Recommending and agreeing retail prices: the limits under competition law

This guide looks at how EU and UK competition law affects:

• the extent to which a supplier and retailer can discuss recommended retail prices (RRPs);
• how far a supplier can seek to regulate prices and impose other conditions on an online retailer;
• the circumstances in which a retailer complaining to its supplier about the pricing policies of another retailer may be considered to be anti-competitive;
• whether online retailers can mirror the pricing policies of their competitors, perhaps by using pricing algorithms to achieve that objective; and
• a suppliers’ ability to prevent their distributors from supplying products to online marketplaces, such as Amazon and eBay, on which  the Court of Justice of the EU (CJEU) has recently ruled.

Resale price maintenance (RPM) is generally prohibited, apart from in exceptional circumstances

EU and UK competition law generally prohibits an arrangement between a retailer and a supplier under which the retailer agrees to resell goods or services at a price:

• that is fixed (directly or indirectly) by the supplier or above a minimum price level set by the supplier;
• which has been agreed between the supplier and the retailer; or
• which involves the supplier mandating the maximum rebate or discount that the retailer can offer (or margin that the retailer can make).

Nevertheless, as an exception, it may be possible to justify RPM in certain circumstances, if it would lead to benefits for consumers. For example:

• where a manufacturer introduces a new product, RPM may be permitted for an introductory period where it provides retailers with the means and incentives to increase promotional efforts and expand overall demand for the product, so making the entry a success; and
• where RPM may be necessary to organise a coordinated short term (two to six weeks) low price campaign in a franchise system or similar distribution system.

Suppliers can generally use non-binding recommended or maximum resale prices

A supplier can, however, issue non-binding RRPs for its products or impose maximum prices above which its retailers or distributors may not resell the products, provided that the RRP or the maximum price does not amount to a fixed or minimum resale price as a result of pressure or incentives.

If both the supplier’s and the buyer’s market shares do not exceed 30%, these restrictions will be automatically exempted under the EU Vertical Agreements Block Exemption (VABE). However, in each case, the RRPs or maximum retail prices must not be disguised minimum resale prices or fixed resale prices. In particular, retailers must be allowed to resell products at prices below the RRPs or maximum resale prices.

Can suppliers discuss RRPs with their retailers?

A supplier may seek to collect the opinions of its retailers about whether its RRPs are set at appropriate levels. However, there is a risk that such discussions might be interpreted as an attempt by the supplier to ensure that the retailer will observe the RRPs, or as an agreement on future resale prices between them. These risks are increased if there are regular discussions on RRPs between retailers and their suppliers, especially if the retailers generally adhere to the RRPs.

By way of general guidance, a supplier should only discuss the level of RRPs with its retailers in exceptional circumstances, for example where the supplier is introducing a new product line and wishes to know how appropriately to price it for the market. Even then, the process needs to be managed very carefully as a series of independent bilateral consultations between the supplier and each retailer.

Suppliers and retailers generally should not discuss resale prices with their competitors

Suppliers and retailers should not generally discuss resale prices with, nor disclose details of their current and future resale prices to, their competitors. Agreeing any element of pricing with a competitor is a serious breach of EU and UK competition law and risks both civil and criminal sanctions.

The exceptions to this principle are limited, for example, to situations where the discussion gives effect to – and is strictly limited to – a genuine supplier/customer relationship between them, even where they are also competitors in other contexts.

Can a retailer complain to its supplier about other retailers’ prices?

It is not uncommon for a retailer (retailer A) to complain to a supplier (supplier B) about the low prices charged by a competing retailer (retailer C), with the intention or expectation that the supplier will pressurise retailer C to increase its prices or in some way punish C.

However, if, following the complaint, the supplier does take that action against retailer C, then retailer A and the supplier B may well be considered to be party to an agreement or concerted practice in breach of EU or UK competition law.

In addition, if retailer C does change its pricing policy following the supplier’s approach, then it may well also be considered to be part of a tripartite anti-competitive arrangement with retailer A and supplier B.

