Setting the Retail Price: A Legal Update for the Direct Selling Industry

When RPM applies
RPM can occur directly by the supplier setting specific resale prices or specific minimum resale prices or requesting the reseller to increase its price when the reseller complies with that request. But RPM can also occur indirectly, for example by the supplier:

• fixing the distributor margin,
• fixing the maximum level of discount a distributor can grant from a prescribed price level,
• making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level,
• imposing minimum advertised prices which prohibit the reseller from advertising below a level set by the supplier, linking the prescribed resale price to the resale prices of competitors,
• making threats, or issuing warnings or penalties, or delaying or suspending deliveries, or terminating a contract, in relation to the observance of a given price level.

Minimum advertised prices
Although in principle minimum advertised prices leave the reseller free to sell at a price that is lower than the advertised price, they disincentivise the reseller from setting a lower sale price by restricting its ability to inform potential customers about available discounts, thereby removing a key parameter for price competition between retailers, and so are treated by the CMA as an indirect means of applying RPM.

It is permissible for the supplier to recommend a resale price if this ‘recommendation’ does not in practice amount to a fixed or a minimum sale price as a result of either pressure from, or incentives offered by, the supplier. An example of an incentive to apply a certain price level would be the reimbursement by the supplier of promotional costs incurred by the reseller subject to the condition that the reseller complies with the recommended or maximum resale price. An example of a disincentive to lower the price would be where the supplier threatens to cut further supplies in response to a deviation by the reseller from the recommended or maximum resale price.

How the CMA is showing its teeth to suppliers breaching RPM rules
These prohibitions are policed and enforced by the Competition and Markets Authority (‘CMA’) and the CMA has successfully brought actions against suppliers for unlawful RPM. Previous cases include:

1. Musical instruments manufacturer Roland was fined £4 million for illegally preventing online price discounts in July 2020. Between 2011-2018, Roland set minimum prices for its electronic drum kits and told resellers not to sell below these prices. It used price-monitoring software to police this minimum pricing policy. The fine was high because senior management was involved in setting this unlawful policy and knew what they were doing was wrong. The CMA notes that the use of price monitoring software and similar price reporting does not on its own constitute RPM and may, for example, allow suppliers to intervene swiftly in case of price decreases by competitors or allow resellers to request such intervention by the supplier. However, the CMA also notes that such price monitoring and reporting is commonly a feature of arrangements that do amount to RPM, such as in this case.
2. The National Lighting Company (‘NLC’) was fined £2.7 million for restricting online prices in June 2017. The NLC supplies light fittings to a range of retailers who then sell them on. The CMA found it imposed a minimum price on online sellers, who then had to retail goods at, or above, this price. NLC tried to avoid detection by not committing these agreements to writing.
3. Ultra Finishing (independent suppliers of bathroom products in the UK) was fined £826,000 for restricting online prices in April 2016. From 2012-2014 Ultra issued to retailers so-called’recommended’ retail prices for online sales of its Hudson Reed and Ultra branded products. Despite being described as recommendations, which are lawful, Ultra threatened retailers with penalties for not pricing at or above the ‘recommended’ price, including charging them higher prices for products, withdrawing their rights to use Ultra’s images online, or ceasing supply.

CMA acting against suppliers using RRPs to signal the minimum price
The most recent case is the ‘Där Lighting’ case in March 2022 where Där was fined £1.5 million for using selective distribution arrangements designed to support a pricing policy under which resellers would not advertise or sell online domestic lighting products below a minimum price specified by Där.

The CMA considers it legitimate for a supplier to require its resellers to display the correct recommended retail price (RRP) when advertising its products. However, Där used the brand guidelines relating to the correct display of the relevant RRPs (together with its price lists), both to signal the correct RRPs to resellers and as a means to signal the minimum price. And, from time to time, to instruct them to revert to the minimum price.

Där’s pricing policy which in practice was supported by Där’s implementation and enforcement of its ‘brand guidelines’ under the selective distribution agreements, created “an environment that seemed inimical to discounting in the minds of resellers and so engendered a perception amongst its resellers that the selective distribution arrangements and brand guidelines allowed Där to prevent discounting”.

The distinction between the agency and distributor models in direct selling 
For direct selling companies there is a key distinction between an agency model and a distributor model for the purposes of RPM. Under the distributor model, the direct seller acts as a reseller: the direct seller purchases the product from the company and resells the product on its own account to the customer. It is unlawful for the company to impose RPM on the direct seller under the distributor model.

Under the agency model, the direct seller acts as an introducer or intermediary: the direct seller introduces the customer to the company and the company sells the product directly to the customer. Under the agency model the company is free to set the price, or prices, at which it will sell its products to customers and is equally free to require its direct sellers to advertise and market its products at those prices.

Where the lines become blurred
The distinction between the agency model and the distributor model can become unclear. For example, if a direct seller acting as a distributor obtains an order from a customer which the direct seller passes on to the company for fulfillment, with the company making a ‘back-to-back’ sale of the relevant product to the direct seller and delivering the product directly to the customer, this can then in practice appear very similar to the agency model.

The CMA also notes that the agency model should entail the company bearing the commercial and financial risks relating to the sale. Where that is not the case, then an obligation preventing or restricting the agent from sharing its remuneration with the customer is unlawful, and the agent should be free to reduce the effective price paid by the customer without reducing the income due to the company.

Exceptions to the RPM prohibition

• A minimum advertised price can be used to prevent a particular distributor from using the product of a supplier as a loss leader. Where a distributor regularly resells a product below the wholesale price, this can damage the brand image of the product and, over time, reduce overall demand for the product and undermine the supplier’s incentives to invest in quality and brand image. In that case, preventing that distributor from selling below the wholesale price, by imposing on it, a targeted minimum resale price or minimum advertised price may be considered on balance pro-competitive.

The CMA may now be more open to suppliers making efficiency claims than it was pre-Brexit, and it is helpful that the CMA has now provided examples of circumstances in which potential efficiencies may be claimed and considered pro-competitive. However, it is still for the supplier to put forward concrete evidence to substantiate its claim that RPM may lead to efficiencies and that all of the conditions for exemption are satisfied.

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.