Resale price maintenance in the musical instruments industry: the CMA goes on a crusade

Resale price maintenance in the musical instruments industry

While at the Podcast show on 25 May 2022, I struck a conversation with Kevin Fairburn, senior account manager for the Japanese musical products brand Zoom at Sound Service MSL Distribution Ltd, who mentioned that online retailing of musical instruments (‟MI”) and products was more strictly regulated, in the United Kingdom (‟UK”), since its Competition and Markets Authority (‟CMA”) had handed down several decisions against top MI suppliers and retailers, such as Roland and Fender. Intrigued, I decided to dive in, and get to the bottom of these CMA cases which, according to Kevin, did a lot to make MI online retailing a better place for fairer competition. Here is what I found.

1. The facts: the CMA zeroes in on widespread resale price maintenance in the musical instruments industry

The CMA receives more complaints about Resale Price Maintenance (‟RPM”) than any other type of anti-competitive behaviour.

RPM is a breach of competition law, by various parties, via anti-competitive agreements and/or concerted practices, whereby suppliers tend to limit the ability of the retailers of their products, to discount the prices of such supplied products, either online or in brick-and-mortar retail points. RPM is illegal because it prevents retailers from offering lower prices, and setting their prices independently, to attract more customers.

Since the CMA was established in 2014, more than a quarter of all complaints considered by the CMA’s pipeline team as possible antitrust infringements, related to RPM. Therefore, the CMA treats RPM as an enforcement priority.

There was evidence of harm arising from widespread RPM across the supply of MI in the UK, including electronic drums, digital pianos, digital keyboards, guitars, synthesizers and high-tech equipment.

This is why the CMA prioritised five cases, from 17 April 2018 when it launched five investigations under Chapter I of the Competition Act 1998 (‟CA 98”) and article 101 of the Treaty on the Functioning of the European Union (‟TFEU”). Each of these five cases concluded with an infringement decision that imposed a significant financial penalty, from 8 October 2019 to 22 July 2020.

Before launching – and during – these five investigations, the CMA had taken other steps to stop the widespread practice of RPM for MI in the UK, to no avail:

  • it sent a warning letter to over 80 suppliers and retailers of MI suspected of having engaged in RPM, about RPM, and the need to comply with competition law;

2. The decisions: five exemplary CMA decisions find liable, and fine, Roland, GAK and Yamaha, Casio, Fender and Korg for RPM

As already explained in our article ‟Why selective distribution makes sense for a luxury or premium business”, article 101 (1) TFEU provides that, as part of RPM obligations, retailers must be free to determine their own resale prices. While such article of the TFEU does not prohibit a supplier/manufacturer from suggesting or recommending resale prices, practices that fix purchase or selling prices, to distort, restrict or prevent competition, are unlawful.

In the cosmetics, fashion and luxury sectors, many decisions were handed down, in the beginning of the 2010s, in order to force suppliers to stop precluding their retailers, members of selective distribution networks, from selling products online, via e-commerce sales. Some of the most notable RPM cases include the judgment from the European Court of Justice (‟ECJ”) ‟Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi” dated 13 October 2011, and the ECJ ruling ‟Coty Germany GmbH v Parfümerie Akzente GmbH” dated 6 December 2017.

Now that e-commerce sales have widened to other retail sectors, such as MI and musical products, it is mind-boggling to note that MI suppliers and retailers had still not learned their lesson, fighting tooth and nail any heightened competition brought by online distribution channels.

In particular, MI suppliers used online price monitoring software to ensure that MI retailers were not selling below an ‟agreed price”, via their e-commerce websites. MI retailers which were found to not be complying with the suppliers’ minimum pricing policy, were swiftly sanctioned via withholding of stock or withdrawal of financial support for marketing promotions. Online MI retailers also used this type of software to track their competitors’ prices and to make sure that their rivals were not undercutting the ‟minimum agreed price”; those found to have broken the agreement were reported to the MI supplier. The use of online price monitoring software both increased MI suppliers’ ability to enforce their illegal RPM pricing policies, and widened their impact.

Other RPM unlawful practices detected by the CMA during its investigations were:

  • withholding payment of a retailer’s invoice;
  • making financial bonuses contingent on maintaining a certain price point;
  • reducing the retailers’ credit limit;
  • restricting a retailer’s access to popular product ranges, and
  • offering less favourable contractual terms to the retailer.