In practice, the test is whether:

• Retailer A complained to supplier B with the intention that the supplier would take action against retailer C, or with the expectation that the supplier would do so; or
• Retailer A provided details of its future pricing information to supplier B with the intention that the supplier would pass that data to retailer C, or with the expectation that the supplier would do so.

It is important to consider the context in which these issues often arise. It is well established that, in a cartel-type situation, a competition authority may reach a finding of infringement by using fragmented or circumstantial evidence and/or by drawing inferences or presumptions from the available evidence.

In addition, in the real world, competition investigations usually take place in the context of communications, especially emails, which are often unfortunately or ambiguously drafted and which are frequently unhelpful to a defendant seeking to prove its innocence.

As a result, if, following retailer A’s approach, the supplier does take some form of anti-competitive action then it may, in practice, be hard for retailer A to disprove an allegation that it had originally contacted the supplier with that objective in mind.

Imagine retailer A’s defence that, when it complained to supplier B about retailer C’s pricing policy, it did not intend the supplier to act in an anti-competitive way – even though that supplier did so act and even though retailer A accepts that it was reasonably foreseeable that the supplier would react to the complaint in that way.

As a practical matter, a competition authority or court is likely to be sceptical about such an argument and may reach a conclusion that there has been an infringement. In the circumstances described, it may be difficult for a defendant to prove its innocence. Similar considerations would apply to a situation where information about a retailer’s future pricing had been supplied to a competing retailer through a third party, such as an intermediary or common supplier.

The risk of an anti-competitive arrangement being considered to exist would be even stronger if the exchanges were bilateral. In other words, if retailers A and C had both disclosed their future pricing intentions to supplier B, in circumstances where each of the retailers intended that it would be passed on by the supplier to the other retailer to influence market conditions, and supplier B does so.

Legitimate responses – but be careful

In principle, it is likely to be legitimate for retailer A to ask the supplier B, referring to its general market intelligence that retailer C is selling products more cheaply, if it is receiving the best commercial terms from the supplier, and to seek to obtain a lower input price from the supplier on a purely bilateral basis. However, if following that discussion, the supplier takes adverse action against retailer C or seeks to encourage retailer C to raise its prices, then it may well be difficult for retailer A to prove that it did not intend that result to occur.

To reduce that risk, retailer A should be very clear in its approach to supplier B what it did, and did not, want the supplier to do in response.

Likewise, a supplier may generally take a unilateral decision to cancel or reduce sales of a product to retailer C because of the retailer's discounting policies. However, if the supplier’s action follows a complaint from another retailer, or if it follows previous discussions between the supplier and retailer C about the latter’s pricing policies, then the supplier’s action may well be construed as anti-competitive.

In any event, care would need to be taken to ensure that any refusal to supply, or reduce supplies, does not give rise to an abuse of a dominant position if the supplier has a market share of 40% or more.

What about online sales?

Given the increasingly intense price competition arising from online selling, a supplier may wish to try and control the prices charged or advertised online by its retailers. However, the rules on pricing described above apply equally to a situation where the retailer sells online as they do to sales from bricks and mortar outlets.

A supplier also cannot impose a complete ban on selling online and cannot discourage or punish the retailer for doing so, for example, by charging higher wholesale prices for goods sold online, threatening to withhold supplies, withdrawing or applying differential rebates, or imposing quotas or limits as to how many goods can be sold online as opposed to offline.

In addition, it is likely to infringe competition law if a supplier requires retailers not to advertise a specific online price or if they were prevented from advertising online discounts from the supplier’s RRPs.

There are circumstances in which a supplier can prevent its distributors from 'actively' selling products, such as where a distributor targets sales outside of its exclusive territory through unsolicited emails, territory based banners on third party websites, or paying search engines to display adverts to users in specific territories. However, it is generally not acceptable to restrict 'passive sales', such as where a customer's approach is not solicited by the distributor, by preventing customers located in other territories from accessing a distributor's website or automatically rerouting customers to another distributor's website in the 'correct' territory, or requiring that transactions are terminated if the customer's credit card details reveal that they are in a different territory.

