'Co-dependent' schools - when is an information exchange permissible?

As has been well publicised in the national press, some 50 of the country's leading independent schools have got themselves into hot water with the Office of Fair Trading (OFT) over an inappropriate exchange of confidential information.

This briefing note reviews the sanctions facing the schools and explores, from a practical perspective, when an information exchange may be permissible.

What got the schools into hot water?

The OFT has provisionally found that "the regular and systematic exchange of confidential information as to intended fee increases was anti-competitive and resulted in parents being charged higher fees than would otherwise have been the case."¹

Under the so-called 'Sevenoaks Survey' the schools exchanged information relating to fee levels and increases between 2001 and 2004. Under this survey, the schools disclosed details of their proposed fees for the following academic year between February and June. This information was collated and tabulated by the bursar of Sevenoaks school, and circulated between the schools four to six times a year.

What is most striking about the press reporting of this provisional finding are some schools' protestations that they had no knowledge that such 'benchmarking' would fall foul of the competition rules.

So what are the consequences for the schools?

The 'cap' for the level of fines the OFT can impose on a school is 10 per cent of the global turnover of that school. However, the OFT has provisionally indicated that the fines to be imposed on the schools are unlikely to be at the top end of the permitted scale.

Fines will not necessarily be the end of the story. There is also the possibility of a class action for damages being brought on behalf of the parents against the schools found to have infringed competition law. Such an action is likely to be brought before the Competition Appeals Tribunal, which has the power to hear claims for damages following the adoption of an infringement decision by the Office of Fair Trading. As a matter of practice, private actions for damages by victims of breaches of competition law are a new feature to both United Kingdom (UK) and European Union (EU) competition law and so such an action would be relatively novel.

And, for individuals?

In different circumstances, individuals involved in 'fee fixing' could also have been the subject of censure under the Enterprise Act 2002.

A 'cartel offence' under the Act would be committed where individuals dishonestly agree with others to carry out so-called 'hardcore' cartel activities such as price-fixing, limiting supply or production, market sharing and bid rigging.

However, the OFT has not indicated that there was any element of dishonesty on the part of the individuals acting on behalf of the schools.

To date, the OFT has yet to prosecute an individual for a cartel offence. A successful prosecution may lead to a prison term of up to five years, and/or an unlimited fine.

If any of the schools are bodies corporate, then their directors are vulnerable to disqualification for up to 15 years if they knew or ought to have known their schools were infringing UK/EU competition law.

So what type of information exchange will be suspect?

Clarissa Farr, president of the Girls' Schools Association, said in an article in The Times on 11 November that, "she feared the OFT ruling would inhibit schools from sharing good practice".

This comment also begs the question as to what type of information exchange with competitors should be avoided.

In general terms, it is a fundamental principle of competition law that competitors must act independently. Competitors should not share information that enables them to co-ordinate their behaviour, and which negates the uncertainty of market conditions.

Sharing of information is thus problematical when it leads to an artificially transparent market, namely, when companies are able to identify, individually, their competitors' practices and behaviour. Clearly, oligopolistic markets are more prone to becoming artificially transparent than fragmented markets. For example, the UK Tractor Registration Exchange case² concerned a highly concentrated market in that it concerned the eight largest tractor manufacturers in the UK, which together enjoyed a combined market share of 87 to 88 per cent.

Thus, it is a hardcore breach of competition law for competitors to exchange, either directly or indirectly, information which has the object or effect of:

• influencing the conduct on the market of all competitors;
• disclosing to competitors the course of conduct a company has decided to adopt, or is contemplating adopting; or
• which results in an artificially transparent market. An exchange of the following type of information, if it is individualised, and relates to recent, current or future data, between competitors is generally considered to be a hardcore breach of UK/EU competition law:
• information on customers, sales, orders and pricing;³
• information relating to production volumes and capacity utilisation;⁴
• information on market shares; and⁵
• terms and conditions of sale.⁶

Guidelines on acceptable information exchanges

The European Commission, following the UK Tractor Registration Exchange case, provided the following guidance in relation to acceptable information exchanges:

• aggregated information may be exchanged between competitors which is less than 12 months' old provided that at least three companies from different industrial or financial groups participate; and
• individual data may not be exchanged until 12 months after the date of the event to which the information relates.⁷ In response to the number of questions received from schools during its investigation, the OFT has also published guidelines setting out the type of information which schools may, and may not, also exchange.⁸ In brief, these provide the following:
• information that relates to a large proportion of a company's costs (such, for schools, as salaries) should not be exchanged, as this will permit the alignment of competitive conduct;
• more generally, information that may adversely affect the competitive process, such as terms and conditions, should not be exchanged;
• information which is quantitative in nature, such as fees and salaries should not be exchanged;
• information which is qualitative in nature, such as the effect of government legislation can generally be exchanged;
• generally, it is permitted to share 'opinions and experiences';
• confidential and sensitive business information must not be exchanged;
• informal conversations are sufficient to bring an exchange of information within the realms of a concerted practice; and
• an exchange of historic, aggregated and anonymised information generally complies with UK competition law as long as it does not influence future competitive market behaviour.

How else could the schools have escaped censure?

It has been reported that the OFT has accepted 'leniency' applications for two of the schools concerned, namely Winchester and Eton, whereby the OFT will reduce or not impose fines.

Leniency is a key part of competition enforcement agencies' weaponry against cartel activity.⁹ In the UK, the OFT has the power to grant full immunity from fines to companies that are the first to blow the whistle on fellow members of a cartel. They can also grant immunity from prosecution to individuals by issuing a 'no-action' letter.

The conditions for meeting the criteria for leniency are fairly exacting. Companies/individuals must admit participation in the cartel; provide the OFT with all the information available to them regarding the existence of the cartel; maintain continuous and complete co-operation throughout the OFT's investigation and cease any further participation in the cartel. Leniency is not available to the instigators of a cartel. Nor does leniency remove the possibility of damages claims. As noted above, damages claims are likely to become more and more a feature of the competition law landscape.

What next?

The OFT's decision is but a provisional finding. A definitive finding will be adopted once the schools have been given the opportunity to make oral and written representations – a process which is expected to take several months. Following this, the OFT will determine whether or not to impose penalties on the schools

Notes:

1. See OFT press release of 9 November 2005.
2. 'Exchange of information between tractor and agricultural machinery manufacturers', page 156-8, European Competition Report 1999.
3. CEPI-Cartonboard OJ (1994) L243.
4. Vegetable Parchment (1978) L70/54 (1978) 1CMLR 534; CEPI-Cartonboard OJ (1994) L243.
5. UK Agricultural Tractor Registration Exchange OJ (1992) L68/19.
6. Commission decision (77/592/EEC) VNP and COBELPA OJ (1977) L242/10.
7. Exchange of information between tractor and agricultural machinery manufacturers', page 156-8, European Competition Report 1999.
8. 'Independent schools: Frequently asked questions', OFT Guidance 444, June 2004, at paragraph 5.
9. See the OFT's guidance on leniency in 'OFT's guidance as to the appropriate amount of a penalty'; and 'Leniency and no-action', OFT Guidance 803.