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The supply chain has been described as the interconnected journey that components and goods take before their assembly and sale to customers. In practice, from the sourcing of raw materials to the sale to end customers, a myriad of actors intervene in a complex series of interlocking contractual relationships. When things go wrong, parties to supply or distribution agreements will bring their contractual disputes before courts and reliance on private enforcement is therefore inherent to the operation of supply chains. However, public enforcement also plays a significant role. Indeed, competition authorities actively enforce the competition rules in the supply chain context. Violations of the competition rules can lead to hefty fines, and competition authorities tend not to be bashful in exercising their fining powers.
Regulatory and compliance challenges
Businesses participating in a supply chain may enter into agreements with partners active at different levels of the supply chain. Some of these agreements will clearly and unequivocally improve economic efficiency within a chain of production or distribution – for instance, by facilitating better coordination between the participants in the supply chain or reducing transaction and distribution costs. In some cases, however, there is a risk that anticompetitive effects can outweigh these efficiency-enhancing effects due to anticompetitive restrictions.
Below are some of the antitrust pitfalls that businesses should be aware of in the supply chain context.
Resale price maintenance
Supply or distribution agreements that restrict a buyer’s ability to freely determine its resale price, including those that establish a fixed or minimum sale price, are strictly prohibited and amount to resale price maintenance (RPM). RPM is a good example of a regular trigger for aggressive intervention by the competition authorities in Europe. In fact, RPM is the most common practice area that the UK competition authority writes warning and advisory letters to businesses about. RPM is viewed as a very severe anticompetitive restriction in Europe and can rarely be justified, except in very specific circumstances. Take, for example, the introduction of a new product where RPM may be an efficient means to induce distributors to better consider the manufacturer’s interest in promoting that product, or RPM may be necessary when organizing a coordinated short-term low-price campaign, particularly in distribution systems where the supplier applies a uniform distribution format. In principle, maximum resale prices or resale price recommendations are allowed. However, there is a fine line between recommending a price and falling into prohibited RPM. For example, if recommended prices are combined with incentives to follow a specific price level or disincentives to reduce a price, this may amount to RPM and be subject to hefty penalties. Most competition authorities in Europe have taken action against RPM in the past few years. The German competition authority, which has adopted a vigilant stance toward RPM enforcement, has most recently imposed a considerable fine of €16 million on an electronics manufacturer. Similarly, the most recent fines by the European Commission, totaling more than €111 million for RPM, were imposed on four different electronics manufacturers. While the electronics sector has been under scrutiny, RPM is sector-agnostic. In recent years, we have seen enforcement in a wide range of sectors, including the home appliances, cosmetics, food and beverage industries and animal nutrition.
Territorial and customer restrictions
Businesses active across the EU should be extremely cautious in designing and implementing their sales strategy in compliance with the EU competition rules as these specifically prohibit restrictions to trade within the internal market and impediments to the free movement of goods within it. A supplier/manufacturer is thus not allowed to:
- Limit the territories or customers to which wholesaler customers can resell their products;
- Prevent exclusive distributors in certain EU member states from replying to unsolicited sales requests from customers (also known as “passive sales”) located in other member states; or
- Subject such passive sales to its prior authorization.
Exchange of commercially sensitive information
Exchanges of commercially sensitive information between competitors in a supply chain context are another major antitrust red flag. Competitors should not discuss and/or exchange information on their future pricing intentions, costs, production capacities, commercial strategies and business plans, inter alia.
It is noteworthy in an era where the sustainability of supply chains has become a priority, that certain exchanges of information related to sustainability issues are tolerated, such as on the sustainability characteristics of an organization’s supply chain. Thus, in practice, sharing information about suppliers that have (un)sustainable value chains or use (un)sustainable means of transportation will, in general, be allowed because this may help companies fulfill their sustainability due diligence obligations under national or EU law. Businesses can also set up joint databases containing information on the sustainability of their suppliers, producers or distributors, provided there is no obligation to exclusively contract with sustainable entities or cease contracting with unsustainable entities.
Refusal to supply
Additional restrictions apply to businesses in a dominant position. It is prohibited for a dominant supplier to refuse to supply a customer in a member state to prevent the resale of products in neighboring EU countries where prices to end customers are higher. Similarly, ceasing the supply of products in one member state to prevent them from being imported into another member state where the supplier is selling these products at higher prices is also prohibited.
As can be seen from the above, the competition rules affect a variety of aspects and different levels of the supply chain. Companies need to be well aware of these antitrust pitfalls in order to minimize their risk of coming within the enforcement radar of the competition authorities.
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