Lessons from Fender’s record CMA fine for restricting online discounting

Posted: 29/01/2020

“Break competition law and you will face serious consequences,” the CMA’s chief executive Andrea Coscelli declared ominously following the Competition and Markets Authority’s (CMA) recent announcement that it had fined Fender Musical Instruments Europe Limited.

Fender is part of one of the world's largest groups manufacturing stringed instruments and amplifiers. It has a global presence and users of its products include some of the most renowned artists in the music industry.

Fender’s £4.5 million punishment represents the largest online retail price maintenance (RPM) related fine imposed in the UK to date. This type of fine is issued when a supplier and its distributor(s) agree to limit the prices the distributors can charge customers for the supplier's products [1]. As a result of the CMA’s investigation, Fender has admitted that it pursued a policy aimed at restricting UK retailers from discounting their online prices.

The CMA’s investigation

It isn’t clear what set off the investigation into Fender that led to the £4.5 million fine. Some in the media have speculated about a tip-off in Germany. The CMA nevertheless found reasons to suspect breaches of chapter I of the Competition Act 1998 (CA) and article 101 of the Treaty on the Functioning of the European Union.

In April 2018, the CMA launched its investigation and carried out concurrent inspections of Fender’s premises. The legal basis for the inspections was section 27 CA. Some difficulties arose when a senior officer of Fender failed to hand over certain of his notebooks, which led to a separate penalty of £25,000.

In May 2019, the CMA confirmed that it had decided to carry on with its investigation into alleged anti-competitive agreements in the musical instruments and equipment sector. Subsequently, in October 2019, the CMA published a statement of objections alleging that Fender had breached elements of competition law by restricting online discounting for its guitars. Then, more recently, the CMA published a press release announcing Fender’s fine [2].

Evidence of an agreement and/or concerted practices

The CMA’s non-confidential decision has not yet been published. However, its recent press release provides examples which will have been used to demonstrate an informal agreement of RPM between Fender and the group’s UK retailers. The CMA uncovered that Fender periodically demanded that UK retailers increase their online prices after being prompted that the retailers were not respecting its pricing policy. The CMA also retrieved emails and texts demonstrating this from Fender’s IT servers and mobile phones despite certain employees’ deliberate attempts to write down as little as possible on the subject.

A record breaking fine

The CMA is hoping that the size of the fine it has imposed on Fender will deter deliberate flouting of competition law rules.

In his announcement, the CMA’s chief executive said: “The fact the CMA has imposed large fines on major musical instrument firms Casio and Fender in a matter of months should be a lesson to this industry and any other company considering illegal behaviour [3].”

Indeed, the penalty comes after Casio Electronics was fined £3.7 million in 2019 for the same behaviour.

Comment

There are a number of lessons that companies can take away from the CMA’s decision:

• they should be aware that online RPM is high on the CMA’s radar. In the decision, the CMA justified its interest on consumer protection grounds: ‘[Fender’s illegal behaviour] often leads to customers missing out on the best deals because, even when they shop around, they find all retailers tend to be selling at a similar price’ [4]. The European Commission has also been paying attention to RPM and, in July 2018, fined four companies for prohibited behaviour: Philips, Pioneer, Asus and Denon;
• it is yet another example of companies struggling to find the balance between maintaining physical distribution and providing online discounting. Companies should take this decision as an opportunity to check that their current pricing policy and practices comply with competition law;
• parent companies should not assume they are protected from fines issued to their subsidiaries. Here, the CMA’s infringement decision was also directed at Fender’s parent company. Under UK and EU competition law, companies belonging to the same corporate group will frequently constitute a single undertaking and thus can be held jointly liable. The question of liability will be determined by whether, at the time of the infringement, the parent company could and did exercise decisive influence over the conduct of its subsidiary, so that the two formed part of a single economic unit;
• companies can hugely benefit from cooperating with the CMA. The CMA could have fined Fender an amount equivalent to up to 10% of its global sales. The sum was, however, discounted by 60% under the CMA’s leniency programme. Fender was given an additional 20% discount to reflect settlement. In other words, the fine was £4.5 million instead of approximatively £14 million.

This article has been co-written with Olivier Jacquelin, a trainee solicitor in the commercial, IP and IT team.

[1] RPM is defined at paragraph 48 in the Commission’s Vertical Guidelines as ‘agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer’.

[2]Competition and Markets Authority, Guitar maker fined £4.5m for illegally preventing price discounts, press release available at < https://www.gov.uk/government/news/guitar-maker-fined-4-5m-for-illegally-preventing-price-discounts >.

[3] Ibid.

[4] Ibid.

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