After a gruelling seven-year competition probe, the Office of Fair Trading (OFT) has finally imposed fines of £225m for the fixing of resale prices of tobacco products in the UK on several leading tobacco manufacturers and retailers.
Background
The OFT found that tobacco manufacturers Imperial Tobacco and Gallagher had entered into a series of individual arrangements with several leading retailers, including household names, such as Asda, The Co-operative Group, Sainsbury’s and Morrisons. Tesco was also involved but the case against it was dropped for lack of evidence. Several supermarkets received the benefit of a reduction in fines under the OFT’s leniency programme, as they pro-actively volunteered information and fully co-operated with the enquiry.
Under the price-fixing arrangements, the retail price of a certain brand of tobacco products was linked to that of a competing manufacturer’s brand. These price shadowing arrangements restricted the ability of retailers to decide the products’ selling prices independently. If one manufacturer changed the price of a product, the supermarket concerned would follow suit with a corresponding change in the price of the competing brand.
These arrangements reduced the incentive for tobacco companies to cut prices to win market share. It also gave them greater comfort that raising prices would not cost them lost sales to competitors with cheaper products. This removal of the risk of price competition was to the detriment of consumers.
Several of the tobacco manufacturers and supermarkets defended these practices by arguing that the arrangements with retailers were designed to allow brands to be priced competitively and ensure that promotional discounts given to retailers were passed on to consumers.
Imperial Tobacco, Morrisons and The Co-operative Group have already stated their intention to appeal against the results of the OFT’s decision to the Competition Appeal Tribunal.
Implications
The dispute is highly significant for the following reasons:
- The OFT’s decision is a clear signal to the manufacturers and retailers of products in all sectors that they risk substantial penalties if they do not look very carefully at whether their pricing arrangements with their trading partners fully comply with Competition Act 1998 (the 1998 Act).
- One of the disturbing facts of this dispute is that the huge fines handed down did not relate to hardcore cartel activity but to a series of arrangements that were more peripheral and were probablyintended to test the limits of competition law.
- The OFT is undoubtedly looking to break new ground in the scope of prohibition under Chapter 1 of the 1998 Act as it relates to unlawful pricing policies. It is also testing whether its wide construction of companies’ duties under that 1998 Act will stick.
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Two of the central issues of this dispute are what constitutes proper business behaviour, and what is permitted in discussions between suppliers and retailers. There is now a substantial question mark over what suppliers can and cannot talk about with their retailers or customers concerning the promotion of their products. This uncertainty will be a matter of concern to many companies.
Although many of the key issues of this dispute may be clarified after the relevant appeals have been heard, it underlines the importance for companies of taking immediate legal advice to ensure that pricing, discounting and promotional policies are fully compliant with all aspects of competition law.
