Publications
Too much information - Information exchange between competitors
Fist published in NZ Lawyer, 9 March 2012, Issue 179.
Introduction
There are many situations in which competing firms might exchange information. In most cases such information exchange will be for a legitimate purpose. For example, competitors might share information on health and safety issues or environmental standards directly or through a trade association. However, sharing competitively sensitive information, particularly in relation to prices, raises competition law issues.
A recent case from the UK Office of Fair Trading (OFT) in the insurance sector offers a useful reminder of these issues. We look at this case and then consider the New Zealand position. We also provide an update from our previous column reporting on the passage of Australian legislation designed to clamp down on price signalling, focussed initially on the banking sector.
UK auto insurers' data exchange tool
On 2 December 2011, the OFT issued a decision to accept binding commitments from seven motor vehicle insurance providers and two IT providers to remedy the OFT's concerns that the companies were involved in anti-competitive information exchange, potentially in breach of UK and EU competition laws1 (the Auto Insurance case).2 While the OFT's acceptance of the commitments means that it did not reach a final decision on the legality of the practices, its decision illustrates the difficulties that information exchange can create, even when ostensibly for a legitimate purpose.
In the Auto Insurance case, a number of insurers contributed detailed pricing and risk information to a database provider, SSP, enabling insurance brokers to access prices for policies that they sell to customers. Prices were submitted around 6 weeks before going live. Being a purely vertical information flow (from supplier to customer) this aspect of the information exchange did not raise competition concerns.
However, the pricing information was also passed to a second provider, Experian, which incorporated it into a market data analysis product "WhatIf? Private Motor". Most insurers in the market subscribed to WhatIf?, allowing them to access their competitors' future pricing information for almost any risk profile in the market. Indeed, it was possible to manipulate the database to allow insurers to extract competitors' exact pricing models for each risk factor.
The OFT was concerned that exchange of detailed, advance pricing information between competitors constituted a "concerted practice" in that each of the insurers acquiesced to the provision of pricing information to Experian knowing that it could be accessed by their competitors. The detailed nature of the information and the frequency of its exchange, led to the OFT's concerns that insurers could coordinate on their pricing, leading to a less competitive market outcome. However, the OFT did not need to make a final decision on this point as the parties offered commitments to the OFT in order to remedy potential competition concerns.
Interestingly, the OFT did not stop the insurers using WhatIf? altogether. Indeed, the OFT recognised that the tool was useful in allowing smaller insurers to accurately rate policy risks and encouraged market entry. Accordingly, the parties committed to restrict the data that could be extracted from the tool: the data must be at least six months old (to avoid sharing of future pricing information) and aggregated over at least five insurers (to avoid identification of individual insurers' pricing policies).
The Auto Insurers case demonstrates the nuanced nature of competition concerns around information exchange. There can be many pro-competitive reasons for exchanging information and current technology can facilitate fast and wide-ranging information exchange. However, parties to such practices need to be sure they are not overstepping the mark and providing competitively sensitive information that is unnecessary to achieve the pro-competitive purpose, as this could raise competition law concerns.
These considerations also apply in New Zealand, although a different legal framework applies.
Information exchange in New Zealand
New Zealand competition law does place limits on information exchanges between competitors. However, there is little case law in New Zealand providing guidance on the exact application of the Commerce Act to information exchange, so a "first principles" approach is necessary.3
Unlike UK and EU legislation, our Commerce Act makes no reference to a "concerted practice." Rather, the Commerce Commission would have to show that information exchange fell within the general prohibition on conduct that substantially lessens competition4 or the per se prohibition on price-fixing.5 In either case the Commission would have to establish that the information exchange constituted a "contract, arrangement or understanding," which requires some meeting of the minds or expectation of future conduct (which, arguably, was present in Auto Insurance).
In any event, information sharing is certainly on competition regulators' radars so it pays to consider the competition law implications of any practices which involve sharing information with competitors. As the Auto Insurance case demonstrates, sharing information with competitors is less likely to raise concerns where the information is historical, aggregated over a number of firms and anonymous. For example, historical volume figures aggregated through a third party are unlikely to raise concerns, whereas competitor-specific information on future pricing carries significant competition law risk.
Update on the Australian position
For most sectors, the Australian position is similar to that in New Zealand: a breach of the law requires a finding of a contract, arrangement or understanding (in addition to an effect on competition).
However, in this column in April last year (http://www.nzlawyermagazine.co.nz) we reported on a Bill before the Australian Parliament to outlaw certain unilateral "price signalling" conduct. To recap, the law introduces two prohibitions:
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Private disclosure prohibition: a per se prohibition against a corporation making a private disclosure of pricing information to competitors in relation to specified goods/services supplied or acquired by the corporation; and
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General disclosure prohibition: a prohibition against a corporation disclosing information (whether private or public) for the purpose of substantially lessening competition, if the information relates to prices, capacity or any aspect of the corporation's commercial strategy in relation to specified goods/services supplied or acquired by the corporation.
These prohibitions are subject to a raft of exceptions.
Since our last briefing, the Bill has now passed through the Australian Parliament and has become law.6 It is expected to come into force in June this year. Two notable developments are:
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The draft regulations, stipulating the entities and activities to which the Act will apply, have been released for consultation. Initially the Act will only apply to the banking sector, and specifically to "Authorised Deposit-taking Institutions".7 It will only apply to lending and deposit-taking activities (which are defined under Australian banking laws).
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There are now no fewer than 13 exceptions to the prohibitions, which demonstrates their extraordinary breadth. A key new addition is an exception to the private disclosure prohibition for conduct in the "Ordinary Course of Business". However, this term is not further defined.
There has been no talk of introducing similar legislation in New Zealand at this stage, and arguably, existing competition laws are sufficient to protect against anticompetitive information exchange. Even if some anticompetitive information exchange currently slips through the gaps, importing the untested and seemingly cumbersome Australian provision risks doing more harm than good.
1 Specifically the Chapter 1 prohibition under the UK Competition Act 1998 and Article 101(1) of the Treaty on the Functioning of the European Union.
2 Office of Fair Trading Decision to accept binding commitments to modify a data exchange tool used by Motor Insurers, December 2011, OFT1395.
3 In the first years following commencement of the Act the Commission heard a handful of authorisation applications concerning information exchange (see for example Decision 167 relating to the Chemists' Guild of New Zealand's price lists, Decision 220 relating to the NZ Medical Association's exchange of fees for paediatrics and Decision 240 relating to the Insurance Council's Statistical Programme). In 2004 it again warned the Pharmacy Guild about its price lists (Commerce Commission Press Release of 23 September 2004).
6 Competition and Consumer Amendment Act (No. 1) 2011
7 Those institutions which are licensed by The Australian Prudential Regulation Authority as ADIs under the Banking Act 1959.
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
