Important UK Decision on Information Exchange: The Curious Case of Schrödinger’s Cat?

In a Nutshell

In an important judgment today, the Court of Appeal upheld the Competition and Markets Authority’s ("CMA") finding of infringement in a case involving the exchange of competitively sensitive information at a single meeting, in which only one participant in the exchange was fined.  

The CMA has said that this case sends a clear and unequivocal message to all businesses across the UK that if companies exchange competitively sensitive, confidential information – even at just one meetingthat is itself a breach of competition law.

The implications of the judgment are important for companies to note in terms of:

  • the strict line that competition authorities are prepared to take in relation to exchanges of pricing information (and other competitively sensitive parameters);
  • the fact that cartel cases are able to spawn multiple, separate infringements; and
  • the need for individuals who find themselves in discussions which stray into dangerous territory from a competition perspective to immediately and unequivocally state that they are not acting on any information received and to remove themselves from the discussion immediately (and have noted the fact they have done so).

The decision is also notable in relation to the forensic approach the CMA (and the Competition Appeal Tribunal ("CAT")) has taken to considering each piece of information provided and received in the course of the exchange and its analysis of the ways, in the context of this market, in which each piece of information could reduce uncertainty as to the parties’ future competitive behaviour.

Background

In December 2016 the CMA fined Balmoral, a supplier of galvanised steel tanks used in fire suppression sprinkler systems, £130,000 for taking part in an exchange of competitively sensitive information on prices and pricing intentions with 3 of its competitors. Ironically the exchange took place at a meeting in July 2012 to which Balmoral had been invited to gauge its appetite to join a long-running cartel between water tank suppliers. Balmoral repeatedly declined to do so during the meeting. As part of the cartel, customers were allocated among the cartel participants and the parties agreed benchmark levels of pricing and maximum discounts to be offered to “preferred” and “non-preferred” customers (so that each company would win bids from customers allocated to it; and lose bids from customers allocated to its competitors so as to create the appearance of competition).  

The Managing Director of Balmoral, a supplier which had entered the market 6 months previously, disrupting the cartel and reducing prices by as much as 20%, refused to participate in the cartel but exchanged competitively sensitive information at the meeting, remaining at the meeting for over an hour and continuing to discuss the size of the market, market share and current and future pricing intentions. The meeting was secretly recorded by the CMA following a leniency application by one supplier. The CMA alleged that information was provided concerning Balmoral’s views on what pricing should be for specific tanks, that prices should move upwards and appropriate price bands for other tanks going forward.

The CMA fined the participants to the cartel a total of £2.6 million for fixing prices, rigging bids and allocating customers for steel tanks ("the Main Cartel Decision"). The CMA however failed in its criminal prosecution of two of the cartel executives. In relation to the July meeting the CMA concluded that Balmoral was both providing and actively seeking pricing and strategic information about its competitors and that this information reduced uncertainty about their pricing behaviour. The CMA imposed a fine of £130,000 on Balmoral (alone) for this infringement: a fine which was somewhat at odds with the £22,000 fine imposed on one of the long standing cartel participants (due to its smaller turnover).

On appeal to the CAT, the CMA’s findings were upheld, with the CAT stating that “.. we are entirely satisfied that Balmoral was a party to [the information exchange infringement].. Mr Joyce [the Managing Director of Balmoral] went to the meeting knowing or suspecting that the discussion was very likely to trespass into problematic areas .. however reluctantly Mr Joyce was drawn into conversation about pricing which went well beyond a discussion of general market conditions or historic prices.. What appears to us from the recording of the meeting was that Mr Joyce was seeking to reassure [the other cartel participants] that although it would not join the Main Cartel, it would charge prices that would not render continuation by the others of the cartel entirely impossible. Those hopes that he engendered were not fulfilled and we accept that [the other cartel participants] realised soon after the game was up and there was no point, after the meeting, complaining further to Balmoral about its pricing. Applying the case law which establishes where the line is to be drawn between innocuous discussion and infringement, we are in no doubt that the conduct here was an infringement”.

