Introduction
In this article, we explore recent competition law decisions in the UK involving distribution agreements. The Competition and Markets Authority (“CMA”) and the UK courts. The primary UK statute for competition law is the Competition Act 1998. Chapter I of the CA 1998 prohibits anti-competitive agreements and applies the same language and principles as Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). This means that there has been a high degree of alignment between UK and EU competition law.
Pursuant to EU competition law, two of the most serious anti-competitive restrictions which can be included within vertical agreements (such as distribution arrangements) are re-sale price maintenance (under which the supplier restricts the ability of the reseller to set its own price for the goods) and passive sales bans (which prevent the reseller from fulfilling unsolicited orders from outside its designated territory or customer group). Restrictions on a reseller’s ability to sell its goods online are considered to be a type of passive sales ban and generally unlawful.
The cases set out below illustrate that this remains the UK’s position for now, meaning it remains consistent EU Law and to some extent at odds with the approach of competition law systems in other Anglo-Saxon jurisdictions.
Fender and Roland – RPM strikes the wrong note with the CMA
In a number of recent decisions, the UK Competition and Markets Authority has taken a hard-line on provisions which impose resale price maintenance on resellers.
Most recently, in July 2020, the CMA issued decisions finding that two musical instrument manufacturers, Roland and Korg, had contravened competition law by operating policies which restricted online price competition. The CMA considered that Roland required its electronic drum kits to be sold at or above a minimum price between January 2011 and April 2018, while Korg did the same for its specialist equipment such as synthesizers and DJ production tools, from June 2015 to April 2018.
The CMA’s investigations into Roland and Korg followed fines issued earlier in 2020 to the keyboard supplier Casio[1] and the guitar maker Fender[2] for similar behavior.
The CMA discovered that the suppliers had used software which made it easier for them to monitor online prices, with Roland and Korg both subscribing to these services. As a result, suppliers were able to identify lower online prices and put pressure on retailers to increase these. The CMA considered that this ‘all-seeing’ software would be likely to force more retailers to comply with pricing rules in the first place, for fear of being caught and sanctioned.
There is another software dimension to this case. It was the CMA’s own data analytics software which itself brought the suspicious online pricing activity to the regulator’s attention.
Roland and Korg were fined a total of £5.5 million for the infringement. Roland’s penalty was reduced to £4 million as it made an application under the CMA’s leniency policy. The CMA also fined a retailer which had co-operated with the RPM policy, the first time a reseller has been sanctioned by the UK regulator for participation in RPM. Some may consider this harsh as it is usually the supplier which imposes RPM on the re-seller, with the reseller having little choice but to accept the policy.
In addition to the latest infringement decisions, the CMA has sent warning letters to 70 other suppliers or musical instrument resellers, who are suspected of involvement in RPM. Failing to cease anti-competitive conduct after receiving a warning letter may result any fines being increased by 25%.
It was announced in September 2020 that Roland has appealed the fine to the Competition Appeal Tribunal.
Ping case – online sales bans for golf clubs are definitely not cricket!
Ping is a supplier of high-end golf equipment, such as clubs. In 2017, the CMA issued a decision finding that Ping infringed Chapter I of the Competition Act 1998 by preventing two UK retailers from selling its golf clubs on their websites.
Ping had sought to justify the online sales ban by reference to the nature of its goods. Ping said it was essential for shoppers to attend a brick and mortar store in order to receive a custom fitting for golf clubs which would ensure they were optimised for the individual golfer.
That was rejected by the CMA, which found that while it may be permissible for Ping to impose conditions on online sales, prohibiting them outright would be disproportionate and incompatible with competition law. While Ping was pursuing a genuine commercial aim of promoting in-store custom fitting, it could have achieved that objective through less restrictive means.
That such an aim could not of itself legitimise an online sales ban shows how any outright prohibition will require a very robust justification. In the earlier case of Pierre Fabre,[3] the CJEU held that banning online sales of perfumes and other cosmetic products was not justified by a desire to protect customer safety (on the basis, PF said, that customers should be given advice on the products in store at the point-of-sale). For one thing, the Court pointed out that the products in question were not medicines (albeit, in any event, pharmacists in such situations are not in the business of providing clinical diagnoses).
Accordingly, Ping was fined £1.45 million by the CMA and required to bring the online sales ban to an end. It was also prohibited from imposing the same or equivalent terms on other retailers. Ping appealed the decision to the Competition Appeal Tribunal (“CAT”). The CAT agreed with the CMA that the ban on internet selling was an agreement by object, that it was not objectively justified and did not benefit from an individual exemption under S 9 of the Competition Act 1998 (which reflects Article 101(3) TFEU)[4]. The CAT did, however, reduce the fine by £200,000. Ping appealed further to the Court of Appeal.
