Resale Price Maintenance (RPM), Competition Law and Penalties for Breaches are key considerations for any growing franchise.
Fraser Brown Recently presented at the British Franchising Association's (BFA) legal update, speaking on the topic of price fixing and RPM.
Giving clarity to the matter, The Competition and Markets Authority published an open letter, advising resellers and suppliers that Resale Price Maintenance (RPM) is something which they must be aware of and be cautious to avoid.
This letter highlighted the different practices that can be identified as illegal Resale Price Maintenance (RPM) and includes the use of Minimum Advertised Price (MAP) policies, and warned suppliers and retailers of the serious consequences that could be faced if found to be engaging in illegal RPM.
However, RPM is not a matter that exclusively affects resellers and suppliers, and is something which all businesses should be aware of, and particularly those in the franchising sector.
What is RPM?
RPM refers to the situation whereby one party attempts to restrict the ability of the other to price its goods and services freely. An example of this is where a Franchisor imposes a minimum price which a Franchisee is prohibited from pricing below. The effect of this is that the Franchisee would not have full discretion to set its own prices, and so might be restricted from competing with other businesses, or even with other outlets in the franchise network.
Restriction on practices constituting RPM arise from Competition Law, which refers to a set of rules and regulations, which are in place to encourage fair competition between businesses. The purpose of these principles is to remove anti-competitive practices from the marketplace, and to promote fair trade.
The outcome is that consumers have a wider choice when selecting providers, and the goods and services available are of a higher standard.
In the UK, competition is primarily governed by the Competition Act 1998, which prohibits:
“Any agreement or concerted practice which has the object or effect of preventing, restricting or distorting competition…”
The Competition and Markets Authority (CMA) has the power to take enforcement action against those it considers to have breached the regulations. Where there is trade between EU Member States, the Treaty on the Functioning of the European Union (TFEU) will apply, and its principles can be applied by UK Courts. The European Commission also has the power to take action for breaches.
Penalties for Breaches
The CMA has the power to impose a number of sanctions for those found to have breached the regulations. The European Commission can also take enforcement action for breaches involving trade between EU Member States.
Possible penalties include:
- An order to cease operation.
- Declaration of invalidity of the Franchise Agreement.
- Fines of up to 10% of Global Turnover.
- Director Disqualification for up to 15 years.
Penalties can be adjusted due to any aggravating or mitigating circumstances which may apply.
RPM is a matter which all should be aware of when conducting business, but particularly those in the franchising sector. Franchisors generally wish to ensure consistency in the franchise network, and consistency in pricing amongst outlets is often of utmost importance to a Franchisor.
Whilst you must not specify prices, set minimum levels, or impose sanctions for non-compliance with recommendations, there are permitted ways in which you can ensure a level of consistency.
- Setting of a maximum price is permitted.
- You can make non-binding recommendations on pricing.
- You should ensure that all staff are fully trained and are complying with the regulations. They must not communicate any restrictions verbally other than those contained in the Franchise Documentation (Agreement, Manual, Policies, etc).
If you require further advice or guidance, the Competition and Markets Authority has published a number of useful guides:
You should seek Legal Advice if you have any questions or concerns about compliance. Our dedicated Franchising Legal Team would be happy to assist with any queries you may have.
If you are interested in any of the topics raised in this article, or for further information, please contact Tabitha. Alternatively, you can call to speak to one of our team on 0115 9888 777.