As non-essential retail stores get set to re-open, we share below some key recommendations for suppliers to help minimise competition law risk over the coming weeks and months.
Current market conditions are tempting some people to reach out to their counterparts at competitors – but any competitor contact needs to be managed carefully from a competition law perspective.
Whilst it may often be the case that a problem shared is a problem halved, that does not generally hold true when it comes to contacts between competitors.
Through the eyes of our clients, over the past few weeks we have seen several instances of employees exposing their businesses to competition law risk by contacting their counterparts at competitors to discuss commercial challenges arising in relation to COVID-19, without giving consideration to the competition law position.
Any contact with a competitor is potentially sensitive and should be properly risk-assessed in advance. Genuinely well-intended cooperation between competitors may well be lawful, but the (hopefully well-intended) motivations of the individuals concerned is not necessarily determinative of the legal position (even well-intended contacts can risk having unintended anti-competitive effects) and each scenario needs to be carefully considered on its facts. The risks associated with getting it wrong are significant.
Do therefore remain alert to the risks associated with contacts with competitors. Ensure that employees recognise that competition law continues to apply and that they should seek advice before having any meaningful contact with competitors.
As retailers seek to make up for lost sales, suppliers must be careful to avoid interfering with retailers’ commercial freedom.
It is no coincidence that the retail sector has been subject to considerable competition law scrutiny over the past few years.
For the Competition and Markets Authority (CMA), enforcing competition law in relation to resale price maintenance and internet sales restrictions (both practices seen as directly harming consumers) has been one of its top priorities, leading to a series of high-profile decisions, large fines and director disqualifications.
The reopening of the retail sector risks amplifying the compliance risks that suppliers need to manage in this regard. In an effort to make up lost sales and shift excess stock, retailers may choose to offer significant discounts, increase their online sales activities, seek to sell in novel ways and/or target customers from outside of their usual areas of operation.
Suppliers should remind their staff to seek guidance before doing anything that could risk being construed as interfering in dealers’ commercial freedom (including their ability to determine their own retail prices or resell online), otherwise they risk exposing themselves to considerable competition law risk. The line between legitimate conduct to protect the brand and anti-competitive conduct is often a fine one: infringements in this area are viewed as serious and, as such, are heavily penalised by the CMA.
Suppliers who operate selective distribution systems will need to take care that any support they offer to their authorised retailers does not risk undermining the integrity of their selective distribution network.
Ensuring that selective distribution systems comply with competition law requires a degree of discipline and self-policing by suppliers.
It is an inherent part of selective distribution, for example, that all authorised retailers must meet the supplier’s specified quality criteria, and that appropriate action should be taken against any retailer who fails to meet the criteria or who sells to an unauthorised reseller outside of the network.
The reopening of the retail sector is likely to bring pressure to bear on the operation of selective distribution systems. Compliance with ‘COVID-secure’ rules for their premises might, for example, preclude (or, at least, make it more difficult) for some retailers to comply with aspects of the supplier’s quality criteria. Or, perhaps, financial constraints might impede certain retailers’ ability to comply.
Advice should be taken before relaxing any aspect of the network and/or before taking steps that might risk being perceived as giving certain retailers more favourable treatment than others. Ultimately, this is an area where pragmatic temporary workarounds should be achievable, provided appropriate care is taken to identify and manage any associated competition law risk.
Take care to manage any supply constraints appropriately.
For many businesses, supply chains remain under considerable pressure and product shortages (or delays) continue.
Generally speaking, competition law allows suppliers to decide for themselves what products they will supply and to whom.
However, to the extent that a supplier may hold a dominant market position, additional considerations come into play. Product allocation systems that risk being perceived as subjective, inconsistent or favourable to some dealers over others, or that appear to benefit the supplier’s direct sales over third party retail, potentially risk being challenged as an abuse of dominance.
It is therefore important that suppliers have in place appropriate procedures for determining what product they will supply and to whom in times of shortage.
Understand, however, how you can lawfully support your retailers - competition law is not all about the “don’ts”.
Perhaps inevitably, competition law compliance is often perceived as a series of “don’ts”. It is however equally important to understand the “dos”.
In the context of COVID-19, there are many ways in which suppliers may legitimately work with their retailers to help them re-open their sales premises safely and, hopefully, return towards normal trading conditions.
There are however limits and, accordingly, appropriate care should be taken. Most importantly, suppliers’ engagement with retailers should not impinge on retailers’ commercial freedom or lead to coordination or any sharing of information between competing retailers regarding commercially sensitive matters.
Don’t let your guard down on compliance initiatives
In many respects, times of pressure and crisis can lead to normal safeguards being (perhaps unconsciously) relaxed, compromising an effective compliance culture and making competition infringements more likely to occur.
With this in mind, we would recommend that suppliers refresh employees’ familiarity with competition law, for example, through a webinar refresher session or rolling out e-learning.
The compliance messaging should be supported by senior management engagement and by legal teams’ metaphorical doors being open to staff who want to seek guidance or discuss issues that they come across.
Time will tell, but in the coming months we may well see competition authority investigations into certain businesses’ conduct during the current pandemic. Ensuring an appropriate awareness of competition law remains the key starting point in enabling businesses to identify and manage – and, ultimately, minimise – their potential exposure to competition law risk.
Our underlying message to suppliers in the retail sector is a simple one: subject to very limited exceptions, competition law continues to apply; COVID-19 does not create any excuses for acting in a manner that would ordinarily infringe competition law; and the coming weeks may well exacerbate many of the day-to-day compliance risks that suppliers face, as the retail sector re-opens in a very different world to the one in which it was operating two or three months ago.