Passive sales restrictions may nevertheless be permissible within a selective distribution network, in which a supplier can prevent passive sales by an authorised distributor to an unauthorised distributor.Within a selective distribution system, a supplier can also refuse to supply 'pure' online resellers and can require the retailer to have at least one physical store. The supplier can also require the online seller to ensure that the website meets certain quality standards that are commensurate with those required for a physical store.

In some cases, an online retailer may wish to match the prices offered by competing online resellers. However, there are ways in which price-matching should be undertaken. If the retailer independently decides to monitor and mirror the prices of another retailer, that would be compatible with EU and UK competition law. However, one online retailer should never discuss or agree pricing or pricing strategy with another online retailer as that would be a serious breach of competition law.

A topical issue is the increasing use of algorithms being used by online retailers to monitor competitors’ prices and to automatically adjust prices in response to competitors’ price changes. In the same way that it would be anti-competitive for two competing retailers to discuss or agree actual prices, it would also likely be unlawful for those retailers to discuss or agree the algorithms by which they would adjust their respective online prices. Equally, it could raise competition concerns if competing online retailers were to outsource their pricing decisions to one and the same third party service provider.

While it is common practice for online retailers to independently use algorithms to monitor competitors’ prices and to make price adjustments accordingly, either automatically or manually, the European Commission has warned that such algorithms should be designed in such a way that doesn't allow them to collude and that businesses will be held responsible for what their automated systems do (see out separate report https://www.out-law.com/en/articles/2017/march/concern-over-collusion-through-algorithms-raised-by-eu-competition-regulator/). This indicates that online retailers may need to adopt a more cautious approach to employing these systems in future.

What about limiting sales to online marketplaces?

Another topical issue is the question of whether suppliers can restrict retailers from selling on online platforms and marketplaces such as Amazon and eBay, and through price comparison websites.

The usual concern of suppliers is that these platforms cause even stronger downward pricing pressure on retail prices, that the presentation of the products may fall below the suppliers’ desired quality standards and that it facilitates 'free-riding' – this is where it undermines the investments made by the supplier and other authorised distributors to improve the quality and image of the products.

In Germany, a ban on selling through third party online platforms was held to be anti-competitive in a number of cases but, in a landmark judgment of the CJEU, the issue has been considered further.

In December 2017, the CJEU handed down its judgment in a dispute between US beauty products manufacturer Coty and German business Parfümerie Akzente, which sells perfumes and other toiletries over the internet.The CJEU found  that it is permissible for suppliers to prohibit members of a selective distribution system for luxury goods from using third parties’ websites to distribute the contract products.

A selective distribution system is one where the supplier: (i) only appoints as distributors those businesses that meet specific selection criteria; (ii) supplies the contract products for resale only to those selected distributors; and (iii) prevents the selected distributors from selling the relevant products to resellers who are not members of the selective distribution system.

In addition, in a selective distribution system, the distributors are usually prevented from operating at retail outlets that have not been authorised by the supplier.  However, the selected distributors must be free to supply the contract products to any end-users.

Selective distribution systems are typically used to control the promotion and sale of technical products which need technical advice or assistance to consumers, or luxury products that need to be sold in a way which conveys an ‘aura of luxury’, at the point of sale.

.The CJEU found that a prohibition on selected distributors of luxury goods using third-party platforms was 'appropriate to preserve the luxury image of the goods' and compatible with EU competition law, as long as the distributors are chosen by reference to objective criteria of a qualitative nature, and the distributors remain free to sell the products online through their own websites. This would mean that there was no outright ban on product sales and no restriction of passive sales to end-users.

The CJEU made no ruling as to whether such prohibitions would be lawful and appropriate in the context of the distribution of other goods, whether they are sold via a selective distribution system or not, leaving this point open to debate.The European Commission has indicated that, in line with guidance it issued following its e-commerce sector inquiry, that even outside selective distribution systems, a ban on online platforms could still benefit from exemption and will depend on the particular facts in each case. We can expect further clarity from the Commission when it begins to review the VABE, which expires in 2022.