Hub and Spoke Cartel in Comparative Law
Introduction
The hub and spoke cartel, which is a relatively new type of violation in terms of Turkish competition law, is defined as the indirect exchange of information between two independent undertakings which are horizontal competitors on the supplier or retailer level, through another undertaking operating at a different level of the production or distribution chain. Despite the lack of a direct exchange of information among the horizontal competitors, this indirect exchange of information can be considered to have the same negative impacts on the market as a normal cartel. However, it is not possible to conclude that each indirect exchange of information constitutes a hub and spoke cartel. Therefore, the existence of the elements for a hub and spoke cartel should be examined in each individual case.
The elements of a hub and spoke cartel are not defined in the legislation and are determined in light of the jurisprudence of the competition authorities. In this article, the main decisions where hub and spoke cartels have been evaluated in the UK, USA and Portugal are discussed.
Decisions in the UK
The Argos Decision[1]
In the Argos decision regarding the UK toy market, the Office of Fair Trading (“OFT”) determined that there was a hub and spoke application between the toy supplier Hasbro operating in the upstream market and the retailers Argos and Littlewoods operating in the downstream market.
Hasbro learnt that the retailers were unhappy about their profit margins. Hasbro also predicted that if it agreed on prices with Argos and Littlewoods, which were considered as the largest toy retailers, other players in the market would also follow the prices applied by these two retailers. To achieve this result, Hasbro’s sales team negotiated separately with Argos and Littlewoods and informed them that the resale price determined by Hasbro would be applied by their competitors as well.
Argos and Littlewoods began to apply the resale price determined by Hasbro in accordance with the information flow they had obtained from Hasbro. In this process, where Argos and Littlewoods set a common price, it was determined that they never actually came together and exchanged information directly.
The OFT determined that this process caused a hub and spoke type of violation. This decision was challenged by Argos and Littlewoods before the UK Competition Appeal Tribunal on the grounds that no direct communication took place between them. However, the objections were not accepted and the OFT’s decision regarding the existence of the violation was upheld.
The Replica Football Kit Decision[2]
The Replica Football Kit case began when the OFT launched an investigation in order to determine whether competition law had been violated by means of the determination of resale prices in the replica football products market. As a result of the investigation, the OFT decided on the existence of a hub and spoke type of violation. The OFT’s decision was also upheld by the UK Competition Appeal Tribunal.
Umbro, which was one of the undertakings subject to the decision, was a producer of licensed supporter products for English Premier League teams. Umbro was both a producer and a provider in the market. The products produced by Umbro were sold by retailers and delivered to the end consumer. The undertakings operating in the replica football products market were Allsports, Blacks, JJB and Sports Soccer. Among these undertakings, the undertaking with the highest economic power in the market was considered to be JJB.
Umbro suggested retailers recommended sales prices. Due to its market power, JJB was able to set sales prices below the recommended ones. On the other hand, other retailers were unable to compete on price with JJB while still maintaining their profit margins. Faced with this situation, Umbro conducted negotiations with retailers operating in the market. In these meetings, the discussions were focused on applying the recommended sales price determined by Umbro as the minimum price and making sales at or above this price. During the negotiations, it was understood that Umbro stated to each retailer that competitor retailers would also apply the same prices. Therefore, the triangular structure in the hub and spoke where Umbro was the hub and the retailers were the spokes occurred.
The OFT decided that the practices of the undertakings involved in the investigation comprised hub and spoke elements and that these practices constituted a violation of competition law. The Tribunal held that the application of the recommended sales price was not a per se violation of competition law. However, applying the determined recommended sales price as the actual sales price, combined with the undertakings’ intention to raise the prices, did constitute a violation.
According to the UK Competition Appeal Tribunal, the competitive issue addressed in the decision was that each retailer agreed with Umbro that they would not lower their prices and each retailer knew that its competitors were also party to the same agreement. The Tribunal decided that there was a single price-fixing agreement to which each undertaking in the information exchange triangle was a party.
USA Decisions
The Interstate Circuit Decision[3]
In this 1939 decision, which was the first decision to deal with a hub and spoke cartel in the USA, the violation was examined without explicitly using the term “hub and spoke.” Although the decision is an old one from the film screening industry, it sheds light on the elements of a hub and spoke violation.
At the time of this decision, some movie theaters showed films that had just been released, while other theaters screened films that had been released previously. The theaters showing films that had been previously released – the “second run” theaters – showed them for lower ticket prices than those that showed new “first-run” films. Interstate Circuit operated a large number of movie theaters. In letters sent to eight movie distributors, Interstate Circuit stated that in order to reduce the competitive pressure created by the second screening halls on the first screening prices in their own theaters, distributors would be required to set the minimum prices in these second screening theaters. If a distributor did not comply, Interstate would not show that distributor’s first run films its own theaters.
For Interstate Circuit’s plan to work, a large number of producers had to join the plan. Therefore, the letters explained in detail the plan and the actions in case of non-compliance with the plan. Taking into account the meetings that followed the letters, it was considered that all distributors knew that the others were aware of the relevant plan and also knew that enactment of the plan would restrict business. Therefore, the US Supreme Court concluded that although there was no direct communication between the distributors, each of them knew that the main purpose of the plan was the anti-competitive agreement between the distributors and that this situation went beyond a simple vertical relationship[4].
The E-books Decision[5]
In 2010, Apple wanted to enter the e-book market. Amazon was a player already operating in the market at that time. Publishers sold their books to Amazon at wholesale prices. Amazon then freely set the prices for e-books sold on its platform.
