Although it may seem logical for entrepreneurs to protect their interests by agreeing on commercial strategies to respond to new market challenges or to attract consumers with public announcements about lowering their prices in the upcoming period, this is a very sensitive area that can cause serious violations of competition law, and then bring significant penalties to entrepreneurs.
Recently, we often encounter announcements from certain entrepreneurs or associations of entrepreneurs in the media regarding their plans concerning prices. For example, craft associations announced a few months ago price increases for certain services and held meetings of their members to discuss price levels as a response to rising energy costs in 2022. Shortly thereafter, following the Government’s decision to reduce VAT on certain categories of products from April 1, 2022, some retail chains announced in the media that they would adequately reduce the prices of some products from a certain date.
Although it may seem logical for entrepreneurs to protect their interests by agreeing on which commercial strategies to respond to new market challenges or to attract consumers with public announcements about lowering their prices in the upcoming period, this is a very sensitive area that can cause serious violations of competition law, and then bring significant penalties to entrepreneurs.
Strange Decision of the Constitutional Court
The term cartel is something that many would say even the birds on the branch know that competitors must not agree on prices or divide the market. However, prohibited agreements are a much more complex topic than that, and practice shows that in Croatia there is still not enough awareness of even the obvious forms of cartel behavior. Just when we think we are showing progress compared to the previous state of the market where a large number of entrepreneurs and their associations considered it commendable when they managed to agree on a price, an awkward case arises, such as the so-called security guard cartel. Awkward because the Constitutional Court decided to intervene in competition law issues and in this specific case incorrectly supported the understanding that an agreement regarding 'only' one of the elements of the price (in this case, the price of the security guard’s hourly rate) is not a cartel.
Namely, a prohibited agreement does not only encompass an agreement on price but also an agreement on individual elements of that price. In a situation where the Constitutional Court makes such a decision, which is logically followed by bombastic headlines in the newspapers stating that the Constitutional Court has overturned previous decisions of responsible bodies, it is not unusual for entrepreneurs to lose their compass and no longer know what is allowed and what is not. If confusion arises around the basic forms of cartel behavior, it is hard to expect that entrepreneurs will know how to act in less obvious situations, such as the exchange of sensitive information. Therefore, it is not surprising that entrepreneurs and associations continue to publicly call for agreements or announce their commercial strategies.
What is Prohibited
What is allowed and what is not? A useful source for determining what is allowed and what is not is the law and practice at the level of the European Union, which provides certain guidelines in this area, which is also followed by our legal system. Namely, not every exchange of information between competitors is prohibited, and there are various examples when the exchange of information can be beneficial (especially in the case of contracts such as R&D contracts). Since the focus of the responsible bodies is on prohibited forms of behavior, this article focuses on problematic behaviors and draws attention to some frequent examples.
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As early as 2009, a decision was made at the European level in the telecommunications sector in which the court clarified that the number of meetings is irrelevant – what matters is whether even one meeting allowed participants to take into account the exchanged information in making decisions about market behavior
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The exchange of sensitive, so-called strategic information, which removes strategic uncertainty in the market and thus reduces the independence of entrepreneurs in decision-making, is primarily considered problematic. Although it is most often considered that key strategic information concerns prices and quantities as well as costs and demand, the usefulness of certain information and their strategic character depends on the specific case. The form of information (individual/aggregated information), the age of the information, market circumstances, and the frequency of exchange are also taken into account in the assessment.
What is Old Information
If it is indeed aggregated data, so that it is sufficiently difficult to determine information relating to individual entrepreneurs from them, it will be less likely to be a problematic exchange of information than when it concerns information relating to individual entrepreneurs. Also, exchanges of sufficiently old information are generally not problematic because their relevance for market competition is questionable. Information older than one year is sometimes mentioned as a guideline for determining age, but this should not be taken as a strict rule.
Moreover, caution is needed when assessing what is truly old in a specific case since the age of information depends on the characteristics of the specific market, particularly taking into account the frequency of price negotiations. For example, if the average duration of contracts in an industry is an indicator of the frequency of price negotiations, then information that is several times older than the average duration of those contracts would be sufficiently old.
