Background: the development of index-based pricing for iron ore
This case relates to the alleged confidentiality of one element of pricing of iron ore sold under long-term iron ore sales contracts (LTCs).
Over the last decade the pricing of physical seaborne iron ore has gone through an evolution.
Previously, pricing relied on annual benchmark negotiations between major producers and end users. In recent years, however, this model has been abandoned, and the market has moved towards a more dynamic, market index-based pricing.
These iron ore price indices, and the sophisticated methodologies which underpin them, have been developed by competing PRAs over several years. Over time, these PRAs have refined the methodologies used, and the resulting indices are generally considered to reflect actual supply and demand dynamics on a considerably more contemporaneous basis than the previous annual benchmark pricing model ever could. As such, many market participants have come to consider the availability of these price indices to be a positive development in the market. Index-based pricing has the effect of reducing instances of contractual non-performance which had previously been more common when there was significant divergence between (i) the agreed LTC benchmark price; and (ii) the prevailing spot price for iron ore.
However, the existence of these price indices is reliant on market participants reporting actual normalised spot prices achieved for iron ore cargoes to PRAs, which the PRAs then ‘aggregate’ in order to establish average prices for the relevant period. As such, the indices can be said to rely on significant market participants – in particular, major producers – positively embracing transparency in pricing and continuing to cooperate in the reporting process.
There are now a number of different iron ore market price indices in existence, the methodology of each of which reflects, to some degree, actual spot sales achieved in any given month for iron ore (i) with similar physical characteristics (e.g., percentage of ferrous content and the size grade), and (ii) sold for seaborne delivery to the most popular iron ore delivery ports (e.g., CFR Qingdao, China).
Electronic platforms for the spot sale and purchase of physical iron ore have also come into existence over that same period, and the volume of iron ore traded over such platforms has grown significantly.
The actual normalised sales prices achieved over such platforms, and a variety of other data points, are also commonly reported to PRAs. These data points assist to create the transparency and liquidity necessary to underpin the price indices and to give the market confidence in their accuracy as a reflection of the supply/demand dynamic in real time.
Market confidence has grown sufficiently over the years such that index-linked pricing now forms at least a significant part of the pricing mechanism applicable under most long-term contracts between major suppliers and their largest customers.
Another common element of the pricing formulae for long-term iron ore sales is (depending on the particular product and index utilised) a premium or, more commonly, a discount applied per dry metric tonne unit (DMTU) against the applicable index. This discount may be calculated by producers based on a multitude of factors.
It is this discount, and its alleged confidential nature, which formed the basis of the case at hand, in which Fortescue Metals Group Ltd. and its subsidiary, Chichester Metals Pty. Ltd. (together, FMG) sought to prevent the publication of discount data by two PRAs, Argus Media Limited and S&P Global Inc. (together, the Defendants).
FMG, the fourth largest producer of iron ore globally and the single largest producer of solely iron ore, recently sought an English High Court injunction to restrain the Defendants from publishing FMG’s monthly ‘DMTU discount’.
The DMTU discount has been an element of the pricing formula in FMG’s LTCs, and was offered to existing and prospective customers subject to certain requirements as to confidentiality. Towards the end of each month, FMG informs its existing and prospective LTC customers of its DMTU discount for the following month. The DMTU discount is the same for all of these existing and prospective customers, meaning that FMG’s DMTU discount for each month can be said to have become widely known within the market without any breach of confidentiality by any of the recipients.
Since 2014, PRAs including the Defendants have published market reports and analyses containing iron ore producers’ DMTU discounts, including the FMG DMTU discount. It was understood at the hearing that the information contained in the PRAs’ reports was typically gleaned from Weibo, WeChat and other open social media platforms on which iron ore traders commonly circulate such information. So the reports relied somewhat on FMG’s actual and prospective customers (not the PRAs themselves) breaching their duties of confidentiality to FMG.1
From late 2019 onwards (i.e., after a delay of around five years) FMG started taking action to restrict PRAs’ monthly publication of its DMTU discount.
In particular, in March and April 2020, FMG first wrote to its Chinese customers reminding them not to divulge the monthly DMTU discounts in accordance with their LTCs’ confidentiality obligations. FMG also sought undertakings from PRAs to cease publishing its DMTU discounts. Some agreed, but not the Defendants, against which FMG swiftly commenced proceedings on 17 April 2020.
In its court application against the Defendants, FMG explained that its change in position was due to (i) the recent change in its DMTU discount’s pricing function (whereas it was previously a factor of the provisional price under FMG’s LTCs, it was now fully integrated into the final price calculation), and (ii) the fact that since 2018 LTCs (rather than spot sales) had become increasingly strategically important to its business.
The Court granted two short interim orders on 23 and 29 April 2020, restraining the Defendants from publishing details of the DMTU discount. At the return hearing on 12 May 2020. FMG asked for the injunction to remain in place for an extended period, until the question could be heard at a full trial.
Mr Justice Miles found in favour of the Defendants, and refused to extend the interim restraint order up until trial.
