Tim O’Callaghan is a partner Druces LLP, specialising in advice to the fashion and luxury goods business. In this month’s column, he discusses anti-competitive business practices in the lingerie sector.
Imagine for a moment that you have set up a new lingerie boutique, you have viewed many possible shops and finally found one in a street with good footfall and other independent luxury shops nearby.
You have dealt with the pushy estate agent, secured a good lease from a very stubborn landlord and finally fitted out your sparkling new store in a way you had been dreaming of for years.
Determined to make a success of it, you book your ticket to the Paris tradeshow and renew your acquaintance with your favourite brands that you had long been planning to stock.
Then, speaking to the designers, your dream turns into a nightmare as one after another they tell you that they will not supply you with their exciting new collection, as they have an exclusive agreement to supply a lingerie shop at the other edge of town.
It seems like a disastrous position to be in, but it does happen. So what can be done and what does the law say about such arrangements?
There are two sets of laws in the UK that seek to curb anti-competitive business practices. Domestic law, and EU law. For our purposes, the law relating to ‘anti-competitive agreements’ is most relevant. These are defined as agreements between businesses that prevent, restrict or distort competition (or which are intended to restrict) and which affect UK trade.
Applying this definition to our example above; the ‘exclusivity’ provision insisted on by the other boutique does seem to restrict competition – it may even result in you having to completely re-think your target brands.
However, the law allows for an exemption in the case of ‘vertical agreements’. Vertical agreements are agreements between supplier and distributor or supplier and shop.
The agreement in our example is a vertical agreement, the exemption means that, generally, exclusivity restrictions in such an agreement will NOT be unlawful provided the supplier and buyer have a market share of less than 30% and that the agreement does not contain any so-called “hardcore” restrictions, such as:
• Resale price maintenance (basically price-fixing – attempting to set the shop’s freedom to determine its resale price)
• Territorial restrictions – restricting the territory into which a distributor may sell;
• Restrictions of online sales
So, in the absence of large market share and any of the greater sins against freedom of trade listed above, it is likely that the brands’ ability to refuse to supply your new boutique is legally defensible.
What is permissible in law, however, is not always best for the industry and such restrictions can have a real impact on new retailers taking the plunge.
The whole issue was recently looked into by the Office of Fair Trading (OFT) in the context of, what is probably the most anti-competitive market in the clothing industry – the school uniform market.
For any readers who have not had the pleasure of purchasing a school uniform, both state and private schools are able to enter exclusive contracts with manufacturers and shops (typically just one) to sell their uniforms. This is a captive market for the selected shop, as pupils must wear the uniform and they are the only shop that sells it.
The OFT, whilst noting the obvious detriments to free trade, concluded that the complaints received did not amount to infringements of competition law. If such a conclusion is reached about the notorious anti-competitive world of school uniforms, the practice in the intimate apparel sector of shops entering into exclusivity agreements with suppliers is not likely to excite the OFT.
As unfair as the practice seems, the law of England and Wales has always been a great respecter of parties’ freedom to contract, to strike a bargain and enter into a contract on whatever terms they agree. In this case, in the absence of any of the ‘hardcore’ restrictions the ‘exclusivity’ of the other shop is lawful. After all, it has been agreed to by both parties.
The intimate apparel solicitor is even aware of instances where rival boutiques call their suppliers and refuse to continue to place orders unless the brands confirm that they will not sell to a named rival.
Returning to our example, what can you, as the new lingerie boutique owner, do? The best course of action may be to appeal to the brands themselves.
Provided your boutique fits with the brand’s image and looks as though it may do well, it would be in the brand’s best interests to sell to you as well as the other boutique who imposed the ‘exclusivity’.
If you dangle the bait of a large order in front of them, perhaps with a large percentage up-front, they may be convinced to re-negotiate the exclusivity provision with the rival shop.
Failing that, there is a dazzling array of intimate apparel talent and new brands starting up in the UK, so if you don’t get to stock your favourite brands, you will be spoiled for choice for replacements.