The UK Competition and Market Authority (CMA) investigation in the musical instrument sector resulted in fines for anti-competitive behaviour for several sellers for resale price maintenance (RPM). Roland (known for its drumkits) appealed against a fine of over £4m and its appeal was dismissed by the UK’s Competition Appeal Tribunal on 19 April 2021. Worse for Roland, the appeal had unexpected re-percussions - the Tribunal increased the fine to just over £5m! This post looks at the reasons why the fine for Roland increased on appeal …. the case is very cymbalic!
Background
In 2019 and 2020, the CMA investigated and fined several manufacturers and retailers in the musical instrument sector for engaging in RPM. Major companies known for their guitars, keyboards, synthesisers and drumkits were all investigated and fined – Casio, Fender, Korg, Roland and Yamaha – each being fined several millions. In June 2020, the CMA also sent an open letter to the musical instrument industry warning them not to engage in RPM.
Resale Price Maintenance - What is this?
The CMA investigations and fines relate to infringements of Chapter I of the Competition Act 1998 (Chapter I) and/or Article 101 of the Treaty on the Functioning of the European Union (Article 101 TFEU which prohibit anti-competitive agreements or arrangements which restrict, distort or prevent competition. The anti-competitive agreements investigated by the CMA in the musical instruments sector were resale price maintenance agreements or RPM in breach of Chapter 1/Article 101.
RPM occurs where a company operating in an upstream market (such as a producer, manufacturer or supplier) imposes, either directly or indirectly, a fixed or minimum price that the downstream reseller is obliged to observe when reselling the goods. RPM is considered a very serious competition law infringement – a ‘hard-core’ restriction - because it prevents retailers from competing with each other on price and also prevents improvements in quality of service. It completely undermines the resellers pricing freedom and distorts any competition between resellers. It is considered to restrict competition ‘by object’ meaning that the CMA does not even have to show that it has anti-competitive effects. In brief, it is considered a very serious form of price-fixing by the CMA and other competition authorities.
In June 2020, the open letter from the CMA to the musical instrument industry set out what companies need to know about RPM:
• It is illegal for a supplier to prevent a retailer from discounting prices.
• Both the supplier and the retailer are potentially breaking the law if they agree that the retailer will not price below a minimum level.
• An agreement does not have to be explicit – it can be achieved by threats or financial incentives not to sell below a particular price.
• Cheating on an agreement – by a retailer sometimes reducing prices – does not prevent such arrangements being illegal.
• Fines can be increased if the CMA finds that the law has been broken intentionally because businesses are aware that their behaviour restricts competition.
• The CMA can impose fines of up to 10% of worldwide turnover on businesses that break competition law.
• It is important to ensure that everyone in an organisation understands what they need to do to stay on the right side of the law.
Decision against Roland - Serious ‘re-percussions’
In July 2020, the CMA decision found that Roland had entered into agreements with online resellers, which set minimum prices that the retailers could not sell below. Roland monitored resellers to make sure they complied with the pricing policy and had a system in place for threatening and punishing resellers who did not keep in line. Its monitoring system included price tracking software and also getting resellers to report other resellers who were not adhering to the pricing. The CMA decided that Roland UK had engaged in RPM by requiring its electronic drum kits, related components and accessories to be sold at or above a minimum price between 7 January 2011 and 17 April 2018.
Roland received a reduced fine under the CMA’s leniency and settlement procedures. The settlement policy operates where a company admits acting illegally and co-operates in return for a reduced fine. The idea behind the policy is that this helps make the CMA’s investigation more efficient because it can adopt decisions more quickly and save time and resources. It can reduce fines up to 20% for a settlement procedure. The CMA leniency procedure is a policy under which businesses and individuals that provide evidence of cartel activity and co-operate with the CMA’s investigation can benefit from a reduction in or, in some circumstances, complete immunity from penalties.
