UK: Be Careful What You Wish For: CAT’s Replica Football Kit Judgment Shows that Achieving the Right Price Can Be Costly

Last Updated: 22 November 2004
Article by Pat Treacy and Sophie Lawrance

The Competition Appeal Tribunal (CAT) gave its longest judgment to date at the beginning of October. The judgment concerned the OFT’s Replica Kit decision of 2003. Following an investigation, the Office of Fair Trading (OFT) had found that that a number of companies had participated in a cartel aimed at fixing the price of replica football kit in 2000 and 2001. Fines ranging from £73,000 to £8.37m were imposed on a total of 9 companies. Two companies, JJB Sports plc and Allsports Limited, appealed against the OFT’s finding of liability and the level of penalty imposed.1 Under CAT rules, an appeal from an investigation by the OFT involves a full hearing of the merits of the case. Further evidence emerged at the 14-day hearing. The CAT judgment upheld most of the OFT’s original decision.

The case is of interest both for its development of UK procedure (for example, it clarifies the applicable standard of proof in cartel cases in the UK), and for its substantive legal analysis. It explores some of the ways in which a supplier may be central to a price-fixing arrangement between retailers. It also emphasises that even passive conduct and indirect contacts may be capable of amounting to anti-competitive collusion. The case also provides some useful examples of pricing practices to avoid. Each of these issues is discussed below.

Suppliers as cartel "enforcers"

The substantive law relating to price fixing is fairly settled. A concerted practice between competitors which has the aim of maximising profit by fixing the price of goods represents one of the most serious breaches of competition law. As a consequence, the issues have been addressed regularly and the law is clearly established. The key elements of the law are clearly set out in the CAT’s judgment.

Price-fixing cartels are usually formed by direct competitors. Suppliers may engage in resale price maintenance (another serious breach of competition rules) but it is less usual that they assume a role in implementing a cartel between competitors. In the Replica Kit case, Umbro, the supplier in question, did play such a role. Following pressure by JJB, one of Umbro’s biggest retailer customers, Umbro took action to "restore pricing stability to the market". It achieved this by threatening to cancel orders made by other retailers who were known to offer substantial discounts on the recommended resale price ("RRP") of replica England and Manchester United football shirts. Certain of the discounters acceded to the commercial pressure and agreed not to sell the replica kit below an agreed price. In its judgment, the CAT confirmed that all the parties (i.e. JJB, Umbro and the discounters) were participants in a single anti-competitive cartel.

Indirect or passive participation is enough

The CAT found that anti-competitive collusion could exist even without direct contact between the parties. The indirect disclosure by one competitor (JJB) through a supplier (Umbro) of its future pricing intentions to other competitors (the discounters) was sufficient to amount to price fixing. In a passage which should be of interest to almost all retailers and which is worth quoting, the CAT sets out the extremely limited circumstances in which it may be legitimate for a retailer to disclose its pricing intentions to a supplier:

"If one retailer A privately discloses to a supplier B its future pricing intentions in circumstances where it is reasonably foreseeable that B might make use of that information to influence market conditions, and B passes that information on to a competing retailer C, then in our view, A, B and C are to be regarded on those facts as parties to a concerted practice having as its object or effect the prevention, restriction or distortion of competition. The prohibition on direct or indirect contact between competitors on prices has been infringed.

The position might […] be different only if it could be shown that retailer A revealed its future pricing intentions to its supplier B for some legitimate purpose not related in any way to competition, and could not reasonably have foreseen that such information would be used by B in a way capable of affecting market conditions. It seems to us that such disclosure by a retailer to a supplier will rarely be legitimate, otherwise resale price maintenance could be reintroduced by the back door".

Many companies are aware that they should not discuss pricing strategies with their competitors. This judgment shows that companies should avoid such discussions with any other company which is active on the same market, even if not a direct competitor and even if the two companies are in a vertical (e.g. supply) relationship.

The judgment also emphasises that the competition authorities may find that a company has engaged in a cartel even if its participation has been largely passive. The CAT stated that a company is likely to be found to have been a passive party to a cartel arrangement if it has taken part in a meeting to discuss price fixing and has done nothing to distance itself from the discussion. In such circumstances, the company is taken to have given its tacit approval to the unlawful initiative, unless it has publicly distanced itself or informed the OFT.

