“Anti-competitive agreements in the Tobacco industry” – Authorities have fined two manufacturers and nine retailers £225 million

First published by Author on December 16, 2016 in the following categories: Latest

In April 2008 there were concerns into whether the tobacco manufacturing industry was unlawfully fixing cigarette prices.

As a result of the concerns, the Competition and Markets Authority (formerly the Office for Fair Trading) investigated several manufacturers and retailers, including Imperial Tobacco, Gallaher Group, Asda, Somerfield Stores, and Co-operative Group Food for their potential infringements of competition law: specifically in relation to the retail pricing of certain tobacco products.

Investigation

The eight year long investigation has nearly come to a close. The inquiry was launched in 2008 after the consumer watchdog was concerned with suspected price-fixing in the industry. It alleged that manufacturers as well as retailers were making agreements to restrict the ability to make independent selling prices. This was over a three year period from 2000 to 2003.

Importance of competition

The importance of competition was highlighted by the then OFT Chief Executive, John Fingleton, who said:

“…for markets to work well for consumers, it is a fundamental principle that pricing decisions should be made independently.”

This was done by linking the retail price of a manufacturer’s brand to the retail price of a competing brand of another manufacturer.

Competition Act and TFEU

The Competition Act and the Treaty on the Functioning of the European Union (TFEU) prohibits such agreements or conduct that would damage the competition in the U.K., therefore affecting the market and consumers free choice.

The Competition Act, in particular section 2(1) (dubbed the ‘Chapter I prohibition’), provides that companies and organisations should be prohibited from making agreements that may prevent, restrict, or distort competition. In effect, this is so that trading in the U.K. can be an ‘open’ one and smaller businesses can actually compete with the bigger organisations, as well as providing a ‘real choice’ for consumers.

Article 101 of the TFEU also provides a similar kind of rule-enforcing as the Competition Act does. It prohibits agreements for things like undertakings, sharing markets, fixing prices, etc.

Fines

In 2010, the OFT fined two tobacco companies and nine retailers a total of £225 million for “unlawful” pricing practices. Tobacco manufacturer Imperial Tobacco was handed the biggest penalty of £112 million, which was estimated to be 10 per cent of their cash flow in 2010! The manufacturers denied that it “categorically” linked the pricing

The retailers were not best pleased with the OFT’s penalty as they believed their stance to be “illogical and without foundation”. Some manufacturers and retailers including Imperial Tobacco and Asda successfully appealed the OFT’s decision in the Competition Appeal Tribunal, where they quashed the OFT’s decision.