Online Sales and Price-Fixing
The CMA recently issued a warning to online retailers against price-fixing and using automated re-pricing software to facilitate such arrangements.
This Article (which was first published on Lexis®PSL Commercial on 23 November 2016 and can be found here) considers the background to the CMA's warning and the possible risks of using automated re-pricing software.
What is the background to the price fixing warning by the CMA?
On 7 November 2016, the CMA launched its latest campaign to remind online sellers of the need to comply with UK competition law. The CMA used the recent focus on Black Friday as an opportunity to reinforce the message that online sellers, irrespective of their size, should neither agree their prices nor discuss their pricing intentions with their competitors. Price-fixing between competitors is one of the most serious forms of competition law infringement and substantial penalties can be imposed for such cartel activities.
The warning follows a recent infringement decision by the CMA, where it found that two online sellers had agreed not to undercut each other on prices for licensed sport and entertainment posters and frames, which they both sold on an online marketplace. After difficulties in monitoring each other's compliance with their arrangement, the two sellers had then utilised automated re-pricing software to ensure compliance.
Back in June, the CMA had issued a warning to online retailers and suppliers in relation to their vertical pricing arrangements, namely Resale Price Maintenance or RPM, whereby a supplier and retailer agree that the retailer will not sell or advertise the supplier's products online below a certain price. The CMA had emphasised that retailers should determine independently the price at which they wish to sell products. This warning again followed recent infringement decisions issued by the CMA.
There is an increased focus by the CMA on digital and online markets and ensuring that these markets are working effectively is one of the CMA's priorities. The CMA acknowledges that the internet is "an increasingly important channel for businesses to advertise and sell their products, as it opens up markets, provides customers with more choice and enhances price competition". As well as different forms of price-fixing, the CMA is also currently investigating the issue of online sales bans imposed by suppliers (on 9 June 2016, the CMA issued a statement of objections to Ping Europe Limited in relation to its ban on retailers selling its golf clubs online).
Online sales activities are also the subject of increased attention by the European Commission. In 2015, it launched a sector enquiry into e-commerce and it is due to publish its final report in early 2017. Its provisional findings have highlighted a variety of arrangements and practices which potentially infringe competition law, including pricing restrictions.
Is online retail particularly prone to price-fixing and, if so, why?
Price-fixing is by no means a new phenomenon. However, the CMA, and other competition authorities such as the European Commission, have acknowledged that one of the main features of e-commerce is price transparency. This, of course, can be extremely beneficial for consumers, who are able to shop around for the best value products more effectively. Price transparency can drive price competition as competitors can react unilaterally and quickly to pricing changes in the market place. However, this transparency also makes it easier for competitors to collude over prices and monitor compliance with illegal price-fixing arrangements. Similarly, retailers are well aware that manufacturers and suppliers can, and do, monitor readily the retail prices for their products and, thus, retailers may be more reluctant to deviate from pricing or maximum discount "recommendations" of their suppliers for fear of retribution.
How widespread is the use of automated re-pricing/price management software, what are its risks and has the CMA produced any guidance in this area?
In its recent preliminary e-commerce inquiry report, the European Commission confirmed that approximately half of the retailers, who had responded to its questionnaire, had stated that they track the online prices of competitors. Of these retailers, 67% were using automatic software programmes to do so. 78% of these software users would then adjust their own prices to those of their competitors. The European Commission found that most retailers adjusted their prices manually, but a "significant number" used both manual and automatic price adjustments, whilst about 8% only used automatic adjustments.
There was also an acknowledgement that some manufacturers were engaging in tracking the online retail prices of their products sold by distributors (approximately 30% did so systematically and others on a more specific basis) and 38% of these manufacturers used price-tracking software.
Price-tracking software is certainly becoming more prevalent and sophisticated. Its use does raise the question of whether it provides perfect competition so that retailers can, and do, respond unilaterally and competitively to pricing developments in the marketplace or instead whether it has an adverse effect on competition by either facilitating or strengthening collusion between retailers or enabling manufacturers to monitor and enforce retailers' compliance with their particular pricing policies.
This is a question which the European Commission is likely to have to consider further in the not so distant future. For its part, the CMA has warned against using automatic re-pricing software to give effect to illegal price-fixing agreements. It is not the use of price-tracking software which is problematic, but the purpose behind its use. The CMA has also highlighted that software providers could themselves be at risk of infringing competition law in circumstances where they assist their clients in using the software to facilitate their price-fixing agreements.
What are the main regulations governing price-fixing for online retailers? What are the penalties and can consumers take action individually?
The Chapter I prohibition under the UK's Competition Act 1998 covers, inter alia, agreements between undertakings and concerted practices which may affect trade within the UK and which have as their object or effect the prevention, restriction or distortion of competition within the UK. Most forms of price-fixing, whether between retailers or between a retailer and its supplier, i.e. irrespective of whether it is a horizontal or vertical arrangement, will fall within this Chapter I prohibition.
