UK: Recommending Retail Prices: How Far Can You Go Now? Part 2

Last Updated: 4 January 2007
Article by Guy Lougher

This briefing updates a note produced in May 2005 in the light of the Court of Appeal's judgment in the JJB, Argos and Littlewoods appeals.

The Court of Appeal on 19 October 2006 upheld two decisions by the UK's Competition Appeal Tribunal (CAT) confirming the Office of Fair Trading (OFT) decisions to fine JJB Sports, Argos and Littlewoods in relation to allegations of price fixing in two separate cases.

Overview

The cases involved a consideration of how EC and UK competition law affects:-

  • the extent to which a supplier and retailer can discuss recommended retail prices (RRPs);
  • the circumstances in which a retailer complaining to its supplier about the pricing policies of another retailer may be considered to be anti-competitive; and
  • the extent to which a supplier may seek to persuade a retailer to follow RRPs.

At first sight, the Court of Appeal appears to have taken a narrower view than the CAT had done of when in law price discussions between suppliers and retailers can be construed as anti-competitive agreements. However, on closer examination and having regard to the realities of commercial practice, the Court's judgment may not lead to a material change in the circumstances where an anti-competitive arrangement may still be found to exist.

In particular, it still remains the case that direct contact is not required between competitors for them to be found to have engaged in an anti-competitive arrangement, whether that be to fix prices or to exchange future pricing information. The Court of Appeal agreed with the CAT's finding that such anti-competitive arrangements could be found to exist where retailers used an intermediary (in these cases a common supplier) to implement their arrangement. As a result, great care still needs to be taken when a retailer discusses its retail prices with its supplier.

On price discussions the Court of Appeal has outlined a different test to that adopted by the CAT

The CAT had previously stated that a unilateral disclosure by Retailer A of its future pricing intentions to a Supplier B can constitute a concerted practice if the Retailer could ‘reasonably foresee’ that Supplier B would pass that information on to Retailer C, facilitating an anti-competitive agreement between A, B and C. The Court of Appeal suggested that the CAT ‘may have gone too far’ on this point if Retailer A did not in fact foresee that Supplier B would use the pricing information to influence market conditions or that Retailer C did not appreciate that Supplier B was passing the information to him with Retailer A's concurrence (paragraph 91 of the judgment).

The Court of Appeal instead set out an alternative test (paragraph 141 of the judgment) to that outlined by the CAT. The Court of Appeal indicated that a concerted practice in breach of EC and UK competition law is likely to be deemed to arise if Retailer A discloses details of its future pricing intentions to its Supplier B, in circumstances where Retailer A ‘may be taken to intend’ that Supplier B will pass that information on to other retailers, and the Supplier then does so and where Retailer C may be taken to know the circumstances in which the information had been passed to the Supplier by Retailer A. The Court of Appeal indicated that if Retailer C then uses that information in determining its own future pricing intentions, then Supplier B and Retailers A and C would all be considered party to an anticompetitive concerted practice.

The Court of Appeal indicated that the case for a concerted practice being considered to exist would be even stronger if the exchanges were bilateral. In other words, if Retailer C had also disclosed its future pricing intentions to Supplier B, ‘in circumstances where C may be taken to intend that B will make use of that informatioAn to influence market conditions by passing that information to (amongst others) A, and B does so’.

Resale Price Maintenance (RPM) is still prohibited - No change!

The Court of Appeal's judgment does not affect the principle that EC and UK competition law prohibit an agreement between a retailer and a supplier under which the retailer agrees to resell goods or services either;

  • at a price fixed by the supplier or above a minimum price level set by the supplier, or
  • at a price which has been agreed between the supplier and the retailer.

Suppliers can generally use non-binding recommended or maximum resale prices - No change!

Yes, a supplier can1 still issue non-binding RRPs for its products, or impose maximum prices above which its retailers or distributors may not resell the products. However, in each case the RRP or maximum retail price must not be a disguised minimum resale price or a fixed resale price. In particular, retailers must be allowed to resell products at prices below the RRPs or maximum resale prices.

Suppliers and retailers generally should not discuss resale prices with their competitors - No change but watch this space!

The Court of Appeal's judgment does not change the previous rule that suppliers and retailers should not generally discuss resale prices with (nor disclose details of their resale prices to) their competitors. The exceptions to this principle are limited, for example to situations where the discussion occurs in order to give effect to a genuine supplier/customer relationship between them.

Interestingly, however, this issue was raised recently in the context of an appeal to the CAT by Makers UK Limited against an OFT infringement decision, during which the CAT was asked to consider the implications of the Court of Appeal's judgment in a construction context. The facts were that Makers, which was preparing a tender for a particular construction contract, sought a sub-contract price from a company, Asphaltic, that was itself involved in preparing a separate competing bid for the same contract and where Makers learned that Asphaltic was preparing the separate bid.

The OFT argued before the CAT in Makers that collusive behaviour could be found where the following cumulative conditions are satisfied:-

  • an employer knows that a potential sub-contractor from whom the employer had sought a quote is itself tendering for the same contract as the employer;
  • that sub-contractor has given the employer a price for doing the whole job;
  • that sub-contractor knows the potential employer is bidding for the same contract; and
  • the potential employer bids for the contract having received a price from the sub-contractor.

The CAT's decision is awaited with interest.

