Competition Issues for B2B Exchanges

This article is based on UK law. It was last updated in May 2005. Currently, there is not an equivalent Hong Kong article.

Introduction

A few years ago, B2B exchanges (" B2B s") were largely unheard of. It is now a fast developing and constantly changing sector generating billions of pounds worldwide. NASA

So what are they? B2B s are business-to-business electronic exchanges, or marketplaces, where goods and services are traded. However, they are often more sophisticated than simple trading platforms, as they can provide additional services such as e-procurement, project management and the provision of market information.

B2B s are remarkably diverse, not only in terms of the variety of goods and services that are traded, the price and revenue systems employed, but also the different ownership structures set up.

Efficiencies of B2B Exchanges

The technology behind B2B s can speed business communications into real-time transactions. Administration costs, search costs and processing costs are cut. Comparisons between competing goods and services are quick and easy. There is a reduced need for physical assets for many businesses. Market expansion is rapid. Joint purchasing and product design are facilitated. There is scope for greater accuracy, improved quality and increased productivity which, in turn, should lead to increased competition.

However, there is another side to the coin. Where there is access to a lot of information relating to rivals' activities, there is potential for collusion and price fixing. In addition, as specific marketplaces establish themselves, there is the possibility of exclusionary practices.

The Competition Regimes

The EC Treaty prohibits agreements that prevent, restrict or distort competition. UK law has a similar prohibition in respect of conduct or agreements that affect trade within the UK. Further, the European Commission requires mandatory notification of certain joint ventures.

Under US law there are similar, if not more stringent antitrust laws. The fines for infringing the UK or EC competition rules can be up to 10% of worldwide turnover. In the EU and US, fines can run into hundreds of millions of euros or dollars. In the US and EU, the most serious breaches of competition law have been criminalised. The competition authorities work in close co-operation; consequently those involved in establishing or managing B2B s need to be aware of all the various prohibitions and restrictions.

The Competition Issues facing B2B s

(a) Exchange of information

If data on price, output, costs, discounts and purchase quantities (and consequently strategic planning) is exchanged through the medium of, or can be deduced from, the B2B , the market for the relevant goods may be affected and competition concerns will arise.

The question will be whether the effect of the marketplace is pro-competitive or anti-competitive. Factors such as the structure of the market, the market share of participants, the relationships between the information-sharing parties and the kind of information being exchanged are relevant. Clearly, if the information is up to the minute it will be more sensitive than historical data and similarly information relating to core goods is of more concern than that relating to non-core goods.

If the information is publicly available or accessible from sources other than through the B2B , it is less likely to cause concern than if the B2B is the only source or the only readily accessible source for that information. So how does information exchange lead to collusion? Information may be available to a specific individual, giving it a trading advantage over another. A member of an exchange may obtain information that is not available to non-members.

Given that exchanges are often owned and managed by competing players in the relevant market, such "owner-participants" may well get access to sensitive information about their competitors which may lead to price fixing. Access to such information would be illegal.

At the participant level, care is needed not to disclose sensitive information to rival firms with whom users on the exchange compete. In particular, care is needed to avoid the publication of pricing or other sensitive information.

An organised exchange of individual data from an identifiable source is likely to infringe competition law. However, where the exchange of such information is objectively vital to the achievement of the benefits of the exchange, the risk of contravention is reduced but the type of information that will be covered by this exception will be very limited.

(b) Access

There are two aspects to the access issue – exclusion and exclusivity. They can both potentially affect competition among the marketplaces themselves. Exclusion involves restrictions permitting only select businesses to participate in a B2B , and exclusivity involves the prevention by a B2B of a participating business from joining other B2B s (i.e. foreclosure of the market to competing B2B s).

As B2B s are often owned by several of the major players in a particular industry, there may also be a temptation to deny access to other competitors, or allowing them to join but disadvantaging them by raising costs, requiring minimum turnover or volume, closing the bidding after a certain number of participants have joined up or being biased in their presentation of data.

Factors to take into account include:

• the degree of exclusion flowing from the restraint, its duration and terminability,
• the percentage of the market foreclosed and other indicia of the likely effect on competitors' ability to operate,
• the availability of alternative access routes to supplies or customers,
• the feasibility for rivals to employ countermeasures to defeat the attempted exclusion and
• the likely impact on competition in a relevant market of raising rivals' costs, including consideration of any pro-competitive justifications.

In practical terms, the more successful the exchange, the more essential it is to have open access.

A refusal to grant access to the B2B without objective justification is likely to breach the EU prohibition on the abuse of a dominant position. Where the B2B is dominant in the relevant market, barriers to entry / membership, rather than outright exclusion, are likely to be anti-competitive. Dominance for these purposes often arises where the market share exceeds 40%. The difficulty lies in defining the relevant market. In the past, European competition authorities have used very narrow definitions of the market to ascertain market share.

Restrictions were permitted previously during the start up of the business but only to the extent necessary to ensure the viability of the exchange. It is now possible that a non-compete clause may be allowed for the lifetime of the B2B , but only as is objectively necessary. In addition, where the participating parties have strong market positions, or the market could be foreclosed to competition, a non-compete clause may only be permitted for a shorter period of time, if at all.

Possible solutions

Although B2B s are a relatively new phenomenon, the competition issues arising are not entirely new, and the issues may usually be addressed by reference to existing competition law:

1. Covisint

Covisint is a B2B for car makers. It was notified to the German Federal Cartel Office ("FCO") under national merger control rules, investigated and cleared. The issues that the FCO focused on were:

• whether the forum offered free access,
• whether confidentiality was guaranteed in the exchange of data (that is, whether there was adequate data protection, including firewalls and security rules),
• whether the platform increased the risk of co-ordinated action by its participants.

