On 25 January 2017, the German Federal Cartel Office (Bundeskartellamt, BKartA) published a draft guidance paper setting out its position on resale price maintenance (RPM) in the brick-and-mortar food retail sector, including its enforcement priorities and guidance for manufacturers/suppliers and retailers that operate in the sector1. The BKartA has invited comments on the draft guidance by 10 March 2017.
1. In 2015 and 2016, the BKartA fixed substantial fines, totaling more than €250 million, against manufacturers and large retail chains in the food sector. It now wishes to “explain the background, the purpose and the scope of the prohibition of vertical price fixing”, or RPM, to businesses in the industry, including small and medium-sized businesses which “do not have easy access” to competition law advice.
In the paper, the BKartA reiterates its firm stance on RPM: RPM restricts competition by object, seriously infringes competition law, typically distorts competition even when the businesses involved have only small market shares, and it may only seldom qualify for an exemption under Article 101(3) of the Treaty on the Functioning of the European Union and §2 of the German Act on Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB). The recent judgment of the Celle Court of Appeals (OLG Celle) which held that RPM is only prohibited if its effects are sufficiently appreciable2 is not mentioned in the paper.
The BKartA mentions when RPM may be justified according to the Commission’s guidelines on vertical restraints3 – preventing free riding on efforts of other retailers, ensuring margins for retailers marketing a recently launched product, avoiding double mark-ups and creating a quality brand image by imposing high prices. It, however, only seems to do this to point to alternatives to these very cases which are less restrictive of competition such as selective distribution, direct compensation for the efforts made by retailers, vertical maximum prices and higher manufacturer prices.
2. Furthermore, the BKartA explains that threatening disadvantages, or offering benefits to a retailer in order to induce him to meet a minimum price is prohibited under German law4 , and that a retailer which acquiesces, even tacitly, to a resale price required by the manufacturer, or more generally, the supplier will also be in breach of RPM rules. The case being that a retailer, which sees no way to object to unfriendly requests, should alert competition authorities or at least document threats of the supplier.
3. According to the BKartA, both the sales and procurement markets in the food retail sector are highly concentrated and do not leave room for efficiency gains through RPM. Whilst the draft paper refers to brick-and-mortar food retail only, the BKartA is also likely to apply its principles to other industries, namely branded consumer products. Online food sales still have very limited importance in Germany. The non-food RPM matters have not yielded fines as high as the food retail cases, but they often concern far smaller companies and markets.
4. The third part of the paper describes several examples of behaviour which the BKartA considers is problematic or unlawful:
- Unsurprisingly, an outright written or oral agreement on minimum or fixed prices or margins is unlawful. According to the BKartA, an agreement which allows the supplier to set the retail price on behalf of the retailer amounts to the same thing. If, however, the retailer is always free to deviate from such a proposed price in every single case, this position of the BKartA seems questionable to us: why should a retailer then not defer to its supplier, if it could also abide with a recommended resale price?
The BKartA considers agreements where the retailer is formally free to set its prices, but affords it incentives to meet minimum resale prices, like a “price management discount”, as price fixing agreements.
- Non-binding recommended resale prices are lawful. The supplier may also explain its recommendations to the retailer. It may, however, in no case insinuate any coordination with other retailers. It may not use threats, even subtle ones, or incentives for the retailer to comply with recommended prices. If a supplier, whose products are important for the success of the retailer, raises compliance with recommended resale prices as a subject in discussions, this could already constitute an unlawful threat.
- For a retailer who plans a promotion, it can be problematic to disclose to the supplier its proposed reduced price, as the supplier could urge the retailer to meet a minimum price. Suppliers should not require such disclosures. Likewise, it may be problematic if a supplier guarantees to the retailer a certain margin for given products in advance, as the retailer could understand this as an assurance that other retailers will abide with the supplier’s recommended resale price.
- Suppliers are free not to supply a retailer because its resale pricing policy is undesirable, subject to restrictions for dominant or powerful businesses. However, this action must be based on an autonomous internal, and presumably silent, decision of the supplier. A supplier may not impose minimum resale prices on a retailer as a condition for establishing or continuing a business relation.
- If a retailer provides sales data to its suppliers, this may not be used to help the supplier monitor resale prices and coordinate resale pricing by other retailers. Therefore, data relating to future pricing or data so recent that it allows the supplier to react immediately to the resale prices of the retailer may be problematic.
5. Last, the BKartA addresses enforcement priorities and use of its discretion to open investigations. It will take into account the scope of the alleged RPM, indications that it may be justified by efficiencies, the market position of the businesses involved, the level of concentration in the market and the complexity of the products concerned. The BKartA will, in particular, take action where there are infringements which, beyond RPM between one supplier and one retailer, aim at coordinating prices between suppliers or retailers in a substantial part of the market. Other criteria include systematic versus singular infringements, and whether a player is a recidivist. The BKartA will fine clear breaches of competition law and choose to merely prohibit a given form of conduct in complex or novel cases. It emphasises that it has the discretion to fine some businesses involved in an infringement while sparing others. When a company cooperates in revealing an infringement, its fine may be reduced; “particularly valuable” cooperation may even result in immunity from fines.
The enforcement principles are not really new. In our view, it would be useful for the BKartA to specify the scope and prerequisites to obtain immunity from fines or reductions in fines. It would also be helpful if the guidance confirmed the thumb rule of the past that a one-time, first infringement by a small or medium-sized company will not result in fines.
Some of the very detailed “dos and don’ts” mentioned under 4. above appear fussy and highly mistrustful of manufacturers. It is important to emphasize that behaviour which is in itself harmless may, together with other circumstances, have the potential to be an infringement. Therefore, it is crucial to decide on a case by case basis how to proceed, and to document the reasons for such decisions.
It is not likely that the BKartA will change its point of view substantially, unless the Federal Court of Justice (Bundesgerichtshof, BGH), or the European Court of Justice, intervene. Therefore, the “dos and don’ts” related to RPM must be an integral part of any competition law compliance effort for Germany and German markets, not only in the food and food retail industries, but also in branded product industries.