E-commerce in the EU: How and why manufacturers and retailers should avoid resale price restrictions

11 September 2018

On 24 July 2018, the European Commission (the "Commission") announced that in four separate cases it had fined four manufacturers a total of more than €111 million for infringements of Article 101 of the Treaty of the Functioning of the European Union (TFEU) in relation to pricing restrictions imposed upon retailers.



This update considers the background to the cases, the Commission's concerns in relation to e-commerce in particular, and what this means for manufacturers and retailers.

Manufacturers' strategies to maintain pricing levels online

While the Commission's infringement decisions are yet to be published, the Commission's press release provides that, during a range of periods from 2011 to 2015, each of the four manufacturers independently placed pressure upon retailers to set higher prices online.

These practises affected a number of different Member States, and covered a range of different consumer electronics, including kitchen appliances, hair dryers, notebook computers, speakers, and headphones.

From its investigations, the Commission found that the manufacturers had deployed monitoring tools in order to track resale pricing within each of their distribution networks. With this data, each manufacturer was then able to individually target retailers that were offering lower prices online. In certain instances, manufacturers intervened in relation to price differentials of just €1.

In intervening, the manufacturer would contact the "lower price" retailer in question, and instruct them to increase their online prices to the manufacturer's desired levels. If the retailer refused, it faced threats or sanctions, with such sanctions including products being withheld from the retailer by the manufacturer.

The Commission found that these threats and sanctions had the aim of ensuring that the retailer changed its own commercial policy, and complied with the manufacturer's instructions in relation to resale pricing.

Resale price maintenance - a restriction of competition "by object"

A restriction of competition "by object" is a restriction that, by its very nature, can be regarded as "harmful to the proper functioning of normal competition".[1]

Where a "by object" restriction exists, there is no requirement for a competition authority (or third party) to prove that the restriction had any actual effect upon competition. This is on the basis that a "by object" restriction "reveals in itself a sufficient degree of harm to competition", such that is no need to prove any effect.[2]

Where a manufacturer requires its retailers to adhere to minimum or fixed resale prices determined by the manufacturer (so-called resale price maintenance, or "RPM"), this has consistently been held to constitute a restriction of competition "by object".[3]

As such, the use of RPM will generally infringe Article 101 TFEU, as well as the applicable national competition laws of EU Member States.

Specific concerns in relation to e-commerce

In discussing the four RPM cases, Margrethe Vestager, Commissioner for Competition, confirmed the seriousness of the infringements, explaining that the manufacturers had denied consumers the full benefits of e-commerce by preventing retailers from offering lower prices, and stopping consumers from comparing prices and shopping around for the best deals.[4] This echoes concerns raised by national competition authorities in domestic cases investigating RPM, including in relation to online pricing.

In addition, the Commission found that the specific targeting of "lower price" retailers had a broader effect upon pricing online. This effect arose from the widespread use by retailers of price comparison websites, as well as pricing algorithms, to monitor competitors' pricing online - and to adjust their own pricing - in real time.[5]

For example, if a retailer reduced its prices online, a number of competitors would follow this price reduction; conversely, if a retailer increased its prices online, a number of competitors would also follow this price increase. Once the Commission's infringement decisions are published, it will be of interest to consider the extent to which the manufacturers were aware of this effect, and if so, how this has been addressed by the Commission in calculating the fines imposed.

While the manufacturers were fined a total of more than €111 million, notably in each case the manufacturer received specific reductions to its fine, on the basis that it admitted its pricing strategies infringed EU competition law, and cooperated with the Commission in the course of the investigation. In the absence of these reductions, the fines would have totalled approximately €190 million.

The Commission's renewed interest in RPM

The four cases mark the first fines imposed by the Commission in relation to infringements concerning RPM since 2003. For much of this intervening period, RPM cases have been pursued by national competition authorities in the EU, including the UK's Competition and Markets Authority.

However, with the Commission keen to ensure that consumers across the EU receive the full benefit of e-commerce (particularly in view of the Commission's focus upon bolstering the Digital Single Market across the EU), and with other possible pricing cases in the pipeline, the Commission is again prioritising enforcement action against RPM, especially where these practices affect pricing online.

What does this mean for manufacturers and retailers?

Given the Commission's increased scrutiny of pricing restrictions and e-commerce, and the continued focus of national competition authorities on RPM cases, manufacturers and retailers should ensure that any distribution arrangements leave retailers free to determine their resale prices independently, in accordance with Article 101 TFEU (and the national competition laws of relevant Member States).

Recommended resale prices and maximum resale prices

Importantly, the use of recommended resale pricing, and well as the application of maximum resale pricing, is generally permissible within the EU.

This is on the basis that where a manufacturer:

  • genuinely recommends resale prices to its retailers; or
  • applies genuine maximum resale prices to its retailers,

these pricing activities will not constitute a restriction of competition "by object", provided that these prices do not in reality constitute fixed or minimum resale prices (e.g. due to threats made by the manufacturer).