In its judgment of 21 January 2020[5], the Court of Appeal reaffirmed the previous decisions of the CMA the CAT. It agreed that the internet sales prohibition constituted an infringement by object. The main judgment of the Court was delivered by Lady Justice Rose. The Lord Chancellor of the High Court, apparently a keen golfer, summarised the Court’s decision nicely in a two paragraph judgment alongside that of Lady Rose:
“As anyone who has ever played a round of golf will be able to attest, the clubs that are used can hugely affect the quality of the game played. As Ping’s [Internet Sales Policy] states, it believes that it is fundamental to the process of selling its clubs that the consumer is “custom-fitted to ensure they receive clubs that are custom-built to their own specifications”. It does not, however, follow in my view that that desirable objective requires the imposition of a complete ban on internet sales. Some customers may, for example, already know their personal specifications after a recent dynamic custom fitting and wish to buy a second or third set of clubs online. Others may wish to buy a set of Ping clubs as a gift for someone whose essential data are known. There are many ways in which Ping’s objective can be substantially fulfilled without imposing a blanket ban on internet sales.
Moreover, I do not think that the growing popularity of the internet as a sales medium can be minimised. It may be that, when the CMA reached its decision, relatively few customers actually bought their golf clubs online. But the speed of the internet is increasing and we are living in an age of technological innovation. It would, I think, be inappropriate in this context for us to accept that the ISP did not reveal a sufficient degree of harm to competition to be considered a restriction of competition by object within the meaning of Article 101(1).”[6]
Ping sought further appeal to the UK Supreme Court, but permission was denied in May 2020.
Conclusion
These decisions illustrate the need for businesses to ensure that their UK distribution policies are compliant with competition law. The CMA is relatively aggressive in taking enforcement proceedings against businesses which include hard-core restrictions in their distribution agreements or policies. Where online sales are concerned, it even possesses software tools allowing it to detect anti-competitive conduct between online suppliers and resellers.
This approach towards distribution often surprises lawyers from outside Europe, particularly the USA, where the antitrust rules take a much lighter touch on “vertical” restrictions, such as RPM and territorial sales restrictions. The rationale for policing distribution agreements in Europe lies in part in the desire to protect the integrity of the EU single market, which was shared by the UK since it joined the Union in 1972.
The approach of the CMA and the UK courts in these cases conforms with the competition law of the European Union, notwithstanding that the UK left the European Union on 31 January 2020. That may change in time. Section 60 of the Competition Act 1998, which previously required UK competition law to be interpreted consistently with EU competition law, will no longer be applicable after 31 December 2020.
One may wonder in particular whether the UK’s system of laws will continue to prohibit territorial restrictions on sales or internet sales bans. As mentioned above, EU competition law has taken this stance to ensure that cross-border trade within the EU single market is not stymied by contractual restrictions between suppliers and distributors. Empowering EU-based consumers to shop around in different member states is considered good for the health of the single market.
That may not be a concern for the UK now that it has left the EU. However, the UK is worried about the integrity of the internal market within the UK and protecting cross-border trade between England, Wales, Scotland and Northern Ireland. Until now, the scope for regulatory differences between the home nations has been limited as all legislative bodies have needed to follow EU Law. There is a concern that going forward the devolved assemblies could pass divergent rules to regulate the market. That could mean that goods produced in one part of the UK may not be sold legally in another part as they would conform to different regulatory standards.
In September 2020, the UK Government presented the United Kingdom Internal Market Bill[7] before Parliament, a draft law which has the aim of ensuring that the UK’s single market does not become fragmented along national lines, relying in part on the principle of mutual recognition of laws in different parts of the UK. That principle is well known to EU lawyers!
UK competition law – and more specifically prohibitions on online or passive sales bans – can serve alongside and reinforce the UK Internal Market Bill, ensuring that private actors do not artificially fragment the UK internal market. For that reason, suppliers should not expect a relaxation on online sales prohibitions any time soon.
PAUL HENTY
CHARLES RUSSELL SPEECHLYS LLP
[1] https://www.gov.uk/government/news/piano-supplier-fined-3-7m-for-illegally-preventing-price-discounts
[2] https://www.gov.uk/government/news/guitar-maker-fined-4-5m-for-illegally-preventing-price-discounts
[3] C-439/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence [2011]
[4] Case [2018] CAT 13, available here: https://www.catribunal.org.uk/sites/default/files/2018-10/1279_Ping_Judgment_CAT_13_070918.PDF
[5] Case [2020] EWCA Civ 13, available here: https://www.catribunal.org.uk/sites/default/files/2020-01/C3_2018_2863_PING_EUROPE_2020_EWCA_Civ_13.pdf
[6] At [131] – 133].
[7] https://services.parliament.uk/bills/2019-21/unitedkingdominternalmarket.html