16 Dec 2021

Introduction

EU and UK competition law is changing in 2022, and there are some changes coming down the line in relation to prices. But, spoiler alert, price-fixing and resale price maintenance are and will continue to be against the law.

So, what are the rules relating to pricing that those in the fashion industry need to know about, and how are things likely to change in 2022?

The basics

A fashion brand which does not hold a dominant position in the market for the types of products which it sells has considerable freedom as to the prices at which it sells its products to its direct business customers.

It is crucial that when setting the purchase prices for its products, the brand does not coordinate or collude with its competitors – instead, the brand must set its purchase prices independently.

However, it is in the onward sale down the supply chain where competition law infringements often arise, because the brand must not impose fixed or minimum resale prices on its distributors or retailers.

Resale price maintenance

Resale price maintenance (RPM) in the context of relationships between fashion brands and their distributors and retailers refers to any steps taken which are designed to ensure that the distributors or retailers do not sell the brand’s products for less than a specified price. Competition law prohibits resale price maintenance because in general it leads to consumers paying higher prices.

What is not always appreciated by brands is that there are various pricing practices short of agreeing with your distributors or retailers on a fixed or minimum resale price which could get you into hot water. These other pricing practices are usually referred to as “indirect resale price maintenance.” 

Some examples of indirect resale price maintenance are:

  • fixing a distributor’s distribution margin;
  • fixing the maximum % discount which the distributor can give retailers; and
  • stick and carrot measure with the aim of ensuring compliance with the minimum price – for example, threats, penalties, and refusal to supply if a distributor or retailer fails to observe or enforce a particular price, or inducements given to distributors and retailers to persuade them to observe a particular resale price.

What about Recommended Retail Prices?

Setting Recommended Retail Prices (RRPs) is not against the law, unless the RRPs are accompanied by other measures which have the effect of making the RRPs a minimum resale price in all but name.

In a recent case, the Competition and Markets Authority (CMA) found that a ‘recommendation’ given by a manufacturer to retailers regarding prices had the practical effect of preventing retailers from selling below the recommended price. This was because the supplier used various monitoring and enforcement mechanisms to make sure that retailers did not advertise or sell its products below the recommended level.

In this case, the supplier had originally received several complaints from its bricks-and-mortar resellers about significant discounting of the supplier’s products online.

To address these complaints, the supplier at first introduced an online trading policy which required online retailers not to resell the supplier’s products below a maximum discount of 20% off the RRP for that product.

The supplier revised its policy a few years later so that it contained a ‘recommendation’ – which was stated not to be legally binding – that online prices should be no lower than 25% off in-store RRPs.

However, despite being described as a non-binding ‘recommendation’, the way in which the supplier’s trading policy was structured meant that the supplier could limit or withdraw a retailer’s right to use images of the supplier’s products on the retailer’s site if the retailer did not comply with the price recommendation.

In addition, the supplier monitored the prices at which the online retailers were selling the products and took action against retailers which were selling below the recommended price level, including threatening to refuse to continue to supply such retailers. The CMA fined the supplier around £800,000.

The consequences of resale price maintenance

Resale price maintenance is illegal. The consequences of engaging in RPM can be severe – fines can be as much as 10% of the worldwide turnover of the business.

Competition law regulators are increasingly active in their investigation and prosecution of RPM, particularly in the online channel. For example, in the last two years the CMA has pursued suppliers and retailers in the musical instruments industry in five investigations into resale price maintenance which led to the CMA imposing fines totalling more than £13.7 million. 

On the back of these investigations, the CMA also developed its own online price-monitoring tool which it is using to detect resale price maintenance in the musical instruments sector.  

The CMA has opened investigations into other sectors of concern, including two into RPM in the replica football kits market; one in relation to Rangers Football Club, and another in relation to Leicester City Football Club, and both involving JD Sports.

In terms of the use by suppliers of price monitoring software, the CMA and several national competition law regulators in EU countries have, in recent years, been heavily critical of parties which use such software to detect and punish resellers which sell below their RRPs. Therefore, fashion brands using such software should be careful, as it may lead to scrutiny from competition law regulators.

It is not just the suppliers which can be fined – distributors and retailers which are active participants in suppliers’ attempts to maintain prices have also been fined.

The consequences of being found to have engaged in price fixing are not purely legal and financial either. Significant reputational damage to the brand itself can also result.

Changes in 2022?

Although not yet confirmed, it looks as though dual pricing (where a brand charges the same retailer a higher price for products intended to be resold online than for products intended to be resold offline) will no longer be a hardcore breach of competition law. This will allow fashion brands to incentivise hybrid retailers to invest in brick-and-mortar retail.

Further, more guidance is expected from the CMA on the potential efficiency arguments which could justify RPM. The current position of the CMA is that it remains open to such arguments, which it will consider carefully.

Nevertheless, RPM remains a material concern for fashion businesses and one that should be taken extremely seriously.

Please get in touch with the specialist team at Fox Williams if you have any concerns about RPM or how your business may be affected.

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