pipes.” In this Q&A interview, Reeves offers highlights from the panel and additional insights on the current state of the law in this area.
What is behind the renewed scrutiny of and challenges to information exchanges by competitors?
The law is in a state of flux when it comes to information exchanges. Historically, the courts, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) have principally looked at information exchanges through the lens that they are either facilitating price fixing agreements, or they are facilitating joint ventures or things that are clearly pro-competitive. As a result, if parties are looking to exchange current, competitively sensitive information and have agreed to do so in order to control prices or output, in order to do something that would clearly be harmful, that will very likely be illegal under Section 1 of the Sherman Act. In contrast, the law has tended to be relatively clear that if you are exchanging information that is less competitively sensitive and your objective is to enhance output, further innovation or lower prices, then that is protected.
Recently, however, there have been a spate of litigations and government investigations involving circumstances where (1) competitors are exchanging information whose competitive sensitivity is debatable, leading to some dispute as to whether it is likely to facilitate an anti-competitive effect, and (2) where there is not a separate agreement to engage in conduct related to controlling prices or output. In other words, they are simply exchanging information that the plaintiff or government believes is competitively sensitive without an actual agreement as to what they will do with that information. So, whereas in the past there had to have been an agreement to harm competition, now the concern is more simply that the sharing of information will allow you to have the same effect as the agreement would have. What that means is that there is an increased scrutiny on the exchange of competitively sensitive information, even in cases where there may not have been an explicit agreement to fix prices or do something harmful.
How can companies assess the risk they face when participating in an information exchange?
Historically, apart from the general parameters provided by the Sherman Act, the principal guidepost for companies to assess the legality of a potential information exchange has been the DOJ/FTC’s joint healthcare statements that were put together in 1996. Those statements provide that the agencies will not challenge provider participation in surveys that involve information exchanges if (i) the exchange is managed by a third party; (ii) the information provided by participants is based on data that is more than three months old; (iii) there are at least five contributors of data for each disseminated statistic; (iv) no individual participant’s data represents more than 25 percent of any particular statistic; and (v) shared information is sufficiently aggregated. Although these statements were articulated in the healthcare context, practitioners in all contexts routinely rely on them in counseling parties that are thinking about participating in an information exchange.
Although this standard has long been thought of as “safety zone” – meaning conduct beyond these parameters may still be defensible – the FTC and private plaintiffs have recently started to challenge conduct that is very close to these parameters. So while it used to be the case that if you went beyond the safety zone, your conduct might be subject to additional scrutiny but could still be defensible, this safety zone has (in the eyes of plaintiffs and the FTC) essentially become the only zone of permissible conduct. As a result, there is a trend to declare everything beyond the safety zone as presumptively illegal. Moreover, the agencies may demand even more stringent requirements than those set out by the safe harbors. In the recent Ductile Pipes decision, In re Sigma Corp., Docket No. C-4347 (FTC Consent Agreement Jan. 4, 2012), for example, the information exchange requirements imposed in the FTC consent order required data to be more than six months old, rather than the usual three months safe harbor criteria.
What are some best practices companies should follow when it comes to information exchanges?
There are a few steps. The first step is always to think about why it is you want to exchange the information. Is it to facilitate something that is defensible and good from a consumer standpoint? For example, does exchanging the information allow you to develop a new product, or engage in innovation or enter into a joint venture that will deliver better products at better prices? If you are doing any of those things, you are likely fine, though you will want to think carefully about whether the information you are exchanging is current and particularly competitively sensitive. If so, precautions – including, for example, the implementation of a “clean team” – may help you achieve your end.
The second step is to think about whether either company in the exchange has market power, individually or together. The greater your individual and combined market shares are, the more likely you are to run afoul of the antitrust laws.
Third and finally, if you have any concerns whatsoever about what you are planning to share with your competitors, ask inside or outside counsel for assistance in thinking about whether it is something worth doing. There may be a way to structure what you want to accomplish so that it does not run afoul of the antitrust laws. It is important to do this early, rather than after the fact. And finally, you should always pick up the phone and ask questions as early as possible, rather than creating a bunch of emails back and forth with your competitors that creates a paper trail for a potential investigation or litigation.