In April 2018, the CMA opened five investigations in the musical instrument sector relating to alleged anticompetitive agreements and/or concerted practices. These investigations covered a number of different types of musical instrument, and each investigation concerned one of five of the most well-recognised brands (Casio, Fender, Korg, Roland, and Yamaha). In this post, we consider the recent ruling in an appeal by Roland of the penalty that was imposed by the CMA that resulted in an increase of penalty amount by loss of a settlement discount.
A statement of objections was issued to Roland on 24 March 2020, provisionally finding that, between January 2011 and April 2018, Roland had engaged in resale price maintenance (RPM) by restricting online discounting for its electronic drum kits and the related components and accessories. Roland settled the case, and an infringement decision was issued on 22 July 2020. A fine of just over £4 million was imposed on Roland – an amount that included a 20% leniency discount and a 20% settlement discount. In line with other RPM cases, the CMA had used a starting point percentage of 19% for the calculation of its fine. Roland subsequently appealed the level of the penalty to the CAT on the grounds that the 19% starting point was excessive, and the 20% leniency discount was too low. Roland didn’t challenge the findings of fact made by the CMA; it continued to accept the full scope of the infringement found. It also accepted that the infringement was one deserving of a financial penalty.
The calculation of the penalty issued to Roland
In accordance with the Penalty Guidance, the CMA followed the six-step approach to the calculation of Roland’s penalty.
- Step 1 – a starting point of 19% of Roland’s relevant turnover (the percentage was challenged as Roland’s first ground of appeal).
- Step 2 – a duration multiplier of 5.5 (no challenge made to this step).
- Step 3 – uplift of 15% for the involvement of senior employees; uplift of 10% for committing the infringement intentionally; and discount of 10% in recognition of Roland’s efforts to ensure future competition compliance (no challenge made to this step).
- Step 4 – no adjustment for specific deterrence and proportionality (this was appealed as an alternative to adopting a different starting point at Step 1).
- Step 5 – no adjustment was needed to prevent the statutory cap of 10% of global turnover from being exceeded.
- Step 6 – 20% discount for settlement (which wasn’t challenged by Roland, but the CMA applied to have it revoked after the appeal was filed); a 100% discount for leniency for the period 7 January 2011 to 31 December 2012 (which wasn’t challenged), and a 20% leniency discount for the remainder of the period (which was the subject of Roland’s second ground of appeal).
Roland’s appeal on the 19% starting point
Roland viewed a starting point of 3.5% as appropriate because in selecting 19%, the CMA had overstated the seriousness of RPM generally, and in the circumstances of this case, had not reflected the very narrow market coverage of the RPM found. Before any adjustments for leniency or settlement, a starting point of 3.5% would amount to a fine of £1.2 million – which would wipe out three years’ worth of Roland’s profit.
Although previous CMA cases have typically taken 18-19% as the starting point, Roland cited the approach of the European Commission and the French competition authority to start at 7-8%, and the Belgian competition authority, which imposed a penalty of 5-10% for a January 2019 RPM case. The CAT found those have little relevance when the CMA is “entitled to take a UK specific view in the light of its own particular experience”.
Roland also cited a number of CMA cases concerning horizontal conduct (i.e., the most serious behaviour) where the starting point ranged from 16%-30%. It submitted that a starting point of 19% meant that RPM was broadly on a par with those infringements, when in fact it is much less serious because there can be a pro-competitive aim, with the Commission’s Guidelines on Vertical Restraints acknowledging that vertical restraints “may provide substantial scope for efficiencies”. More comparative was the conduct in Ping, where the starting point was 12%.
After making the case for a 7-8% starting point in RPM cases generally, Roland turned to the specific circumstances of its case. The decision issued by the CMA only concerned RPM between Roland and one reseller in relation to online sales. The precise % of Roland’s sales that were therefore affected was relatively small. Accordingly, Roland submitted that a 7% starting point should be at least halved. However, the CAT found that the CMA didn’t have to proceed on the basis that the agreement was an isolated arrangement, as there was likely to have been a wide adverse effect. In particular, the monitoring of online prices by Roland and some resellers widened the likely effects.
In considering the seriousness of RPM, the CAT referred to the Vertical Guidelines, which identify seven ways in which RPM may restrict competition. Although the CMA did not identify all those consequences in its decision, it was entitled to regard RPM as potentially having those harmful effects. Roland had referred to potential pro-competitive effects, but there was no evidence that those were actually produced here, and the CAT did not in any event accept that a “pro-competitive aim per se means that an infringement without demonstrable competitive benefits should be considered as much less serious than an infringement pursued with an anti-competitive aim”.
