Competition law – resale price maintenance

INTRODUCTION

The main aim of competition law is to protect competition on behalf of consumers and it deals with vertical and horizontal agreements, which restraint on competition, and monopolies. Resale price maintenance (hereinafter RPM), which is the agreement imposes an agreed upon price to resellers from the manufacturer, is one of them and its form is various such that a fixed price, a minimum price, a maximum price or recommended price. Competition in a market can be affected by RPM because it is a type of price fixing and therefore the treatment of RPM is subject to competition law in many countries. Anti-competition effects of RPM are tried to hinder by both in the United States (hereinafter the USA) with the Sherman Antitrust Act (hereinafter the Sherman Act) and European Union (hereinafter the EU) with the Article 101 of the Treaty on the Functioning of the European Union (hereinafter the TFEU).

The appearance of RPM dates back to the late 1800s with ‘the rise of branding and advertising that facilitated product differentiation’ as a moot point both legal and social.

Recommended and maximum RPM agreements generally do not fall within relevant rules of competition law in the USA and EU. However, the situation is different for minimum and fixed PRM. These vertical price restraints are considered automatically as anti-competitive in many jurisdictions. The other side of a coin is realised by certain countries such as in the USA these agreements are assessed under the rule of reason approach instead of per se rule after the significant change. However, on the other side of the Atlantic, there is opinion necessiatatis which is not correct that these type of RPM are evaluated under per se illegal. This paper critically analyses the approaches taken by competition regulators and appellate courts in the U.S. and the EU to the treatment of retail price maintenance as a form of anti-competitive behaviour.

RPM IN THE USA

Article 1 of the Sherman Act indicates that ‘every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.’ Under this article, there are two tests to establish whether an agreement or a practice restraint of competition which is the ‘per se rule’ and the ‘rule of reason.’ Under the per se rule, certain kind of restraints is not able to be justified because judicial experiences show that these agreements or practices always or nearly always harm competition, thus the court do not need to evaluate their competitive effects case by case. In other words, these restraints are a lack of economic benefit and it is impossible to negate the presumption of unlawfulness. Because of these reasons, the Supreme Court of the United States (hereinafter the Supreme Court) has stated certain restraints rigorously assumed per se unreasonable.

On the other hand, the creation of the rule of reason is conformable and was necessary because the Sherman Act has broad language and all contracts can be prohibited under this broad language. It is stated by the Supreme Court that ‘the Sherman Act only prohibits contracts or acts which [are] unreasonably restrictive of competitive conditions’. Under the rule of reason, ‘the fact finder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.’ In other words, it requires the court to measure positive (pro-competitive) and negative (anti-competitive) effects of restraints on competition. A burden of proof is split between the parties under the rule of reason follow: first, the plaintiff need to submit prima facie evidence which shows that RPM has a negative effect on consumer and the market. Second, the defendant needs to prove that RPM should be justified because of its positive effect on consumer and the market. Finally, the plaintiff still has an opportunity to disprove the defendant’s evidence which shows positive effects. After measuring the restraint may be declared as unlawful if its anticompetitive effects outbalance its procompetitive effects. The court need to take into account specific information about the relevant business and the restraint’s history, nature, and effect when weighing anti and pro-competitive effects. Due to these factors, to decide which effect, positive or negative, outweigh may take a long time. In the case of Legion Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court abandoned the almost century old per se rule for minimum PRM in return for the rule of reason. However, it was not the only overruling on the case.

In 1911, in the case of Rd. Miles Med. Co. v. John D. Park & Sons Co. (hereinafter Dr. Miles) the Supreme Court declared that minimum PRM which was imposed by the manufacturer was unlawful under section 1 of the Sherman Act because the purpose of minimum RPM was to ‘prevent competition among those who trade.’ Thus, the Supreme Court stated that RPM should be declared as per se illegal.

In 1919, the Supreme Court established the ‘Colgate Doctrine’ in the case of United States v. Colgate & Co. Colgate & Co. sent its dealers ‘letters, telegrams, circulars and lists showing uniform prices to be charged’ and made ‘requests to offending dealers for assurances and promises of adherence to price, which were often given’. The Supreme Court expressed that only agreement between a supplier and its reseller may fall within Article 1 of the Sherman Act, and the unilateral practices of suppliers are exempted from this article because only contracts fall within the Sherman Act. This case was the first escape from Dr. Miles. After 65 years, in the case of Monsanto Co. v. Spray-Rite Service Corp the Supreme Court reinforced the Colgate Doctrine by broadly discussing and the difference of the decisions between the case of United States v. Colgate & Co. and Dr. Miles has been clearly revealed.

