The Court of Appeal recently ruled that customers who discuss their future pricing intentions with their suppliers run the risk of being accused of price fixing.

This judgment follows the appeals made by Argos, Littlewoods and JJB Sports against decisions of the Competition Appeal Tribunal ("CAT"). Although the ruling is of particular relevance to the retail sector, the findings are of much more widespread application as they further clarify what needs to be demonstrated by a Competition Regulator in order to "convict" a business of participating in an unlawful price fixing agreement.

Background to the Appeal in the Toys case

On 19 February 2003 the Office of Fair Trading ("OFT") issued a decision claiming that Hasbro, Argos and Littlewoods had been involved in an anti-competitive agreement or concerted practice to fix the prices of certain Hasbro toys and games. The OFT claimed, in this decision, that Argos agreed with Hasbro that it would follow Hasbro's RRPs provided that Littlewoods also agreed to do the same. Argos was fined £17.28 million, Littlewoods was fined £5.37 million and Hasbro escaped a fine because it was granted 100% leniency despite the fact that there was evidence that it was the instigator of the price fixing arrangement.

This decision was appealed to the Competition Appeal Tribunal ("CAT") in April 2003. At the early case management conferences, the OFT effectively conceded that the evidence it had relied on in its decision was insufficient to justify the findings of infringement and sought leave from the CAT to introduce three new witness statements recently given by employees or ex employees of Hasbro. Despite protestations from Argos and Littlewoods, the CAT ordered that the three new witness statements were to be admitted in evidence but were to be the subject of a new Rule 14 procedure. This led to the issuing of a new OFT decision on 21 November 2003 which relied heavily on the new evidence contained in the three additional witness statements.

This new OFT decision was then the subject of an Appeal hearing before the CAT in May 2004 and the CAT issued its judgment on liability on 14 December 2004.

The CAT upheld the OFT's new decision and relied on its earlier ruling in the Replica Kits case to justify the finding that there was a trilateral concerted practice between Hasbro, Argos and Littlewoods. The CAT held that Argos had passed information about its future pricing intentions to Hasbro, which it had subsequently used to influence other retailers' conduct in the market, and Hasbro had fed back information to Argos which Argos knew was based on information Hasbro had received from other retailers. In its Penalty Judgment issued on 29 April 2005, the CAT reduced the penalty on Argos to £15 million and the penalty on Littlewoods to £4.5 million due to errors in the OFT's penalty calculation.

The CAT's judgment was subsequently appealed by Argos and Littlewoods to the Court of Appeal both on points of law and on the level of the penalty.

Points of Issue before the Court of Appeal

There were four key grounds of appeal in the Toys case namely:

  1. The CAT had incorrectly concluded that there was a trilateral concerted practice to fix prices between Argos, Hasbro and Littlewoods. It was claimed that the CAT failed to find the requisite consensus between Argos and Littlewoods that they would each price at or near Hasbro's RRPs;

  2. The CAT wrongly characterised the offence as a price fixing agreement and should have considered whether the evidence merely demonstrated the existence of a price information exchange – which the CAT would then need to show had been entered into for some anti-competitive purpose;

  3. The CAT erred in its penalty calculation by failing to have regard to the OFT's Guidance on the calculation of the level of the penalty. In particular, it and the OFT failed to properly define the relevant product market for the purpose of calculating the "starting point"; and

  4. The CAT should have reduced the penalty imposed on both Argos and Littlewoods on the ground that the OFT had unlawfully discriminated between these two parties and Hasbro by granting Hasbro 100% leniency in circumstances where, according to the OFT's own guidance, it should only have been entitled to a maximum 50% leniency.

Court of Appeal’s Judgment - 19 October 2006

The key points made by the Court of Appeal were as follows:

  1. There must be a mental consensus between two or more parties for a concerted practice to exist;

  2. Discussions between a supplier and a customer about possible prices or about historic prices can lead to discussions of future prices and agreement as to what such future prices should be;

  3. The CAT had gone too far in its statement about how a concerted practice could arise. The correct statement of the law is as follows: where retailer A discloses to supplier B its future pricing intentions in circumstances where A may be taken to intend that B will make use of that information to influence market conditions by passing that information to other retailers (of whom C may be one) and B does, in fact, pass the information to C in circumstances where C may be taken to know the circumstances in which the information was disclosed by A to B and C then makes use of that information in determining its future prices, then A, B & C are all party to a concerted practice;

  4. The CAT is not required to follow the OFT's Guidance on the appropriate level of the penalty; and

  5. Argos and Littlewoods may well have been treated unequally and be entitled to a 50% reduction in their penalty because of the OFT's potentially unjustified grant of 100% leniency to Hasbro.

Commentary

Although the appeals relating to the level of the penalty are of interest, the most important aspect of this case relates to the nature of the evidence which needs to be adduced in order to demonstrate an anti-competitive agreement or concerted practice. It was clear from the Bayer case that a concurrence of wills was required in order for there to be an agreement.

The Court of Appeal has now clarified that such a consensus or meeting of minds is also required in order for there to be a concerted practice. Sadly, the Court of Appeal did not take this opportunity to clarify the position in relation to information exchange agreements (i.e. exchanges of commercially confidential information between competitors) and whether such an agreement, on its own, without clear evidence of intent to restrict or distort competition, is sufficiently strong and compelling evidence of an anti-competitive arrangement.

The OFT certainly appeared to assume that because information about prices had been exchanged, there must have been an agreement to fix prices. It did not adduce any clear evidence that Argos committed to price specific toys at Hasbro's RRPs provided Littlewoods agreed to do the same.

In fact, both the OFT and the CAT accepted that there was no certainty and no guarantee that Argos would price at RRPs.

Furthermore, the evidence relied on by the OFT and the CAT specifically stated that the discussions between Argos and Hasbro about RRPs did not involve going down a list of products and Argos indicating which products it was prepared to price at RRP.

As for the clarification about when a concerted practice may arise, this is to be welcomed. However, in order for there to be a mental consensus between A & C, surely you must have to show that A intended its pricing intentions be revealed to C? There is no evidence that Argos specifically intended its pricing intentions be disclosed to Littlewoods and no evidence that Littlewoods specifically intended its pricing intentions be disclosed to Argos.

Conclusions

This case should be a cause for concern for any business which routinely discusses prices with its suppliers or its customers. The conduct of Argos and Littlewoods was far removed from that of the classic, horizontal price fixing cartel. It was Hasbro who came up with the initiative to persuade retailers to price at the RRPs, in response to retailers' complaints about low margins, and yet Argos and Littlewoods were fined as if they had sat down in a smoke filled room and deliberately agreed to fix prices. There was very little specific evidence (in terms of detailed notes/minutes of meetings or conversations during which prices were discussed) and virtually all of the material used to "convict" Argos emanated from third parties – some of which only emerged after Argos appealed the original OFT Decision. Businesses need to take stock of this decision and consider what mechanisms can be put in place to protect themselves from accusations of price fixing. Compliance programmes may need to be altered, high risk areas of the business audited and refresher training undertaken to warn employees of the ramifications of this judgment. If businesses merely continue to routinely discuss prices as before, the prospects of significant fines await them together with the possibility of director disqualification, even imprisonment for executives, in addition to the possibility of third party damages claims.

The choice is up to you!

© Burges Salmon LLP 2006. All rights reserved.

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