The CAT also found that RPM is particularly damaging when it takes place online, supporting an assessment of RPM being at the top end of the 10-20% range. It found Roland’s submissions on the difference between RPM and horizontal infringements overly-simplistic, and the conduct in Ping can be differentiated by the non-secretive nature of the arrangements in that case and the fact the purpose of the conduct was to benefit golfers rather than restrict competition.
Overall, the CAT concluded that the 19% starting point was appropriate, given that RPM is “an inherently serious infringement which is particularly prevalent in the musical instrument sector and which has a harmful effect on consumers” and it was not out of line with other CMA decisions.
Roland’s appeal on the leniency discount
A company that comes forward with information relating to cartel activities may benefit from a leniency discount where it admits participation, co-operates with the investigation, terminates its participation, and is shown not to have taken steps to coerce others to take part in the cartel activity. The first applicant can receive full immunity, and later applicants prior to the statement of objections can receive reductions of up to 50%.
The day after the start of this investigation, Roland approached the CMA with a leniency application, and an agreement was signed providing that if Roland continued to co-operate, it would benefit from a leniency discount of 100% for the period 7 January 2011 to 31 December 2012, and 20% for the period 1 January 2013 to 17 April 2018. In its appeal to the CAT, Roland submitted that a discount of at least 60% is appropriate for the latter period.
Roland drew comparisons with Fender in Guitars – Fender enquired about leniency around three months after the investigation had started and was fined for concealing evidence, but received a 60% leniency discount. In only one case did a Type B leniency receive less than 50% discount (National Lighting, and even then, a discount of 30% was given).
Roland’s proposed discount of 60% was based on the fact it had provided extensive evidence at a very early stage in the CMA’s investigation. The CMA complained that not all this evidence supported its case, but Roland submitted that’s not the role of the leniency applicant; the applicant’s role is only to make relevant evidence available with the aim of assisting the CMA to uncover the truth. The CMA provided unchallenged evidence that most of the evidence relevant to is investigation was obtained by the CMA’s own evidence gathering. It also highlighted that evidence given by Fender in Guitars had been consistent and very probative; in contrast, Roland’s level of co-operation was low, and employees said things than ran counter to the admission of RPM and actually created procedural inefficiencies.
Overall, the CAT was not persuaded that the 20% leniency discount was inappropriate. The CAT was not in a position itself to compare the material volunteered by Roland with material gathered by the CMA to assess its value, and therefore deferred to the CMA’s assessment of its added value. It was also clear to the CAT that inconsistencies in the evidence had led to further investigation.
The loss of the 20% settlement discount
Settlement is a discretionary process that allows the CMA to achieve efficiencies that result from a streamlined procedure. Under the CA98, the settlement process requires a company to admit that it has breached competition law, and it will accept a streamlined procedure for the remainder of the investigation. In exchange, the CMA will reduce the penalty imposed. CMA Guidance expressly states that if a settling party goes on to appeal a decision, it will no longer benefit from that settlement discount.
As part of the settlement discussions, a company must accept that it will pay a maximum penalty as set out by the CMA in a draft penalty statement. The settlement discount is then applied to that maximum penalty, with any discount capped at 20% for a settlement agreed pre-SO, and 10% for a settlement agreed post-SO. The CMA and a company engaged in settlement discussions can decide to withdraw at any point.
In light of Roland’s appeal, the CMA applied to revoke the 20% settlement discount, which the CAT granted. In doing so, the CAT found that during the settlement process, Roland had had “ample opportunity” to consider the penalty proposed, which had in fact been reduced to take into account some of Roland’s submissions. Allowing settling parties to retain the benefit of a settlement discount despite appealing would undermine the settlement process. The CAT did not accept Roland’s argument that there should be an attempt to quantify the savings still made by the CMA even after an appeal, which in itself would be a “potentially complex and time-consuming exercise”. If Roland wanted the penalty scrutinised, it could have chosen not to settle, and there is nothing unfair in holding Roland to the agreement it did decided to enter into (and had received legal advice on).
This judgment serves as a stark reminder that the CMA has considerable discretion when calculating appropriate financial penalties in accordance with its Guidance. Furthermore, it is another example of the difficulties in successful challenges before the CAT where the issue concerns the exercise of this discretion – the CAT will be slow to intervene or to seek to substitute its own judgment for the CMA’s expert assessment. At this stage, RPM clearly remains both a priority for the CMA and an infringement it considers to be serious – certainly serious enough to merit a high starting point to the fine calculation. It remains to be seen whether the ongoing parallel reviews into the vertical regime in the UK and the EU will result in any changes to this area in view of the significant challenges that the digital marketplace continues to have on manufacturers and high street bricks and mortar retailers.