Competition Markets Authority
When online resellers have the freedom to price items independently this leads to healthy competition rivals strive to offer the best deal for customers and people can shop around for a better deal.
However, if a supplier dictates to its resellers a specific minimum price that they are not allowed to drop below, or tries to stop them from selling at a reduced price, these rival resellers are blocked from competing on price and customers lose out. This practice is known as Resale Price Maintenance (RPM) and is illegal.
We recently fined Fender, a guitar supplier, 4.5 million for breaking the law for restricting its resellers online resale prices in this way. This is the highest UK fine for RPM to date.
What Fender did
Between January 2013 and April 2018 Fender set minimum prices for their guitars and told resellers to sell at, or above, this price.
In order to make sure that resellers kept to these prices, Fender threatened sanctions against those who advertised and sold at lower prices. For example, Fender threatened resellers with:
their orders being delayed or not sent
reducing the amount of stock they could order on credit
removing financial marketing support for promotions
These sanctions were clearly seen as a real risk to resellers who may have decided to offer lower prices if there was no risk of sanctions.
One employee at Fender remembers being told by a senior employee at his company to talk to a reseller and warn them to put their price up:
If your mate is not in line by Monday, he is on stop.
On another occasion, an email between employees at a reseller business referred to a threat being made, leading to immediate action by the reseller:
as predicted just got the threatening phone call from [Fender]! Will move prices.
The employee who received the email responded pointing out that theyd made extra sales by putting their prices down before Fender caught them, and that theyd done nearly 6k today when we might not have.
Resellers also helped police the anti-competitive arrangement by alerting Fender to other resellers who werent complying with Fenders instructions. In one internal email exchange a reseller sent a link showing a competitor selling a guitar at a lower price and said to their colleague:
[i]f youre in the mood for shopping [reporting] any competitors, this lot are undercutting on Fender
Their colleague replied,
[c]heers duly shopped,
meaning they had alerted Fender to the lower price.
How Fender broke the law
RPM is illegal because it cheats people out of a fair deal. It involves a supplier enforcing a minimum price, and therefore restricting the possibility of discounts rather than allowing resellers to compete for custom on price.
In this case, senior employees at Fender who were involved in the illegal business practices had attended competition law training and knew the practice of setting a minimum resale price was illegal. Resellers would sometimes alert them to the fact that it was against the law however senior staff at Fender continued to enforce RPM and embedded a culture of concealment to hide their wrongdoing.
What action we took
We fined Fender 4.5 million for breaking the law. The size of the fine was partly because the practice went on for a long time, and was also increased because senior management were involved, and because the illegal behavior was judged to be intentional staff even knew what they were doing was against the law and hid it.
In this case, Fender admitted to breaking the law and cooperated with the CMAs investigation, and the fine was reduced to reflect this.
What the lessons are
There are a number of valuable learnings that businesses can take from this case, including an understanding that:
- It is illegal for a supplier to interfere with a resellers ability to independently set their own price
- The consequences of breaking competition law can include fines of up to 10% of a businesss global turnover.
- The CMA has sophisticated means of uncovering evidence; even where the companies have tried to hide it by deleting communications.
- If you are ever asked not to put something down in writing you should be suspicious as it could relate to something illegal. If so, you should seek legal advice and seriously consider whether to report the matter to the CMA.
- Directors and senior staff have a special responsibility to be well informed on competition law and make sure their companies are behaving legally and ethically.
- Attending compliance training alone isnt sufficient to be compliant you must actively comply with the law.
- As a reseller you can also be investigated for breaking the law if you are found to have co-operated with a minimum pricing policy. If a supplier tries to make you comply with a minimum pricing policy you should refuse and point them to our guidance and report them to us. Resellers may also face enforcement action such as fines if they have gone along with the suppliers resale price policy.
What you can do
This case shows that its important for suppliers and resellers to keep their pricing practices under review so they dont risk entering into illegal agreements. Some of the ways to do this are to:
Create a culture of compliance everyone in your business must understand what they need to do to stay on the right side of competition law.
Read our 60-second summary on RPM and watch our video both give pointers to help businesses avoid falling foul of the law.
If you have information on other companies in your industry that may have been involved in an anti-competitive arrangement, report it to us or call us on 020 3738 6000.
If you think your business has been involved in RPM, seek independent legal advice and notify the CMA as soon as possible you may benefit from lenient treatment by being the first to come forward to the CMA.