The other escapes from Dr. Miles were created by the Congress this time, not by the Supreme Court. Miller-Tydings Fair Trade Act was legislated in 1937 and it enables the states to legislate fair trade legislation which exempts manufacturers from the Sherman Act as explicated in Dr. Miles. In 1953, with McGuire Act’s the exemption was extended, for instance, manufacturer may impose minimum RPM on a non-signing retailer. Lastly, the Congress legislated the Consumer Goods Pricing Act of 1975, and it was only repealing the Miller-Tydings Act 1937 and McGuire Act 1952. To sum up, the Congress has tried to moderate solid practice of the Dr. Miles with these attempts.

In 1997, the Supreme Court re-examined the per se rule on maximum price fixing with the case of State Oil Co. v. Khan and addressed that ‘that there is insufficient economic justification for per se invalidation of vertical maximum price fixing’ because maximum price fixing helps to prices keep low which is benefit for consumers. Thus, maximum price fixing is not able to harm competition. Beyond this, the Supreme Court confirmed the per se rule on minimum price fixing. To sum up, the Supreme Court overruled its decision in the case of Albrecht v. Herald Co., which is decided maximum price fixing is per se rule.

In 2007, in the case of Legion Creative Leather Products, Inc. v. PSKS, Inc. the Supreme Court by a vote of 5-4 overruled the century old per se rule on RPM declared in the Dr. Miles case. The Supreme Court stated that RPM which is fixed or minimum were not per se illegal, it should be judged under the rule of reason. Leegin is a company which designs, manufactures, and distributes high-quality leather goods and accessories under Brighton brand name. PSKS is a women’s appeal store in Texas who sells products of Brighton. Leegin sells its product only limited stores which can offer customers the best service in the name of supporting Brighton products. Because of the same reason, stores which sell Brighton product have been informed by Leegin not to discount upon recommended retail prices, because ‘discounting harmed Brighton’s brand image and reputation’. After that, Leegin realised that PSKS is selling Brighton products with a discount, thereupon, Leegin required PSKS to stop discounting but the request was rejected by PSKS. After the rejection, Leegin has stopped to sell its product to PSKS and PSKS brought an action against Leegin for the violation of section 1 of the Sherman Act. A jury decided to award PSKS valued at $1.2 million, with attorney’s fees and costs added, amounted to almost $4 million. The case was appealed to the Supreme Court and the Supreme Court held that ‘Dr. Miles is overruled and vertical price restraints are to be judged by the rule of reason.’ Because the effects of price fixing on competition depend on the circumstance and it can be positive as well as negative. Related to this, the Supreme Court addressed that the main purpose of antitrust law is to protect interbrand competition, and RPM is pro-competitive under this circumstances because it stimulates interbrand competition. Besides this procompetitive effect, according to the court, it helps to eliminate free-riding, enabling market entry for new products, and encouraging retailers to provide services even in the absence of free-riding. The potential procompetitive effects of RPM are:

Promotion of interbrand competition

According to the Supreme Court, RPM may promote interbrand competition by reducing intra- brand competition. RPM ‘encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers.’ So, suppliers and retailers can engage in competition with other brands for better quality, better service and a lower price when competition within the distribution chain is eliminated. Thus, economic efficiency will be increasing. Besides, a manufacturer can affect the supply of retail service by controlling its retailers’ margins, thus, retail service can be used as an instrument of interbrand competition.

Encouraging retailers to provide services and preventing free riding

‘This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate. Consumers might learn, for example, about the benefits of a manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees.’ Free riding occurs ‘when one benefits at no cost from what another has paid for’. As proved in competition law, free riding happens when ‘a firm is able to capture the benefits of investments that another firm has made without paying for them’. The most important procompetitive effect is seen to prevent free riding and it has been argued by the Supreme Court in Leegin carefully. Manufacturers do not like free riding retailers because of lower margins and brand destruction. Besides, discount retailers can free ride on the full-service retailers and due to this full service retailers can be demoralizing to sell. Thus, it will affect consumers to buy the product with the decent level of service.

