How to Avoid Allegations of Resale Price Maintenance in Germany
On 25 January 2017, the German Federal Cartel Office (FCO) published its long awaited draft guidance note on the prohibition of vertical price fixing in the brick-and-mortar food retail sector.1 The note summarizes the FCO's conclusions following from extensive investigations into this sector which started in 2010 and ended in December 2016. As a result of these investigations, the FCO imposed a total of EUR 260.5 million in fines on 27 retailers and manufacturers for having engaged in price fixing activities.2 A former guidance issued by the FCO in April 2010 as part of the ongoing proceedings3 became obsolete when the investigations ended. The aim of the guidance note is to revise the former guidance and to explain to companies in the sector the background, purpose and scope of the prohibition of vertical price fixing. The note expressly addresses small and medium-sized undertakings without easy access to antitrust advice. Even though the guidance note refers to the brick-and-mortar food retail sector only, it will also be relevant for vertical pricing in other sectors as it reflects the FCO's current practice. The guidance note is subject to public consultation. Comments are to be submitted by 10 March 2017.
Legal and economic background of the guidance note
The FCO reiterates it's view that vertical or resale price fixing measures (referred to as RPM) are restrictions of competition by object. It is hence not necessary to examine their effects on the market since the distortion of competition can be assumed.4 Consequently, the size of the market shares held by the companies engaging in RPM is irrelevant for an infringement. Exemptions under Art. 101 (3) TFEU and Sec. 2 (1) ARC are possible, but limited to exceptional circumstances. Here, the FCO does not add any clarity, but simply refers to exceptions mentioned in the Vertical Guidelines of the European Commission.5 The FCO furthermore stresses that even though vertical price-related practices can turn out to be merely unilateral (for instance if a supplier request is not implemented by a retailer), they might, nonetheless, violate German competition law: Different from European law, German law prohibits companies also from (unilateral) threats, incentives or other behavior to induce others to engage in prohibited conduct such as resale price maintenance (Sec. 21 (2) ARC).
With respect to potential efficiencies of vertical price fixing the FCO sees two major criteria: the structure of the markets affected and the products concerned. The more pre-sale services a product requires, the more convincing the argument that consumers might benefit from a restriction. The stronger the market position of the supplier initiating vertical price fixing and the more concentrated the affected markets, the stronger the anticompetitive effects will be.
The DOs and DON'Ts for RPM
In order to provide guidance to suppliers and retailers on how to manage the communication within their business relationships in compliance with competition law, the FCO presents numerous case examples.6 Even though the assessment of RPM has to take into account the individual circumstances of each case the following key principles apply:
Agreement on fixed and minimum prices
Direct fixing of (minimum) retail prices is illegal. This also covers agreements that are based on a common interest without issuing pressure or granting incentives. However, in case a retailer is unable in view of the market situation to oppose the influence of its supplier, the FCO advises retailers, if not to inform the authority, to at least document the supplier's threats.
Recommended Resale Prices (RRPs)
Suppliers can express their opinion on which retail price they consider to be appropriate, as long as this does not jeopardize the non-binding character of their recommendation. However, in case a retailer announces to its supplier that it will adopt the recommended retail price (RRP), this could already be interpreted as an agreement on vertical price fixing. According to the FCO, retailers should therefore avoid making comments to the supplier in this regard. The supplier must also not coordinate between retailers, use threats, even subtle ones, or incentives as means for compelling a retailer to comply with a RRP.
Quantity management and promotion
In order to ensure the efficient use of production facilities supplier and retailer may agree in advance on supplier-supported promotion periods. Competition concerns could arise in case the supplier is not only informed of the quantities needed, but also of the promotional retail price intended by the retailer. Where a retailer wishes to obtain an assessment from the supplier on the sales volumes it can expect to achieve with a certain promotional retail price, the retailer should ask for an assessment based on several alternative promotional prices. Suppliers at the same time should not request from their retailers any advance information on the intended pricing.
Guaranteed margins and renegotiations
The upfront guarantee of a certain sales margin can be problematic, since the retailer could understand this as an assurance that other retailers have agreed to "go along" with the supplier's RRPs. The FCO assumes that otherwise such guarantees would not be likely. Likewise, if the retailer justifies its compensation demands by referring to the price setting behavior of its competitors, this could be understood by the supplier as an attempt to induce it to ensure that other retailers also observe its price recommendations.
Termination of and refusal to engage in business relations
The FCO stresses that manufacturers are not under a general obligation to supply, except under specific circumstances in case of dominance. A decision to refuse supply can hence be motivated by the manufacturer's disagreement with the price setting policies of a retailer, provided, however, this decision has been taken autonomously and silently (i.e. without giving reasons for its decision to the retailer). If the supplier makes it clear that it has terminated the business relationship due to the
retailer's pricing policy, this can already be seen as an attempt to exert pressure on the retailer (Sec. 21 (2) ARC). Where the parties proceed to engage in business relations with the retailer now following the supplier's RRP, the FCO considers it likely that the new supply contract contains a (tacit) agreement on RPM. Communication on the pricing policy becomes less critical the more time (e.g. two years) has passed before the supply relationship is resumed.
The FCO acknowledges that data on sales prices and quantities are important for the suppliers' distribution strategies. The provision of sales data through retailers is therefore generally allowed. However, this data must not be used to coordinate pricing strategies, either between retailer and supplier, or between retailers with the supplier acting as a mediator, or between suppliers with the retailer acting as a mediator. Obviously, the data provided should be as historic as possible. The FCO seems to suggest that a gap of three months between the sale of a product and the disclosure of respective sales data appears reasonable in the sector. The supplier should also be contractually prohibited to pass on sales data obtained from one retailer to another.
The draft guidance note brings nothing new for the specialist, but is a good summary for the target audience.