Turkey: Turkish Competition Board's Hub And Spoke Approach In Light Of Recent Developments

Hub-and-spoke arrangements are cartels in triangular scheme that involves undertakings at different levels of supply chain (which are called the spokes, at one level of the supply chain, and a common partner in trade on another level of the supply chain, which is called the hub) and also contains both vertical and horizontal elements. They involve competitively sensitive information exchanges as well.1

Although the case law on hub and spoke agreements is rather rare considering that they are an atypical cartel example and mostly hard to prove even compared to other cartels. On the other hand the Turkish Competition Authority ("Authority") seems to have a tendency to consider whether or not hub and spoke arrangement is the case when it observes information exchange between different parties active at different levels of the supply chain. After decisions in which the Authority analysed whether or not hub and spoke is the case without the conclusion of such by the Turkish Competition Board ("Board"), in its recent decision, the Board decided that five retailers and one supplier violated Law No. 4054 on the Protection of Competition ("Law No. 4054") via a hub-and-spoke cartel and fined a total of TRY 2.7 billion, after investigating around 30 undertakings comprising of retailers (markets) and suppliers (of the markets) in Turkey.2

I. Defining the Line

Indirect information exchange through vertical relations within the scope of cartel or concerted practices is not clearly regulated within the framework of Turkish competition law and the Board's case-law on the subject is very limited. However, this concept has been elaborated in detail by the United Kingdom competition authority, Office of Fair Trading ("OFT").

OFT brought hub and spoke collusions to light for the first time during the mid-2000s and gained global recognition with its decisions on the retail market called Replica Kit decision and Hasbro decision. Due to lack of major precedent cases worldwide, the Authority3 alongside competition authorities of EU countries¹ used UK precedents for guidance.

In Replica Kit decision, which is its first-ever hub and spokes case, OFT found that retailers and suppliers in the sportswear market had entered into price fixing agreements for replica football kits through a trading partner they have in common and fined the parties. ² When one of the fined undertakings appealed the decision, the United Kingdom Competition Appeal Tribunal ("CAT") stated that illegal concerted actions existed and dismissed the appeal. OFT evaluated that hub and spoke arrangements exist "if one retailer A, privately discloses to a supplier B, its future pricing intentions in circumstances where it is reasonably foreseeable that B might make use of that information to influence market conditions, and B then passes that pricing information on to a competing retailer C" and created the reasonable foreseeability test.³

However, the legal test formulated by the OFT has been claimed to be excessively broad and harsh in terms of retailers who may be unaware of the supplier's motive to exchange confidential information to its competitor with anti-competitive motives and the case was appealed to the Court of Appeal. Even though the Court of Appeal upheld the decision of the CAT, stated that intent is essential for such infringement and formulated a more nuanced legal test with three criteria;

i. "retailer A discloses to supplier B its future pricing intentions in circumstances where A may be taken to intend that B will make use of that information to influence market conditions by passing that information to other retailers (of whom C is or may be one),

ii. B does, in fact, pass that information to C in circumstances where C may be taken to know the circumstances in which the information was disclosed by A to B and

iii. C does, in fact, use the information in determining its own future pricing intentions then A, B and C are all to be regarded as parties to a concerted practice having as its object the restriction or distortion of competition."⁴

OFT adopted the same approach in its subsequent investigation for Hasbro UK Ltd., Argos Ltd and Littlewoods Ltd. In its Hasbro decision,⁵ the agreements between and the alleged sharing of information about the prices of Hasbro products were examined. OFT found that there were two bilateral agreements, one between Hasbro and Argos and one between Hasbro and Littlewood. When the decision is appealed, Court of Appeal held that "concerted practices can take many forms, and courts have always been careful not to define or limit what may amount to a concerted practice".⁶

In addition to these decisions, the Tesco decision of OFT in 2011, can be considered as the most recent decision of OFT on competition law infringement based on hub and spoke and vertical information exchange.

In August 2011, the OFT found that nine supermarkets and dairy processors had shared confidential commercial information with the intent of increasing retail prices of dairy products in 2002 and 2003.⁷ Tesco appealed the decision before the CAT. It has been examined whether Tesco shared information about the future price trend with rival undertakings through vertically related suppliers, based on the legal test adopted in the Hasbro decision. CAT concluded that only some of the communications that were subject to the claim that Tesco was indirectly sharing information with its competitors through its suppliers could be proven and ultimately upheld the OFT's decision to limit competition to Tesco's British-produced cheddar and regional cheese markets, noting that Tesco had violated competition law in three of the 14 titles examined in total.⁸

II. The Board's Hub and Spoke Precedents

As mentioned above, in terms of practice in Turkey, hub and spoke arrangements are not clearly regulated within the framework of Turkish competition law. However, the Authority's approach to the alleged hub and spoke arrangements does not differentiate from the disclosed OFT precedents. As a matter of fact, the Board benefited from the criteria set forth in the Tesco decision of OFT in the analysis of alleged infringement, as seen in the two cases that hub and spoke arrangements are cited.

The Aral decision⁹ was adopted after an investigation on Aral Game and its retailers in computer and video game consoles market and consumer electronics. In Aral decision Board has referred to the Replica Kit decision using the three criteria test and stated that in order to acknowledge the existence of a hub and spoke infringement, three criteria must be fulfilled and a conscious and joint adoption of common intention is required. Therefore the Board noted when the suppliers are using sensitive information to negotiate prices, it would not be appropriate to conclude that suppliers behaving anti-competitively in terms of intent. Hence the Board only fined Aral Game and the retailers who requested their suppliers to warn other retailers to accommodate resale prices, taking that other price adjusting retailers were not in a position to know the source of the requests and therefore stated the case at hand did not constitute a cartel.

