Online retailers should tread carefully after Trod

The announcement on 28 July 2016 by the UK Competition and Markets Authority (‘CMA’) that it had fined a relatively small Birmingham-based online toy retailer, specialising in distributing Justin Bieber posters, £163,371 for breaching competition law did not trigger much reaction outside of the local media. However, if you dig a little deeper, there is more to this case than meets the eye. We discuss the implications of the Trod case for online retailers.

Shortened investigations and greater cooperation - a continuing trend

The CMA’s press release confirms that its investigation into Trod Ltd was launched in December 2015, following receipt of a leniency application from one of Trod Ltd’s competitors, a company called GB eye Limited (trading as ‘GB Posters’). To secure immunity from fines, GB eye confessed to the CMA that it had entered into an agreement with Trod whereby each agreed not to undercut the other’s prices for wall posters and frames sold on Amazon’s UK website and supplied evidence of the illegal agreement.

Nothing unusual so far. However, the first interesting aspect of this case is the swiftness with which the case was disposed - taking less than eight months from start to finish (the CMA issued its formal infringement decision on 12 August 2016). CMA investigations typically take well over a year, if not longer, to complete.

The CMA has come under pressure from recent Government reviews to deliver completed cases more quickly and that may partly explain the efficient handling of this case. In addition, the CMA is now using far more sophisticated forensic techniques to gather and assess evidence of wrongdoing. Unannounced inspections used to involve officials walking around company premises (shadowed by teams of lawyers) looking for hard copy files or conducting on-screen searches through company emails but, in December 2014, the CMA announced it had introduced a new role - that of the Director of Digital Forensics and Intelligence. This advanced the CMA’s conduct of internet investigations, helped the capture and review of digital evidence and provided leadership to its fast-developing in-house forensics team.  One year later, it was no doubt a relatively straightforward task for the CMA’s digital forensic investigators to image Trod’s servers and secure data which could be used to support the evidence already supplied by GB eye.

However, to fully understand why the case was concluded so quickly we need to look further afield. In April 2015, the US Department of Justice (‘DOJ’) announced its first ‘online marketplace prosecution.’ David Topkins, the founder of Poster Revolution, an online poster retailer acquired by Art.com in September 2012, became the first senior manager from an e-commerce business to be prosecuted under the antitrust laws. His crime was to have conspired with other online sellers to fix, increase, maintain and stabilise the prices of certain posters sold through Amazon Marketplace in the United States over the period from September 2013 to January 2014. The DOJ found evidence of discussions between Mr Topkins and his co-conspirators, proving that they had agreed to coordinate their pricing strategies for sales of these posters.

Having announced a plea agreement with Mr Topkins in April 2015, the DOJ later revealed that a federal grand jury in San Francisco indicted Trod Ltd in San Francisco in August 2015, and Daniel Aston, the boss of Trod Ltd, in December 2015, for separate but similar conduct. It seems that it was the existence of the DOJ’s investigation that compelled GB eye Limited to confess its wrongdoing to the CMA in the UK.  Trod pled guilty for fixing prices of posters in August 2016.

This is a great case study in international cooperation - a trend that has emerged and grown in importance in the past five to ten years. The opportunity for investigators in different jurisdictions to collaborate with each other, sharing case strategies and best practice, helps ensure more efficient use of resources and drives swifter resolution of cases. The CMA took full advantage of the US involvement, ensuring that it coordinated its ensuing investigation into Trod Ltd with the DOJ, conducting a joint dawn raid of the company premises, as well as the domestic premises of one of the company’s directors (presumed to be Mr Aston) on 1 December 2015. The raids no doubt assisted the US investigators to progress their investigations swiftly with the DOJ announcing on 11 August 2016 that Trod Ltd had pleaded guilty to fixing the prices of wall posters sold through Amazon Marketplace to online shoppers in the US.  Had these events occurred five years ago, the cooperation between the US and UK authorities would most likely have been less streamlined and the cases would have taken longer to resolve.

Technological advances raise interesting challenges for antitrust law

The second interesting aspect of this case is the novel way in which the cartel was implemented.