Encouraging entry of new firms and brands

According to the Supreme Court, RPM can encourage the entry of new firms and brands. New firm can ‘use the restriction in order to induce competent and aggressive retailers to make the kind of investment of capital and labour that is often required in the distribution of products unknown to the consumer’. So, RPM can be used by manufacturers to induce their retailers to invest in the new product in order to bring it to the attention of consumers. If the introductory retail price of the new product is fixed, potential losses are more predictable and a profit margin can be achieved in spite of the high introductory cost.

Encouraging retailers to provide extra services

According to the Supreme Court, ‘offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services’.

Although these procompetitive effects, the Supreme Court pointed out that there are potential anticompetitive effects as well and these effects must not be ignored or underestimated. Minimum RPM may cause the following anticompetitive effect:

RPM is that it can be used to facilitate a manufacturer or retailer cartel

The use RPM to conduct a cartel by manufacturers harms both dealers and consumer because it forces to parties to buy less and pay more. And RPM can be used by the manufacturer to conduct unlawful cartels, especially which member are not following an agreed-upon. Beyond this, RPM also ‘might be used to organize cartels at the retailer level’ and harms consumer and the market.

RPM can be abused by a powerful manufacturer or retailer.

‘A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs’. ‘A manufacturer with market power, by comparison, might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants.’ Thereby, a powerful manufacturer could abuse the power to set minimum resale prices. Eventually, abusing the power by both manufacturer or retailer will harm consumer and the market.

As mentioned above per se rule approach has been abandoned in the favour of rule of reason for minimum RPM by 5 votes against 4 and this shows that the decision has a strong dissent. Justice Breyer concluded that overruling of Dr. Miles was not proper because the parties and the court trust Dr. Miles which is ninety-six years old and from that time the conditions are still the same. Besides, he addressed that the Leegin decision is to attempt the change the Sherman Act and the Court should not have changed it. One of the most important objection is related to free rider, according to Justice Breyer free riding happens sometimes, however, as mentioned above the Supreme Court has made it like as the main point of its decision. Related to dissent, there is a doubt about the frequent of free riding. Finally, the Supreme Court have not said that minimum PRM is pleasant or invariably permissible, it said that the courts must evaluate the reasons behind an agreement or practices and its competitive effects carefully.

RPM IN THE EU

First paragraph of the Article 101 of the TFEU prohibits ‘all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular tthose which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions’. EC courts had enhanced a case by case explication for this provision and they stated in their decision what kind of agreements or practices are the subject of object restriction. So, it is possible to say that EU has adopted per se restrictions approach. The prohibition of RPM only consists fixed and minimum resale pricing, maximum and recommended pricing are exempted in the EU. Thus, fixed and minimum RPM can be defined a ‘restriction by object’ under article 101(1) TFEU. The means of object restriction is unnecessary to prove that it will produce anti-competitive effect where it is determined. Where it is determined, it is possible to say that the EU Court of Justice has generally applied a broad understanding of the ‘by object’ concept. In T-Mobile case, the court held that for a practice to be restrictive ‘by object’, ‘it is sufficient that it has the potential to have a negative impact on competition’. The Commission fined heavily because of the RPM which was established the presence of an agreement between the supplier and a distributor to fixed or minimum RPM.

This approach of 101(1) TFEU is reflected in art.4(a) of the Vertical Agreements Block Exemption Regulation (hereinafter VABE) which excludes fixed and minimum RPM from the benefit of the exemption and it has been qualified as a ‘hard-core’ violation regardless of 30% market share cap of each party. Consistent to this, EC Commission constituted that ‘restrictions of a buyer’s ability to determine its minimum sale price generally constitute restrictions by object’ in the De minimis notice. According to De minimis, agreements that affect competition within the terms of Article 101(1) will nevertheless not be caught where they do not have an appreciable impact either on inter-state trade or on competition. However, minimum and fixed cannot obtain benefit from De Minimis like as VABE because of its nature. According to VABE and De minimis notice, RPM has not got procompetitive benefits for the consumer, so it is possible to define as a per se restrictiveness. Besides, in the Commission Notice Guidelines on Vertical Restrains, agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale level to be observed by the buyer, are treated as a hardcore restriction. Besides, in the Commission Notice Guidelines on Vertical Restrains, the Commission stated that agreements or practices related to RPM “are presumed to restrict competition … [and are] unlikely to fulfil the conditions of Article 101(3)”. Consistently, the Commission has expressed in it decisions that these restrictions are unlikely to be beneficial to consumers, so, an individual exemption which is Article 101(3) is not apical. For instance, in the case of Volkswagen, the Commission expressed that consumers do not obtain any benefits from resale price maintenance; they have to pay more and receive nothing in return and fined Volkswagen.

