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Competition law recognises that investment in brands can be economically beneficial. However, there is a tension between the restrictions brand owners are allowed to put in place to protect those brands within both UK and EU competition law.
Agreements and concerted practices that infringe competition law by preventing, restricting or distorting competition are void and unenforceable and can lead to fines of up to 10% of turnover for those involved. There is also the reputational impact to consider for companies and the risk of Director disqualification for those involved or those who should have known about the activity but did not prevent it.
To avoid the risk of getting drawn in to long and costly investigations with potentially very serious consequences, brand owners and retailers need to consider carefully how best to protect their brand value in a compliant way. The recent cases highlight the risks for brand owners and retailers in agreeing retail prices. There are legitimate ways to protect brand value that do not infringe competition law.
Price fixing: Football shirts
Fixing minimum prices is generally considered by competition authorities to be a ‘hardcore’ and ‘object’ (but see below) restriction of competition. This is because introducing fixed minimum prices removes the ability of retailers to compete on price, which is regarded as the most important of areas of competition.
The UK’s Competition and Markets Authority has recently imposed fines in relation to the fixing of the price of both Rangers FC and Leicester City FC products by the football clubs and JD Sports (and Elite Sports in relation to Rangers shirts).
This is not the first time retailers of football kit have fallen foul of competition law. One of the earliest cases under the UK Competition Act 1998 related to ‘hub and spoke’ agreements between Umbro (the manufacturer) and various retailers whereby Umbro liaised between retailers to ensure that none of them would discount its products.
These cases not only highlight the importance of brand owners not attempting to fix retail prices, but also the competition law risks to manufacturers of products distributed by multiple competing retailers of complaints from one retailer about the prices being charged by other retailers. In such situations manufacturers need to tread very carefully.
Price fixing: Drinks distribution
Price fixing is normally considered a restriction of competition ‘by object’. This means that to find an infringement competition authorities and courts do not need to conduct a specific economic analysis of the anti-competitive effects of the price fixing. Rather, it is assumed that competition is prevented, restricted or distorted by it and that these outweigh any potential countervailing benefits to competition and consumers.
However, a recent judgement of the European Court of Justice (“CJEU”) has arguably slightly softened this stance (at least in the EU). The case concerned the distribution of drinks in Portugal by Super Bock Bebidas. Super Bock was fined by the Portuguese competition authority for imposing fixed or minimum prices to be charged by distributors to hotels, restaurants and bars for their products. It seems that although the distributors were unhappy with the pricing restrictions, they nevertheless complied with them to avoid retaliatory measures by Super Bock such as the removal of discounts or having supplies cut off. This compliance with the price restrictions was treated as evidence of there being an ‘agreement’ (in competition law terms) between Super Bock and the distributors to fix the prices because it was said that there was sufficient ‘concurrence of wills’ between the parties.
Super Bock appealed to the CJEU. Among other things, it argued that although price fixing is a ‘hardcore’ restriction under the EU’s Vertical Agreements Block Exemption, and therefore unable to fall within the block exemption, this was not sufficient for it to be presumed to be an ‘object’ infringement.
Interestingly, to a degree, the CJEU agreed. The court said that a vertical agreement fixing minimum resale prices can only be categorised as a restriction ‘by object’ after there is a determination that the “agreement presents a sufficient degree of harm to competition, taking into account the nature of its terms, the objectives that it seeks to attain and all of the factors that characterise the economic and legal context of which it forms a part”.
Although precisely what constitutes such an assessment is unclear, this has been argued to bring the EU position closer the ‘rule of reason’ approach adopted in the US. The CJEU judgement is also in line with the UK Court of Appeal’s judgement in the appeal brought by Ping against it restricting online sales where the CoA said: “To say that a restriction is a hardcore restriction… is not the same as saying it is a restriction by object”.
However, for the CJEU to make this decision in these terms in relation to price fixing – which is generally regarded as the most serious vertical restriction on competition – may make it procedurally harder for competition authorities to establish infringements based on retail price fixing in the future. This means that investigations will take longer and be even more resource intensive for companies and regulators. Despite being an EU case, given that it is also in line with the recent Court of Appeal judgement in the Ping case, it would seem likely to be influential in the UK.
Conclusion
Brand owners make considerable investments in promoting their brands and understandably do not want to see these devalued in the way they are retailed. However, they need to tread carefully when seeking to impose restrictions on resellers to avoid falling foul of competition law, which is likely to be extremely damaging for all concerned. Retail price fixing is very rarely likely to be a legally sound option.
We have considerable experience in assisting brand owners and retailers in relation to the distribution strategies for branded goods and can assist companies in achieving their objectives while staying on the right side of competition law. These include having properly set up selective and exclusive distribution arrangements.
If it would be helpful to discuss any of the issues arising from this update, please contact Noel Beale or your usual Michelmores LLP contact.
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