Back to school for the OFT?

On 25 October 2012 the Office of Fair Trading announced that it had written to the head teachers of almost 30,000 State schools to draw attention to the high price of school uniforms. The high price is caused in part by  74% of schools requiring parents to purchase uniforms from a single, named retailer or from the school itself. This has created a captive market for chosen suppliers, allowing them to charge an additional £52 million per year (see para 2.3 of the OFT’s 2006 school uniforms review).

The October 2012 letter advises schools either to cease specifying from whom uniforms may be obtained, or to award the right to supply on a basis that takes into account the cost to parents. The letter does not specify what the OFT will do if the schools fail to comply, but I want to suggest that action against the schools is possible under the Competition Act 1998.

The legal basis of the OFT letter

The legal basis for the OFT letter is section 5 of the Enterprise Act 2002, which gives the OFT the power to carry out a fact-finding review. Why has the OFT opted for a fact-finding review rather than a Competition Act investigation? In its press release when it first opened this review in 2006, the OFT said that it could not act under the Competition Act 1998. It gave two reasons.

The first explanation is that there is no legislation that deals specifically with school uniforms. Whilst there is no statutory guidance expressly stating that schools must enable uniforms to be obtained in a manner compatible with competition law, it is odd that the OFT takes this as indication the Competition Act 1998 is inapplicable. The presumption is that the Competition Act 1998 applies unless there is an express or implied exemption. The express exemption of those providing education contained in para. 14 of Schedule 1 of The Restrictive Trade Practices Act 1976 was not carried over into the Competition Act 1998 regime. A 2006 decision that certain independent fee–paying schools, though charities, were subject to the Competition Act; a 2005 decision that a merger between two English universities was subject to the Enterprise Act 2002; and investigations into the conduct of educational establishments in other EU member-States, serve to illustrate the point.

The second explanation is that the individual school’s board of governors determine whether an exclusive relationship with a supplier should be made. The ability of parents to control the board of governors supposedly precluded application of the Competition Act 1998. Indeed, the October 2012 letter urges parents to complain to school governors if they are dissatisfied with the schools’ decision to use an exclusive supplier. This suggests that a complaint is a more appropriate means of redress, rather than demonstrating that the Competition Act 1998 is inapplicable. However, when the avenue of complaining to the governors has been exhausted, if a parent complains to the OFT about the governors’ policy, something other than their ability to complain to the governors must explain why competition law cannot be applied. It is also clear that the OFT’s approach does not take account of the position of foreclosed retailers (who have not been urged to complain to school governors).

A third explanation emerges in the school uniforms review summary report of 5 July 2006. It is said that:

“actions to address problems in any particular local markets would be unlikely to be effective in establishing a general deterrent and the OFT must take account of competing claims in deciding on areas of work on which to devote its resources.”

This does not claim that the Competition Act 1998 is inapplicable but that pursuit of this infraction is not the best use of OFT resources. This would be an acceptable justification, were it not for two things. First, the OFT has devoted considerable resources to the 2006 and 2012 fact-finding reviews. Secondly, the OFT’s reasoning on why it does not use competition law powers gives the impression that the Competition Act 1998 is inapplicable. This may deter parents from bringing a private action or more likely, competing retailers from simply supplying the relevant uniforms (and advertising them as meeting the requirements of a particular school), and relying on the Competition Act 1998 to defeat an attempt to enforce the exclusive supply arrangement.

The Competition Act problem

Neither the 2006 nor the 2012 fact-finding review indicate how it is that schools are able to place restrictions on who may supply uniforms. This only becomes clear by delving into the annex to its 2012 review, which at paragraphs C.15-C.21 indicates that various items of a school’s uniform must bear the school’s logo. It is possible for the school’s badge, logo or crest to be registered and protected by trade mark, as discussed in Arsenal Football Club plc v. Matthew Reed. In the absence of registration, some protection for a badge or logo might arise under the law of passing off. In addition, the design of the badge, crest, logo, or other elements of the uniform design, may also be protected by copyright. The OFT has recognised that control of such rights enables a football club to specify who may produce its football kit (see paras 557-568 of the 2002 OFT investigation into the market for replica football kit). Similarly, it enables schools to restrict who may supply clothing bearing their marks or clothing conforming to the specified design. In turn, the school is able to grant licences for the use of their logo, crest, or uniform design to a supplier or retailer. This licencing activity is clearly subject to competition law and the October 2012 letter should have made this clear.

The applicability of the Competition Act does not in itself suggest infringement. The first stage of establishing an infringement will involve defining the relevant market. Following the 2002 OFT investigation into the market for replica football kit it seems difficult to avoid the conclusion that the relevant product market is for unique items of a particular school’s uniform and that the nominated supplier has 100% share of this market. The agreement would, therefore, fall outside any parallel exemption that would be available under section 10 of the Competition Act 1998, since such exemptions are unavailable to parties with a market share greater than 30%. It is also difficult to see how the arrangements could benefit from the exemption in section 9 of the Competition Act, since the findings of the OFT’s fact-finding review suggest either that consumers do not benefit from the arrangement or that the restrictions are not indispensable to any benefits obtained.

Remedies

Since competition law is applicable and an infringement not unarguable it is interesting to consider the remedies available should infringing exclusive arrangements be maintained. An obvious remedy is compulsory licencing. In relation to the licencing of trade mark this would ordinarily conflict with the function of guaranteeing origin and as such is prohibited under TRIPS. However, there is a question whether compulsory licensing of trade mark is permissible as a remedy in a competition case. Compulsory licences are sometimes available in copyright, but only rarely. Should compulsory licences be granted there is of course the problem of determining the appropriate licence fee. However, the 2006 fact-finding exercise found that although the exclusive supply of uniforms was a significant financial detriment to parents, there was little financial benefit to the schools. As such it is not clear that difficulties in obtaining royalties or loss of royalty will present an insurmountable hurdle.