Hub and Spoke Conspiracy
Hub and Spoke is a nascent term in Turkish Competition Law. It is not specified enough yet and also there are not many decisions regarding this topic.
What is “Hub and Spoke”?
The term of “Hub and Spoke” is first used in aviation sector to define a way of routing flights by Delta Airlines in 1955. Subsequently, it is used to define business models in different sectors by commencing with cargo sector. Competition Law is also one of the fields this term used.
Restriction of competition may be in different variations as horizontal or vertical. A horizontal agreement means sharing information between suppliers or retailers at the same level of the supply chain. Besides, a vertical agreement means sharing information between a supplier and a retailer which exist at different levels of the supply chain. Moreover, horizontal and vertical agreements may be interwoven and constitute a new structure named “Hub and Spoke”. Hub and Spoke (or ABC Information Exchange) is an infringement which causes restriction of competition in brand and provides information share between supplier (“Hub”) and its retailers (“Spoke”) due to tripartite agreements.
Why has “Hub and Spoke” arisen? How does it work?
Disruption of perfect competition market, turning into oligopolistic or monopolistic structure, deterioration of economy lead competitors try alternative sales technics and keep prices up. Hub and Spoke is cut out for competitors aiming aforementioned results owing to its accessible and clear implementation.
Hub and Spoke is generally comprise of delivery of written or oral order related to pricing by the supplier or retailer. The point distinguishes Hub and Spoke from horizontal conspiracy is the basis of the price recommendation order belongs to a third party like another retailer or supplier. To clarify; a retailer informs its supplier regarding its pricing and supplier shares this pricing information with another retailer at the same level of the supply chain. Besides, the party sharing information may be supplier by using retailer. Please see the diagrams below for a better understanding:
Retailer --> Supplier --> Retailer
Supplier --> Retailer --> Supplier
Information exchange is not adequate for alleging parties for violation per se. Information changed should be used by the last party and this usage should affect competition in the market adversely.
Practice in US, UK, EU and Turkish Law
Hub and Spoke is evaluated in antitrust and criminal law disciplines according to US Law. The United States Court of Appeals for the First Circuit explained the structure with following terms: In a "hub-and-spoke conspiracy," a central mastermind, or "hub," controls numerous "spokes," or secondary co-conspirators. These co-conspirators participate in independent transactions with the individual or group of individuals at the "hub" that collectively further a single, illegal enterprise. “Interstate Circuit” decision dated 1939 is considered as the descendant of Hub and Spoke conspiracy in US law. The matter of the decision is that two dominant theatre owners sent price-fixing letters to the distributors (such as Paramount Pictures) of motion picture films and the distributors accepted the demands.
“Replica Kit” is the first decision on hub and spoke cartels in UK law. It is surprising that decision is given in 2003. The matter was that supplier and sportswear retailers enter into price-fixing agreements related to replica football kits. In this decision, the Office of Fair Trading ruled that information concerning prices is shared between two or more retailers via a common supplier at a different level of the supply chain; there may be a price-fixing agreement between the retailers. Subsequently, “Hasbro” decision is given. Hasbro established a recommended retail price policy in order for not to reduce its margins. The policy was based on providing retailers which are Argos “the main retailer” and Littlewoods “the main rival” to follow the recommended prices.
In the European Union (“Union”) Competition Law legislation, there is no description of Hub and Spoke. However, the basis of subject has regulated in the Treaty on the Functioning of the European Union (“TFEU”), article 101(1). This article regulates the prohibition of horizontal and vertical agreements, which are the origins of Hub and Spoke.
Few members of the Union, the competition authorities and courts of these members have given rulings such as Estonia and Belgium. “Vodka Cartel” decision in Estonia, four major retailers in market (market share of these retailers were 66.3%, according to the OECD Annual Report on Competition Policy Developments in Estonia) agreed to increase the prices of lower priced vodkas. The information exchange was performed by way of supplier, retailers did not communicate directly. After that, the price of aforementioned products were rose 15.7%. Estonia courts have fined the retailers in the aggregate amount of 10 879 000 EUR. However it is also ruled that 90% of this amount will not be enforced, provided that no new offences are committed during the probationary period. Another decision on Hub and Spoke in Union was given by Belgium Competition Authority (“BCA”) in 2015. Price increases were in drugstore, perfumery and hygiene products. 7 retailers (supermarkets) had exchanged information between the years of 2002 and 2007 through their suppliers. The distinctive feature of every Hub and Spoke cartels, contacting with other retailers indirectly is also existed in this case. The BCA has decided that these activities was contrary to Article IV.1 of the Code of Economic Law and Article 101 of the TFEU. The penalty was the highest ever in history of Belgian Competition Law, in the amount of EUR 174 million.
