In March 2012 (Too much information – Information exchange between competitors), we discussed the risks involved in exchanging information with competitors. A recent decision of the United Kingdom Competition Appeal Tribunal (CAT), concerning milk and cheese prices, emphasises that similar risks can arise in passing information to suppliers or customers in circumstances where they then share the information with competitors.

Background

In 2002, there was unrest in the British dairy industry. Farmers were concerned that the prices they were receiving from processors for raw milk were too low and began blockading dairy processing plants. Processors in turn could not increase payments to farmers without either reducing their margins or increasing their prices for milk, butter and cheese to retailers like Asda, Sainsbury's and Tesco.

In the face of mounting pressure, Tesco made a public commitment to supporting the farmers. It called on processors to pay farmers at least two pence more per litre of raw milk. That in turn meant that processors' prices (and so retail prices) were under pressure. In 2002 and 2003, processing companies sought to increase the prices charged to supermarkets, including for cheese.

In mid 2003, one of the processors applied to the Office of Fair Trading (OFT) for leniency. The OFT opened an investigation under the Competition Act 1998, concerned that the price increases sought by the processors had been accompanied by unlawful exchanges of the supermarkets' confidential future retail pricing information. The OFT reached an early resolution of the matter with several other parties.

In July 2011, the OFT issued its decision (Dairy retail price initiatives (CA98/03/2011)). It concluded that Tesco and others had breached the Competition Act by indirectly exchanging their future retail pricing intentions for cheese via their suppliers – resulting in concerted practices with the object of restricting competition - and imposed a fine of £10.4 million on Tesco. Tesco appealed to the CAT, challenging the OFT's rulings on both liability and penalty.

The CAT decision

The CAT delivered its liability judgment in December 2012 (Tesco Stores Ltd v Office of Fair Trading [2012] CAT 31). It considered nine instances of alleged anti-competitive conduct in relation to cheese pricing in 2002, and set aside all but three of the OFT's conclusions. It also set aside all alleged instances relating to cheese pricing in 2003.

There was no suggestion of direct communication or agreement between the retailers. Rather, the OFT alleged that Tesco had participated in what is known as an 'A-B-C' or 'hub-and-spokes' cartel via its suppliers, the dairy processors. The CAT applied the test set out by the Court of Appeal in Argos Ltd v Office of Fair Trading [2006] EWCA Civ 1318, and stated that such an arrangement could exist where:

  • retailer A disclosed to processor B its future pricing intentions;
  • retailer A could be taken to intend that processor B would make use of that information to influence market conditions by passing that information to other retailers (such as C);
  • processor B in fact passed that information to retailer C;
  • retailer C may be taken to know the circumstances in which the information was disclosed by A to B; and
  • retailer C in fact used that information in determining its own future pricing intentions.

The CAT acknowledged that these issues were fact-specific and required careful analysis, including consideration of the extent to which inferences (particularly about the parties' intentions and knowledge in passing and receiving information) could be properly drawn. The CAT was conscious both that disclosures of actual or likely retail prices by a retailer to its supplier are often part of normal commercial dialogue and that a retailer may have little control over whether its supplier then discloses that information to another party.

In relation to disclosure from the retailer to the processor, the CAT in some cases identified internal emails which showed that Tesco had indeed communicated its future retail pricing intentions (relevantly, that it would raise its retail cheese prices). In several cases the OFT's allegations fell at this first hurdle – there was simply insufficient evidence of the communication from Tesco to processors.

As to Tesco's intention, the CAT concluded that where there had been such communications they could not be explained away as part of the normal commercial dialogue between retailer and processor, especially where the retailer was indicating that it planned to raise the retail prices for products which it did not even purchase from that processor. Prior receipt of similar information from other retailers via the processor was equally damaging.

The transmission of Tesco's pricing intentions from the processor to Tesco's competitors was established by concessions and emails (some of which quite transparently reported what Tesco had indicated it would do). Establishing the competitors' state of mind when receiving that information proved more difficult. The CAT thought it significant that competitors must have appreciated when they received the sensitive pricing information that there could be no legitimate commercial reason for Tesco to have shared that information with processors or for processors to pass it on. Again, evidence of competitors passing similar information to Tesco or other retailers in the past was relevant.

It is worth noting that the CAT held Tesco liable both where it had passed information on as the "A" retailer and where it had received information as the "C" retailer.

Penalty

In a short order issued in late February 2013, the CAT reduced the penalty imposed by the OFT from £10.4 million to £6.5 million (by consent).

The position in New Zealand

As noted in our earlier article, there is little case-law in New Zealand on "hub-and-spoke" exchanges of information between competitors. Such an arrangement would be assessed according to the "substantial lessening of competition" test under section 27 or the price-fixing provisions of sections 27 and 30 in combination. The key lesson is simple: exchanges of pricing information are always sensitive from a competition law point of view, especially where those plans relate to future pricing intentions. Although there can be legitimate reasons for customers and suppliers to discuss a company's prices with its competitors (e.g., in trying to negotiate a better deal) companies should be extremely wary of providing information in the hope or expectation that it will be passed on to its competitor(s).

First published in NZ Lawyer, 8 March 2013.