The Competition and Markets Authority (CMA) recently published an open letter to businesses warning of the risks in suppliers restricting their retailers’ resale prices. The letter follows two decisions by the CMA, taken earlier this year, to fine two suppliers a total of £3 million for separately engaging in the illegal practice of resale price maintenance.
Research undertaken by the CMA indicates that businesses’ understanding of resale price maintenance is surprisingly low with about one third of those surveyed incorrectly considering it legal to set the resale price of their retailers and another 37% unclear on the rules in this area.
The recent cases clearly signal a willingness by the CMA to take enforcement action. This article therefore intends to clarify the legal framework surrounding resale price maintenance and highlight the issues franchisors should be aware of regarding their franchisees ability to set their own resale prices.
Background to competition law
The basic principles of competition law are enshrined in Articles 101 and 102 of the Treaty on the Functioning of the European Union and the Competition Act 1998. The CMA is the UK regulatory body currently authorised to apply and enforce both the UK and the EU competition regimes, where appropriate. Sanctions against non-compliant businesses can include significant fines of up to 10% of worldwide turnover.
For the purposes of competition law, franchise agreements are commonly classified as “vertical agreements” due to the franchisor and the franchisee operating at different levels of the supply chain. Such agreements may benefit from a safe harbour under the European Commission’s vertical agreements block exemption regulation (Regulation). However, franchisors should take particular care when considering pricing restrictions (including resale price maintenance). These are “hardcore” restrictions and are inherently problematic from a competition law perspective. As a result the whole franchise agreement may fall outside of the safe harbour provided for in the Regulation.
Resale Price Maintenance & Franchising
Under EU and UK competition law it is generally unlawful for a franchisor to fix the price, or to set a minimum price, at which a franchisee is able to sell goods or services to its customers. Franchisors who may wish to ensure consistency across their network, particularly with regards to uniform pricing, are often unaware of the law in this area.
Any restrictions (either direct or indirect) on franchisees’ or other retailers’ ability to sell their products or services online or in stores at independently determined prices may reduce competition between competing retailers and therefore potentially contribute to artificially inflated prices.
The Competition Act 1998 generally allows a franchisor to recommend or set a maximum price for goods or services sold by its franchisees, provided this does not in practice constitute a fixed or minimum price. The CMA guidance provides that where a franchisor imposes or threatens its franchisees with penalties for failing to comply with “recommended” pricing, this will amount to illegal resale price maintenance. Such threats may include charging franchisees higher prices or withdrawing supply of products.
The European Commission guidelines recognise that resale price maintenance can be used in limited circumstances such as to facilitate new market entry and fund short-term low price campaigns. However, determining whether such actions fall within the restriction will require a detailed assessment of the circumstances and therefore advice should be sought before seeking to rely on these exceptions.
Lack of awareness in this area could prove very costly and the CMA has released a short video guide on resale price maintenance which may prove a useful resource for franchisors interested in learning more about this area.