CMA publishes pricing guidance for suppliers and online retailers
This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
In May 2016 the CMA published two infringement decisions in which it imposed fines in the commercial catering equipment and bathroom fittings sectors. In each case the fine related to illegal price fixing between a supplier and a retailer, whereby the supplier had imposed a minimum price for the online sale of its goods by the retailer, so-called 'resale price maintenance' or RPM.
Accompanying the publication of the non-confidential version of each decision in June 2016, the CMA published an open letter and a 60 Second Summary addressed to retailers and suppliers emphasising the importance of compliance with UK competition law, with the key message that online sales are not exempted from the competition rules.
What is Resale Price Maintenance?
The Competition Act 1998 prohibits agreements that effect trade within the UK which have as their object or effect the prevention, restriction or distortion of competition. The prohibition specifically prohibits price fixing, which includes resale price maintenance. EU law contains an equivalent prohibition of anticompetitive agreements which affect trade between the EU Member States.
Competition authorities are concerned with RPM on the basis that it restricts the ability of the retailer to set prices independently, ultimately leading to artificially high retail prices.
UK and EU competition law prohibits both direct and indirect RPM. Direct RPM simply sets a minimum price for which a retailer may re-sell a supplier's product. Examples of indirect RPM include:
- Imposing restrictions on the retailers ability to discount;
- Preventing or limiting the ability of the retailer to advertise lower prices online;
- Linking the resale price of a product to the price offered by other retailers for the same product; and
- Threats of refusal to supply or the imposition of penalties for non-adherence to a recommended retail price.
The CMA infringement decisions
ITW, a fridge supplier, was fined £2.299 million by the CMA for infringing competition law by adopting a minimum advertising policy that restricted the price at which its retailers could advertise fridges online. It was also found that ITW threatened dealers with sanctions (including the threat of charging higher wholesale prices or refusing to supply the retailers concerned) in the event that they advertised below the minimum price established by the policy. The fine imposed on ITW was reduced by 10% for establishing a competition law compliance programme and a further 20% to reflect cost savings gained by ITW's cooperation with the CMA and entry into a settlement agreement.
Ultra Fittings, a bathroom supplier, was fined £786,668 by the CMA for setting recommended retail prices for online sales – which in itself is lawful – and accompanying those recommended prices with threats of penalties (including the threat of higher prices or the withdrawal of the right to use Ultra's images online) should the retailer fail to price at or above the recommended price. The CMA found that this restriction on the pricing freedom of the retailer was unlawful, and in particular that whilst the setting of a recommended retail price is generally permitted, when coupled with threats of strong financial incentives to comply, such a practice can become an indirect RPM. Ultra's fine was reduced by 20% for efficiencies generated by their full cooperation and early settlement and a further 5% for the instigation of a competition law compliance programme.
Concluding Thoughts
Following these two decisions, the CMA has also sent warning letters to suppliers in both the commercial catering equipment and bathroom fittings sectors which it suspects might have engaged in similar pricing practices, warning companies about the risks of imposing minimum prices in relation to online sales. Such letters do not mean that the recipient company has infringed competition law, but the warning is clear – continue to set minimum prices in relation to online sales and you could face enforcement action.
What these two decisions illustrate is that there is no difference between brick and mortar sales and online sales for the purposes of RPM, with the CMA stressing that the internet is an increasingly important channel for business and that the principles of competition law apply to all sectors. With respect to online sales, businesses should further note that it is an infringement of competition law for a supplier to prevent a retailer or distributor from satisfying unsolicited sales from outside the territory defined in a particular agreement (so-called passive sales). Any attempt to prevent passive sales must not therefore form part of commercial arrangements.
The internet has revolutionised commerce and businesses should be aware that the CMA has been diligent in recognising that the online sphere is not a safe harbour for suppliers seeking to impose minimum pricing (whether direct or indirect). In order to avoid the considerable legal consequences, suppliers and retailers should take note of the CMA's recent guidance and infringement decisions, taking this as the ideal opportunity to internally audit and ensure proper and effective competition compliance programmes are in place.
For more information please contact Dervla Broderick or Lucy Cass.
