Coronavirus – CMA opens investigation into price gouging – UK

• United Kingdom

• Competition, EU and Trade
• Coronavirus - Competition issues
• Health and life sciences

22-06-2020

Summary

On 19 June 2020, the UK Competition and Markets Authority (“CMA”) announced that it has opened investigations into suspected excessive and unfair pricing for hand sanitiser products by four pharmacies and convenience stores. The investigations are under the Chapter II Prohibition of the Competition Act 1988, which prohibits abuse of a dominant position. The investigations are at an early stage, and the CMA have not reached a view on whether there has been a breach of competition law, but if proved, the companies involved could be fined up to 10% of turnover.

Pricing concerns during the pandemic

Concerns about “price gouging” or excessive prices have been a strong feature of the CMA’s response to the pandemic. In their guidance note on the CMA’s approach to business cooperation in response to COVID-19, published on 25 March 2020, the CMA made clear that it considers that it is of the utmost importance that products and services essential for consumer health in the current context are not being priced above normal competitive levels, either through collusion between companies or, where a company has a dominant position, by unilaterally exploiting that dominance to charge excessive prices.

They also published an open letter to the pharmaceutical and food and drink industries, warning that “a minority of firms [in these sectors] are seeking to capitalise on the current situation by charging unjustifiably high prices for essential goods” and that CMA “will use all of the powers available to us to ensure that markets continue to work well during the coronavirus outbreak”.

They noted that increased retail prices may be unavoidable, as a result of increased prices further up the supply chain and urged retailers to pass on information to the CMA where they had been subject to price rises by wholesalers or suppliers.

The CMA then wrote individually to 264 traders that had collectively been the subject of over 3,100 complaints to the CMA in respect of price rises. These letters requested information about apparently unjustified price increases, including information that would allow the CMA to investigate any issues further up the supply chain.

It seems likely that information gathered in this exercise has led to the opening of these four investigations.

Difficulties in “excessive pricing”

The CMA has opened these investigations under the Chapter II Prohibition of the Competition Act 1998, which prohibits abuse of a dominant position. Excessive prices can be an abuse of dominance. However, although there have been some recent cases^[1], generally speaking, excessive pricing cases are rare. This is partly because competition authorities usually expect that the market itself will regulate high prices, by encouraging new entry or expansion by existing players; this means that their interventions are limited to markets where the conditions of competition are imperfect. However, it is also because of the difficulty in establishing an “excessive” price.

To succeed in these cases, the CMA will first have to establish that the relevant parties hold a dominant position on a market or markets; and then that the price is excessive. The basic definition of an excessive price is one which bears no reasonable relation to the economic value of the product.

The United Brands^[2] case established a two limb test for an “excessive” price, which is: first, is the price excessive by reference to a comparison between the sale price and the cost of production; and second, is the price unfair, either (i) in itself or (ii) when compared to competing products.

This is a difficult test to apply in practice, and the ECJ has stressed that there is no single method, test or set of criteria which is generally accepted across jurisdictions or in economic writing for the determination of an excessive price; and that being the case, competition authorities should examine a case by combining several methods^[3].

This inevitably leads to lengthy and complex investigations, not particularly suited to responding rapidly to deal with high prices which exploit consumers in the current pandemic. Indeed, in May of this year, the CMA was reported to have asked BEIS for temporary new powers to address price gouging, as current “consumer and competition law are not really designed for emergencies” and there was a gap in their power to address this behaviour^[4]. However, Government was reported to be less than keen on new legislation, and it may be that this lukewarm response has led the CMA to pursue the Chapter II route after all.

What can we expect?

The investigations are at a very early stage and no details are been publicly announced. However, we can draw some initial conclusions:

• each of the four pharmacies and convenience stores will have to be found to hold a dominant position on a relevant market. This is likely to mean that the CMA will rely on very narrow market definitions, possibly looking at particular small geographic areas, or perhaps particular customer groups who find they can’t easily access alternative, cheaper supplies;
• the cases are focussed on retail sales of hand sanitiser, and this is likely to mean that the CMA was not provided with evidence that there had been cost increases further up the supply chain, that would justify increased retail prices; and
• given that the CMA wrote to 264 traders requesting information about price rises, the fact that they have chosen to begin action against just these four pharmacies and convenience stores suggests that these may be cases where the evidence is most clear cut or the price increases particularly egregious, or they may relate to especially vulnerable consumers.

The cases certainly suggest that retailers of these kinds of consumer health products must be very careful if planning a price rise, and certainly not assume that the CMA is toothless or unable to take action – even if no finding of infringement is made, a CMA investigation is a time-consuming and costly exercise to go through.

Manufacturers should also carefully consider their own price rises as it can not be assumed that these will be the only cases. Manufacturers seeking to avoid the reputational risk of being connected with an investigation into the retail prices of their products might also consider imposing maximum resale prices, which are permitted under competition law.

The current investigations will certainly add to a complex and fast moving set of challenges facing businesses at the present time.

[1] For example, the Pfizer/Flynn Pharma case in respect of phenytoin sodium capsules, the remittal case for which was opened by the CMA on 8 June 2020 following the Court of Appeal judgment of 10 March 2020
[2] Case 27/76 United Brands v Commission [1978] ECR207, [1978]1 CMLR 429
[3] Case C-177/16, AKKA/LAA
[4] FT, 17 May 2020, “UK watchdog seeks powers to tackle coronavirus profiteering”