There is no active practice in Turkish Competition Law regarding the Hub and Spoke. On the other hand, it is talked enough. Turkish Competition Board defined Hub and Spoke in Goodyear & Brisa & Pirelli Tires case. Companies are alleged for price-fixing with tripartite agreement. The Board defined the Hub and Spoke with 3 criteria such as i) disclosing future pricing information, ii) application of this information to prices by other retailers, iii) effects. The board decided on dismissal of complaint by referring Tesco Decision of UK Competition Authority because that there is no effect against competition.
Case Review
Although the subject is usually examined with price fixing, violation may also contain different vertical agreement types. For instance, in the Toys “R” Us Decision of Federal Trade Commission (“FTC”) the infringement occurs as blocking sales to warehouse clubs in the market. In the decision, Toys "R" Us was alleged, with using its dominant position as a toy distributor to enter into agreements with toy manufacturers to stop selling to warehouse clubs (especially Costco and Pace) the same toys that they sold to Toys "R" Us.
Toys “R” Us was the strongest competitor in the market when this decision was rendered. FTC stated that Toys “R” Us was selling 20% of all the toys sold in the US and this percentage was rising the amounts ranging 35% and 49% in metropolitan areas. It is also stated that Hasbro, huge supplier, and also Mattel were concerning to find another retailer instead of Toys “R” Us. Even the considerable rivals as Walmart and Target were not able to compete Toys “R” Us’ discount policy.
The significance of product range is also mentioned in FTC’s decision. It is explained that a girl wishes to have Malibu Barbie will not be satisfied with My First Barbie or a boy wishes to have Anakin Skywalker figure will be disappointed by having a truck instead. Toy industry defined as a faddish industry.
According to the FTC, the reason of this case was quite clear. Toys “R” Us has been enjoying being the only retailer who can make remarkable discount owing to the fact that its main rivals were traditional toy retailers. With warehouse clubs’ entering into market, Toys “R” Us has lost its position in the market in the scope of making discounts and having unique product range.
As a result of abovementioned situation, Toys “R” Us has decided to follow a new policy which constitutes the topic of this case. Toys “R” Us was very careful while introducing this new policy to toy manufacturers; all manufacturers were connected individually. Clearly this policy was forming vertical agreements. However, Toys “R” Us did not stop with these vertical agreements and it further commit its suppliers to enter into a horizontal agreement regarding the boycott of the clubs. Thus, violation passed a higher stage by gaining Hub and Spoke definition. In conclusion, Toys “R” Us was fined to pay a civil penalty in the amount of one million and three hundred thousand United States Dollars ($1,300,000.00).
Evaluation and Conclusion
Although the market actors' reliable access to the price information of their competitors in a competitive environment seems to be appropriate and beneficial to the classical theory of the free market, it is extremely important to prevent abuse in terms of protection of both pure competition and consumer. As may be seen in the cases we have selected from the US, UK and EU practice and explained, the price access established and performed under the supplier coordination and the increases arisen against the market and consumer, block the new entrances to the market and disrupt economic freedom. The application of Hub and Spoke Cartels, which has been raised on the basis of combination of vertical and horizontal agreements in US, UK and EU practice, does not adequately attract the attention of Turkish Competition Authority. However, we believe that the Turkish Competition Authority will follow the global trend even though it is late. For this reason, the enterprises operating in each sector should establish their corporate structure and the communication network and method to be performed with their suppliers, lawfully and in accordance with the relevant legislation.
Bibliography
1- ACCID, Case Study: Toys “R” Us
2- Aslan, Yilmaz; Rekabet Hukuku Dersleri
3- Ardiyok, Sahin and Yesilyaprak, Dilara; Rekabet Hukuku Acisindan Ucuncu
Taraflar Araciligiyla Rakipler Arasi Bilgi Degisimi, Mondaq
4- Favart, Martin; Belgian Competition Authority Adopts Its First Settlement
Decision In Supermarkets Cartel Federal Trade Commission;
https://www.ftc.gov/enforcement/cases-proceedings/091-0082/toys-r-us-inc
5- OECD; Hub and Spoke Arrangements - Note By Belgium
6- OECD; Roundtable on Hub and Spoke Arrangements - Background Note
7- Rivas, Van De Walle De Ghelcke; Concerted practices and exchange of information: An overview of EU and national case law
8- Sanli, Kerem Cem; Uygulamali Rekabet Hukuku Seminerleri
9- Slaughter and May; The EU Competition Rules on Horizontal Agreements
10- UK Competition Authority; https://www.gov.uk/cma-cases
11- Vereecken, Bram; Hub and Spoke Cartels in EU Competition Law
12- Yildiz, Ugur; Rekabet Hukukunda ABC Bilgi Degisimi/Hub & Spoke Conspiracy
HUKUK BÜROSU