In one of the first dawn raids of the New Year, the German competition authority have raided the premises of several cable manufacturers. The investigation arose in response to alleged coordination of metal surcharge calculations.

Metal and other raw material surcharges are used in many industries, in addition to the negotiated price, to allow for short-term changes in the metal/raw material procurement costs. They are particularly prevalent where the surcharge accounts for a high proportion of the final products’ total manufacturing costs.  Often, the mathematical formula used to calculate the surcharge is linked to prices quoted on exchanges, and therefore increases or decreases the price automatically.

Despite companies’ increased awareness of the limitations of antitrust and competition laws, surcharge reviews may fall through the gaps of compliance programs.  This may be due to, firstly, there being cut-throat competition in the industry on the base price, with the surcharge perhaps being in place for a decade or more, and secondly, because surcharges are in themselves a permissible instrument for passing on changes in raw material prices quasi automatically into the overall selling price of products, without the need for new negotiations.

However, suppliers are prohibited to form arrangements where they agree to introduce or maintain such a surcharge as a standard throughout the industry, thereby eliminating competition by way of other pricing models.  In past cases, authorities have found that even where the formulas for the calculation differed – the fact the concept had been agreed (potentially decades ago) was anticompetitive.  There have been a number of cases in the past, notably on quarto plates and steel, with the most well-known being Airfreight.  Here, airlines were found to have agreed fuel and security surcharges, which the European Commission held to be an infringement of competition law. The case is still pending before the European Courts.

The recent raids on cable manufacturers are a reminder that companies using similar price mechanisms are well advised to review the origins of any surcharge formula to ensure there is nothing historically that could be construed as an agreement or concerted practice to implement a surcharge or continue to apply it.