Credit History Information Exchange between Competitors - Latvia

Until recently most businesses focused more on attraction of new customers and entering into bigger and bigger transactions. Now the every day practices and attitude towards clients has changed drastically, since, due to the interdependence of the businesses, the non-payment risk increases in geometrical progression. Most companies would have preferred to sell their goods only for prepayment, but it is not always possible to agree on such arrangement and, in that case, the financial standing of the client is of utmost importance.
There is some publicly available data on companies, which fail to comply with their payment obligations. However, this data is very limited and does not therefore resolve the non-payment issue.
1. Credit history register
There are specialised registers, which contain information on the companies with bad debt history, and those are actively used by market participants. However, the information contained in the said registers may not be satisfactory. These registers are not unified and only contain information on companies, the debts whereof have already been transferred to the debt recovery companies. Furthermore, these registers are not industry specific and are mostly confined to information on Latvian companies. Accordingly, one may find it difficult to confirm the creditworthiness of a potential cooperation partner prior to the conclusion of the contract, where no relevant data is publicly available.
2. Where to get industry specific credit history information?
If no public data exists on credit history of a potential cooperation partner, one may wonder if its competitors have already dealt with the company in question and. if yes, were there any substantial payment delays? It could indeed be more logical and easier to exchange the data on bad debtors within the industry.
For example, Wholesales Ltd produces product A, which is used for the purposes of manufacturing product B. The competitors of Wholesales Ltd also sell their goods (product A) to the manufacturers of product B. In most industries there will not be an infinite number of product B manufacturers, i.e., Wholesales Ltd, and its competitors could be dealing with the same (at least partly) cooperation partners.
It could therefore be of mutual benefit if all producers of product A (Wholesales Ltd and its competitors) would come together and establish their own register of cooperation partners, who do not fully or timely comply with their payment obligations. In that case the producers of product A would be better safeguarded against non-payment risks.
3. Is exchange of information between competitors legal?
According to the case-law of the European Court of Justice on agreements on the exchange of information, such agreements are not compatible with the rules on competition if they reduce or remove the degree of uncertainty as to the operation of the market in question with the result that competition between undertakings is reduced.
In effect, every economic operator must determine autonomously the policy which it intends to pursue on the common market. However, that requirement of independence does not deprive economic operators of the right to adapt themselves intelligently to the existing or anticipated market conditions.
It has been admitted by the European Court of Justice that the essential objective of credit information exchange systems is to make available to credit providers (sellers, service providers or financial institutions) relevant information about existing or potential clients, in particular concerning the way in which they have treated their debts previously.
Such registers increase the amount of information available to market participants on potential buyers, thus making it easier for the sellers (creditors) to foresee the likelihood of non-payment. In doing so, such registers are in principle capable of reducing the rate of clients defaults and thus of improving the functioning of the market.
4. How to set up the bad debt register and not to breach competition law?
4.1. Access to the register data by non-participating competitors and third parties
The exchange of information raises barriers to entry for non-members of the exchange system. If one of the competitors chooses not to become a member of the information exchange, he would be disadvantaged by the fact that he does not have access to the information, which is available to other market participants.
It is therefore important that the bad debt data be accessible in a non-discriminatory manner, in law and in fact, to all operators active in the relevant sphere. If such accessibility were not guaranteed, some of those operators would be placed at a disadvantage and thus competition authorities could conclude that the arrangement in question is contrary to the provisions of the competition law.
4.2. What type of information can be disclosed?
The European Court of Justice has established that any discussion among competitors about their current and/or future prices is likely to lead to the conclusion that an anti-competitive price fixing agreement has been entered into. The mere fact of providing price related information may be sufficient to establish that a cartel exists.
It is therefore important that the information available to the competitors through the register of bad debts does not allow the competitors to identify the prices, offered by other market participants. For that reason, such register should not contain information on specific transactions.
Competition rules do not allow competitors to exchange commercially sensitive information. Therefore, when setting up a credit history register it should be guaranteed that no confidential information is available to the competitors.
4.3. Will my competitors be able to identify my clients?
In order that registers in question must not reveal the market position or the commercial strategy of competitors, it is important that the list of competitors (those, who are exchanging the information) clients is not revealed, directly or indirectly.
In other words, information exchanged regarding customer credit worthiness must not allow the identification of each others customers. This might occur, for example, if the threshold for categorizing a customer as a bad debtor were excessively low, i.e., if even a customer missing the payment deadline for a few days would fall into the category of bad debtors and became liable for notification to the competitors. For that reason the threshold for categorizing a customer as a bad debtor should be sufficiently high, which includes both sufficiently long period of delay and amount delayed.
Moreover, the competitors could be in the position to identify each others lists of clients if aggregate information regarding bad debtors were circulated between less than three undertakings. Therefore, where there are only two companies, exchanging data on credit history of their clients, the setting up of a bad debt register is normally precluded by the rules of the competition law.
Furthermore, to guarantee non-disclosure of the customers lists, the information should be gathered, aggregated and circulated by a neutral third party (e.g., a market research firm).
4.4. How often can credit history information be exchanged between competitors?
The age of the data and the frequency of exchange is of key importance. If the information exchanged is "historical" rather than current it is likely to cause fewer issues as it is less likely to reveal competitor strategies. What is considered to be "historical" will vary from case to case but it depends again on the use to which the information could be put. There are no presumptions of sufficiently old information for it to be admissible for an exchange between the competitors. In practice, this often means that information should only be exchanged once it is at least one year old.
However, if the information exchanged is sufficiently aggregated amongst competitors so that a competitor's individual sales, values and clients are not ascertainable, the competition law risk may be mitigated, so that potentially even very recent information can be exchanged.
5. Conclusions
It follows that, provided the information exchange arrangements comply with the aforementioned criteria, it is, in principle, allowed by the competition law rules.
It should, however, be noted that the compatibility of an information exchange system with the competition rules cannot be assessed in the abstract, and competition rules do not apply automatically to all industries. It is necessary to analyse the particular economic and legal context in which the undertakings concerned operate, the nature of the goods or services affected, as well as the real conditions of the functioning and the structure of the market or markets in question.
For instance, if supply on a market is highly concentrated, the exchange of certain information may, according in particular to the type of information exchanged, be liable to enable undertakings to be aware of the market position and commercial strategy of their competitors, thus altering rivalry on the market and increasing the probability of collusion, or even facilitating it. On the other hand, if supply is fragmented, the exchange of information between competitors may be neutral, or even positive, for the competitive nature of the market.
Taking into account the need of tailor-made application of competition rules, we urge that prior to taking any action you should contact your lawyer, as only case-specific legal advice and, possibly, economic analysis, can be relied upon. Please bear in mind that incorrect application of the competition law rules may result in significant fines, which may amount up to 10% of the annual turnover of all companies, involved in the breach of the competition law.
ABOUT THE AUTHOR: Julija Jerneva, Partner with Vilgerts Law Firm
Julija Jerneva is a Chambers and Partners Europe recommended practitioner in Latvia and she advises clients on all areas of Latvian and EC competition law, including distribution agreements, abuse of dominance, mergers, has extensive experience in designing anti-trust compliance programs and dawn-raid instructions. She has extensively advised clients in cases before the Competition Council of Latvia, including merger clearances and alleged antitrust violations. During the 2007-2008, Ms. Jerneva participated in the process of drafting of the amendments to the Latvian Competition Law.
Ms Jerneva periodically lectures at the Law Faculty of the University of Latvia and the Riga Graduate School of Law. She is author of many articles in on subjects of international, national, and EC law. She has just co-released a handbook for judges, covering Latvian and EC Competition Law.