Prohibition of price fixing in the food retail sector – public consultation runs until 10 March 2017

On 25 January 2017, the German Federal Cartel Office (“FCO”) published a draft guidance note on issues relating to the prohibition of vertical price fixing in the brick-and-mortar food retail sector (“guidance note”; available here). The guidance note is intended to serve as a guideline to companies in the sector and to inform them by means of practical examples about the background, purpose and scope of the prohibition of vertical price fixing in the food retail sector. It is also explicitly directed at companies which have so far not been advised specifically on antitrust matters on an on-going basis, especially small and medium-sized companies. All interested parties can comment on the draft until 10 March 2017.

Background

The publication of the guidance note is the result of the developments over the past years which started in January 2010 with dawn raids at various leading retailers and brand manufacturers due to suspected illegal price agreements (known as the “vertical case”). The FCO closed its investigations on the vertical case only last year, imposing fines against retailers and manufacturers in the food retail sector totalling €260.5 million for vertical price fixing agreements.

The FCO already made a first attempt to provide assistance in the (provisional) assessment of vertical practices in the food retail sector with a note in April 2010 (so called "Handreichung"). In practice, however, this note further contributed to the uncertainty as regards the scope of the prohibition of vertical price fixing. With the completion of most proceedings regarding the vertical case and the publication of the more extensive guidance note, this note will now become obsolete anyway. The FCO obtained additional findings in its food retail Sector Inquiry in Germany which ran from 2011 until 2014 (summary in English available here).

The guidance note now published combines the sum of these findings and is intended to serve as a guideline and guide to industry retailers and manufacturers.

Content of the guidance note

Like the provisional note of 2010 , the guidance note deals only with vertical price fixing, i.e. price agreements at different levels of the distribution chain. For example, the guidance note explicitly does not comment on the assessment of Internet distribution models in terms of antitrust law which has still not been conclusively clarified. Accordingly, aiming to be a guideline and guide for, if possible, all companies in the industry, the informative approach of the guidance note covers a wide area, but at the same time is and necessarily has to be generalised and intentionally simplified:

• The first part of the guidance note deals with the legal and economic background of the prohibition of vertical price fixing, first explaining the legal basics of German and European prohibition of anti-competitive agreements. It rather extensively deals with potential efficiencies of price fixing strategies, but also points out their anti-competitive effects. Once again, the FCO makes it clear that it views vertical practices in the industry rather critically and still assumes that a few retailers have a very strong market position in relation to the food industry.


• The second part of the guidance note – certainly the most interesting not only for food retail companies – concerns the assessment under competition law in practice and contains a number of practical examples which the FCO has taken from its experience in the vertical case and which it analyses in terms of competition law in the guidance note. This part of the guidance note is subdivided into the following topic areas:
  
  (i) Agreement on fixed and minimum prices:
  
  According to the FCO, agreements on the resale price (retail price – “RP”) are generally illegal since they run counter to retailers’ autonomous price-setting and price competition at the retail level. From the FCO’s perspective, an illegal anti-competitive agreement not only exists in cases where (minimum) RP’s are fixed directly, but also where only margin surcharges on the purchase price or dynamic price setting (linked to a third-party retailer’s RP) have been agreed. Furthermore, the FCO does not consider it necessary in this context that the agreement is made as a result of exerted pressure (e.g. threats to suspend supply) or offered incentives (such as a “price management” for the benefit of the retailer) as long as the agreement or arrangement is based on a common interest of both manufacturer and retailer.
  
  The FCO also emphasizes that a manufacturer already infringes competition law when it unilaterally exerts pressure on the retailer or offers incentives to maintain a certain RP (cf. also Sec. 21(2) of the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB).
  
  (ii) Recommended resale prices (RRPs):
  
  The FCO considers it to be lawful, in principle, that a manufacturer (unilaterally) issues – or even explains – RRPs. However, this only applies for as long as the non-binding character of the manufacturer’s recommendation is not questioned and the retailer is not given any additional information (such as a promise that third-party retailers would also adhere to the RRPs) to influence the retailer’s price-setting decision. If the manufacturer stays within the bounds of what is permitted, the retailer may adopt the recommended price, without giving rise to an infringement of competition law. However, as a precautionary measure, the FCO recommends that retailers do not make any comments to the manufacturers which could give the impression that the retailer has the intention of observing the RRPs.
  
  (iii) Quantity management/promotion planning:
  
  The “ quantity management/promotion planning” section deals with communication between manufacturers and retailers in connection with the planning and implementation of retailer sales promotions. In particular, the FCO deems it to be in line with competition law to schedule promotion periods in advance in annual talks. For reasons of quantity management, the manufacturer needs timely information about the retailer’s – usually higher – quantity requirements during the promotion period. In that context the manufacturer may also consider third-party retailer promotions in order to avoid an excessive number of campaigns running at the same time. Competitive concerns mainly arise, however, when the retailer informs the manufacturer of the planned promotion RP.
  
