Introduction Undue influence prohibited under German law Fixing (minimum) resale prices Recommended resale prices Quantity management and promotional activities Margin guarantees Termination or refusal to supply Information exchange Enforcement priorities Public consultation
On January 25 2017 the Federal Cartel Office published draft guidelines on resale price maintenance. While the guidelines are officially targeted at the food retail sector, they are also likely to have a significant effect on other sectors. A public consultation has been initiated and interested parties are invited to submit comments by March 10 2017.
The regulator is widely seen as being at the forefront of vertical enforcement. In the past, the Federal Cartel Office prosecuted numerous cases on vertical price fixing, particularly in the food retail sector, and imposed fines on both manufacturers and retailers. The guidelines summarise Federal Cartel Office case law. In this context, the vast majority of the cases in question ended with settlement decisions and were thus not subject to judicial review.
Undue influence prohibited under German law
If a dominant or non-dominant supplier exercises pressure or offers incentives to induce retailers to conclude or adhere to an illegal vertical price-fixing agreement, this attempt to influence the retailer is in and by itself an infringement, even if the retailer ultimately did not submit to such influence (Section 21(2) of the Act Against Restraints of Competition). If the retailer submits to such undue influence from the supplier, the Federal Cartel Office generally considers that both retailer and supplier enter into an anti-competitive agreement (ie, both supplier and retailer can be held responsible). However, the regulator has acknowledged that the degree of influence exercised by the supplier may be taken into consideration as a mitigating factor on the side of the retailer.
Fixing (minimum) resale prices
Fixing resale prices constitutes a restriction by object. According to the guidelines, fixing resale prices covers not only the actual fixing of a certain price, but also:
- setting a maximum percentage, by which the retailer may undercut a reference price (eg, the recommended resale price);
- setting a minimum margin that the reseller must add to the purchase price;
- appointing a benchmark retailer whose price may not be undercut by other retailers; and
- agreeing to any of the above, on condition that certain benchmark retailers stay within a given price range.
The Federal Cartel Office explicitly acknowledges non-binding recommended resale prices (RRPs) to be a legal, unilateral practice of suppliers.
Qualifying RRPs as unilateral signals that suppliers need not rely on the European Commission's Block Exemption Regulation 330/2010 should they want to suggest RRPs. This in turn would mean that RRPs can also be used by suppliers that have a market share exceeding 30%.
While non-binding recommendations may be legal, in practice the difficulty often lies in distinguishing unilateral recommendations from agreements, concerted practices or undue influence. In this respect, suppliers are, in general, free to explain the reasoning behind the RRP to the retailer provided that, in view of all circumstances, the recommendation remains non-binding and does not induce the retailer to adhere to the RRP.
This remains a difficult line to draw. The Federal Cartel Office recommends that retailers should not make any comment that could create the impression that the retailer intends to adhere to the RRP. Where a supplier expresses the expectation that a retailer should adhere to the RRP, the office recommends that the retailer explicitly object to such an expectation.
Quantity management and promotional activities
Suppliers and retailers may have an interest in jointly planning promotional activities, particularly to ensure sufficient supply for a promotional campaign. In this respect, the Federal Cartel Office acknowledges the supplier's interest in agreeing in advance to supplier-supported promotion periods in order to avoid overlapping promotional campaigns of different retailers.
In practice, the difficulty often lies in the fact that the required supply will also depend on the promotional price – the lower the intended promotional price, the more supply the retailer may need to satisfy the demand. Retailers may therefore want to disclose the intended promotional price to the supplier in order to agree a reasonable amount of supply. It can become difficult to distinguish between:
- the legal information about a price that has been set autonomously by the retailer; and
- a promise on the part of the retailer to charge a certain retail price that would constitute an agreement on the resale price.
The Federal Cartel Office has no real solution to this problem and recommends only that:
- retailers should generally not inform suppliers about the intended promotional price or propose several different promotional prices; and
- suppliers should not oblige retailers to inform them in advance about the promotional price.
Strong retailers in particular sometimes require suppliers to grant some form of margin guarantee. If strong retailers cannot sell a given product at the expected price level they occasionally request a compensation payment from the supplier (eg, a retrospective rebate in order to offset the margin loss suffered by the retailer).
The Federal Cartel Office is critical towards such practices. If the retailer enjoys market power, such requests by the retailer could be considered abusive. Also, absent any market power of the retailer, the office will have concerns if such compensation payments are promised in advance or made on a regular basis and thereby create an expectation for such compensation. According to the Federal Cartel Office, this is likely to induce retailers to adhere to RRPs.
Termination or refusal to supply
The Federal Cartel Office clarifies that – in the absence of market power of the supplier – a supplier is free to refuse to enter into or to terminate supply agreements with customers. The office confirms that, in principle, a supplier can refuse to supply certain dealers (eg, discounters) if it feels that the aggressive pricing policies of these dealers are incompatible with the positioning of the product in the market. In other words, a supplier can unilaterally refuse to supply a retailer if the supplier suspects that the retailer is or would be too price aggressive.
In practice, the difficulty lies in the fact that, in the Federal Cartel Office's view, the supplier must not divulge the reasons for refusing or terminating supply. Divulging the reasons would constitute an attempt to exert undue influence on the retailer to change its retail prices and infringe Section 21(2) of the Act Against Restraints of Competition.
The Federal Cartel Office confirms that, in principle, the exchange of data on sales prices and quantities between retailer and supplier is permissible.
However, such information exchange must not be used to monitor or coordinate pricing strategies between supplier and retailer or between retailers. The Federal Cartel Office considers the provision of future or current data to be a first indication of resale price fixing agreements. Retailers should therefore refrain from announcing future prices and reporting current prices to the supplier. Only historic data should be exchanged.
The Federal Cartel Office stresses its discretion when prioritising cases, selecting cases and deciding against which companies the proceedings will be directed.
The following aspects will be considered in particular:
- the nature of infringement (vertical or horizontal) – priority will be given to cases that go beyond pure vertical price fixing and include elements of horizontal coordination between retailers or between suppliers;
- market-related criteria (eg, market positions of companies involved and concentration on the market);
- product-related criteria (eg, product related reasons which could justify resale price maintenance, such as the product's complexity or necessity of pre-sales services); and
- other criteria (eg, duration and extent of infringement, available evidence, extent of harm caused and need to send warning signal to the market).
The Federal Cartel Office has stated that it is likely to prosecute vertical price fixing in fines proceedings, not in mere administrative proceedings.
While the leniency notice of the Federal Cartel Office does generally not apply to vertical cases, the draft guidelines state that in individual cases it may decide to refrain from imposing a fine if the cooperation provided by the undertaking is particularly valuable for the authority's investigation.
The draft guidelines have been published to open a public consultation process. Interested parties wishing to comment can do so until March 10 2017.
For further information on this topic please contact Kai Neuhaus at CMS Hasche Sigle by telephone (+32 2 6500 420) or email ([email protected]). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
