The Competition and Markets Authority (CMA) has recently published a summary of the warning letters it sent to businesses in relation to potential infringements of competition law in 2023, providing an invaluable insight into enforcement trends in competition law. The CMA revealed that in 2023 it sent letters to 23 businesses, in addition to the 47 letters sent in 2022. What can we learn from these letters?
Which sectors were targeted by the CMA?
Businesses in the retail and wholesale market received the most warning letters (17%), followed closely by the technology products and heating equipment sectors receiving 11% of letters each. Other sectors in receipt of CMA letters include household goods, recruitment services, agriculture and environment, recreation, healthcare, clothing, and advertising, demonstrating the breadth of sectors that the CMA is actively monitoring.
Which anti-competitive behaviours were targeted by the CMA?
All of the letters issued in 2023 warned against behaviour that could infringe the Chapter I prohibition (the prohibition of anti-competitive agreements), whilst only 10% of the letters referenced behaviour that may infringe the Chapter II prohibition (the prohibition against abusing a dominant position), as detailed below:
Chapter I Prohibition
Unsurprisingly, a large proportion (40%) of the letters issued by the CMA were in relation to resale price maintenance (RPM), with suppliers seeking to control the prices at which their products were sold throughout the supply chain. Whilst RPM may be permissible in very limited circumstances under the Vertical Agreement Block Exemption Order (VABEO) including when used for a fixed temporary period for pricing promotions in franchising models, the letters from the CMA reinforce that use of RPM is a particularly risky strategy and provide a timely reminder to all businesses (including those involved in franchises) of the importance of pricing independence. Businesses should be particularly wary of any agreements or practices that restrict discounting, attempt to impose prices in any way (including minimum retail prices), restrictions on what customer groups suppliers may sell to, and long-term exclusivity arrangements.
Chapter II Prohibition
In each letter sent by the CMA in relation to alleged Chapter II infringements, the CMA also claimed that the same behaviour could constitute a Chapter I infringement. Both letters were in relation to market foreclosure in downstream or related markets, one in relation to restriction of online advertising platforms, and the other in relation to exclusivity arrangements. Whilst anti-competitive agreements will pose the highest risk for franchises, the risk of collective dominance should be borne in mind when acting in a coordinated manner with other franchisees, particularly when refusing to supply or purchase from specific entities.
Recent examples of CMA action in relation to resale price maintenance
The CMA has frequently stated that the behaviour that attracts the highest number of complaints to the CMA is resale price maintenance, also commonly referred to as price fixing. The CMA has taken action in relation to price fixing on a number of occasions, and the consequences are significant, with those complicit in anti-competitive behaviour liable for fines of up to 10% of group worldwide turnover, personal fines and director disqualification. In DAR lighting, the CMA fined DAR, a supplier of domestic light fittings, £1.5 million for restricting the discounts that retailers could offer online. Two years earlier, the CMA fined a number of organisations in the music sector in relation to a chapter 1 infringement, again due to restrictions placed on retailers in relation to online discounting. Importantly, in this case the CMA also accepted a settlement from GAK, a musical instruments retailer, for its engagement in RPM, highlighting that CMA action is not limited to those seeking to impose prices on retailers, and that action will extend to any retailers that are also party to the anti-competitive agreement.
What does this mean for you?
If your business receives a warning letter from the CMA in relation to a potential breach of competition or consumer law, it is important that you act quickly and take advice on the nature of the breach. Acting fast is of vital importance, as failing to respond to letter has historically resulted in significant uplifts to fines and in certain circumstances could lead to daily fines for failing to cooperate.
The vast majority of businesses will not have received a letter from the CMA, however this does not mean that the CMA will not take action against them. The CMA has extensive dawn raid powers, akin to a police search, which are to be strengthened as a result of the Digital Markets, Competition and Consumers Act once it comes into force in January 2025. Whilst sometimes the CMA will issue a letter before taking further action, often it will proceed straight to a dawn raid, for which the organisation accused of anti-competitive behaviour will have no notice. Organisations should therefore have a robust competition compliance policy and training programme for staff, clearly laying out dos and don’ts for competition law compliance, and what to do in the event of a dawn raid. If you believe that you may be party to an anti-competitive agreement, you should seek advice quickly, organisations that whistleblow to the CMA may benefit from leniency and immunity from fines, but only if that organisation is the first to inform the CMA of the anti-competitive agreement.
Franchise models present a number of interesting questions for competition authorities. Historically, franchise agreements have operated in a grey area within competition law, and questions have been raised as to how certain sectors (in particular: fast-food and high-end fragrance) are able to maintain consistent pricing levels across all franchise outlets. In the most recent VABEO guidance the CMA has presented more concrete guidance on how it will interpret competition law in relation to franchises. Importantly, the CMA has indicated that it will view franchise agreements in the same way it treats selective or exclusive supply agreements, providing franchisors with vital insight on what clauses may be included in agreements and benefit from the block exemption. In addition, the concept of brand aura may now be extended to franchise arrangements, granting franchisors with increased control over how their brand is presented, even by franchisees.
Our competition team has over 40 years of combined competition law experience, offering advice and training to a large number of household names. Members of our team have defended the first ever dawn raid brought under the Competition Act 1998, and has been involved in a number of high-profile CMA and OFT investigations. If you require assistance regarding competition compliance, please do not hesitate to contact us.