  (iv) Guaranteed margins/renegotiations:
  
  In the “guaranteed margins/renegotiations” section, the FCO on the one hand deals with the question of whether the manufacturer may guarantee margins to the retailer in order to assume the risk of a false assessment of market developments, which is an extremely complicated question in competition law. On the other hand, the FCO positions itself on the admissibility of subsequent compensation demands in renegotiations. In both cases the agreements result in a deviation from the traditional risk allocation and involve the consideration of the retailer’s revenue and expected future revenue. Subject to the special rules of conduct which apply to companies in a strong or dominant market position, the FCO considers such guarantees or compensation demands to be in principle in line with competition law, but it also points out in detail, giving practical examples, in what cases there can already be prohibited vertical price fixing.
  
  (v) Termination of and refusal to engage in business relations:
  
  As regards the topic area “ termination of and refusal to engage in business relations”, the FCO clarifies that – beyond the scope of the prohibition of dominance abuse – manufacturers are not under a general supply obligation towards retailers. A manufacturer may refuse or terminate supply even if the retailer’s RPs conflict with the manufacturer’s own ideas of the product’s placement in the market. However, this must remain an autonomous decision of the manufacturer, and the manufacturer may not use the termination of the business relations or a corresponding threat to unlawfully influence the retailer’s pricing. According to the FCO, it already suffices if the manufacturer gives corresponding hints, suggesting for example that future supplies to the retailer would be possible if the retailer were to adjust its sales prices according to the manufacturer’s sales policy.
  
  (vi) Data exchange issues between retailers and manufacturers:
  
  Finally, the FCO recognizes the food retail sector’s interest in a direct exchange of sales data (in particular quantities and RPs) between retailers and manufacturers, and in principle also deems such a data exchange to be admissible. In the opinion of the FCO, manufacturers have a legitimate interest in obtaining reliable sales data from retailers directly – and not through market research institutions – , while retailers have a legitimate interest in generating additional revenue by supplying such data. However, the limits of what is admissible under competition law are exceeded if the data exchange is (also) used for agreeing the price-setting behaviour between manufacturers and retailers or between retailers, with the manufacturer acting as a mediator. Apart from the exchange of future-related sales data which raises competitive concerns, the exchange of sales data from the past can also be critical in terms of competition law. The FCO believes that in that case an essential – though not the only – indication that vertical price fixing exists is that current sales data are exchanged. As a rule, however, there must be further evidence (such as manufacturer interventions or quick reactions of other retailers) to give rise to an infringement of competition law.


• In the final third part of the guidance note, the FCO explains FCO proceedings. It addresses its criteria for initiating proceedings against companies for suspected infringement of the prohibition of vertical price fixing in the first place (case prioritisation taking into account available resources), and the question of which type of proceedings (administrative or fines proceedings) it would choose. According to the FCO, the characteristics of the market structure and of the type of product concerned are of decisive importance in the food retail sector. In addition to the market positions of the manufacturer and the retailer, the duration and extent of the alleged infringement, other criteria such as the intensity of the binding effect and the extent of direct harm potentially caused, especially to end-consumers, are also taken into account.
   
  
  

  Outlook

  The guidance note is explicitly intended to be a guideline and guide to companies in the food retail sector for questions relating to vertical price fixing. Its volume and the many case examples are due to the aim of explicitly addressing also small and medium-sized companies which are not specifically advised on antitrust matters on an on-going basis. This is, in principle, to be welcomed, since the guidance note can in particular serve as a first source of assistance. However, it may be doubted that it can also permanently provide companies with legal certainty in the long-run, not least because the FCO still reserves the right to make broad discretionary decisions.
  
  In addition, the information only reflects the opinion of the FCO on the scope of the prohibition of vertical price fixing, and this only with respect to the food retail sector. Neither the European Commission nor foreign antitrust and competition authorities are bound to those assessments. In addition to the vertical Block Exemption Regulation and the Vertical Guidelines of the European Commission, the assessments of other Member States (e.g. the “Standpoint on Resale Price Maintenance” of the Austrian Federal Competition Authority, available here) must also be considered. A thorough review and detailed advice on competition and compliance issues by a lawyer, based on the individual case, will therefore continue to be indispensable in the future.
  
  Currently, the guidance note is a draft for public consultation. Interested parties can submit their comments until 10 March 2017. After completion of the consultation procedure, the FCO will publish the final version of the guidance note.