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Brief Counsel

Competitor relations – how to have them without jumping the gun

06 March 2009

A recent internal report reveals the Commerce Commission's view of how competitors should deal with each other to avoid falling foul of the Commerce Act.

The case study

In 2004, the Otago and Southland District Health Boards (DHBs) issued a Request For Proposal (RFP) asking for bids to provide all hospital and community testing services in their combined regions.

The two existing suppliers put in a joint bid. The DHBs wanted them to work together: the RFP referred to the DHBs' wish to see "collaboration between providers to ensure a cost-reflective, sustainable, and efficient laboratory service".

The joint bid was successful but it was submitted before an application for clearance was filed – and clearance was declined.

The Commerce Commission explored the question of whether the joint bid was a price fix. It found that it wasn't because it was never implemented. Had it been implemented, the Commission's view would probably have been different:

"The Commission does not seek to argue that the joint bids themselves amounted to price-fixing in breach of section 30 of the Act. …a transparent joint bid by competitors that is made subject to Commission clearance is not synonymous with price-fixing."

But the story doesn't end there… 

New RFPs were eventually issued by the DHBs and the former joint bidders submitted independent bids. 

The Commission then assessed whether the exchange of competitively sensitive information for the purpose of preparing the joint bid had affected the subsequent independent bids. 

"The concern in this case is that the exchange of detailed operational and strategic information required in order for [the parties] to formulate their initial joint proposals may have harmed the competitiveness of the most recent RFPs, in which [the parties] were required to bid separately."

Specifically, the Commission asked whether the information exchange had the purpose or effect of:

  • substantially lessening competition at the time of the subsequent RFP – in breach of section 27 of the Commerce Act; or

  • fixing, controlling or maintaining the independent bid prices in breach of section 30 of the Commerce Act.

Ultimately, the Commission found no breach. It recognised that, after the failed joint bid, the bidders had been instructed to destroy any commercially sensitive documents received from each other. It recognised also that neither bidder had taken into account any information obtained from the other to inform it of the likely tender price the other would submit.

The Commission had a few criticisms along the way

The Commission thought the confidentiality agreement the parties had signed was deficient because it didn't name all the relevant subsidiary companies, it didn't specify the purpose for which the information was to be used, and it only required confidential information to be returned or destroyed on demand (not automatically).

The Commission was also concerned that the same people who prepared the joint bid prepared the independent bids.  (This is likely to be a fact of life for most companies.  Few would have enough appropriately qualified people for two separate teams).

The lessons: how to bid with your competitor and avoid an allegation of price fixing

  • Check whether your joint bid could be saved by the "joint venture pricing" exception in the Commerce Act. But take advice as this exception is very narrow. It may not give you the protection you need.
  • Consider whether the joint arrangement could be structured to involve an "acquisition" of assets or shares, and make it subject to Commerce Commission clearance. (Getting clearance should save you from the "per se" prohibition on price fixing.)
  • In the early stages, limit or manage disclosure of commercially sensitive information (input costs, prices etc). Don't start pricing up your joint bid until you get clearance.
  • Sign and enforce a confidentiality agreement:
    • Limit the information to be exchanged to what is strictly necessary, or provide confidential information only to an independent third party for analysis.
    • Limit the purpose for which competitor information can be used (i.e. to prepare the joint bid).
    • Limit who on each side sees competitor information (named individuals and preferably not those in the front line of pricing up contracts).
    • Make sure all confidential information is returned or deleted if the venture ends or the bid is unsuccessful. Police it.
  • Don't proceed if you don't get clearance – even if the issuer of the RFP wants you to bid jointly.

What does it mean for due diligence?

If you are looking to sell to your competitor, your competitor will want to do due diligence – to understand your costs and revenues to decide whether to proceed and at what price. That is standard business practice. 

But if the deal does not proceed, your competitor may still hold sensitive information about your business. And even if it does proceed, use of that information before the deal settles could be seen as "jumping the gun" by the Commission (see Footnote). 

Imagine a large contract comes up before signing and settlement. You propose to bid and so does your competitor. If due diligence has provided your competitor with detailed financial information that would enable it to determine your likely bid price, the Commission will be concerned – as it would be if you agreed not to bid at all for the contract. (Take another look at that part of the sale and purchase agreement that deals with conduct in the period between signing and settlement.)

Confidentiality agreements are standard in merger and acquisition transactions but, in some cases, the flow of confidential information may not be as strictly managed as it should be.

A recent case in the United States emphasises the importance of robust confidentiality protocols. Sensitive information exchanged during merger talks and due diligence was alleged to have shown an unlawful price-fixing conspiracy.

The court rejected the claim because there was no evidence inconsistent with two competing entities engaging in legitimate merger discussions and planning. The confidentiality arrangements in place, while not perfect, were robust enough for the court to be confident that they were legitimate.

But one of the questions the court asked was whether the information exchange was necessary for the due diligence process. The fact that pricing information was available only as averages was important in the court's conclusion.

The lessons: how to manage due diligence to avoid allegations of anti-competitive conduct

  • In the early stages, limit or manage disclosure of commercially sensitive information (input costs, prices etc).
  • Limit the information to be exchanged to what is necessary to give the acquirer comfort around the financial position of the target: e.g. price averages or ranges rather than specifics. Or provide confidential information only to an independent third party for analysis.
  • Don't provide competitively sensitive information in a way that can be permanently downloaded onto acquirer computers or forwarded on.
  • Enforce the confidentiality agreement: make sure all confidential information is returned or deleted if the deal is not consummated.
  • Before you hand over sensitive information, consider how you'd feel if the deal collapses. Would you wish you hadn't?

Is the Commerce Commission being oversensitive?

Perhaps. There are undoubtedly good arguments that the Commission's concerns in this instance were unwarranted; that the joint venture exception for price fixing could apply; and that in many instances information exchange between competitors has no effect whatsoever on the competitive process. Indeed it can be argued that greater transparency of information can sometimes result in a more competitive outcome.

But, whether you agree with the Commission or not, and while in this case "all's well that ends well", it does tell us what the Commission thinks. 

To avoid the time, effort and expense of a Commerce Commission investigation there are steps you can take. Take advice from your competition law advisors.

Footnote

A more extreme version of gun-jumping was recently engaged in by Mars Inc when it closed a deal to acquire US pet food producer Nutro Products in Germany without receiving Federal Cartel Office approval of the transaction. The €4.5 million fine was the largest ever imposed by the FCO for a breach of the "suspension obligation" in German law.