This decision can partly be explained by the relatively high burden of proof for extending an interim restraining order in circumstances where issues of freedom of expression are in place.
In order to succeed, FMG needed to satisfy the Court that it would probably (“more likely than not”) obtain a permanent injunction at trial2 – which it failed to do. This is a particularly high standard to meet, and to a large extent this decision should therefore be treated with caution pending final judgment. The fact that the interim order was lifted does not mean that permanent relief will not be granted when the matter comes to trial; only that at this early stage FMG was not able to show that it was “more likely than not” that such permanent relief would be granted.
Mr Justice Miles noted that because PRAs are ‘publishers of journalism’ for the purposes of EU law, the application raised issues in respect of freedom of expression under Article 10 of the European Convention on Human Rights and Section 12 of the Human Rights Act 1998. As such, a fact-specific balancing exercise was required between:
- a duty to treat FMG’s DMTU discounts with confidence3 – which duty the Court found FMG would be likely to establish at trial; and
- the Defendants’ freedom of expression – which may justify a breach of confidence where it would be in the public interest for the DMTU discount to be published despite its confidential nature.4
The confidential nature of the DMTU discounts
Mr Justice Miles closely reviewed the case law on the circumstances in which information can be treated as ‘confidential information’ or a ‘trade secret’.5
On balance, he found that it was more likely than not that FMG would be able to show at trial that the DMTU discount had a “quality of confidence”, although in this particular case such quality was not “particularly strong or pronounced”.
Factors considered include the relatively generic nature of the DMTU discounts, which were not “bespoke prices” specifically negotiated under each LTC, but a general figure communicated to all of FMG’s existing and prospective LTC customers. Thus, the DMTU discount was widely disseminated by FMG itself, albeit FMG never intended the DMTU discounts to be published by PRAs, and indeed the DMTU discounts were likely to fall within the scope of the LTCs’ confidentiality clauses.
In this respect, it was particularly telling that FMG’s DMTU discount had been published by the Defendants since 2014 (around five years) without any protest or action from FMG, since the cases show that it is relevant to consider how widely the alleged confidential information was known and what steps were taken by the owner of the information to keep it secret.
All in all, however, the Court felt that FMG was likely to show at trial that both its customers and PRAs such as the Defendants were under a duty of confidence towards FMG in respect of the DMTU discounts. For example, (i) the DMTU discount was supplied to a limited class of customers for the specific purpose of pricing LTCs and typically subject to binding contractual obligations of confidentiality, and (ii) whilst generic, the DMTU discount was not in the category of, for instance, a price list which is provided to anyone who expresses an interest.
Nevertheless, this was likely to be found to be a relatively weak duty of confidence in the circumstances. This was important when the duty was viewed in context and balanced against the public interest in having these DMTU discounts published.
A public interest in publishing the DMTU discounts
Mr Justice Miles found that it was likely that the Defendants would be able to show at trial that it is in the public interest to publish the DMTU discounts even though that would require a breach of confidence.6
A number of points in the judge’s reasoning reveal the importance given to PRAs and their perceived role in upholding information-sharing, healthy competition and transparency in the commodities markets:
- Restraining the Defendants would eliminate a significant source of information (i.e., premium or discount pricing) about an important segment of an important market. The iron ore market is of great economic and strategic importance – said by some to be second only to the oil market – and FMG is one of the largest producers of iron ore globally. DMTU discounts are used in the LTC market, which constitutes approximately 85 per cent of the total iron ore market globally (the remaining 15 per cent being covered by spot trades). Unlike the spot market, the LTC market is particularly opaque, save for the PRAs’ provision of market intelligence. This market intelligence, which includes DMTU discounts across producers’ LTCs, is particularly useful for smaller spot buyers, governments, academics and regulators (amongst others) to better understand iron ore market trends, and all of whom have a legitimate and important interest in being able to access such intelligence.
- There is a recognised competing public interest in upholding confidentiality duties, as this enables parties to negotiate their agreements openly and properly. However, Mr Justice Miles did not agree that in this case the disclosure of its DMTU discounts would hinder FMG’s ability to negotiate new contracts or perform existing contracts. Amongst other things:
a. the DMTU discount is not a negotiated component of the LTCs’ pricing and does not represent the ‘bespoke’ final price charged to each customer. It is a generic figure, identical for all of FMG’s actual and prospective customers. In that respect, PRAs have not disclosed the specific, negotiated terms of LTCs when publishing the DMTU discount, and no ‘reverse engineering’ with the DMTU discount in hand would enable these terms to be identified either; and
b. there was nothing to show that the publication of its DMTU discounts had hindered or affected FMG’s dealings with its counterparties, all the more as the DMTU discount had been published since 2014 without any protest on FMG’s part.
