Atypical Cartels: ‘Hub and Spoke’ Infringements Speaker: Andrew Groves Director, Markets and Projects Office of Fair Trading (OFT) Views expressed are personal and not necessarily those of the OFT

Overview Background to Hub and Spoke infringements? Test for assessing Hub and Spoke infringements (1) – Overview Test for assessing Hub and Spoke infringements (2) - Detail Challenges to investigation What is acceptable information disclosure? What is the harm caused by Hub and Spoke?

Background to “Hub and Spoke” (1): Direct Contacts Direct agreements between competitors which fix the prices they charge on the market are illegal Discussions between competitors about current and future prices (i.e. absent an agreement to fix prices) are also illegal. No need for reciprocity – the unilateral disclosure of information from one competitor to another is sufficient [T-Mobile] Anic presumption

Background to Hub and Spoke (2): Extending the Principles for Direct Disclosures to Indirect Disclosures Hub and Spoke infringements can arise where competitors indirectly exchange business sensitive information through an intermediary (such as a retailers exchanging via a common supplier – as in Dairy) Where established, infringements arising from indirect disclosures are of the same gravity as direct disclosures: ‘A concerted practice consisting of indirect contact between competitors via their common supplier is no different in substance from two competing retailers sitting across a table and telling each other what their prices will be next week’; CAT in Tesco (Dairy)

The test for establishing Hub and Spoke infringements (1) Hub and spoke information exchanges involve three key elements, all of which are essential to establishing an infringement: The transmission of future pricing information from one retailer (A) to another retailer (C) via an intermediary (B) – the horizontal element is key to this type of infringement An intention on the part of the disclosing retailer (A) that the information will be passed on to a competitor (i.e. C) – it is this intent that distinguishes potentially legitimate from illegitimate disclosures An understanding on the part of the receiving retailer (C) of the circumstances in which the information was disclosed NB: Unilateral disclosure sufficient – no need for reciprocity. Infringements stronger where that occurs

The test for establishing Hub and Spoke (2) COMMON SUPPLIER B Intermediary/”hub” COMMON SUPPLIER B Intermediary/”hub” Supplier B C understands reasons for B’s disclosure to C. Future pricing information Future pricing information Future pricing information Future pricing information Disclosure may be reciprocal A intended or foresaw disclosure COMPETITOR RETAILER A Disclosing retailer COMPETITOR RETAILER A Disclosing retailer COMPETITOR RETAILER C Receiving retailer(s) COMPETITOR RETAILER C Receiving retailer(s) Future pricing information is passed from A-B-C. Evidence of the exchange may be more cogent where there is a reciprocal disclosure of future pricing information from C-B-A.

The test for establishing hub and spoke(3): C’s involvement and the Anic presumption A’s involvement (and B’s) can be elementary to show Key to note in C’s role is that the Anic presumption does apply – Rebuttable presumption that knowledge of competitors’ future conduct will influence behaviour if recipient remains “active on the market in question” Recipient “cannot normally fail to take that information into account when formulating its policy” (CAT in Argos) To rebut, C needs to provide evidence showing information had “no influence whatsoever” on its conduct The key is assessing the disclosure in its context.

Challenges to investigation (1): Intro Suspected Hub and Spoke infringements present a number of challenges to an investigator Need to demonstrate two disclosures of information A disclosing its information to B B passing on A’s information to C Need to also demonstrate that the disclosures had an anti-competitive purpose (i.e. that A intended that B would use its pricing intentions to influence the market place by passing it on to competitors) Need to also demonstrate C’s state of mind (i.e. that C understood the circumstances of the disclosure by A to B)

Challenges to investigation (2) – Demonstrating two disclosures Exchanges rarely fully documented Discussions often occur over the telephone Where documents do exist they are rarely unambiguous Extent of the problem depends on where the gap is If there is an A to B but no B to C – hard to progress without further evidence (hard to infer what would have happened to the information) If there is a B to C but no A to B – there is a possibility of inferring an A to B but this will depend on context. Witness evidence can be important in plugging gaps – esp. if they are the mutual intermediary Harder for a retailer to say what happened to information it disclosed to, or vouch for origin of what it received, from B

Challenges to investigation (3) – Demonstrating Intent Rarely demonstrated by documentary evidence Unlikely to get a clear statement from retailer A that its information should be passed on Rely heavily on witness and inferences drawn from circumstantial evidence Following provide credible grounds for inference: “A” discloses its pricing information to “B” having made some form of conditional commitment to move its prices provided competitors follow “A” discloses its pricing information to “B” having previously received information from “B” regarding “C’s” pricing intentions

Challenges to investigation (4) – Need to show some form of anti-competitive purpose Important to be commercially aware and not mistake aggressive behaviour for an infringement A number of commercially legitimate reasons why a retailer might disclose its pricing intentions to a supplier

What is acceptable information disclosure? Not all exchanges of future pricing information between retailers and suppliers on prices are illegal. Examples of potentially legitimate exchanges: Discussion of retail pricing during a promotion which the supplier is funding Discussion of a price decrease that might mean more stock is required Discussion of a retail pricing point for a new product Passing on pricing information that will be printed on a pack However, such exchanges may not be acceptable: where there is intent or foresight that the information on pricing intentions will be passed on to a competing retailer Retailers can avoid any misunderstanding by: making it clear, when passing information on future pricing intentions to a supplier, that the information is to be treated confidentially rejecting information on their competitor’s future pricing intentions

Observations on theory of harm Jurisprudence is clear – where hub and spoke disclosures occur and all elements of the test are met – indirect disclosures will have the same impact as direct disclosures in terms of the reduction in horizontal competition Competitors know each others’ future pricing intentions Both suppliers and retailers face reduced competitive pressures Consumers pay more and sooner