The Roland infringement decision is addressed to Roland (U.K.) Limited which was directly involved in the infringement, and to Roland Corporation as its parent company (together Roland). The CMA starting point for the calculation of the fine was 19% of the relevant turnover. The amount of the fine was discounted by 20%, under the CMA’s Leniency Programme and by a further 20% under the CMA’s settlement process. The result was that the fine was just over £4 million.
Settlement discount vs appeal – a conun‘drum’
Roland filed a notice of appeal with the Competition Appeal Tribunal (‘CAT’ or ‘the Tribunal’) raising two grounds of appeal. First, the starting point of 19% of relevant turnover for the fine was excessive according to Roland. The CMA (i) overstated the seriousness of RPM generally, imposing a penalty that is on a par with the penalties it imposes for much more serious horizontal infringements , and (ii) failed to take account of the very narrow scope of the RPM that it actually found in the decision. Second, the 20% discount for leniency given by the CMA was too low.
The risk with filing an appeal was that Roland would lose its 20% settlement discount if it lost the appeal. Predictably, because Roland appealed the decision, the CMA applied to revoke the settlement discount of 20% discount for the period 1 January 2013 to 17 April 2018.
Result of the appeal – Snared!
The result was that the Tribunal unanimously rejected Roland’s appeal and granted the CMA’s application resulting in the fine increasing to just over £5 million.
On the first ground of appeal, the Tribunal agreed with the CMA that RPM was a serious infringement and that ‘it is particularly damaging when it takes place online’. In addition, the Court did ‘not accept the premise of Roland’s argument that there is necessarily a significant difference between the seriousness of RPM and the seriousness of horizontal infringement’ and found this argument ‘over-simplistic’. In summary, Roland’s argument that RPM was not as bad as a horizontal price-fixing cartel was given short shrift by the Tribunal.
On the second ground of appeal, the Tribunal was not persuaded that the 20% leniency discount was inappropriate and it did not propose to apply a different discount. The Tribunal found that it was not the speed with which the application for leniency was made that determined the level of the leniency discount, but the value added to the investigation. The Tribunal gave weight to the evaluative assessment made by the CMA of the added value of material given to it and of the level of Roland’s cooperation.
As regards the revocation of the settlement agreement by the appeal, the Tribunal found that it was not unfair to hold Roland to its agreement that, if it chose to appeal the penalty, it would lose the benefit of the settlement discount. The Tribunal agreed with the CMA that if a settling party could retain the benefit of a settlement discount despite appealing the infringement decision, the settlement process would be undermined. As a result of the judgment rejecting Roland’s appeal, the penalty payable by Roland without the 20% settlement discount is just over £5 million.
Summary and analysis
There are several key aspects of this judgment that are relevant more widely to any company operating in the UK:
First, the CMA and the Tribunal are marching to the same beat and share the view that RPM is a serious offence. The CMA’s message in its open letter to the musical instrument industry was clear: the CMA takes RPM seriously and is focused on tackling anti-competitive practices that diminish the many benefits of e-commerce. It considers that online RPM short-changes customers because they cannot shop around for a better deal. The Tribunal judgment confirms that it shares this view of the seriously of this offence particularly online. This is relevant for any company engaging with online resellers to understand that RPM is a highly risky strategy and likely to attract severe fines.
Second, the Tribunal will allow the CMA a lot of discretion in how it applies a leniency discount. The CMA enjoys a lot of discretion in setting the level of the discount because only the CMA is in a position to evaluate whether the material given by a firm helps the investigation. As a result contesting the level of the leniency discount is difficult for any firm. This judgment confirms that the Tribunal will not second-guess the CMA on the value it attributes to any evidence for the purposes of calculating this discount.
Finally, the risk with appealing after settlement is that the fine increase and unfortunately for Roland, this is what happened. This was part of the gamble when filing an appeal after settling with the CMA. For public policy reasons, it was unlikely that the Tribunal would allow Roland retain the benefit of the settlement discount if it lost the appeal. This case serves as a warning to any other company that considers bringing an appeal after settling with the CMA.
(The end- No more bad drum or percussions puns - I will beat it!).