Competition Update for the Manufacturing Sector

Competition Update for the Manufacturing Sector

The Competition and Markets Authority (CMA) has been very active in the last few months with a number of announcements made for current and new investigations. We have selected three which are of particular interest to the manufacturing sector.

1. Acquittal for two out of three in criminal cartel prosecution.

On 24 June 2015, the CMA announced that two men charged with the criminal cartel offence had been acquitted at trial. The jury were not persuaded that the two men had dishonestly agreed to divide customers, fix prices and rig bids.

The third man charged pleaded guilty in June 2014 and is currently awaiting sentencing.

The criminal cartel offence (established under the Enterprise Act 2002 (as amended)) is committed when a group of independent companies join together to:

  • fix prices
  • bid rig (collusive tendering);
  • limit production; or
  • share markets or customers.

The offence carries a maximum sentence on conviction of five years prison and/or a fine.

It should be noted that this case was brought under the previous competition regime which required dishonesty on the part of the accused for a crime to be committed. Amendments to the regime which came into effect on 1 April 2014 removed the ‘dishonesty’ element from the criminal cartel offence, although there are a series of defences which might be available.

In commenting on the acquittal, the CMA stated that although the Jury was not convinced in this case, it was no longer necessary to prove dishonesty when bringing prosecutions. The CMA wishes to remind anyone involved in cartel conduct or those who might be tempted that they remain committed to investigating and prosecuting individuals who take part in cartels.

It is clear that despite this setback, the CMA is still intent on criminal investigations. Indeed, it may be the case that they are now keener than ever to unearth a criminal cartel, to prove that the 2014 reform has removed obstacles such as the requirement for dishonesty which has hindered their efforts previously.

2. CMA continuing to investigate bathroom fittings sector.

On 15 July 2015, the CMA stated that it will continue its investigations into vertical arrangements between certain suppliers and resellers in the bathroom fittings sector. The investigation is in relation to Chapter I of the Competition Act 1998 and Article 101 of the TFEU in relation to anticompetitive agreements.

The CMA has been investigating vertical arrangements in the retail and wholesale markets for bathroom fittings (products installed in bathrooms, such as bathroom suites, towel rails, shower accessories etc) since August 2014.  Vertical arrangements are agreements between business at different levels of the supply chain, such as a manufacturer and wholesaler or wholesaler and retailer.

The majority of vertical arrangements do not breach competition law as they benefit from a ‘block exemption’ – a blanket exclusion for these types of agreements. However, certain ‘hard core’ practices are outside this exemption, such as:

  • Resale price maintenance – specifying ‘minimum pricing’;
  • Restrictions on sale, either by area or by customer;
  • Preventing supply to other distributors in a network; or
  • Restricting access to spare parts.

We have not been provided details of the exact dealings, however the CMA’s findings will be of interest to parties dealing in vertical relationships, particularly where there are a number of parties between manufacturers and eventual end user. Manufacturers and wholesalers alike should keep a close eye on this case.

3. Developments in the hotel online booking investigation

We have previously written in relation to ‘most favoured nation’ clauses or price parity provisions.  In simple terms, these are clauses where a supplier promises to give a buyer its best price. If, in the future, the supplier agrees to supply a third party with a better price, it must allow the buyer to also purchase at that price.  It may also be required to pay back the difference in price to the buyer.

The CMA has for some time been investigating price parity provisions in relation to the hotel online booking sector, together with a number of European competition authorities. June and July have seen both and Expedia, Inc. agree to abandon or waive their rate, conditions and availability parity clauses.

Most favoured nation (MFN) clauses limit competition as they favour buyer power and reinforce a certain price in the market. Unless a new buyer can offer sufficient financial incentive to the supplier to offer a lower price, the supplier is going to maintain its higher prices to avoid a penalty under the MFN clause. This both reduces competition in the market due to price maintenance and favours larger businesses with the buyer power necessary to overcome MFN clauses. It also acts as a barrier to new entrants, who are likely to need to negotiate lower prices in order to gain entry into the market but do not have the buyer power to combat MFN restrictions.

The overall effect is a restriction on competition on the market leading to higher prices and reduced numbers of players in a market, leading to a poorer outcome for consumers.

Previously in this area, Amazon abandoned their use of price parity provisions in 2013, following investigation by the UK and German competition authorities.

Most favoured nation clauses are often used in a manufacturing setting, particularly where components are widely used within a competitive sector. Business should review their use of such clauses or practices in light of this investigation.

Michelmores’ Competition Team regularly reviews contracts and clauses for clients, as well as undertaking competition compliance audits. We would be happy to assist if you have any concerns in relation to MFN clauses or competition compliance more generally.

This article provides an overview only and is not intended to be an exhaustive analysis of complete issues.  It should not be relied upon in relation to specific matters.