Legal briefing | Commercial Law, Competition |

CMA beats the drum on resale price maintenance

Overview

Across five cases in less than a year, fines totalling £13.7m and warning letters sent to the entire industry, the UK Competition and Markets Authority (the "CMA") has put suppliers and retailers on notice that it will not tolerate efforts to fix or otherwise stabilise resale prices for consumers. While all five cases concerned activities in the musical instruments sector, the risks and lessons apply to vertical distribution arrangements in a much broader context and show that the CMA is prepared to clamp down hard on businesses which flout the rules.

So-called 'resale price maintenance' between manufacturers and distributors has long been illegal under competition law. However, the CMA's wide-ranging enforcement actions and ongoing monitoring of online resale prices within the musical instrument industry has underlined an EU-wide trend of regulators focussing on the controls manufacturers try to place on the online sales practices of their distributors.  

Below we briefly summarise the CMA's latest enforcement actions in this sector and explore the key practical takeaways – which apply equally to the pricing practices of manufacturers and retailers both in and outside the sale of musical instruments.

Online resale price maintenance in the spotlight

Last week, the CMA published an infringement decision in the latest in a line of five cases over the past eleven months pursuing both manufacturers and a retailer for resale price maintenance ("RPM") as regards the online sale of musical instruments. This followed the issuance of 70 warning letters, the publication of three case-studies, guidance and an open-letter to manufacturers and retailers in this industry, underlining the CMA's ongoing concern with RPM in this sector and beyond.

Rocking the boat: CMA's focus on RPM in the musical instruments sector

April 2018 – CMA announces it has opened five investigations relating to suspected anti-competitive agreements and concerted practices in relation to musical instruments and equipment.

August 2019 – CMA issues its first fine of £3.7m to a manufacturer of digital pianos and keyboards.

January 2020 – CMA issues its second fine of £4.5m to a manufacturer of guitars.

29 June 2020 – CMA issues two separate fines totalling £5.5m to manufacturers of electronic drums and synthesisers/hi-tech equipment, announces a separate settlement with a retailer regarding an agreement not to discount the online price of a certain brand of instruments, and publishes an open-letter to the entire musical instruments industry on the dangers of resale price maintenance.

17 July 2020 – CMA formally issues its infringement decision to a retailer and manufacturer further to the settlement mentioned above.

This extensive enforcement action sends a clear message that the CMA are taking RPM seriously and are focused on tackling online selling practices where retailers are instructed to maintain higher resale prices of their suppliers' branded products.  Save for in very exceptional circumstances, third-party distributors outside a manufacturer's corporate group must be free to price as they wish, and any direct or indirect resale price controls imposed by manufacturers on retailers will be deemed an egregious breach of competition law, punishable by potentially significant fines and possibly even director disqualification.

Indirect control on resale prices defined broadly

CMA case studies regarding its investigations into Korg (synthesizers; fined £1.5m), Casio (keyboards; fined £3.7m) and Fender (guitars; fined £4.5m) underline how indirect sanctions or pressure on a distributor designed to maintain a minimum resale price are likely to be found to infringe competition law.

In addition to explicit agreements which dictate the price at which a distributor must price a product, the following sanctions (or threats regarding the same) may be deemed a form of RPM if used to pressure a distributor into maintaining a certain price point:

  • withholding payment of a retailer's invoice;

  • withholding agreed marketing support for the retailer;

  • making financial bonuses contingent on maintaining a certain price point;

  • reducing the retailers' credit limit;

  • delaying deliveries or otherwise withholding the supply of products;

  • restricting a retailer's access to popular product ranges; and/or

  • offering less favourable contractual terms to the retailer.

Recommended resale prices (RRPs) remain legal.  However, manufacturers should be careful that sales staff do not compel retailers to maintain a certain price point via the use of implied or indirect sanctions.

The recent fines against Roland (electronic drums; fined £4m) and Korg also illustrate how the CMA will deploy forensic IT tools to uncover internal and external documents, email correspondence and social messages which evidence attempts to maintain resale prices.  Korg failed to keep its RPM behaviours hidden, despite staff using encrypted communication platforms and avoiding 'direct language' regarding resale prices.  Firms should therefore not expect to be able to bury attempts to influence retailers' resale prices in ostensibly legitimate policy documents or otherwise conceal them by, e.g., avoiding formal written communications.  Indeed, the CMA has emphasised that any attempts by firms to conceal RPM practices may result in higher fines.

All that said, manufacturers and brand owners clearly have a legitimate interest in safeguarding the value of their brands and can legitimately exercise a degree of control over distributors for this purpose.  For example, the use of clear selective distribution criteria and contractual rights to terminate for convenience (or shorter terms) could give manufacturers some flexibility in managing their route to market.

Be careful when using price-monitoring software

Manufacturers and retailers must take extra care if they use price monitoring software.

Although monitoring a firm's own market position is a legitimate business practice, acting on that price information in a way that could be perceived as limiting retailers' freedom to set their own resale prices will be considered an infringement by the CMA.