Apple and other publishers were not happy about the low sales prices applied by Amazon. That said, Apple offered the publishers a new agency model. In this respect, publishers had the opportunity to determine the sales prices of the e-books they were selling through the iBookstore, under the condition that they did not exceed the sales prices of the printed versions of the books. Under this system, Apple started charging a 30% commission for each e-book sold. However, the fact that Amazon continued to sell at low prices made it difficult for Apple to sell. Therefore, Apple added a most favored customer clause (MFN) to the publishers’ agreements. Thus, Apple prevented publishers from applying higher sales prices in the iBookstore compared to other platforms.
The only way for the publishers to solve this problem was to switch to a similar model with Apple in their agreements with Amazon. However, this was considered as a risky strategy to be applied individually, unless all publishers switched to the relevant model at the same time. Apple played a very active role in coordinating the publishers to negotiate agreements with Amazon. As of March 2010, the majority of the publishers had negotiated agreements including the relevant model with Amazon.
The E-books decision contains all the elements of a hub and spoke cartel as the publishers moved to a new business model in coordination with each other and therefore caused the sales prices to increase in the market. On the other hand, Apple ensured the same sales prices for all e-books and prevented the iBookstore from becoming competitively disadvantaged. In addition to the communication between the publishers, there was also an exchange of information between Apple and the publishers. Therefore, it can be concluded that the elements of the hub and spoke cartel were present in the case at hand.[6]
The Portuguese Competition Authority’s Supermarket Chain Decisions
The Portuguese Competition Authority (“AdC”), in its decisions in 2020, imposed an administrative fine of approximately 304 million Euros on six supermarket chains, two beverage suppliers, a board member and a manager for determining prices on the products of suppliers to the detriment of consumers.[7]
In the initial decision of AdC, Modelo Continente, Pingo Doce, Auchan and Intermarché and supplier Sociedade Central de Cervejas (“SCC”), SCC Board member and a unit manager of Modelo Continente were penalized for determining prices together.
In the second decision, AdC fined the same four chain stores (Modelo Continente, Pingo Doce, Auchan and Intermarché) and Lidl and Cooplecnorte (E. Leclerc) for determining prices through the alcoholic beverage supplier Primedrinks.
In the first decision, as a result of the investigation, AdC determined that the distributors and the supplier determined prices together between 2008 and 2017. This practice concerned Sagres and Heineken beers supplied by SCC, as well as mineral waters such as Bandida do Pomar and Água do Luso. AdC emphasized that by means of determining the prices together in this way, the prices in the retail market increased gradually and regularly.
In the second decision, it was determined that between 2007 and 2017, prices were determined for various products such as the Esporão and Aveleda wines supplied by Primedrinks, The Famous Grouse and Grant´s branded whiskeys, Hendrick's gin, and Stolichnaya vodka and that prices increased slowly but regularly in the retail market as a result.
According to AdC, undertakings stabilized retail sales prices through a common supplier, eliminated price competition between them and prevented the consumers from benefiting from price competition.
AdC also emphasized that the penalized practices constituted competition law violations, which are known as hub and spoke in competition law terminology, that they deprived consumers of price competition and that they were the first decisions related to this type of violation in Portugal. In the decisions, taking into account that the examined behaviors were still ongoing, it was also decided to force these practices to cease immediately.
Conclusion
There is no definition provided for hub and spoke under Turkish competition law. The elements which are set forth by comparative law, primarily by the UK authorities, define the framework for the application of hub and spoke. Hence, for an infringement to be classified as hub and spoke, the two-phased objective and subjective elements should be met. The objective element is the information exchange between undertakings operating at different levels of the market and the influence of this information exchange on the market behavior of undertakings. On the other hand, the subjective element is fundamentally about the existence of the will of the undertakings to distort competition by way of information exchange. The presence of the aforementioned elements should be evaluated in the sui generis conditions of each communication. Not every information exchange gives rise to a hub and spoke cartel.
The competition authorities must basically prove that information is transmitted between undertakings by an intermediary with the purpose of affecting market conditions, that the exchanged information is competitively sensitive and that the undertaking receiving the competitively sensitive information knows that the information is transmitted from its competitor or that it uses the information to conclude that there is a hub and spoke cartel.
- Argos Limited and Littlewoods Limited v. Office of Fair Trading, [2004] CAT 24, https://www.catribunal.org.uk/sites/default/files/Jdg1014Argos141204.pdf (Last accessed: 10.05.2022).
- JJB Sports plc and Allsports Ltd v Office of Fair Trading, [2004] CAT 17, https://www.catribunal.org.uk/sites/default/files/Jdg1021Umbro011004.pdf (Last accessed: 10.05.2022).
- Interstate Circuit, Inc. v. United States 306 U.S. 208 (1939).
- Garrod, L., Harrington, J. E., & Olczak, M. (2021). Hub-and-spoke cartels: Why they form, how they operate, and how to prosecute them (pp. 168-172). The MIT Press.
- United States v. Apple, et al. 12 CV 2826, 2012 WL 1193205 (S.D.N.Y. Apr. 11, 2012); United States v. Apple Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) and United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015).
- OECD: Roundtable on Hub and Spoke Arrangements, Background Note (2019), para. 110, https://one.oecd.org/document/DAF/COMP(2019)14/en/pdf (Last accessed: 10.05.2022). For the technical analysis of the cartel, see. Garrod/Harrington/Olczak, p. 191-193.
- Press release dated 21.12.2020 published on AdC’s official website, https://www.concorrencia.pt/en/articles/adc-imposed-fines-six-large-retail-food-chains (Last accessed: 10.05.2022).
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