How to survive the credit crunch: beware of survival planning with suppliers or rivals

Checking on the financial health of suppliers and customers is a common sense and important measure in the current financial climate but firms should avoid any discussions with competitors or distributors that might stray into anti-competitive territory.

This could include, for example, a supplier agreeing with its competitors the terms on which they will all be prepared to deal with suppliers or customers, or entering into price-fixing or market-sharing agreements to protect themselves against adverse market conditions. But the competition rules will also apply to discussions between a supplier and its distributors.

Guy Lougher, who heads the national EU and Competition Law Group at Pinsent Masons, the law firm behind OUT-LAW.COM, explained.

“Say a supplier is called by one of its distributors, Retailer B, who is complaining about aggressive discounting by one of its competitors, Retailer C, in relation to widgets.  In that situation, Retailer B may demand from the supplier a lower price for widgets so that it can compete more aggressively in the marketplace; that situation is, in itself, not problematic from a competition law perspective.”

However, Lougher said, Retailer B may ask the supplier to stop supplying widgets to Retailer C because of its pricing behaviour, or ask the supplier to 'encourage' Retailer C to compete less aggressively on price.

“If the supplier then acted on that request and contacted Retailer C in order to give effect to either of those requests, then an anti-competitive agreement or concerted practice may well be deemed to have arisen between the supplier and Retailer B,” said Lougher.

If, however, following the call from retailer B, the supplier materially changes the price on which or the terms and conditions at which it supplies widgets to Retailer C, he said, it may face the prospect of having to disprove a negative – trying to demonstrate that that change was not caused by or related to the approach from Retailer B, which in practice may be very difficult for the supplier to prove.

Lougher added: “Equally, if following such an approach from the supplier, there was a change in Retailer C's pricing behaviour so that it competed less aggressively with Retailer B (and especially if Retailer C ceased to engage in such active price competition), then a tripartite anti-competitive agreement or concerted practice may be considered to have arisen between the supplier, Retailer B and Retailer C."

Lougher stressed that, faced with such a call from Retailer B, the supplier must indicate very clearly upfront to Retailer B that it cannot discuss the pricing behaviour or commercial policies of Retailer C at all.

They should also, he said, take note of conversations, including telephone calls and be careful as to what they discuss by email.

“This in turn places a considerable burden on suppliers; they must ensure that their sales and marketing staff have a sufficient understanding of the competition rules and of how to comply with them. Equally, distributors, like Retailer B, should ensure that their staff understand the limits on the type of discussions that they should have or initiate with their suppliers,” he said.

Lougher underlined the danger of either party failing to understand properly the competition rules, which might well expose the companies to lengthy and time-consuming investigations.

“If they are found to have breached the competition rules, they face sanctions including heavy fines, actions for damages and in a worst case, potentially even imprisonment of the individuals involved,” he said.