The FCO also held that the behaviour of the venture was constrained by a number of actual and potential competitors and would not have any negative effects on the market.

The US Federal Trade Commission also gave Covisint the go-ahead following its notification under pre-merger notification provisions. However, both the FCO and the FTC reserved the right to investigate further in due course.

2. Volbroker.com

Volbroker.com was created by Deutsche Bank UK Holdings Ltd, UBS AG, Goldman Sachs, Citibank Investments Ltd, J.P Morgan and Nat West, all major players performing market-maker functions in the market for foreign currency options. Volbroker.com was formed to create the first brokerage service to bring automated trading among banks in foreign currency options.

The European Commission noted that the exchange is open to the whole industry on a non-discriminatory basis, is based on open standards, allows shareholders and other users to participate in other exchanges, does not allow joint purchasing and provides for adequate data protection.

The Commission issued a 'comfort letter' to the parties after the deal was notified for clearance. The founders provided the following assurances to avoid the exchange of commercially sensitive confidential information:

• none of Volbroker.com's staff or management will have any contractual or other obligation towards any of the founders and vice-versa;
• Volbroker.com's staff and management will be in a geographically distinct location from that of the founders;
• the representatives of the founders on Volbroker.com's Board of Directors will not have access to commercially sensitive information;
• directors will not have access to commercially sensitive information relating to each other or to third parties;
• the founders will not have access to the information technology and communications systems of Volbroker.com; and
• the founders will ensure that the staff and management of all the parties understand and appreciate the importance of maintaining the confidentiality of sensitive commercial information and that sanctions for breach are spelled out.

Interestingly, the principles established in Volbroker.com have served as a basis for many B2B s that were subsequently established. They were also applied in the case of Opodo, an internet travel agency that was established as a joint venture between nine of the leading European airlines.

3. Myaircraft.com

Myaircraft.com is a joint venture between Honeywell, United Technologies and iTechnologies. It was cleared by the European Commission under the Merger Regulation on the premise that the marketplace would face strong competition from other similar web-sites. In addition, the B2B exchange method of conducting business was only one of a number of options in the aircraft parts field.

4. Identrus

Identrus is a joint venture network for the authentication of electronic signatures between ABN-AMRO, Bankers Trust, Bank of America, Barclays Bank, Bayerische Hypo- und Vereinsbank, Chase Manhattan Bank, Citibank and Deutsche Bank.

Identrus provides an infrastructure to help companies operate effectively and safely on the internet. It uses digital identities technology and validates those identities. Its system also forms a basis for payment, authorisation, directory, document management, secure e-mail and secure on-line marketplace applications.

The joint venture was cleared by the European Commission on the basis that:

• the participants competed with each other in the provision of the services,
• the participants were free to set prices and to have their own independent applications built in the Identrus infrastructure,
• users were free to choose which participant to obtain services from, and
• competing systems were being developed.

5. Water Portal (Aquadia)

Water Portal is an on-line electronic exchange for the water industry, created by Ondeo, a subsidiary of Group Suez, and Thames Water and has been authorised by the European Commission. Water Portal is used to offer services including electronic procurement, information and bid management services to companies in water-related industries.

In approving the venture, the Commission noted that electronic exchanges are generally pro-competitive as they improve the efficiency of procurement channels. They can present competition problems if they shut out smaller players (the "exclusionary effect"), tie their members exclusively to the platform or are used to exchange sensitive information. Having examined the conditions of access to Water Portal, the Commission concluded that:

• it provides adequate safeguards to avoid any exchange or disclosure of confidential information,
• full and open access of suppliers and buyers to the exchange will be guaranteed, and
• there will be no exclusivity provisions.

What approach should B2B s take?

The competition issues for B2B s have been the subject of in-depth workshops, conferences and reports over the years. Although there is no formal EU or UK set of rules or guidance for B2B s to follow there have been no new substantive legal developments or policies established since the above mentioned cases were considered. Therefore, certain principles may be considered to be well established at this stage. This article does no more than flag up some of the points that arise and draw attention to some of the steps that can be taken to avoid infringement of the various competition regimes.

By way of conclusion, it is clear that every situation will be dealt with on a case by case basis. However, assistance can be drawn from the approach of the competition authorities to the above scenarios and B2B s and prospective B2B s might take heed of the following as regards the exchange of information and access:

Information exchange

Shareholders need to ensure that there are adequate safeguards to prevent confidential information being disseminated.

The exchange should be an independent entity. A director who is a shareholder must not have access to confidential information other than when acquired bona fide in his capacity as a director. It is advisable to ensure that a competition lawyer checks the meeting agendas and is present at Board meetings.

Users/participants should ensure that information placed on the web site should not allow others to deduce the identity of the parties. The information should be disseminated by third parties, not participants. Participants should provide trade data to "Neutramediaries", who are independent third parties who promote services to B2B s, such as monitoring the marketplace, preparing conduct of business rules and clearing transactions.

The information provided should be historical and should be made available to buyers and sellers equally. Information should not be analysed or commented upon. Participants should be able to decide independently what use to put it to.

Access

Restrictions on founder members should be limited as far as possible. Restrictions at the start-up stage should only exist in so far as they are necessary to ensure the viability of the business.

A non-compete clause will only be allowed to the extent it can be shown to be objectively necessary. The permitted duration of the clause will depend on market positions of the parties, market structure and potential for foreclosure. All relevant buyers and sellers should have access on a non-discriminatory basis, unless there is an objectively justifiable reason for exclusion and communicate this reason at the outset.