UK: Key Competition Law Issues For Consumer Goods Companies In 2010

Last Updated: 9 February 2010
Article by Susan Hankey, Caroline Hobson and Fran Matthews

The consumer goods sector has increasingly become one of main sectors to be scrutinised by UK and European competition regulators in the last two to three years. The intense focus on the sector is set to continue during 2010. Both within the UK, and across Europe, there will be a number of key competition law developments that will impact on all consumer goods companies:

  • The Groceries Supply Code of Practice (GSCOP) is to come into force on 4 February 2010
  • The Office of Fair Trading is to report on its market studies into the advertising of prices and online selling
  • Important competition law changes to distribution arrangements are due to be implemented in June 2010
  • Increased scrutiny and enforcement action by the competition authorities of the consumer goods sector is set to continue
  • Guidance is expected on indirect information exchange practices and hub and spoke arrangements
  • Office of Fair Trading guidance is expected on effective compliance policies
  • The Treaty of Lisbon has entered into force and a new Competition Commissioner will take charge.

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The consumer goods sector has increasingly become one of main sectors to be scrutinised by UK and European competition regulators in the last two to three years. The intense focus on the sector is set to continue during 2010 in which there will be a number of key competition law developments that will impact on all consumer goods companies.

Groceries Supply Code of Practice to come into force

The GSCOP is due to come into force on 4 February 2010. The GSCOP was one of the recommendations of the Competition Commission following its inquiry into the grocery sector which was completed in 2008 and seeks to address the finding that certain grocery retailers adopted supply chain practices that transferred excessive risks and unexpected costs to suppliers.

Mindful of the criticism that the effectiveness of the GSCOP would be compromised without an appropriate independent enforcement body or ombudsman being created, the Department for Business, Innovation and Skills (BIS) has recently announced that it is to commence a consultation on how best to enforce the GSCOP, who the enforcement body might be (including possibly the OFT) and the powers it could have. The consultation will commence in early February once the GSCOP has come into force.

The BIS webpage regarding the Competition Commission's grocery sector inquiry can be found here (http://tinyurl.com/ykrzhr8).

Office of Fair Trading to report on market studies into advertising of prices and online selling

The Office of Fair Trading (OFT) launched in October 2009 two separate market studies.

The first of these, into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer's Internet use. Online selling has introduced new pricing and advertising practices and the OFT is keen to understand whether these give rise to consumer harm. It is expected that this study will be completed by Spring 2010.

The second study will investigate the advertising of prices (both online and in traditional retail contexts), in particular various pricing practices which may potentially mislead consumers including:

  • Drip pricing where price increments 'drip' through the buying process;
  • Bait pricing where consumers are enticed with discounts but only a few of the products are available at the discounted price;
  • Complex pricing where pricing practices are used which may make it difficult for the consumer to assess the unit price such as 'three-for-two' offers;
  • Reference pricing where sale prices are compared to an 'original' or 'recommended' price; and
  • Time limited offers where discounts are advertised as only being available for short periods of time.

The OFT aims to complete this study by summer 2010.

Further information on these market studies can be found on the OFT website here (http://tinyurl.com/n3efaz ).

Important competition law changes to distribution arrangements due to be implemented in June 2010

The European Commission is currently reviewing the Vertical Agreements Block Exemption ('Block Exemption') and accompanying guidelines which govern distribution and supply arrangements. The key proposals which will impact the consumer goods sector include:

Market share of buyers to be taken into account – under the current Block Exemption, vertical agreements are exempt from infringing competition law provided that the supplier's market share for the contract goods does not exceed 30%. The European Commission is now proposing that exemption will also be conditional on the buyer's market share not exceeding 30%. This proposal has provoked widespread reaction. This will take outside of the safe harbour provided by the Block Exemption a large number of agreements involving buyers with significant market shares. It will also give rise to uncertainty since market shares in the retail context can be difficult to estimate.

Resale price maintenance – the draft block exemption and guidelines continue to view resale price maintenance (RPM) as being in breach of competition law. However, the European Commission has now proposed that suppliers may be entitled to impose resale price maintenance provisions on distributors and retailers in certain limited circumstances:

  • Where it is necessary for the launch of a new brand, or an existing product into a new market;
  • Where fixed resale prices may be necessary to organise in a franchise system or similar distribution system a short-term (between 2 to 6 weeks) coordinated low-price campaign;
  • Where RPM may be useful to avoid a large retailer using a particular brand as a loss leader.

It will be interesting to see whether these proposals survive the final draft and whether any further guidance on the circumstances in which RPM may be applied will be provided. Whilst this opens the door for suppliers to exert some pressure on retail pricing and will restrict retailers' flexibility, the circumstances above are limited and it is to be expected that the competition authorities would apply a high evidentiary threshold before accepting that RPM is permissible in such circumstances.

Online sales - the proposed guidelines update and amplify the current guidance on a supplier's ability to restrict online sales by retailers and distributors. The general aim is of maximising use of the Internet as a distribution channel. Thus an absolute ban on Internet sales will almost always fall foul of the competition law rules. The Commission indicates, for example, that suppliers should not:

  • Require a retailer to block or re-route access to its website to customers located in certain territories, or to terminate orders from such customers;
  • Require a retailer to terminate consumers' transactions over the Internet if their credit card data reveal that they are outside that retailer's territory;
  • Require a retailer to limit the proportion of overall sales made over the Internet;
  • Require a retailer to pay more for products intended to be sold online.

The supplier is, however, able to require quality standards for use of an Internet site (as it could for a shop) and where a supplier operates a selective distribution system, may impose certain criteria relating to online sales.

