Competition law: Spotlight on the musical instruments sector

The CMA has issued further fines against companies engaging in retail price maintenance in the musical instruments sector. We summarise the recent decisions

04 August 2020

 

Over the last year, the UK Competition and Markets Authority ('CMA') has cracked down on a number of musical instrument companies, bringing the total fines in the industry to nearly £14 million.

In October 2019 and January 2020, the CMA fined Casio and Fender respectively for engaging in retail price maintenance ('RPM'). Most recently on 29 June 2020, the CMA imposed fines of £1.5 million on Korg and around £4 million on Roland for engaging in RPM. On 17 July 2020, the CMA also fined GAK, a musical instruments retailer, and Yamaha Music Europe ('YME') for engaging in RPM.

The CMA has also issued an open letter to the industry and written to almost 70 manufacturers and retailers across the sector, warning them that they should not participate in RPM and urging companies to comply with competition law.

The Chapter I Prohibition

The CMA’s recent fines in the musical instruments sector relate to infringements of the Chapter I of the Competition Act 1998 (the 'Chapter I Prohibition') and/or Article 101 of the Treaty on the Functioning of the European Union ('TFEU'). This legislation prohibits agreements between undertakings (or associations of undertakings), which have as their object or effect the restriction, distortion or prevention of competition within the UK and EU respectively.

These agreements do not necessarily have to arise between companies operating at the same level of the supply chain (such as actual or potential competitors) but can arise between non-competing companies such as a producer and retailer.  In particular, the Chapter I Prohibition and Article 101 of the TFEU prohibit agreements which fix prices, impose fixed or minimum retail prices, or allocate customers or markets, and also cover restrictions on online sales. 

The CMA can fine companies that infringe competition law up to 10 percent of their worldwide turnover and have their agreements rendered void and unenforceable. In addition, the parent companies of the companies that commit the infringement can be held jointly and severally liable for the fines.

Retail Price Maintenance

RPM is a situation where a company operating in the upstream market (such as a producer or supplier), imposes either directly or indirectly a fixed or minimum price that the downstream retailer must observe when reselling the goods. RPM is considered to be a ‘hard-core’ restriction, which means that it does not benefit from the Vertical Agreement Block Exemption Regulation. In its simplest form, RPM can remove the ability of retailers to compete with each other on price and hinder improvements in the quality of their service (see the chart below). At the same time, RPM is considered to restrict competition ‘by object’, which means that the CMA does not have to prove that it results in any actual anti-competitive effects on the market.

Diagram for WLU Web version

Korg and Ronald’s conduct

The CMA considered that Korg and Roland entered into agreements respectively with online resellers, which set minimum prices that the retailers could not sell below. In both cases, the CMA has published case studies that outline the conduct undertaken by Korg and Roland. According to the case studies, both Korg and Roland monitored the resellers to make sure that they complied with the pricing policy and threatened (and sometimes applied) sanctions where the resellers did not comply with the policy.

The CMA also found internal documents in both cases suggesting that senior employees at Korg and Roland were aware that RPM is unlawful. For example, the CMA found that one employee at Korg internally warned that Korg needed 'to stop this before we find ourselves being fined 10 percent of […] turnover for the past 10 years!'

In light of this conduct, the CMA fined Korg and Ronald (as well as their respective parent companies) for engaging in RPM. Both the fines included a 20 percent reduction given that the companies entered into a settlement agreement with the CMA. In addition, the fine imposed on Ronald also included a 20 percent reduction and full immunity from fines for certain periods of the infringement under the CMA’s leniency programme.

GAK and YME’s conduct

The CMA found that GAK and YME agreed that GAK would not discount the online price of certain YME musical instruments below a minimum price. YME was granted full immunity from fines because it was the first to bring the conduct to the attention of the CMA. However, the CMA imposed a fine on GAK and the amount was increased by 15 percent after it emerged that the activity appeared to have continued after GAK received an advisory letter from the CMA, making it aware that there was evidence suggesting it might be engaging in RPM.

Ultimately, GAK entered into a settlement agreement with the CMA and agreed to pay a maximum fine of £278,945. The fine included a 20 percent discount to reflect savings due to the company’s admissions and co-operation with the CMA under the settlement agreement. The full decision is yet to be published, however this the first time that the CMA has taken enforcement action against a retailer in a RPM case.

The CMA’s settlement and leniency procedure

In the cases mentioned above, the companies received reduced fines under the CMA’s settlement and leniency programmes. The CMA’s settlement procedure is designed to help the CMA conduct its investigations efficiently, resulting in the early adoption of decisions and resource savings. Under the CMA’s settlement procedure, companies can receive a maximum reduction on fines of up to 20% if they admit to the CMA that they have committed an infringement of competition law, terminate the unlawful conduct, agree to pay a fine and fully co-operate with the CMA.

The CMA’s leniency programme is designed to encourage companies to approach the CMA with information about cartel activity (which includes RPM) given the difficulties authorities face in uncovering such conduct. Under the leniency programme, companies can receive full immunity or a reduced fine in return for providing information to the CMA that enables it to investigate a case (i.e. before it has issued a statement of objections). There are three types of leniency:

  1. Type A immunity– this applies to the first applicant to report and provide evidence of a cartel to the CMA if the CMA does not have a pre-existing investigation or sufficient information about the reported conduct. In this case, the CMA must grant the successful applicant immunity from any fine.
  2. Type B leniency – this applies to the first applicant to report and provide evidence of a cartel, when the CMA is conducting a pre-existing investigation into the reported conduct. In this case, the CMA has discretion to grant the applicant immunity or up to a 100% discount on any fine.
  3. Type C leniency – this applies where another company has already reported the cartel activity, or where the applicant has coerced another company to participate in the cartel activity. In this case, the CMA has discretion to grant the applicant up to a 50% discount on any fine.

In addition, in order to qualify for leniency, a company must admit to the CMA that they have committed an infringement of competition law, terminate the unlawful conduct and fully co-operate with the CMA. Companies can benefit from leniency and settlement discounts simultaneously. 

The CMA is currently consulting on its ability to exercise its discretion to grant Type B leniency in RPM cases. It is proposing to clarify the way in which it will exercise its discretion in granting Type B leniency in RPM cases such that immunity would not be granted and the CMA would not grant a reduction in the level of any fine of more than 50 percent. The consultation is due to close on 28 August 2020.

CMA’s price monitoring tool

A common trend that the CMA observed in investigating the cases for RPM in the last 12 months was that the monitoring of price deviations from the minimum price was exacerbated through the suppliers’ use of price tracking software.

In an era where price information becomes more transparent through online markets, and in taking stock of the increased enforcement in the musical industry sector for RPM, the CMA is set to develop a tool to 'monitor pricing and detect suspicious activity in other sectors in the future'.

How can we help?

Burges Salmon has significant experience advising companies on the application of competition law to a broad range of supply and distribution arrangements, including online sales, as well as the CMA’s leniency and settlement procedures. If you have any questions in relation to the issues raised in this article, please contact Chris Worrall, or your usual Burges Salmon contact.

Written by Sandra Mapara and Paschalis Lois

Key contact

Chris Worrall

Chris Worrall Partner

  • Head of Competition
  • Mergers and Acquisitions
  • Financial Services

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