When Lowlands cake maker Peijnenburg got fed up with supermarket Albert Heijn’s reductions in the price of its ginger cake, it terminated supplies on three weeks’ notice. Could it do this without breaking competition laws and what would be the position here in the UK? Osborne Clarke competition law partner, Simon Neill investigates.
Protecting your brand in a price war – having your cake and eating it?
Brand protection, resale price maintenance and reasonable notice of termination
Peijnenburg (cake manufacturer) and Albert Heijn (supermarket).
Press Release 28 February 2005
A report by Tjeerd Overdijk of Amsterdam law firm Steinhauser Hoogenraad firstname.lastname@example.org
Well-known cake manufacturer P had been supplying supermarket AH with its popular Dutch ginger cake for resale for several decades. A supermarket price war broke out in 2003, resulting in AH selling P's ginger cake at ever-lower prices. The sustained downward pressure on the brand's resale price led to a steep fall in P’s market share, as an increasing number of retailers declined to purchase the loss-making brand.
In an attempt to protect the value of its brand, P unsuccessfully sought to agree recommended resale prices with the supermarkets. After this initiative failed, P decided, as a last resort, to cease supplying its brand to AH, giving AH only three weeks’ notice of termination. AH subsequently accused P of seeking to fix a minimum price ‘via the back door’ by refusing to supply.
The matter duly came before the Netherlands Competition Authority (NCA). Although AH conceded that the price war had indeed undermined P's profitability, AH maintained that this was not its legitimate concern. Moreover, AH argued that, given the long-standing commercial relationship between them, P had no right to cease supply – and certainly not without having given considerably longer notice of its intention to do so.
The NCA confirmed that suppliers may not, under any circumstances, oblige buyers to charge consumers a fixed or minimum retail price. The NCA also decided that, in general, no supplier should be forced to sell its products against its will, and that what constitutes "reasonable" notice to terminate an ongoing supply arrangement depends on the circumstances of the individual case – including the legitimate interests of the other party. Although the NCA agreed with AH that, where there has been a long-standing commercial relationship, several months’ notice of termination would normally be reasonable, it considered that, in this case, the considerably shorter notice period of three weeks was permissible, given the value of one of P’s principal brands was at risk.
Surprisingly, the court was forgiving of P’s attempts to persuade AH to adopt a minimum resale price, viewing this as a justifiable competition mistake which the court could overlook.
Why this matters:
A number of observations can be drawn from the NCA's decision. First, even a supplier with a powerful, "must have" brand may nevertheless suffer at the hands of the large supermarket chains, reflecting the latter's substantial purchasing power. In the UK, the relationship between suppliers and retailers has been the subject of considerable scrutiny by the competition authorities. Indeed, in the wake of the Competition Commission's market inquiry in 2000, the four major supermarkets (Tesco, Asda, Sainsburys and Safeway) were obliged to sign up to a Code of Practice designed to protect suppliers from unfair treatment. The OFT recently carried out an audit in to determine how effective the Code of Practice had been in practice, the results of which were published in March 2005. Although the OFT's report gave the supermarkets a relatively clean bill of health, it found that suppliers remained reluctant to complain – even though this could be done anonymously.
Secondly, where a supplier enjoys a dominant position (which, as a rule of thumb, may arise if its share of the relevant market exceeds 40%), a refusal to supply can constitute an abuse of that position – particularly where there has been a course of dealing between the supplier and purchaser. However, a refusal to supply will not infringe competition law provided the refusal can be objectively justified. As in the present case, a refusal to supply may be justified where the supplier's margin has been undermined by, for example, a price war.
It is also worth highlighting that – unlike the NCA's lenient attitude towards P's attempts to agree a minimum resale price for its ginger cake – resale price fixing constitutes a hard core restriction under both EC and UK competition law, punishable with substantial fines. Indeed, any attempt by a supplier to manipulate the resale price of its product – whether through direct or indirect means – is liable to contravene competition law.
Finally, as a general rule, where a contract provides for termination by either party ‘on reasonable notice’, what constitutes reasonableness will be determined by reference to the specific circumstances. This would include the legitimate expectations of the parties, the nature and duration of any dealings between them and any specific investments made by either party to fulfil their respective obligations. For the avoidance of doubt, it is always safer to specify notice periods in the contract.