Category management and upfront access payments – the guidelines provide some brief guidance on the competition law considerations of 'upfront access payments' which the European Commission uses to refer to slotting allowances, 'pay-to-stay' fees and payments for promotional activities of retailers as well as category management. Although there is nothing novel in the guidance set out in those sections, the clarification of the Commission's thinking in these areas is helpful. Their inclusion also emphasises that the Commission is concerned about such practices, whilst recognising their potential positive effects.

The public consultation on the revised block exemption and guidelines finished on 29 September 2009. Currently the European Commission is considering the responses and will shortly issue its final drafts ready for implementation on 1 June 2010. Thus the final position on the above issues will not be known until Spring 2010.

The draft block exemption and accompanying guidelines can be found on the European Commission's website here (http://tinyurl.com/lrw9pr).

Increased scrutiny and enforcement action by the competition authorities of the consumer goods sector is set to continue

The consumer goods sector continues to be a primary focus for investigations by the competition authorities, particularly in the UK.

Most recently in the UK, press reports have indicated that the OFT and Serious Fraud Office are currently investigating Sports Direct and JJB sports for suspected price fixing. The involvement of the Serious Fraud Office suggests that the parties are being investigated for participation in a cartel, which apart from significant corporate fines can render company executives liable to imprisonment. This current investigation comes after both companies were found guilty and fined for fixing the prices of replica football kit in 2003.

Within Europe, regulators have continued their focus on the grocery sector with the Netherlands' and German competition authorities recently announcing investigations in the flour, sweets, coffee and pet foods sectors.

The publication by the European Commission in October 2009 of a report on competition issues in the food supply chain encourages much greater cooperation and information sharing between national competition authorities and indicates that further enforcement action across Europe is likely. The report accompanied a Commission Communication on a better functioning food supply chain in Europe in which the European Commission recommended measures to improve contractual relations in the food supply chain, increase price transparency, to monitor competition issues and encourage cross-border trade. The accompanying competition report is a detailed document and provides valuable guidance on a number of retail-driven and supplier-driven practices common in the sector including category management, tying and bundling arrangements and slotting allowances. Of particular interest is the Commission's discussion of the increased use of private labels. The Commission raises a number of concerns but calls for more information before coming to any conclusions and thus it is expected that regulators are likely to scrutinise private labels more closely in 2010.

The Commission Communication and report on competition issues can be found here ( http://tinyurl.com/ygtf4pf).

Guidance expected on indirect information exchange practices and hub and spoke arrangements

Of particular concern at the moment is the focus of the competition authorities on indirect information exchange and price setting. This occurs when either a retailer or supplier becomes the conduit for pricing (or other commercially sensitive) information between competing suppliers or retailers. It is commonly known as a 'hub and spoke' arrangement where the retailer can act as a hub for the exchange of information between two suppliers, the 'spokes'. Equally a supplier can act as the hub between two or more retailers acting as spokes. The exchange of information in this way can result in price coordination.

It is not necessary for detailed information to be exchanged, or for the exchange to last over a sustained period of time for an infringement finding. Brief information received by a supplier, such as the fact that one retailer will be dropping prices the following week and which is then passed on by the supplier to another retailer, may be sufficient for the OFT to find a competition law breach and significant fines to be awarded to the supplier and both retailers.

Although there is little clear OFT guidance on 'hub and spoke arrangements' (limited principally to the Hasbro/Littlewoods/Argos toy price fixing case of 2003 in which fines of £22.5 million were imposed), this is expected to change in 2010. Final decisions are awaited in key OFT investigations - in 2007 and 2008, a number of retailers and suppliers in the dairy and tobacco sectors entered into early resolution agreements with the OFT and accepted fines totalling £252 million for engaging in the indirect exchange of proposed future retail prices. Final decisions in both these cases are expected in Spring 2010. A third investigation was launched in April 2008 in the grocery sector where a significant number of retailers and suppliers are being investigated. It is not known when, or indeed if, any decision against any party in this investigation will be published.

Further information about the dairy investigation can be found here (www.oft.gov.uk/oft_at_work/markets/goods/dairy-products/) and information about the tobacco investigation can be found here (www.oft.gov.uk/oft_at_work/markets/goods/tobacco/).

OFT guidance is expected on effective compliance policies

The current focus of the competition authorities on the consumer products sector and the significant fines that can be imposed illustrate that it is crucial for companies to have a thorough and effective compliance policy and training programme in place, as well as having appropriate dawn raid procedures should the competition authorities ever make an unannounced inspection. The OFT is currently consulting on why some companies comply with competition law and others do not. The OFT is to issue a report in March 2010 which is expected to identify the key elements the OFT recognises to be part of an effective compliance policy and set out proposals for incentives to encourage companies to ensure compliance measures are in place.

Treaty of Lisbon enters into force and a new Competition Commissioner takes charge

The Treaty of Lisbon came into force on 1 December 2009 and has resulted in a number of changes to the numbering of the competition provisions of the EC Treaty. Articles 81 (prohibition of anti-competitive agreements) and Article 82 (prohibition of an abuse of a dominant position) are now renumbered as Articles 101 and 102 respectively.

The election of a new European Commission brings to an end the five-year term of office of Neelie Kroes whose replacement is Joaquin Almunia. An economist by training, Joaquin Almunia was previously Economic and Monetary Affairs Commissioner. His appointment is likely to bring a greater focus on economics in the enforcement of EU competition law, illustrated by his recent appointments of a number of economists to senior positions within DG Comp. A final vote on the new Commission is expected to take place on Tuesday 9 February 2010 when his appointment will be confirmed

More details about the Treaty of Lisbon changes and the new European Commission can be found here (www.law-now.com/law-now/2009/nomineesforneweunov09.htm).

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 27/01/2010.

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