The CAT also explained that a company which is involved in a cartel may be found liable in respect of acts which take place after the end of that company’s active participation. Unlawful agreements may be deemed to have continued until there is some clear change in circumstances.

The only safe course of conduct for companies which find that they have been drawn into discussions aimed at forming an illegal cartel should therefore act as soon as possible, preferably by informing the OFT, to avoid potentially serious consequences under the competition rules.

Too much talk can be dangerous

Many of the particular issues which arose in the Replica Kit case did so as a result of the close-knit nature of the industry. Most of those involved knew each other socially as well as professionally. In practice, it is impossible to avoid all social contact within an industry. However, steps can be taken to reduce the likelihood of problems arising. For example, in this case, the CAT was critical of an organised dinner at which representatives from the competing suppliers were placed at the same table and were encouraged by the host, a retailer, to talk about retail pricing strategies.

The CAT also criticised Umbro’s habit of calculating prices charged to retailers by reference to the margin which should be made on the recommended retail prices. Such pricing mechanisms are dangerous as they will encourage manufacturers and retailers to discuss RRP levels.

Clarifying the standard of proof in the UK

The standard of proof which applies in cartel cases is not merely of procedural importance but is critical to liability. In some of its earlier judgments (notably Napp in 2002), the CAT had suggested that the standard of proof in a case in which penalties may be imposed on a cartel is high, and may even approach the criminal standard (beyond reasonable doubt). This suggestion was held not to be correct. The CAT made it clear that the civil standard of proof (on balance of probabilities) applies to cases brought under the Competition Act 1998, even though such cases are subject to the defendant’s right to a fair trial under Article 6 of the European Convention on Human Rights. The criminal standard will, of course, continue to apply to the criminal cartel offence under the Enterprise Act 2002.

The CAT explained that even in cases to which the civil standard of proof applies there is some scope for variation in the standard. In general, the more serious the allegation, the more compelling must be the evidence that the defendant is liable. However, cartels are, by their very nature, clandestine. Few arrangements will be committed to writing, and it will often be difficult to obtain evidence of what occurred in meetings between the parties. The CAT has therefore followed the lead of the ECJ in the recent Aarlborg Portland case (price fixing in the cement market) in suggesting that, where it appears from a given market that a price-fixing cartel has been operating, "even a single item of evidence, or wholly circumstantial evidence, depending on the particular context and the particular circumstances, may be sufficient to meet the required standard". This lowering of the evidential burden in certain circumstances should give potential participants in cartels pause for thought, particularly when considered in conjunction with the OFT’s new powers for investigating hardcore cartels under the Competition Act.2

Documents speak louder than witness statements

Voluminous evidence was gathered by the OFT in its initial investigation and considerable further evidence emerged during cross-examination of witnesses before the CAT. Some of this evidence was inevitably contradictory. The CAT accepted that many of the inconsistencies may have been the result of hazy memory rather than an intention to deceive. Nevertheless, the tribunal made clear that more weight will generally be attached to contemporaneous documents than to subsequent attempts to explain events.

Documentary evidence will be particularly persuasive when, as in this case, the document (a diary) was originally prepared for private use. The fact that the author had attempted to delete certain incriminating passages was also regarded as an indication that those entries were true on their face. A later attempt to explain them as a "code" was rejected.

Conclusion

Although the CAT’s judgment does not add substantially to the law on horizontal anti-competitive agreements, it demonstrates that the UK competition authorities are prepared to tackle cartels even where their structure is unusually diffuse. The case should also remind companies that any discussion of price with others in the same industry is dangerous. A company must take clear, decisive and public action if it wishes to distance itself from an anti-competitive arrangement entered into by its competitors.

Joined Cases: JJB Sports plc v. Office of Fair Trading and Allsports Limited v. Office of Fair Trading [2004] CAT 17, available at www.catribunal.org.uk.

Footnotes

1 Two additional participants, Umbro Holdings Limited and Manchester United plc, also appealed against the penalty; the appeal relating to the level of penalty has yet to be heard.

2 These powers include the use of surveillance when gathering information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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