In LASID decision,¹⁰ the Board investigated Tire Industrialists and Importers Association ("LASID") and major tire suppliers for information exchange between competitors through retailers, an association and a research company about the sales volume and the increase in prices. This time, the Board referred to the criteria set forth in Tesco decision;

i. supplier A should give future sale prices to retailer X with the intention of affecting its competitor supplier B's market attitudes;

ii. retailer X should give these pricing information to supplier B;

iii. supplier B which should absolutely know that this information belongs to A will settle its own pricing policy using this information obtained from retailer X.

Even though the Board evaluated that two out of three criteria are fulfilled, it conveyed that sensitive information was exchanged as a bargaining factor in order to demand a discount or a campaign to buy tires at a more affordable price. In this respect, it has been evaluated that the dealers, which acted as hubs, did not restrict competition in terms of intent. Also the information exchanged through LASID and the research company, was from the supplier level and therefore, not competitively sensitive or confidential. The Board also conducted an impact analysis for the case and examined prices and adjustments for certain types of tires for a period of time and concluded that competition is not restricted through information exchange by effect.

On October 28, 2021, the Board announced its latest decision on hub and spoke arrangements, the Retailers decision, by imposing a total administrative fine of TRY 2.682.539.594 to five retailers and a supplier due to infringement of Article 4 of the Law No. 4054 via a hub and spoke cartel. However only the supplier company is imposed with an administrative fine of TRY 11,105,499.32 for resale price maintenance activities with the rest of the fine, TRY 2.671.434.094,38, being imposed for hub and spoke activities.

In the Retailers decision, the Board investigated around 30 undertakings comprising of retailers (markets) and suppliers (of the markets) in Turkey and concluded that there is a hub and spoke cartel between markets where the hub is a supplier of edible oils. Therefore, since the reasoned decision is not published yet, it is clear how the Board will rationalize the arrangement of the markets in only one product they resale among thousands of other products.

Furthermore, it seems that, as indicated by the markets and the supplier during the oral hearing, none of the argued cartelists has enjoyed any financial benefits of the argued cartel as they mostly incurred financial losses from the Turkish sales of edible oils in the past few years. The fact that the markets have their own edible oil branded products and resell edible oil from other suppliers seem also create questions on the cartel structure.

Moreover, the Board also imposed a separate administrative monetary fine to the hub of the argued cartel due to resale price maintenance which might be also controversial as the supplier is both the cartelist and the one who forces resale prices even though it is a well-known fact that the markets have significant buyer power against their suppliers.¹¹ Once the reasoned decision is published, the academic discussions will be particularly interesting considering that the 13th Chamber of the Council of State considered that the applicability of RPM in this market is less likely but also in terms of discussions of ne bis in idem as recently discussed by the 13th Chamber of the Council of State. ¹²

III. Conclusion

The Board has not yet announced its reasoned decision, therefore details of the reasoning behind the decision are currently unclear and whether the Board's approach in this case can be considered as a precedent for future will be more obvious once the reasoned decision is published. As noted above, the reasoned decision is expected to trigger several different academic discussions in terms of the applicability of hub and spoke cartel and RPM in this specific market, what distinguishes hub and spoke arrangements from RPM practices, the rationality of a cartel that seems not to be supported by financial evidence and whether the hub can be fined both for the hub-and-spoke cartel and RPM practices and whether this approach contradicts with the ne bis in idem principle. Because of these reasons and also since the case will be appealed by the relevant parties (e.g. Migros,¹³ BIM¹⁴), it can be expected that the case will remain in the midst of competition law discussions for the next few years.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2021. A link to the full Legal Insight Quarterly may be found here.

Footnotes

1 "Hub-and-spoke arrangements – Note by the European Union", Directorate For Financial And Enterprise Affairs Competition Committee of OECD, 13 November 2019, parag. 1,2.

2 Turkish Competition Board's decision dated October 28, 2021, 21-53/747-360. The Board also concluded that the hub of the hub-and-spoke cartel has infringed the Article 4 of the Law No. 4054 via resale price maintenance (RPM). Discussions on whether or not this will be deemed controversial from the perspective of "ne bis in idem" principle and what distinguishes it from RPM are expected to be more intense once the reasoned decision is published.

3 "Hub-and-spoke arrangements – Note by Turkey", Directorate For Financial And Enterprise Affairs Competition Committee of OECD, 4 December 2019, parag. 4.

1. "Hub-and-spoke arrangements – Note by the European Union", Directorate For Financial And Enterprise Affairs Competition Committee of OECD, 13 November 2019,

2. OFT's decision numbered CA98/06/2003 and dated August 1, 2003.

3. CAT's judgement numbered 1021/1/1/03 and dated November 21, 2005.

4. United Kingdom Court of Appeal's judgement numbered 2005/1071, 1074 and 1623 and dated October 19, 2006.

5. OFT decision numbered CA98/8/2003 and dated November 21, 2003.

6. United Kingdom Court of Appeal's judgement numbered 2005/1071, 1074 and 1623 and dated October 19, 2006.

7. OFT's decision numbered CA98/03/2011 and dated July 26, 2011.

8. CAT's judgement numbered 1188/1/1/11and dated December 20, 2021

9. Turkish Competition Board's decision dated November 7, 2016, 16-37/628-279.

10. Turkish Competition Board's decision dated October 28, 2021, 21-53/747-360.

11. Preliminary Sector Study Report Regarding Fast-Moving Consumer Goods Retailing, parag. 146-154

12. Judgement of the 13th Chamber of the Council of State dated 04 March 2020 and numbered 2019/2944E., 2020/424K.

13. Migros Ticaret A.S.'s public announcement on KAP dated October 29, 2021.

14. BIM Birlesik Magazalar A.S.'s public announcement on KAP dated October 30, 2021.

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