Across all of these musical instrument cases, the CMA registered a concern that suppliers' use of online price monitoring software materially increased their ability to illegally control (or otherwise influence) resale prices market-wide.  So, while use of such pricing software is not in itself illegal, manufacturers should expect to receive close scrutiny from the CMA regarding its use – it cannot be used to find and subsequently punish retailers which are selling below an agreed price.

Responding to this concern, the CMA itself has built a new in-house online price tool to automatically monitor and address suspected RPM behaviour, which it is applying to the musical instrument sector on an ongoing basis.  It has promised to deploy this tool elsewhere where it suspects there may be widespread pricing policies that infringe competition law.

Retailers as well as manufacturers may be in treble

Historically, the CMA has usually pursued manufacturers and not retailers for RPM due to the retailer being perceived as a passive participant in these anti-competitive agreements, or the subject of threats by the manufacturer.

However, the CMA's most recent enforcement action against GAK, a specialist music instrument retailer who settled for a fine of £278,000, suggests that retailers who uphold RPM agreements or practices (e.g. by "shopping" rival retailers discounting below the manufacturer's set price) may well be held to have infringed competition law.

The CMA pursued the retailer despite the relevant manufacturer (Yamaha) having already blown the whistle on the RPM arrangement and admitting liability in exchange for immunity from fines.  In a briefing on its recent enforcement action, the CMA has made clear that the fact that specialist retailers face difficulties in competing on price with 'big online discounters' will not justify their behaviour or result in a reduction of fines.

When negotiating supply agreements, retailers and distributors should be wary of contractual clauses which purport to require anti-competitive behaviour of this kind.  The CMA's recent activity suggests not just a risk of unenforceability for the manufacturer, but also a risk that action could be taken against a complicit reseller. 

RPM need not be successful to be a breach

It does not matter whether attempts to fix or maintain resale prices are ultimately successful for such behaviour to be deemed a breach of competition law.

For example, the fact that certain retailers may have regularly ignored the manufacturer's controls or threats regarding resale prices and/or the retailer in question may play only a limited part in enforcing or cooperating with an RPM arrangement will not absolve them of their competition law breach.  Manufacturers, for their part, should double-check that their standard terms of sale do not seek to impose or threaten any controls of this type, even if there's no particular intention ever to enforce them. 

Similarly, both the Casio and Fender decisions highlight that internal chatter regarding the implementation of potential threats or controls regarding adherence to resale prices may be used as evidence of a broader RPM scheme – even if they are not ultimately acted upon.

Directors and senior staff to face the music?

The CMA has made clear that directors and senior staff have special responsibility to ensure that all employees – including junior sales staff often involved in RPM arrangements – across the business do not engage in RPM.

Not only do senior staff have a separate responsibility to be well informed on competition law themselves, but also must ensure their firm implements a robust competition law compliance regime.  The CMA explicitly notes that merely attending competition law compliance training sessions is not sufficient to be regarded as implementing a 'compliance culture'.

[The CMA] may start to use their powers in order to pursue director disqualifications in RPM cases.

Failure of senior staff to fulfil this special responsibility may not be without consequence. In the Korg, Casio and Fender cases, fines were increased because senior management and senior staff members were involved and complicit in illegal behaviour, despite having been trained in competition compliance. In GAK, senior management's failure to take concrete action in response to an advisory letter from the CMA also resulted in a material increase to the retailer's fine. 

Most notably, a recent CMA blog suggested that it may start to use its powers in order to pursue director disqualifications in RPM cases – despite such personal sanctions usually being reserved for cartel behaviour (e.g. bid-rigging) between direct competitors. 

EU & UK regulators sing from the same hymn sheet

Further online resale price maintenance enforcement action by UK and other European regulators cannot be ruled-out both in the musical instruments sector and beyond.

Not only has the CMA adopted a new online monitoring tool to observe sectors where RPM may be widespread and sent out over 70 warning letters to musical instrument suppliers and retailers, but parallel investigations into the sector have also been opened by other European domestic regulators. In 2020 alone, allegations of RPM in the musical instruments sector have been probed by the competition authorities in Germany, Sweden and Poland, with fines being imposed in Austria.

Outside of musical instruments, RPM has been a focus for Czech Republic and Poland in sports equipment, Finland in hardware supplies, and France in tech devices.  More broadly, the CMA's recent enforcement action reinforces how manufacturers' and retailers' online selling practices – including any controls on resale prices – remain under close scrutiny at a UK and European level. 

It remains to be seen what approach the CMA will take to RPM after the expiry of the Brexit transition period.  The European Commission has traditionally perceived this as an area of domestic enforcement only, but the CMA's recent enforcement action closely follows a number of European Commission investigations into the online selling controls and practices of Nike, Guess, Asus and Phillips (among others).  The fact that the CMA pursued the various musical instruments cases to their conclusion might suggest that the domestic attitude to vertical pricing will remain broadly in tune with European approaches, at least in the short term.   

Back to top