Moreover, recommending resale prices, and applying maximum resale prices, can benefit from exemption under the Vertical Agreement Block Exemption Regulation[6] (the "VABER") where that the parties' market shares do not exceed 30%, and the arrangement does not include any restrictions of competition "by object".[7]

In addition, in the event that the VABER is not applicable (e.g. the market share of one or more of the parties exceeds 30%), recommended and maximum resale prices may nevertheless be capable of benefitting from individual exemption under Article 101(3) TFEU.[8]

Use of fixed or minimum resale pricing to engage in RPM

However, where a manufacturer seeks to engage in RPM (i.e. by using fixed or minimum resale pricing), this will constitute a restriction of competition "by object", and will generally infringe Article 101 TFEU, and the national competition laws of relevant Member States.[9]

RPM may be achieved directly (i.e. via a contractual provision setting fixed or minimum resale prices), as well as indirectly, including in the absence of any formal written agreement.

From EU case law, and the decisional practice of national competition authorities in the EU, examples of indirect RPM include:

  • manufacturers setting a maximum discount that retailers may apply to a prescribed pricing level;
  • manufacturers providing incentives for retailers to adhere to a prescribed pricing level;
  • manufacturers requiring that retailers obtain the manufacturers' consent for retailers to revise their pricing, or to apply discounts;
  • manufacturers preventing retailers from engaging in promotional pricing, including advertising any discounts or price reductions offered;
  • manufacturers preventing retailers from advertising prices (including online) unless these accord with recommended resale prices; and
  • manufacturers threatening to withhold supplies, or to withdraw certain rights (including permissions to use the manufacturers' images in advertising), so as to ensure that retailers to adhere to a prescribed pricing level.

Compliance risks arising from RPM

The use of RPM exposes all of the parties to an infringing arrangement (i.e. the manufacturer, and the retailers) to material risks, including: (i) significant financial penalties of up to 10% of each party's group worldwide turnover; (ii) actions for damages from third parties suffering loss as a result of the infringement; (iii) the infringing arrangements being void and unenforceable; and (iv) incalculable harm to corporate reputation and brand values.

In addition, in the UK, individuals may be exposed to the risk of being disqualified from acting as a company director for a period of up to fifteen years in connection with infringements of EU and/or UK competition law arising from RPM.[10]

In view of these considerable risks, and the continuing scrutiny of competition authorities in the EU, it would be prudent for companies to take proactive steps to:

  • ensure that their distribution arrangements, including in relation to e-commerce and online sales, are fully compliant with applicable competition laws (as considered in our update in relation to selective distribution); and
  • more generally, maintain an effective culture of competition law compliance at all levels of their businesses.

Footnotes

[1] C-373/14 P Toshiba v Commission EU:C:2016:26, paragraph 26.
[2] See, for example, C-67/13 P Groupement des Cartes Bancaires v Commission, EU:C:2014:2204, paragraph 49.
[3] See, for example, See Case 243/83 SA Binon & Cie v SA Agence et messageries de la presse, EU:C:1985:284, paragraph 44.
[4] See, "Statement by Commissioner Vestager on Commission decision to impose fines on four consumer electronics manufacturers for fixing online resale prices".
[5] The Commission observed in the context of its e-commerce sector inquiry that "53 % of the respondent retailers track the online prices of competitors, out of which 67 % use automatic software programmes for that purpose. Larger companies have a tendency to track online prices of competitors more than smaller ones. The majority of those retailers that use software to track prices subsequently adjust their own prices to those of their competitors (78 %)", see the Commission Staff Working Document accompanying the Final report on the E-commerce Sector Inquiry, paragraph 149.
[6] Regulation 330/2010.
[7] See, for example, the Commission's Guidelines on Vertical Restraints, paragraph 226: "[t]he practice of recommending a resale price to a reseller or requiring the reseller to respect a maximum resale price is covered by the [VABER] when the market share of each of the parties to the agreement does not exceed the 30 % threshold, provided it does not amount to a minimum or fixed sale price as a result of pressure from, or incentives offered by, any of the parties".
[8] An arrangement would be capable of benefitting from individual exemption where it satisfies the following four cumulative criteria: (i) the arrangement contributes to improving production or distribution, or promoting technical or economic progress; (ii) the arrangement allows consumers a fair share of the resulting benefit; (iii) the arrangement does not impose restrictions on the parties concerned that are not indispensable to attaining those objectives; and (iv) the arrangement does not afford the parties concerned the possibility of eliminating competition in respect of a substantial part of the products in question. Importantly, it is for the party seeking to rely upon an exemption to evidence that the four cumulative criteria are satisfied by the arrangement.
[9] In very limited circumstances, it may be possible for a party to demonstrate that RPM is capable of benefitting from individual exemption under Article 101(3) TFEU. In this context, the Commission's Guidelines on Vertical Restraints provide high level examples of instance where consumers demonstrably benefit from manufacturers' use of RPM over a necessarily limited time period; the Commission suggests that RPM "may be helpful during the introductory period of expanding demand to induce distributors to better take into account the manufacturer's interest to promote the product. …Similarly, fixed resale prices, and not just maximum resale prices, may be necessary to organise in a franchise system or similar distribution system applying a uniform distribution format a coordinated short term low price campaign (2 to 6 weeks in most cases) which will also benefit the consumers", see the Commission's Guidelines on Vertical Restraints, paragraph 225.
[10] For completeness, individuals would not face criminal sanctions under the so-called Cartel Offence in the UK in respect of RPM that occurs at different levels of the supply chain (i.e. RPM agreed between a manufacturer and its appointed retailers).


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