The Court of Appeal’s Judgment

On appeal Balmoral advanced 4 grounds:

A cat cannot be simultaneously alive and dead or, one cannot be simultaneously guilty and innocent at the same time in relation to the same facts

Balmoral’s first ground of appeal was that the information exchange decision could not logically sit side by side with the Main Cartel Decision (which Balmoral was found not to be a party to). Counsel for Balmoral argued that the “single and continuous infringement” concept in cartel law, which means that each participant to a cartel is found responsible for the overall conduct of the cartel even if some did not attend every meeting or were not involved in every aspect of its decision making, meant that Balmoral should have been found a party to the Main Cartel Decision, but was not. 

Counsel invoked Austrian physicist Erwin Schrödinger’s famous thought experiment in which a cat in a box is simultaneously alive and dead from an observer’s perspective until the box is opened, to argue that Balmoral had been found simultaneously both guilty and innocent of anticompetitive conduct. Counsel also argued that the two decisions cannot sensibly be disentangled, which could leave a civil court handling a follow-on damages claim in great difficulty.

The Court, driving the cat metaphor further, rejected this submission finding that the two infringements were “different animals”: one a long-standing bid rigging, price fixing, customer allocation cartel; and the other an exchange of commercially sensitive information which reduced uncertainty as regards pricing. The Main Cartel and the information exchange could both be said to relate to pricing but that did not make the information exchange a sub-set of the Main Cartel or collapse the former into the latter. The Court considered that to find otherwise would be to conclude that the CMA’s only option was to hold Balmoral liable for a more serious infringement than it had in fact committed and this would be an absurd outcome.

The legal standard for information exchanges was impermissibly strict

In its second ground Balmoral argued that the CAT had adopted an impermissibly strict approach to the test for “object” infringement in the context of information exchanges and had come close to taking the position that any exchange of pricing information between competitors constitutes an object infringement. 

The Court again rejected this argument finding that the CAT had explained why the exchange of pricing information was harmful to competition in the particular context in its findings that:

  • “a single indication as to future pricing may therefore affect a material number of bids and a material value of potential work”..;
  • the “significance of the price exchange information was not simply in the numbers themselves but an indication [to the other cartelists] that Balmoral was not intending to push prices down (whether or not it was true);
  • an exchange of pricing intentions at a single meeting has the potential to affect prices bid over a significant period into the future”;
  • “this is a market in which a one off exchange of pricing information is an object infringement of the competition rules”;
  • the “prices discussed went well beyond generic pricing”;
  • [water tanks] are a sufficiently commoditised product for price information to be valuable among competitors”; and
  • “the meeting provided an opportunity for the parties to confirm their understanding of what prices were being charged for particular tanks directly from their competitors and moreover to gain a better understanding of what prices their competitors might charge in the future”. 

At the earlier appeal stage the CAT had already rejected Balmoral’s arguments that, amongst other things, its managing director was not closely involved in pricing decisions and not in a position to disclose its strategy with any accuracy. 

The information exchanged did not reduce uncertainty

Balmoral argued that the CAT is required, in assessing whether information exchange has reduced uncertainty between participants to it, to compare what the participants knew before the exchange with what they knew afterwards and that a single meeting is less likely to raise concerns than a series of meetings.

The Court gave short shrift to this argument and confirmed the finding in T-Mobile that a single meeting can result in a concerted practice and that other meetings between Balmoral and the other participants did not involve the exchange of pricing information.

Penalty

Balmoral argued that the CMA had breached the principle of equal treatment in that it was the only undertaking fined for the information exchange. The CAT had addressed this point in its earlier judgment when it concluded that the CMA in imposing a fine must have regard to the need for deterrence and the CMA had already imposed a fine on the other participants for the Main Cartel such that the CMA was entitled to find that it could not justify imposing an additional fine on the Main Cartel participants.

The Court accepted the CMA’s argument that it had imposed large fines on the other cartel participants (in fact hitting the statutory cap of 10% of turnover in relation to 2 of them) and could not justify imposing an additional fine. As Balmoral was not in the same position, the decision to fine only it was not inconsistent with the equal treatment principle.