In addition, in circumstances where retailers agree between themselves, i.e. as competitors, to fix prices, including arrangements not to undercut each other, this may also constitute a cartel offence under s188 of the UK's Enterprise Act 2002. This provides, inter alia, that an individual is guilty of the cartel offence where he/she agrees with at least one other person to make or implement an arrangement to fix the price for the supply in the UK (other than to each other) of a product or service.
As e-commerce provides greater scope for cross-border trade, in some instances, price-fixing between online competitors may also infringe Article 101 of the Treaty on the Functioning of the EU. The UK's Chapter I is based on Article 101 with the only difference being the geographic scope as Article 101 requires the effect on trade to be between Member States.
At both UK and EU level, a competition law breach can result in a company being fined up to 10% of its worldwide turnover for its involvement. However, participation in a cartel in the UK also risks serious consequences for the individuals concerned. If found guilty of the cartel offence, an individual could face an unlimited fine and/or imprisonment of up to five years. Directors can also be disqualified from office for up to fifteen years, whether or not the Chapter I breach also constitutes a cartel.
It may be very difficult for individual consumers to gather evidence of price-fixing between competitors. Retailers are unlikely to advertise the fact that they are agreeing between themselves to charge the same prices (as opposed to price matching and compensating consumers if they can find the product cheaper elsewhere) or not to undercut each other. If consumers do have evidence, this can be presented to the CMA, but the question of whether the CMA will take action will depend on the actual evidence and also its administrative priorities at that time.
However, if a retailer is the addressee of an infringement decision by the CMA (or the European Commission), there may be the possibility of follow-on damages action against it, in the form of a class action. The first class action to be launched in the UK is on behalf of consumers, who allege that they have overpaid for their mobility scooters as a result of online retailers being prevented from selling the supplier's scooters online below the Recommended Retail Price.
Have there been any recent noteworthy cases in this area?
Online Price-fixing between Competitors and the Use of Pricing Software:
As mentioned above, the CMA concluded that two online sellers of posters (including popular images the likes of Justin Bieber and One Direction) and frames had participated in an illegal price-fixing cartel (Decision 50223 of 12 August 2016). These sellers had agreed not to undercut each other in respect of the products, which they both sold on Amazon's UK website, except in circumstances where a third-party had offered the product at a better price. As well as being competitors, one of the retailers was a major customer of the other and complained that it was being undercut.
The parties used automated re-pricing software to monitor and adjust their prices, whilst ensuring that they did not undercut each other. They continued to monitor and discuss the situation, particularly when issues with the re-pricing software arose.
In this case, the software providers were not found to be in breach of competition law. However, the CMA has warned that, if software providers do help their clients to use software in order to facilitate an illegal price-fixing agreement, they too are at risk of breaching competition law and of facing serious penalties.
Each of the online retailers had annual turnover of under £16 million. One of the sellers received immunity from fines for reporting the cartel and then co-operating throughout the investigation under the CMA's leniency policy. The other party was fined £163,371.
In May 2016, the CMA imposed fines of almost £2.3 million and over £780,000 on a supplier of commercial fridges (Decision of 24 May 2016 - CE/9856-14) and a bathroom fitting manufacturer (Decision of 10 May 2016 - CE/9857-14) respectively as a result of RPM price-fixing. The fridge supplier had imposed a 'minimum advertised price' which restricted the price at which retailers could advertise the particular product online. Retailers were threatened with higher purchase prices for the fridges or a refusal to supply them, if they did not comply. Similarly, in the bathroom fittings case, the manufacturer threatened retailers if their online price were not set at the "recommended" online price or above. The CMA has said that it "is keeping an active watch on potential RPM agreements in the online space and is prepared to act against firms breaking the law".
What should online businesses be aware of as sales activity intensifies at this time of year?
It is important to remember that competition law applies throughout the year. However, as online sales activity intensifies at this time of year, in the interest of achieving desired sales, online retailers may be facing additional pressure to discuss or agree pricing with their competitors.
Online retailers should bear in mind that:
- they are obliged to comply with competition law, irrespective of the size of their business;
- it is a useful time to remind their employees of the need for competition law compliance;
- they, and their staff, must not discuss their pricing policies or intentions with competitors;
- no-one within the business should agree with a competitor to particular pricing or discounting levels or to not undercut each other;
- they should be vigilant for any potential infringements; and
- they should seek immediate advice if there are any concerns that they may have breached competition law.
As set out above, the CMA does operate a leniency policy, whereby it may be possible for a company to obtain up to 100% immunity from fines and, if relevant, for individuals to also be granted immunity from prosecution. The availability, and level, of leniency will depend on what information the CMA already has and where in the queue the leniency application is. Timing can be everything as it is only the first leniency recipient which can obtain 100% immunity.If online retailers have evidence of competitors infringing competition law, they should consider seeking legal advice as to what action they can take, including presenting their evidence to the CMA.