Retail Matters June 2010

OFT imposes £225m fine against tobacco manufacturers and retailers over pricing practices
 
In April the OFT found that two tobacco manufacturers and ten retailers engaged in unlawful practices in relation to retail prices for tobacco products in the UK, and imposed fines totalling £225 million. This is the largest total fine imposed by the OFT to date in a case under the Competition Act 1998. The fine on Imperial Tobacco (£112 million) is the second highest individual fine following that on British Airways (£121.5 million).

The tobacco manufacturers involved were Imperial Tobacco and Gallaher, and the retailers Asda, The Co-operative Group, First Quench, Morrisons, One Stop Stores (formerly T&S Stores), Safeway, Sainsbury's, Shell, Somerfield and TM Retail. Various parties have indicated their intention to appeal but nevertheless this is a highly interesting case from the perspective of vertical arrangements (i.e. between parties at different levels of the distribution and supply chain) with suppliers and retailers.

The OFT concluded that each manufacturer had a series of individual arrangements with each retailer whereby the retail price of a tobacco brand was linked to that of a competing manufacturer's brand. These arrangements restricted the ability of these retailers to determine their selling prices independently and breached the Competition Act 1998.

The arrangements condemned were therefore not classic "horizontal" price fixing between competitors, but vertical price matching arrangements.  There is no allegation of direct horizontal collusion between competitors.  Nevertheless this case underlines the sacrosanct principle of Competition Law that a retailer must be free to set its own resale prices, totally independently. Manufacturers may impose maximum resale prices or issue recommended resale prices (provided they remain mere recommendations with no sanction for non-respect), but anything which dictates the absolute level of a resale price or delivers a minimum resale price - whether by reference to another price or any other formula - is strictly prohibited.

The infringements span different periods between 2001 and 2003 for different parties, and related variously to the markets for UK duty paid cigarettes, hand rolling tobacco, pipe tobacco, and cigars and cigarillos.  Certain parties have benefitted from discounts in their fines under the OFT's leniency programme, which provides co-operating parties with a discount in fines where they proactively volunteer information which assists the OFT's investigation. Sainsbury's had alerted the OFT to the infringements and as the first to apply to the OFT for leniency, it receives complete immunity from fines.

In addition,  various other parties received reductions in their fines because, following receipt of the OFT's Statement of Objections issued in April 2008, they each admitted liability in respect of the infringements alleged against them and agreed to a streamlined procedure enabling parts of the case to be resolved more quickly so reducing the costs of the investigation.

Having considered representations made by the parties, the OFT has decided not to pursue allegations made in respect of the relationship between each of Imperial Tobacco and Gallaher with Tesco.  The OFT noted that it had insufficient evidence to proceed to an infringement finding. For the same reason, the OFT has also decided not to pursue additional allegations relating to the indirect exchange of proposed future retail prices against various parties.

Imperial Tobacco in particular has rejected the OFT's finding that it breached the Competition Act. It has publicly indicated its intention to appeal and stated that the OFT's decision "relates to certain promotional arrangements that Imperial Tobacco had entered into with multiple retailers prior to August 2003. Imperial Tobacco categorically denies that these promotional arrangements had the purpose or effect or restricting competition. The purpose was to encourage our brands to be priced competitively and that the promotional discounts given to retailers would be passed on to consumers in the form of lower retail prices. Far from being anti-competitive these arrangements were pro-competitive and to the benefit of consumers. Retailers remained free to set their own prices".  It will be interesting to see whether such claims are upheld on appeal.

For further information on competition law please contact
Jonathan Branton
Tel: 0845 165 5025
E-mail: jonathan.branton@cobbetts.com