Can suppliers discuss RRPs with their retailers? - Court of Appeal advises parties to ‘be aware of the risk’

A supplier may wish to collect the opinions of its retailers about whether its RRPs are set at appropriate levels. However, there is a risk that such discussions are interpreted as an attempt by the supplier to ensure that the retailer will observe the RRPs, or as an agreement on future resale prices between them. These risks are increased if there are regular discussions on RRPs between retailers and their supplier, or if the retailers generally adhere to the RRPs.

The Court warned that any party to such vertical discussions needs to be aware of that risk and to avoid it, but in practice this is often difficult to achieve unless very carefully managed. The easiest way of course to minimise the risk is by not engaging in the discussions in the first place.

By way of general guidance, a supplier should only discuss the level of RRPs with its retailers in exceptional circumstances, for example where the supplier is introducing a new product line and wishes to know how appropriately to price it for the market. Even then, the process needs to be managed very carefully as a series of

Complaints by retailers to suppliers about other retailers' prices? - still a minefield

The Court of Appeal considered the situation where Retailer A complains to Supplier B about the low prices charged by a competing retailer, Retailer C, with the intention or expectation that the Supplier will pressurise C to increase its prices or in some way punish C. The Court of Appeal decided that if, following the complaint, the Supplier does take that action against Retailer C then Retailer A and the Supplier B may well be considered to be part of an agreement or concerted practice in breach of EC or UK competition law. In addition, if Retailer C does change its pricing policy in line with the Supplier's approach, then Retailer C will find great difficulty in arguing against being considered part of a tripartite anti-competitive arrangement with Retailer A and the Supplier B.

The Court of Appeal also said that if Retailer A complains to Supplier B who then acts against Retailer C, then all the parties would be liable if Retailer A wants the information to be used anti-competitively and foresaw that it might be so used by the Supplier, who in turn did enter into an agreement or concerted practice with Retailer C (paragraph 86 of the judgment). Retailer A could not argue that it should be excused from liability purely because Supplier B made its own decision to act on Retailer A's complaint. As a result, retailers should still be very cautious when considering whether to complain to a supplier about the prices charged by another retailer.

Does the shift from ‘reasonably foreseeable’ to ‘intent or expectation’ really make a difference?

The Court of Appeal's judgment apparently involves a shift from reasonable foreseeability to intent or expectation. In other words, rather than the test being whether Retailer A did something in a situation where it was reasonably foreseeable that the Supplier would respond in a particular way, the test is now:

  • did Retailer A complain to Supplier B with the intention that the Supplier would take action against Retailer C (or with the expectation that the Supplier would do so), or
  • did Retailer A provide details of its future pricing information to Supplier B with the intention that the Supplier would pass that data to Retailer C (or with the expectation that the Supplier would do so)?

However, it is important to consider the context in which these issues often arise. It is established case-law that in a cartel-type situation a competition authority may construct an infringement finding by using fragmented or circumstantial evidence and/or by drawing inferences or presumptions from the available evidence. In addition, in the real world, competition investigations usually take place in the context of communications, especially e-mails, which are often unfortunately or ambiguously drafted and which are often unhelpful to a defendant seeking to prove its innocence.

As a result, if, following Retailer A's approach, the Supplier does take some form of anti-competitive action then it may in practice be very hard for Retailer A to disprove an allegation that it had originally contacted the Supplier with that objective in mind.

Imagine Retailer A's defence that, when it complained to Supplier B about Retailer C's pricing policy, it did not intend the Supplier to act in an anti-competitive way - even though that supplier did so act and even though Retailer A accepts that it was reasonably foreseeable that the Supplier would react to the complaint in that way. As a practical matter, a competition authority or court is likely to be deeply sceptical about such an argument and may well issue an infringement decision and in the circumstances described above, it may be very difficult for a defendant to prove its innocence. Similar considerations would apply to a situation where information about a retailer's future pricing had been supplied to a competing retailer through a common supplier.

As a result, it can be questioned whether, as a practical issue, the Court of Appeal's new test will really make a material difference on the ground. In the context of a price-fixing case this will be particularly difficult if Retailer A made a number of complaints to the Supplier, or if complaints were made by senior representatives of Retailer A, or where Retailer A's complaints were accompanied by a threat of commercial retaliation (for example, a refusal to buy products from the Supplier in the future) if there was no change in Retailer C's actions.

Legitimate responses - but be careful

In principle it is likely to be legitimate for Retailer A to ask the Supplier B, referring to its general market intelligence that Retailer C is selling products more cheaply, if it is receiving the best commercial terms from the Supplier, and to seek to obtain a lower input price from the Supplier on a purely bilateral basis (paragraph 106 of the judgment). However, if following that discussion the Supplier takes adverse action against Retailer C or seeks to encourage Retailer C to raise its prices, then it may well be difficult for Retailer A to prove that it did not intend that result to occur (see above).

Likewise, a Supplier may generally take a unilateral decision to cancel or reduce sales of a product to Retailer C because of the latter's discounting policies. However, if the Supplier's action follows a complaint from another retailer, or if it follows previous discussions between the Supplier and Retailer C about the latter's pricing policies, then the Supplier's action may well be construed as anti-competitive. In any event, care would need to be taken to ensure that the refusal to supply, or reduced supplies, did not give rise to an abuse of a dominant position if the Supplier has a market share of 40% or more.

Footnote

1 Subject to some specific exceptions in the UK, such as certain electrical white goods and brown goods. independent bilateral consultations between the supplier and each retailer.

Pinsent Masons' EU & Competition Group Guy Lougher, Giles Warrington, Alan Davis, Kate Rees and Angelo Basu

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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