This was not a textbook case of executives heading to the golf course as was the case in the Lysine cartel or of collusion in a ‘smoke-filled room.’ Instead, these online retailers used the tools of their trade to coordinate their activities - relying upon a specific computer algorithm that coordinated changes in their respective prices for posters to implement and maintain the cartel. In short, once you design the right algorithm and agree how it works the computer takes care of the rest. The software itself is not new - it is commonly used by Amazon sellers to monitor competitor pricing and automatically reprice products according to price fluctuations. But the use of an algorithm to implement and maintain a cartel is not something we have seen investigated by the antitrust authorities before.

Some commentators have suggested that this novel approach to implementation of a cartel raises challenging questions about whether the law is still fit for purpose. In the United States, the legislative foundation upon which antitrust enforcement relies is more than a century old¹. In the UK, the rules are almost 20 years old and the concepts on which the law relies much older. Past cases have relied on evidence of monitoring and periodic communication between the cartelists to show implementation of an on-going agreement or understanding to fix prices because such on-going communication was, until now, essential to making a cartel work. Using technology to do this for you changes the look and feel of a cartel completely.

Despite this, in our opinion, this novel use of technology does not call into question the use of well-established principles of antitrust law. At least not yet². The core concepts of what makes a cartel remain just as relevant to this type of arrangement as they do to a group of competitors meeting in a hotel room and writing down agreed prices on a piece of paper. Certainly the authorities do not appear concerned.  The US federal government has not hesitated to apply antitrust rules to the online world. In the UK, the CMA has confirmed that making sure online and digital markets are working effectively is a particular priority. Indeed, this is the third case targeted at online retailers that the CMA has conducted this year, with the previous cases featuring suppliers who had restricted the prices at which retailers can sell their products online. While representatives from Trod suggested they had no idea that what they did was a breach of competition law, this appears to have stemmed from a general lack of awareness as opposed to a perception that the law did not cover the conduct in question. A costly error given the company is now in administration.

More of an issue may be the challenges posed in gathering the requisite evidence in these types of cases in the future. In this case, it is likely that the CMA - as with the DOJ before them - took care to ensure they had witness evidence from GB eye to corroborate the contemporaneous evidence available. This is partly because the CMA does not want to repeat the mistakes of its predecessor - the Office of Fair Trading - which had a poor track record, losing a number of high-profile cases before the Competition Appeal Tribunal for failing to ensure its decisions were robust.

However, in the Trod case, absent evidence from GB eye of a ‘concurrence of wills,’ a creative defence team might have argued that once the algorithm was in place the robots had taken over; using self-learning and adaptation to determine the market price. Interestingly, a CMA spokesperson revealed that it was not possible in Trod to determine how much the firms had benefitted from the cartel, although prices had typically increased by 20 per cent during the period from March 2011 to July 2015. The lack of precision perhaps suggests that monitoring prices was not something the companies themselves were concerned about once the algorithm was in place - perhaps they didn’t need to because the computers couldn’t ‘cheat’ on the cartel. In the future, though, it may be that the CMA needs to get up-to-speed with analysis of ‘big data’ to be able to demonstrate the continuing implementation of a cartel through price movements.

What does this mean for online retailers?

Given the prevalence of automatic repricing software and its use by online retailers, analysing algorithms to ensure that consumers enjoy the benefits that technology delivers without being exposed to deceptive and unfair practices is likely to become part of the day job for antitrust officials.

This is a task they will be increasingly well-equipped to perform. Only last year, the US Federal Trade Commission announced that it had created the Office of Technology, Research and Investigation which will undertake a range of projects, among them to examine the effect of algorithms on markets. There will be many within the CMA who will no doubt be interested in the results of this research.

While we can’t predict the path of technology, and it is clear that future challenges still lie ahead for antitrust authorities, they have so far shown themselves equally capable of evolution: increasing the number, speed and effectiveness of the cartel investigations they pursue and working together to better understand technology and how antitrust law can be used to combat exploitation. Online retailers should tread carefully when conducting business using automatic repricing software to avoid ending up like Trod.

This article was first published in Digital Business Lawyer on 3 October 2016.