Well, after the various above-mentioned warning letters, which were blatantly ignored by the MI suppliers and retailers, the CMA brought its flock back on the right track, via the following swift enforcement actions:

  • On 8 October 2019, the CMA published its first decision against Casio, a Japanese manufacturer of digital pianos and keyboards, which it fined GBP3.7 million for breaching competition law by engaging in RPM;
  • On 24 March 2020, the CMA published its second decision against Fender, a US manufacturer of guitars, which it fined GBP4.5 million for breaching competition law by engaging in RPM;
  • On 9 July 2020, the CMA published its third decision against Korg, a Japanese manufacturer of synthesizers and hi-tech equipment, which it fined GBP1.5 million for breaching competition law by engaging in RPM;
  • On 20 July 2020, the CMA published its fourth decision against Roland, a Japanese manufacturer of electronic drum kits and related components and accessories, which it fined just above GBP4 million for breaking competition law by engaging in RPM, and
  • On 8 September 2020, the CMA published its fifth decision against GAK, a UK online and brick-and-mortar retailer of Yamaha guitars and digital pianos, as well as against Yamaha, a Japanese manufacturer of guitars and digital pianos, in which GAK was fined GBP278,945 (Yamaha was immuned from fines for blowing the whistle on the RPM arrangement and admitting liability) and both GAK and Yamaha were found to have breached competition law by engaging in RPM.

Basing its five decisions and fines on the CMA’s guidance as to the appropriate amount of a penalty, the CMA strived to comply with its twin objectives on financial penalties, (i) to impose penalties on infringing undertakings which reflect the seriousness of the infringement, and (ii) to ensure that the threat of penalties will deter both the infringing undertakings and other undertakings that may be considering anti-competitive activities from engaging in them.

This rational and systematic approach adopted by the CMA did not deter Roland from appealing the infringement decision, in relation to the level of its penalty, despite the fact that Roland had signed the settlement agreement offered by the CMA to settle this investigation. In 19 April 2021, the Competition Appeal Tribunal (‟CAT”) issued its judgment rejecting this appeal on the level of the fine, and removed the 20 percent discount granted to Roland for signing the settlement agreement, hiking the penalty from just above GBP4 million to just above GBP5 million!

The CMA also launched its own in-house price monitoring tool, aimed at deterring companies from entering into agreements restricting online discounting. It uses this tool to monitor pricing and detect suspicious activity in the MI, and other, sector(s). This way, the CMA has a better idea of which sectors to clamp down on, allowing it to prioritise enforcement in those areas – supporting to protect more customers online.

The enforcement actions by the CMA were wide-ranging, catching a MI retailer (GAK), as well as directors and senior staff, into its net. Indeed, MI retailers cannot justify RPM, or request a fine reduction, by arguing that they face difficulties in competing on price with ‟big online discounters”, as the GAK decision attests. Also, if senior staff and management do not comply with their separate responsibility to be well informed on competition law themselves, and instead are involved and complicit in illegal behaviour, failing to take concrete action in response to a warning letter from the CMA, the CMA will increase the fines as it did in the Casio, Korg and Fender decisions.

3. Despite Brexit, the CMA is on the same page with EU regulators on fighting resale price maintenance in the musical instruments industry

Whilst the UK left the European Union (‟EU”) on 1 January 2021, the 5 decisions from the CMA on penalising MI suppliers and retailers for RPM practices are in line with the above-mentioned ECJ case law, as well as RPM enforcement actions taken by other EU regulators. In 2020 alone, allegations of RPM in the MI sector have been probed by the competition authorities in Germany, Sweden and Poland, with fines being imposed in Austria. Outside of MI, RPM has been a focus for Czech Republic and Poland in sports equipment, Finland in hardware suppliers and France in tech devices. More broadly, the CMA’s recent enforcement actions reinforce how manufacturers’ and retailers’ online selling practices – including any controls on resale prices – remain under close scrutiny at a UK and European level.

Indeed, public enforcement against RPM is also regarded as a priority across the EU, with a number of European Commission investigations being done into the online selling controls and practices of Nike, Guess, Asus and Phillips (among others). 

In the 2010 EU Guidelines on Vertical Restraints, which were replaced by the 2022 EU Guidelines on Vertical Restraints, RPM is described as a hardcore restriction under article 4 of Regulation (EU) 2022/720 (the ‟Vertical block exemption regulation”) and a restriction by object under article 101(1) of the TFEU. Under the Vertical block exemption regulation, RPM is still considered to be a severe restriction of competition, and any agreement between suppliers and buyers which provides for RPM will not be exempted under the Vertical block exemption regulation. Post Brexit, the UK adopted a similar stance on RPM, in its new vertical agreements block exemption order (‟VABEO”) which came into force on 1 June 2022: RPM is a hardcore restriction and any agreement which sets out a RPM arrangement cannot be exempted under the VABEO.

Retailers and manufacturers beware: embrace the new online eldorado, without meddling prices … or else!

 

Crefovi’s live webinar: Resale price maintenance in the musical instruments industry – the CMA goes on a crusade – 31 August 2022

 

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