- Mr Justice Miles considered that FMG’s real concern was, rather, for its competitors not to know of its DMTU discounts as this might lead to undercutting behaviour. In this respect he noted that:
a. LTC negotiations are far more complex (with variables as to quantities, delivery dates, term, and other components of the price formula) for a competitor to simply offer a lower DMTU discount to win the deal. Further, DMTU discounts can change significantly from month to month, meaning that knowledge of a given month’s DMTU discount could not be said to influence prospective buyers in respect of an LTC’s full term; and
b. even if it were the case that disclosure of FMG’s DMTU discounts would lead to undercutting by other producers, this is a competitive behaviour that could well be considered to be in the interests of potential customers.
This judgment will be of interest to commodities market participants for a number of reasons:
- Firstly, it shows that the English courts are willing to treat PRAs as ‘publishers of journalism’ in appropriate circumstances, meaning that an attempt to restrain their activities will engage Article 10 of the European Convention on Human Rights and Section 12 of the Human Rights Act 1998. This is of particular interest in the context of interim restraining orders, as the party seeking the order will have to satisfy a relatively high burden in order to restrain the PRAs’ activities for the period pending trial.
- Secondly, it draws attention to the potential for tension between market participants’ interest in (i) having available to themselves and their counterparties sources of dynamic, transparent and reliable pricing data which provides an accurate reflection of supply and demand in real time, and (ii) keeping their own information confidential. These tensions can no doubt be reconciled, but this raises the question of whether market participants who had until now been apparently content to allow the widespread dissemination of supposedly confidential data via social media may seek to ensure that their relevant data is shared with PRAs via more formal and better regulated avenues in future.
- Thirdly, it is conceivable that the (brief) comments from Mr Justice Miles that the disclosure of pricing component data could be useful for competition might stimulate discussion around the extent to which market participants can confidently share actual pricing data with PRAs and/or make use of the prices published by PRAs without falling foul of EU competition regulations. In this respect, it is important to note that the judgment should not be interpreted as the Court advocating the sharing of pricing information generally. In particular:
a. relevant competition regulations are not varied or affected by the present decision and the judgment does not signal any shift in interpretation or policy – it should be viewed as no more than an application of existing considerations to the particular case under consideration;
b. the judgment turned on a set of very specific facts which were unique to the iron ore market, and to the production, dissemination and publication of the particular DMTU discount in question – there are no ‘general rules’ to be discerned which apply to the question of anti-competitive behaviour more generally;
c. it was important that the PRAs were not publishing (or using as the basis of their publications) actual final prices. The published DMTU discounts were only a single component of a more complex pricing formula, and could not be reverse-engineered by readers in order to establish actual final prices. Therefore, there cannot be said to have been any sharing of prices as such; and
d. importantly, this was not a case of data being shared amongst a group of producers or sellers with a view to ensuring a certain price be achieved within a particular market. On the contrary, this was a case of neutral third parties (the PRAs) sharing limited information (not actual prices) which could be accessed by all of their subscribers and which was therefore more likely to equip purchasers to drive prices down.
e. It is noteworthy that this judgment is given in the context of an ongoing wider discussion, at a European Union level, on the benefits of the so-called ‘Horizontal Block Exemptions Regulations’ (the Exemptions Regulations).7 The purpose of the Exemptions Regulations is to allow certain cooperation / practices between companies at a same (i.e. horizontal) level of production or distribution chain – which cooperation / practices would in principle be deemed anti-competitive under EU law – in circumstances where the efficiency gains and economic benefits for the consumers are higher than the restrictions on competition, Economic benefits are said to include, for instance, risk-sharing, cost-sharing, pooling know-how, enhancing product quality and promoting innovation.8 The EU Commission recently carried out a public consultation (in Q4 of 2019 and Q1 of 2020) for a general evaluation of the Exemptions Regulations, and whether they should lapse or be extended and/or revised.9 This case illustrates the need for the guidance to be updated to cover situations relevant to the commodity sector, including the need for a re-think of the nuanced role that price sharing / price signaling can have in promoting and/or hindering competition.
- Finally and more generally, the Court took account of the relatively long period between the PRAs first publishing the relevant category of information and FMG taking steps to restrain publication. This is a reminder for any party considering an application for interim injunctive relief that delay is likely to be viewed unfavourably by the English courts.
- Although the Defendants did not reveal their actual sources for reasons of journalistic integrity.
- Applying Section 12(3) and Section 12(4) of the Human Rights Act 1998; applying Cream Holdings v. Banerjee  1 AC 253.
- Applying Coco v. AN Clark (Engineers) Ltd  RPC 41.
- Applying Brevan Howard Asset Management v. Reuters  EWHC 644 and  EMLR 28.
- Applying Thomas Marshall Ltd v. Guinle  Ch. 227.
- The authorities show that this is the appropriate test. Rather than simply asking whether there is a public interest in the data itself, the question is whether there is a public interest in a publication which involves a breach of confidentiality.
- Commission Regulation (EU) No 1217/2010 for research and development agreements, and Commission Regulation (EU) No 1218/2010 for specialisation agreements, which are both scheduled to expire on 31 December 2022.
- Guidelines on the applicability of Article 101 of the Treaty on the functioning of the European Union to horizontal co-operation agreements.
- We understand that the outcome of the public consultation is scheduled to be published in Q1 2022.
Client Alert 2020-356