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The German competition authority recently fined audio equipment manufacturers Sennheiser and Sonova EUR 6 million for maintaining high resale prices. This was despite the fact that Sennheiser had a compliance programme in place and the unlawful resale price maintenance (RPM) practices started (and mostly took place) before Sonova acquired Sennheiser. This case highlights the importance of not only having compliance programmes, but also implementing them effectively.
We look at the key takeaways from the case and consider what makes up an effective compliance programme, some considerations for competition law due diligence, and what businesses can do if an infringement is identified.
Sennheiser started regularly monitoring and pressuring retailers to raise end consumer prices in 2015 when those prices were considerably below the recommended resale price (RRP) or after retailers had complained about inadequate end consumer prices. Even after selling its consumer electronics business to Sonova in 2022, the conduct continued until a dawn raid ended it. RPM is among the most persecuted vertical restrictions in Germany which regularly result in severe fines imposed by the FCO. Those fines regularly address the manufacturer, but can also be imposed on the distributors. The FCO has also imposed fines for RPM on the retailer where the retailer accepted the imposed prices and even asked the manufacturer to take measures against price undercutting by other retailers (see Wellensteyn / Peek & Cloppenburg).
A more than notable notion of the Sennheiser case is that the fine was imposed despite the fact that Sennheiser had a compliance programme. In fact, the company’s compliance programme was a factor against them, with the authority emphasising that “employees even underwent competition law training but used that knowledge to cover up their price-fixing practices … companies must not only adopt compliance measures but also put them into practice.”
This decision illustrates the challenges with designing a compliance programme that works and effectively protects the company and its managers. Aligning the company’s business model and distribution strategy with the compliance programme is key. We look at some tips below.
The foundation is a thorough risk assessment. While horizontal antitrust law offers regularly clear reference points for compliance evaluation (e.g., behaviour in trade associations), vertical competition law presents more complex challenges. Risks in this area arise beyond the contractual arrangements, in particular, from daily interactions within the supply chain rather than isolated, clearly defined activities. Legal boundaries are less clear, with key topics including:
Risk mitigation requires a compliance team that spends time with the sales force and managers to understand their business and pressure points as well as the communication between suppliers and distributors. Internal audits can provide valuable insights but must comply with data protection and labour laws. Taking the relevant stakeholders (e.g. works councils, data protection officers and senior management) along with the objectives and design is key for effectiveness.
Given the complexity of vertical competition issues, training and policies should include practical, tailored examples. Compliance advice must frequently address individual cases, as blanket prohibitions are often not suitable. Communication between manufacturers and distributors requires more nuanced boundaries than in horizontal competition law, where blanket bans are easier to apply.
Training and guidance needs to reflect culture and match the tone from the top. No amount of training or guidance will succeed unless a robust compliance culture is consistently enforced and exemplified by top management. Senior leadership must clearly and repeatedly emphasise that legal violations will not be tolerated. They must actively drive and support compliance measures, such as the risk assessments outlined earlier and a “speak-up” culture. If risks are identified, they need to be addressed in a pragmatic and credible way to build trust and reinforce a strong compliance culture. This also requires in-depth discussions between the business and the compliance team to find a workable solution for the day-to-day business.
In vertical antitrust matters, this strict approach demands unwavering commitment to compliance. This will also help with the management of external stakeholders and equip employees to handle complaints, for example by distributors who seek to avoid competition. A well-intentioned attempt to alleviate this pressure may expose the manufacturer, because, in most cases, the fines hit the manufacturer.
Both Sennheiser and Sonova were fined even though the unlawful RPM practices started prior to Sonova purchasing the business. This highlights the importance of thoroughly evaluating the effectiveness of a target’s compliance management system, particularly in the area of antitrust, during M&A transactions.
To complete such an assessment, a solid understanding of typical business situations as well as of antitrust rules is required. It is also essential to understand how an effective compliance management system must be designed and implemented to mitigate these risks. The existing compliance system of the target company needs to be reviewed and potentially amended to address any risk identified during the review.
If a breach is identified during the risk assessment or an internal investigation, it is often the case that no formal leniency programme exists for such vertical infringements under competition authority frameworks. However, given the fine reductions offered in cases of cooperation with authorities, also in vertical cases (as demonstrated in the current decision of the FCO), companies may consider reporting the breach to the authorities in the hope of securing reduced fines.
That said, self-reporting in vertical cases poses unique challenges. Unlike horizontal breaches, where competitors bear the fallout from regulatory investigations and are exposed to fine risks, a manufacturer’s disclosure in a vertical case can severely impact its own client relationships (i.e., distributors). Such commercial relationships might suffer lasting damage.