However, the Commission officials have recurrently expressed that per se illegal is not a part of EU Competition law because RPM may be legal if it is fulfilled four conditions of Article of 101(3) by the party. In other words, both ‘object’ and ‘effect’ agreements may benefit from the exemption from that article. The burden of proof of four conditions on the shoulder of contracting or involved parties and they must proof that RPM in the agreement or concerted practice has possible efficiency improvement result. After that, the Commission will weigh pro and anticompetitive effects under Article 101(3) with a detailed examination. In the Commission Notice Guidelines on Vertical Restrains admit efficiency-enhancing potential of RPM for the first time. There are some counted circumstances which RPM may have pro-competitive effects as follows; ‘during market entry or development of a new product’, ‘to co-ordinate a short-term low price campaign (two to six weeks long, in most cases) in a franchise system or similar distribution system’ and ‘to provide an additional margin to allow and encourage retailers to provide (additional) presale services and eliminate potential free-riding, particularly in cases of experience or complex products’. Notably, VABE indicates the Commission’s intention to apply the free-riding theory to RPM with this provision.

This procompetitive approach can be seen in 31 years old Bison case as well. The court denoted that ‘the provisions which fix the prices to be observed in contracts with third parties constitute of themselves a restriction on competition within the meaning of the Article 81(1) of the EC Treaty’. However, the court explained that in such cases ‘the fixing of the retail price by publishers constitutes the sole method by which a wide selection of newspapers and periodicals can be made available to readers, and this circumstance must be taken into account when examining an agreement under the Article 81(3)’. Thus, the court has expressed that ‘the Commission may, in considering an application for exemption under ex Article 85(3), examine whether, in a particular case, such an element of a distribution system may be justified.’ Later, in Matra Hachette SA v Commission of the European Communities case the Court of First Instance generally acknowledged that there is no such a category of agreement which, on a priori grounds, is incapable of satisfying the criteria for exception under Article 81(3), which means that there are no practices (including vertical price fixing) which are automatically unlawful and any defence cannot be used to justify them. Notably, none of conditions in Article 101(3) had been fulfilled. More recently, GlaxoSmithKline case is another example of this situation.

It should be noted that Article 101(3) is not equal to rule of reason. In other words, the existence of rule of reason under EU competition law is doubtful because EC court is prudent about the acknowledgement of the existence of rule of reason. The Court of First Instance replied that ‘quite to the contrary, in various judgments the Court of Justice and the Court of First Instance have been at pains to indicate that the existence of a rule of reason in Community competition law is doubtful’.

CONCLUSION

RPM has been one of the most contradictive price fixing practices in the last hundred years. Because it is not easy to define RPM as purely procompetitive or anticompetitive, its effect on consumers need to be assisted. In the EU, the approach which is related to RPM can be comprehended from the BER, De minimis notice and Guidelines as hardcore, however, this approach is not equal to per se approach in the USA. Under the per se rule in the USA, RPM was assumed to have negative effects so much so that there is not enough possible positive effect which outweighs the negative effects or the positive effects are unlikely to be indispensable in accomplishing benefits on consumer and market in the USA. However, the EU approach gives more flexibility due to there is still a possibility to prove their lawfulness. In other words, agreement or practices can be declared legal, at least theoretically, under the Article 101(3) of the EC Treaty. After the Leegin, in the USA per se rule approach has changed with rule of reason and the court will balance procompetitive benefits against anticompetitive effects according to proof which is submitted by the parties. Consistent with this, the BER and the Guidelines stand on the idea of appropriate evaluation of vertical agreement because the analyse of its effect which is negative and positive on the consumer and market. And the Commission may assess the pro and anticompetitive effect of RPM more critically than before and re-examine its strict position against hardcore restrictions can uneasily fulfil the conditions of Article 101(3) TFEU, because of the efficiency-enhancing potential of RPM which is stated in the 2010 Vertical Guidelines for the first time.

The evaluation of PRM under Article 101 of TFEU have certain similar points with the system of the rule of reason which is modal of the USA antitrust law, but, this similarity can be found only when paragraphs 1 and 3 of Article 101 are applied in tandem. Due to the changes in the USA and current legal system in EU, RPM in the both legal system is evaluated under analogue rules which mandate the outweighing between pro- and anticompetitive effects on the consumer and market.

Source: Essay UK - http://www.essay.uk.com/essays/law/competition-law-resale-price-maintenance/


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