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13 April 2010
Under German and European cartel law, a franchisee must be able to set its own prices. The franchisor may not prescribe the prices at which the franchisee sells the goods that the franchisor supplies (Section 1 of the Act Against Restrictions of Competition and Article 101 of the Treaty on the Functioning of the European Union). However, the franchisor may set maximum prices or issue non-binding price recommendations to the franchisee (Article 4 of the EU Block Exemption Regulation on Vertical Restraints). Therefore, in principle the franchisor is permitted to issue non-binding price recommendations. Price recommendations play a major role in franchising because they provide the franchisee with a basis on which to make price calculations. A franchisor can also suggest a price structure to its franchisees.
However, where non-binding price recommendations have the same effect in practice as fixed or minimum prices due to the exercise of pressure or the offer of incentives, the prohibition on fixed prices is breached. There is a thin line between admissible price monitoring and inadmissible pressure. Thus, regulatory or court decisions which address this situation have far-reaching implications for franchising, even if the facts relate primarily to other sales systems. A recent decision of the Federal Cartel Office illustrates the potentially serious consequences of non-compliance with cartel rules in the course of price monitoring.
On September 25 2009 the Federal Cartel Office imposed a €11.5 million fine on Germany's market leader in the contact lens market.(1) It had been accused of putting pressure on dealers that were charging prices for the products which were below those desired by the company. The company established a system to monitor dealers' sale prices; if the prices fell below the non-binding recommendations by a certain percentage, the dealers were allegedly contacted in an attempt to persuade them to increase their prices. This pressure had allegedly been successful in some cases.
The Federal Cartel Office held that these price stabilization measures went beyond acceptable, non-binding price recommendations. It stated:
"Any contact beyond a mere communication of non-binding price recommendations... which emphasizes the latter by subsequent and repeated reference - in particular with regard to the dealer's existing pricing practices - casts doubt on the non-binding character of the price recommendation... and is to be considered as exertion of pressure."
Even the term 'price monitoring', used internally by the company, was held to indicate an active exercise of influence. In addition, the fact that employees targeted dealers whose prices did not correspond to the desired price level indicated an intention to engage actively in price structuring.
Although no franchise systems were affected by this decision, the company affected could equally have been a franchisor and it is easy to see how a similar situation and similar pressure could arise within a franchising network.
The Federal Cartel Office assumed that the company maintained a monitoring and intervention system with the primary aim of influencing the freedom of dealers to fix their prices. Ultimately, all contact with the dealer following the one-off communication of the non-binding price recommendation was deemed to constitute an exercise of pressure.
The Federal Cartel Office's interpretation of the term 'exercise of pressure' calls into question other measures which are common in franchises and which are considerably less interventionist than the extreme case of the maintenance of a monitoring and intervention system. As such, the decision will lead to considerable legal uncertainty for all distribution systems in which distributors sell products on their own behalf and for their own account.
For example, this decision leaves open the question of whether franchisees may be involved in strategic planning which makes reference to the achievement of a certain price level. In addition, it remains unclear whether other measures, such as turnover targets, may be in breach of cartel law in certain circumstances.
The broad interpretation of the term 'exercise of pressure' is inappropriate and unhelpful. It is hoped that the Federal Cartel Office will exercise appropriate moderation in less serious cases, particularly with respect to franchise systems.
However, parties exchanging information within franchise systems must bear in mind the wide interpretation of the term 'exercise of pressure' in Article 4 of the EU Block Exemption Regulation on Vertical Restraints. In particular, the decision must be taken into account when drafting franchise agreements and handbooks.
The term 'price monitoring' should also be avoided in internal communications between franchisors and franchisees. The choice of this term alone was viewed by the Federal Cartel Office as an indication of the exercise of influence on the freedom to structure prices. In addition, the risk of becoming subject to penalty proceedings can be reduced by undertaking a preventative check of price stabilization measures for their admissibility under cartel law.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Noerr LLP by telephone (+49 30 20 94 20 00), fax (+49 30 20 94 20 94) or email (firstname.lastname@example.org or email@example.com).
(1) Decision B3 123/08.
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