Similarly, the frequency of information exchange is relevant. In markets where short-term contracts are concluded, more frequent exchanges of information will generally be needed, while the opposite applies to markets where long-term contracts are concluded, where exchanges of sensitive information that are not frequent will more often be problematic. Again, caution is needed, and strict conclusions based on such examples that serve as guidelines should be avoided.
It should not be forgotten that a violation of competition law can exist even in the case of a one-time exchange of information.
As early as 2009, a decision was made at the European level in the telecommunications sector in which the court clarified that, in fact, the number of meetings is irrelevant – what matters is whether even one meeting allowed participants to take into account the exchanged information when making decisions about market behavior and thus consciously replace cooperation with market risk.
Public and Hidden
Also, the exchange of some public information is generally not problematic, but care must be taken to see if some information is truly public. It must be information that is generally equally accessible to all competitors and customers, taking into account the cost of accessing such information. In practice, it will rarely be truly public information, as entrepreneurs will not exchange information that they can equally easily collect in the market. A good example of truly public information is the advertising of prices at gas stations, which is equally accessible to customers and nearby competitors.
If there is no prohibited competition agreement, such practice is beneficial for customers as it allows them to compare competitors‘ prices before deciding on fueling. However, if gas station owners began exchanging information among themselves, the assessment would be different.
In this case, it would not be a truly public information, as collecting that information in another available way still requires a significant expenditure of time and travel costs. Additionally, caution is needed when it comes to further actions with information that is public. For example, in some industry, it may be common knowledge that supply costs have risen, but that does not mean that competitors are allowed to jointly assess how to respond to such challenges at a meeting and thus guide their decisions.
Public Does Not Always Exempt
There is also a distinction between whether the exchange of information itself is public or not, but it should not be assumed that public information exchange is thereby permitted. In the previously mentioned example, it would be wrong to conclude that the exchange of information is not problematic just because those entrepreneurs publicly announced that information. On the contrary, as soon as it involves public announcements by several entrepreneurs, the question arises about the effects of such information exchanges. Therefore, entrepreneurs should refrain from exchanging sensitive information by any channels, directly or indirectly (e.g., exchanging information through common customers or third parties), as their exchange easily leads to coordinated action, which is one of the forms of prohibited behavior. In other words, there does not need to be an explicit agreement among competitors for it to be a prohibited agreement.
Public announcements by entrepreneurs indicate possible alignments of behavior, and the Competition Protection Agency has extensive investigative powers to determine what is happening in the market and whether there is a violation in a specific case. This is not only about monitoring the market in general but also about specific inquiries and checks, the possibility of conducting unannounced searches when conditions are met, etc. Thanks to the broad investigative powers, the agency can obtain indications or even evidence of problematic behaviors that are not part of the public domain. Namely, exchanges of sensitive information between competitors are much more common in secrecy.
New EU Guidelines are Coming
What entrepreneurs often overlook is that violations can be proven in various ways, often through mobile communication (e.g., within certain messaging platforms). The consequences can be significant penalties, as the law provides for the highest penalty for cartel behavior of up to 10 percent of the total annual revenue of the entrepreneur (where the term entrepreneur generally refers to the entire group). Possible actions for damages by injured parties and reputational damage are just some of the further possible consequences of such behavior.
To avoid violations in this area (and thus high penalties), entrepreneurs should primarily familiarize themselves with the rules of conduct in the field of competition law. Since this is a specific area for which it is not enough to just glance at the legal text, practice shows that the best way is to organize internal training that allows all relevant employees to learn what is allowed or not in their daily business where they encounter specific issues related to their activities.
In this context, the new guidelines being prepared at the European Union level in this area are also useful, aimed at summarizing old and new rules, existing practices in this area, and examples of best practices. Entrepreneurs are advised to continuously monitor the state in this area and familiarize themselves with the rules as soon as possible. ‚Better to prevent than to cure‘ carries special weight in this area considering the seriousness of penalties and other negative consequences, which even the most successful entrepreneurs find difficult to remedy.
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The exchange of sensitive, so-called strategic information, which removes strategic uncertainty in the market and thus reduces the independence of entrepreneurs in decision-making, is primarily considered problematic. These can include:
- information about prices (e.g., applicable prices, discounts, increases or decreases in prices)
- customer lists
- production costs
- information about quantities, revenues, sales, capacities, marketing plans, risks, investments, and similar
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