What do electric guitars and golf clubs have in common? Answer: fines for online sales restrictions

An increasing number of consumer goods suppliers from golf clubs to light fittings, pianos and electric guitars have now been fined by the UK Competition and Markets Authority (CMA) for unlawfully restricting the way in which their goods are sold online. Not only has the UK competition authority become increasingly strict in policing these types of breaches but the fines have been escalating over the last few years. Below we look at what these companies have been found to have done wrong.

Introduction

The “free riding” challenges posed by the internet are well established. Understandably, commercial pressures and concerns around brand protection can make it tempting to control and limit online sales and avoid a race to the bottom on price.

However, some companies have implemented strategies that go a step too far by preventing online discounts and restricting the use of internet sales. This has given rise to a number of CMA enforcement cases in the last four years. We focus below on the recent CMA fine imposed on Fender and on the Court of Appeal’s ruling against Ping.

Fender and a return of RPM enforcement

On 22 January 2020, the CMA announced its decision to fine Fender Europe, a guitar manufacturer, £4.5 million for illegally restricting online discounts. To date, this is the largest UK fine for these types of restrictions but it is by no means an unusual outcome. Fender required that UK retailers sell their guitars above a minimum stated price and put pressure on those who sold below this minimum level. To make things worse, Fender employees concealed these activities by avoiding written communications. This proved an unhelpful strategy as the CMA recovered incriminating emails and text messages from company servers during its investigation and such behaviour only tends to make the authority more suspicious.

The imposition of minimum prices and restrictions on discounting as required by Fender is known as ‘resale price maintenance’ (RPM) a hardcore breach seen as one of the worst forms of competition infringement. Given the seriousness of the breach, Fender’s fine could have been higher but after admitting to wrongdoing and accepting to settle with the CMA, the company benefited from a reduced penalty.

It was long considered that RPM cases were a thing of the past but as suppliers increasingly contend with how best to manage their sales online, there has been a renewed focus by competition authorities on cases involving pricing restrictions. In the last four years, the CMA imposed sizeable penalties for RPM breaches on: Casio a piano maker (£3.7 million in August 2019), the National Lighting Company (£2.7 million in 2017), ITW, a commercial catering equipment manufacturer (£2.3 million in 2016), and Ulta, a bathroom fittings company (£786,668 in May 2016). And the CMA is not alone. In July 2018, the European Commission fined a number of electronics and home appliance suppliers a combined EUR 111 million for restricting online discounts and more recently the Polish and Dutch competition authorities have imposed fines in similar cases of their own.

Competition authorities see online sales as an important channel for consumers, particularly because they improve price comparison and transparency. Echoing this view, Andrea Coscelli the CMA Chief Executive commented in the Fender press release that: “It is absolutely essential that companies do not prevent people from being able to shop around to buy their products at the best possible price”. Furthermore, the CMA noted that online sales of musical instruments had increased to 40% in recent years making it a channel of choice for consumers. The authorities have now made it clear that dampening the advantages of online sales channels by trying to control prices is unlikely to go unpunished.

The importance of online sales

As we have discussed previously in our alert on the CAT judgment in Ping here other attempts to limit online sales and justify restrictions on the basis that they are necessary to preserve the brand’s image and customer service experience, or prevent free riders where bricks and mortar shops have invested in training or special infrastructure will not always be a sufficient excuse.

Ping, a manufacturer of premium golf clubs that was fined £1.45 million by the CMA in 2017, was reminded of this last month when the Court of Appeal sided with the CMA upholding all of its original findings. In this case, the CMA accepted that preserving brand image was a legitimate justification but Ping’s assertion that face-to-face custom fitting was essential simply failed to convince the Court that a complete online sales ban was necessary to achieve this.

The Court of Appeal highlighted two reasons for finding Ping’s ban to be excessive:

• It was not justified by a “free rider” problem. The fact that the original complainants were dealers within Ping’s selective distribution network which had themselves made substantial investments in the infrastructure for in-store custom fittings showed there was appetite for selling online regardless. Logically, they accepted the risk that customers may visit their shop but decide to purchase from an alternative supplier online. Rose LJ commented that there was in fact no free rider problem at all since Ping could restrict online sales to only the websites of authorised dealers who had made in-store investments.
• Limiting on-line sales limits geographic reach and price competition. Allowing authorised retailers to sell online broadens their reach to customers elsewhere in the UK (or beyond) who would not walk by their shop. Therefore, restricting online sales has the effect of reducing price competition as customers can only choose from shops available locally.

In her Judgment, Rose LJ also commented that if in person sales are in fact so important and key to attracting customers to the brand, they will naturally continue to be the chosen sales route by the operation of ordinary competitive forces even after the online ban is lifted.

Comments

In conclusion, manufacturers should consider online sales restrictions carefully and avoid:

• RPM practices which are likely to attract fines; and
• absolute online sales bans, even where there might be a legitimate reason for them.

As we have discussed previously here there may be scope for control through other means - for example in relation to the marketplaces and platforms on which goods end-up. Although, the boundaries of the law in this area are subject to debate. Legitimate approaches to distribution are also available such as setting up selective distribution systems. As ever in this area, careful planning and risk management is required. In the meantime, the cases discussed above are helpful in setting some bright lines of enforcement which should not be crossed.