A competition-centric probe by the European Commission reportedly centers on fashion brands’ pricing practices. Sources told Reuters on Monday that the Commission is looking into how luxury brands “set prices of handbags and leather goods for distributors,” and in particular, is “investigating whether the companies are imposing consumer prices on multi-brand retailers [that] sell their products and threatening not to sell to them if they do not respect these prices.” The probe first made headlines in April when the Commission confirmed that it had raided a number of fashion brands’ headquarters in connection with concerns of potential violations of the European Union’s competition law.
The European Union regulator has not identified which fashion companies are under its microscope. Kering, however, confirmed in April that it is among the entities that the Commission is targeting as part of “a preliminary investigation into the fashion sector in several countries under EU antitrust rules.” At the same time, the Commission disclosed that the competition-centric probe centers on potential violations of the EU’s prohibition against cartels and other restrictive business practices as set out in Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and Article 53 of the European Economic Area Agreement.
Resale Price Management
A potential clamp down on pricing restrictions in the fashion/luxury realm is not surprising given that “stipulating the price at which products can be resold continues to be a concern to the Commission (as is the case with national competition authorities in Europe and globally),” K&L Gates stated in a note ahead of the EU Commission’s adoption of a new Vertical Block Exemption Regulation and corresponding guidelines last year. After all, EU competition law views resale price maintenance (“RPM”) – or an upstream supplier’s restriction of a downstream reseller’s ability to determine product prices – as a hardcore restriction subject to Article 101(1) of the TFEU, which prohibits agreements that restrict, prevent, or distort competition within the EU and that have an effect on trade between EU member states.
“Price fixing is prohibited for companies in a vertical relationship,” Bird & Bird’s Vojtech Chloupek previously stated in a comment on EU competition law. This means that a brand, for example, may not either directly or indirectly restrict a third-party retailer’s ability determine its own resale price of that brand’s goods, such as by imposing minimum prices. Chloupek cited examples of indirect forms of RPM, including “fixing margins, setting a maximum discount, requiring that retailers obtain the manufacturers’ consent to revise their prices, intimidation, and the use of price reporting and monitoring systems putting pressure on retailers to deter discounting, warnings and similar practices.”
This is likely where fashion/luxury brands come in. While at least some high-end luxury brands have shifted away from wholesale to e-concession distribution models in order to exercise greater control over the conditions in which their products are sold, many brands still maintain wholesale arrangements with third-party retailers like Net-a-Porter, MyTheresa, Matches, etc., thereby, subjecting them to EU competition rules that govern the terms of supplier-reseller relationships.
At issue for the Commission is almost certainly the quiet – but well-established – practice of brands mandating the minimum prices at which their wares can be offered by wholesale partners. Such pricing terms are routinely presented to retailers by their brand partners as pricing “suggestions” since non-binding pricing suggestions are a permissible practice under EU competition law. However, the voluntary nature is often just for show, with sources for TFL saying that if third-party retailers do not adopt brands’ pricing “recommendations,” they run the very-real-risk of those brands cutting off access to supply as a result.
This puts the onus on multi-brand retailers to “play nice” with big brands, in particular, in order to maintain their key brand-retailer relationships. And it works: TFL’s sources say that while retailers may take liberties when it comes to the pricing of smaller brands’ wares (from initial price tags to sales/markdown pricing for unsold stock), they tend to avoid veering from bigger and/or conglomerate-owned companies’ pricing “suggestions” in order to avoid conflict with these valuable, revenue-driving partners.
Commission Crackdown
Should the Commission take action against fashion industry entities in connection with potential price setting behaviors, it would not be the first time. In July 2018, for instance, the Commission fined four consumer electronics companies €111 million after finding that the companies had allegedly restricted online retailers from deciding the prices of their products by using pricing algorithms. A bit more recently, the Commission levied a €40 million fine in Guess in December 2018 for restricting the ability of its third-party retailer partners to decide on the price of Guess products.
As we previously reported, Guess’ sales terms allowed it to impose a minimum resale price and required its authorized distributors to respect these prices or risk paying damages and/or Guess refusing any future supplies. The European Commission confirmed that these restrictions were in breach of EU competition law.
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