Hub & Spoke Arrangements: A Comparative View

A view from Germany byThomas Lübbig, Berlin

15 November 2010

Contents

Germany: a retail market of its own

Strong enforcement priority on resale price maintenance, typically vertical cases, no established case law on Hub & Spoke

Current investigation into food retail by German Federal Cartel Office is shaking up the market

The OTC experienceYou won‘t find it

cheaper anywhere else!

Shelf space management revisited

It‘s all about communication

Again:

It‘s your margin you are eating

into ...

Current case law on Vertical Restraints

8 January 2008: decision against trade associations of OTC drug companies and Pharmacy Federation for organising seminars at which pharmacists were encouraged to shy away from retail price competition (moderate fine of € 465,000)

8 April 2009: fine against Microsoft for agreeing retail prices for “Office Home & Student 2007” software with retailer on at least two occasions (fine of € 9 million)

15 October 2009: fine against Phonak (Swiss hearing aid manufacturer) for systematically monitoring and hunting down price cuts by internet distributors (fine of € 4.2 million)

25 September 2009: Fine against CIBA Vision (contact lense manufacturer) for interfering with internet sales including Ebay sales as well as “agreeing” retail price maintenance with individual resellers by offering incentives or rewards (fine of € 11.5 million)

No clear position on Hub & Spoke in previous case law as focus was always on bilateral vertical agreements

Obiter dictum in CIBA Vision case whereby a concerted practice on a horizontal level between distributors could be achieved via the hub of the manufacturer, but ultimately left open

The January 2010 Big Bang

14 January 2010: comprehensive dawn raid of four food manufacturers and eleven retailers by German Federal Cartel Office Targets of the Investigation:

alleged vertical restraints: rewards for compliance or punishment for non-compliance with recommended resale prices

alleged Hub & Spoke practices with regard to price increases for FMCG products

highly controversial intervention by German Federal Cartel Office with established practice of communication between manufacturers and retailers in food distribution

“Preliminary advice” to companies cooperating with the German Federal Cartel Office

Establishment of a „black“ and a „grey“ list, the grey list outlining practices that would not be seen as a violation of the law on a stand-alone basis, but could become an issue in combination with other objectionable practices

Interim Guidance letter of 13 April 2010 by the FCO

Black List

Clear-cut agreement of resale prices or minimum retail prices

Carrot and stick policies used by manufacturers to ensure compliance by retailers with recommended resale prices

Grey List

Raising the issue of recommended resale prices over and over again with retailers and proactively discussing price cuts below the level of recommended retail prices

Coordinated monitoring of resale price discipline by manufacturers and retailers

Sending of cash receipts to retailer as proof of general compliance with recommended resale prices

Printing of recommended resale prices on food packaging if practised in combination with other elements of retail price maintenance policy

Clear identification of Hub & Spoke practices as a means of horizontal coordination between retailers

General stance of German Federal Cartel Office against “Preispflege”

“Preispflege“, translated as price maintenance policies - a collection of commercial tools taught at business school in order to avoid “value destruction“

“Preispflege“ could be popular where there is a meeting of minds between a manufacturer interested in the universal resale of its products at a high margin, and a retailer interested in general resale price stability

Outlook on current investigation by Federal Cartel Office

The Federal Cartel Office has publicly confirmed that it is only interested in the most severe practices of resale price maintenance agreement, and would not go after a stand-alone incident of a manufacturer resending its price list three times in a year

Investigation seems to be focused on bilateral vertical issues, it may be further extended to Hub & Spoke situations, but that does not seem to be the primary concern of the authority at the moment

© Freshfields Bruckhaus Deringer LLP 2010

This material is for general information only and is not intended to provide legal advice.