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DOJ Antitrust Division Approves Securities Industry Y2K Plan

August 1998

Co-Authors: Kent A. Gardiner and Jonathan A. Epstein.

In July 1998, the Antitrust Division of the Department of Justice reviewed, and decided not to challenge as anticompetitive, a Y2K proposal by the Securities Industry Association (SIA), which represents nearly 800 securities firms. The proposal will allow the association's members and their computer services suppliers to exchange information concerning efforts to address Year 2000 issues confronting the securities industry.

The Department's Antitrust Division provides review letters to address companies' and associations' concerns about the antitrust implications of proposed business activities. The Division approved the SIA proposal for a comprehensive program to coordinate Year 2000 remediation efforts to help ensure the continued smooth functioning of securities markets at the turn of the century. Specifically, the SIA's proposed program would permit two types of information exchanges: (1) Year 2000 compliance information from manufacturers and vendors of computer software, hardware, and chips would be gathered and exchanged among SIA members to allow them to test their internal systems and infrastructure; and (2) direct information exchanges among SIA members concerning such matters as the results of product tests, methods of remediating Year 2000 problems, and individual vendors and their products.

Such exchanges of information among otherwise competing firms often raise antitrust scrutiny for several reasons. As an initial matter, the antitrust enforcement authorities are extremely wary any time competitors communicate directly with each other because such dialogue presents the opportunity for them to collude on issues such as price, output, or allocation of territories, which can have significant anticompetitive effects.

Information exchanges such as the one proposed by the SIA also may raise the specter of specific anticompetitive conduct like group boycotts. That is, under the auspices of an information exchange agreement, independent businesses could meet and agree not to use a particular computer service provider. While there may be valid reasons for reaching that conclusion (i.e., poor performance, noncompetitive price) and while each business could unilaterally reach that conclusion without violating the antitrust laws1, when businesses join together to reach a common decision the possibility of antitrust liability is raised.

Another possible anticompetitive effect of information exchanges with antitrust implications is known as the "conduit" theory. The conduit theory posits that where businesses at two different levels of the manufacturing or distribution chain are allowed to freely exchange information, one party can become a conduit through which parties at another level in the chain communicate with each other about price, output, and other relevant terms. For example, a computer service provider could communicate its pricing structure to a securities firm, knowing that, through the SIA information exchange, that security firm will relay the information to another computer services provider, thus allowing competing service providers to conspire through the SIA "conduit."

Finally, both the Antitrust Division and the Federal Trade Commission historically have been suspicious of communications within trade associations because of the potential for "spill-over" effects. That is, if competitors are allowed to discuss Year 2000 compliance issues, there are concerns that in the course of discussing those permitted issues, the parties will stray into forbidden territory, such as conversations about price, other competitors, etc.

In balancing these traditional antitrust concerns with the unique technological problems raised by Year 2000 issues, the business review letter issued by the Antitrust Division, while approving the SIA's proposed information exchange program, imposed certain limitations: (1) no price information can be exchanged; (2) vendors will only be provided information about their products, not the products of their competitors; (3) neither the SIA nor its members will recommend in favor of or against the products of particular vendors (i.e., the information exchanged will be stated in non-judgmental terms); and (4) no collective procurement action will be taken.

In addition to those express limitations, one must be careful not to interpret the Antitrust Division's decision not to challenge the SIA information exchange program too broadly. Business review letters, such as the one from the Antitrust Division to the SIA, are not binding on antitrust enforcement agencies; rather, those letters are intended to provide guidance as to the Antitrust Division's views of the applicability of the antitrust laws in a specific context. Thus, the high degree of interdependence among securities firms (to the extent that the inability of even a handful of firms to execute trades, transfer funds, or document transactions could have widespread adverse effects on securities trading in general), the pressing need for a common interface, and the overriding importance of maintaining the integrity of the securities market as an integral part of the United States' economy are illustrative of the procompetitive effects of the SIA information exchange agreement which the Antitrust Division felt outweighed the potential anticompetitive effects of that agreement.

Therefore, businesses must be acutely aware that, in a different business context, information exchange programs designed to address Year 2000 compliance issues may raise antitrust concerns. As covered in this issue's Washington Page, several bills in Congress seek to grant broader general protection from antitrust inquiry on Year 2000 issues. Barring such legislative relief, businesses should tailor such programs to their industry and to their particular communication needs and develop appropriate information exchange protocols to reduce antitrust risk.

1 This assumes that a business acting unilaterally does not possess monopoly power. If a business has monopoly power in a given market, the antitrust laws impose certain duties of fair dealing.

Kent A. Gardiner
Partner – Washington, D.C.
Phone: +1.202.624.2578