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Home > News > Think that you can set the minimum prices for the resale of your products? Think again!  

Think that you can set the minimum prices for the resale of your products? Think again!  

02 August 2022 | Edward Jaffa

It can be tempting for manufacturers, wholesalers, retailers and resellers to enter into discussions over the prices customers should be charged for products, however, there are limits to what the law permits. In this article, commercial law specialist, Ed Jaffa, provides a brief guidance on competition law.

Businesses need to tread carefully  

In our experience, competition law is something that can catch out even the best-intended businesses and certain ‘black list’ provisions apply irrespective of the size of the business or its share of the market. 

From a business perspective, it can make perfect commercial sense to try to ensure that a product retains an image of being a high-quality product for an exclusive customer base and to maximise revenue.  

However, when you take a step back and take a wider view, this could easily amount to a breach of competition law, by being an anti-competitive practice which increases prices for the consumer.   

When selling products to retailers, stockists or resellers, manufacturers and wholesalers should ask themselves questions such as: 

  1. “Is there a chance that what I’m doing might prevent competition, by, for example, preventing the different retailers/stockists/resellers from competing for customers’ business through business activities such as offering discounts?” 
  2. “Am I trying to set the prices at which stockists and resellers can sell my products after they’ve bought them from me?”  
  3. “Am I trying to limit access to my products by only allowing certain specified retailers sell my products if certain conditions are met?” 

When retailers, stockists or resellers are negotiating contracts with manufacturers or wholesalers, they should also be alive to the risk of innocently entering into an anti-competitive arrangement because penalties can be imposed to all parties involved in anti-competitive practices. Retailers and resellers would do well to consider questions such as: 

  1. “Is the manufacturer/wholesaler trying to prevent me from selling the products below a certain price?” 
  2. “Am I being prevented from selling the product to different groups of consumers, e.g. am I only allowed to sell the products to consumers in a particular geographical location?”  
  3. “Is there a possibility that the manufacturer/wholesaler may be allowed to terminate the agreement if I don’t comply with all of their instructions in respect of pricing or the consumers who I sell to?” 

Whether you are a manufacturer or wholesaler, retailer or reseller, if the answer is “yes” to any questions such as those above, then this is a red flag and you would do well to take a pause and consider whether you need to be careful about what actions you’re thinking of taking, and to take legal advice if you’re unsure of the risks. 

Recent Case  

A lighting company has recently been fined £1.5 million by the UK Competition and Markets Authority (CMA) for breaching competition law by trying to prevent its stockists from offering customer discounts.  

The CMA found that the company’s use of ‘selective distribution agreements’ effectively prohibited stockists from selling its products below particular prices online.  

Selective distribution agreements are agreements where the manufacturer or wholesaler only allows particular stockists or retailers to sell its products if certain conditions are met.  

Whilst not all selective distribution agreements are illegal, the CMA considered that the company used its agreements to maintain a perception amongst its stockists that discounting was not allowed under any circumstances. The CMA found that the company had restricted retailers’ freedom to set their own prices online between 2017 and 2019.  This is an illegal practice known as ‘resale price maintenance’.  

The CMA said that the company’s actions risked driving up prices for consumers, by giving retailers the impression that they were prevented from offering online discounts of the company’s products, and that this amounted to a breach of the Chapter I prohibition of the Competition Act 1998. 

Chapter I prohibits anti-competitive agreements, concerted practices and decisions which have as their object or effect the prevention, restriction or distortion of competition within the UK (or a part of the UK), or which may affect trade within the UK (or a part of the UK).  

In layman’s terms, this means that companies cannot seek to do anything which may prevent a competitive market environment which lowers prices.  By seeking to prevent its stockists from undercutting each other through discounts, the CMA decided that the company had breached this key aspect of competition law. 

It’s also worth noting that the CMA’s fine was increased by 35% because the company failed to act in response to two official letters from the CMA and its predecessor informing the company that its practices were likely in breach of competition law.  However, the fine was also reduced by 20% because the company admitted that it had broken competition law and cooperated with the CMA.  

To highlight the potential impact of such anti-competitive practices, the CMA notes that its enforcement action against similar arrangements in the light-fittings sector had led to an estimated fall in consumer prices of around 17%.  

At a glance  

Key takeaways from this article: 

  • A company which sought to set the prices which stockists and retailers sold its products to consumers, by preventing the stockists and resellers from selling its products online at a discount, has been fined £1.5 million for breaching competition law. 
  • The company intended to protect its reputation as a premium brand by not allowing discounts of its products, and by using selective distribution agreements to control which stockists and retailers could sell its products. The CMA ruled that this amounted to an anti-competitive practice which broke the law.  
  • The £1.5 million fine includes a 35% uplift, because the company continued its anti-competitive practices after receiving two official warning letters from the CMA, but this fine also includes a reduction of 20% because the company admitted that it broke competition law and cooperated with the CMA’s investigation. 
  • Takeaway tip: if you are business which uses selective distribution agreements or which seeks to set the prices at which retailers, stockists and resellers sell your products, or if you are one of those retailers, stockists or resellers, you need to be very careful to ensure that you’re not breaching competition law.  

How we can help 

Our Corporate and Commercial law teams in Bristol and London specialise in drafting, negotiating, reviewing and advising on all aspects of commercial contracts across a range of sectors for SMEs and large businesses. 

To discuss any commercial matter, contact our commercial law specialist Edward Jaffa, please call 0117 906 9253 or email e.jaffa@gl.law. Alternatively, please complete our contact form.  

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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