Sales conditions have always been the core topic of any agreement between producers and dealers, suppliers and
resellers, distributors and retailers.
Whenever the parties consider discount schemes, volume rebates, recommended resale prices or any other sales terms and conditions, to some extent the competition rules apply.
These type of understandings are defined by the competition law as ‘vertical agreements’, meaning understandings or concerted practices entered into between two or more undertakings, each of which operating at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.
The rule of thumb from the competition law perspective is that the buyer/reseller must at all times remain free to determine his own resale prices.
However, although at a first glance, this competition principle appears to be straightforward, the contractual means, the particular features of an industry and the economic context are always key elements which need in-depth analysis.
The EC Regulation No. 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union (‘TFEU’) to categories of vertical agreements and concerted practices clearly forbids the restriction of the buyer’s ability to determine its sale price, nonetheless without prejudice to the possibility of the supplier to impose a maximum sale price or recommend a sale price, provided that (i) they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties and (ii) the 30% market share threshold is observed (the safe harbour of the Block Exemption Regulation).
This hardcore restriction concerns resale price maintenance (‘RPM’), meaning agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer. In the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is clear cut.
However, RPM can also be achieved through indirect means. Examples of the latter are an agreement fixing the distribution margin, fixing the maximum level of discount the distributor can grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level, linking the prescribed resale price to the resale prices of competitors, threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to observance of a given price level.
Direct or indirect means of achieving price fixing can be made more effective when combined with measures to identify price-cutting distributors, such as the implementation of a price monitoring system, or the obligation on retailers to report other members of the distribution network who deviate from the standard price level.
Similarly, direct or indirect price fixing can be made more effective when combined with measures which may reduce the buyer’s incentive to lower the resale price, such as the supplier printing a recommended resale price on the product or the supplier obliging the buyer to apply a most-favoured-customer clause. The same indirect means and the same ‘supportive’ measures can be used to make maximum or recommended prices work as RPM. However, the use of a particular supportive measure or the provision of a list of recommended prices or maximum prices by the supplier to the buyer is not considered per se as leading to RPM.
The RPM hardcore approach is based on two rebuttable presumptions: the negative effects under Article 101 (1) of the TFEU and the positive effects under Article 101 (3) of the TFEU.
On one hand, the RPM is considered one of the most noteworthy hardcore restriction, as it may restrict competition in a number of ways:
? RPM may facilitate collusion between suppliers by enhancing price transparency in the market, thereby making it easier to detect whether a supplier deviates from the collusive equilibrium by cutting its price;
? By eliminating intra-brand price competition, RPM may also facilitate collusion between the buyers, i.e. at the distribution level;
? RPM may soften competition between manufacturers and/or between retailers, in particular when manufacturers use the same distributors to distribute their products and RPM is applied by all or many of them;
? The immediate effect of RPM will be that all or certain distributors are prevented from lowering their sales price for that particular brand. In other words, the direct effect of RPM is a price increase;
? RPM may lower the pressure on the margin of the manufacturer, in particular where the manufacturer has a commitment problem, i.e. where he has an interest in lowering the price charged to subsequent distributors;
? RPM may be implemented by a manufacturer with market power to foreclose smaller rivals;
? RPM may reduce dynamism and innovation at the distribution level. By preventing price competition between different distributors, RPM may prevent more efficient retailers from entering the market and/or acquiring a satisfactory scale with low prices. It also may prevent or hinder the entry and expansion of distribution formats based on low prices, such as price discounters.
Under these circumstances, RPM clauses and practices have been severely sanctioned both by the European Commission and the Romanian Competition Council.
For example, in 2003, the Commission adopted a decision concluding that Yamaha violated Article 101 (1) of the TFEU by entering into distribution agreements aimed at partitioning the markets for the provision of traditional and electronic musical instruments and equipment in Europe. The restrictions implemented by Yamaha consisted of preventing parallel imports and fixing minimum resale prices for some of those distributors who engaged in parallel imports. The territorial and price restrictions had the common denominator of insulating national markets and ensuring different price levels within the EU. A EUR 2.56mn fine was imposed on Yamaha.
Moreover, the recent caselaw of the Romanian Competition Council also reveals similar RPM agreements, duly sanctioned by the national competition authority. In 2011 the Competition Council applied a fine of over EUR 4mn to Interfruct S.R.L. (as supplier), Albinuta Shops S.R.L. and Profi Rom Food S.R.L. (both as beneficiaries), for PRM agreements restricting the liberty of the beneficiaries to determine their own selling prices for fruit and vegetables purchased from the supplier, and for enabling the direct establishment of minimum sales prices.
On the other hand, the Vertical Guidelines of the European Commission have opened the scope for defending RPM by emphasizing the efficiency reasons that often motivate its use. While RPM remains a hardcore restraint (restriction by object), it is made clear that there can be legitimate motivations for the conduct, so RPM can, in principle, be exempted under Article 101(3) of the TFEU if consumers can be shown to benefit from the practice.
Positive effects from a competition policy perspective may be summarised as follows:
? RPM may protect the producer’s flexibility in competing with other manufacturers and its market policies, as RPM can help reduce problems as free riding, opportunism and misalignment of incentives between manufacturers and retailers;
? RPM may help a manufacturer to introduce a new brand or enter a new market. Where the introduction of a brand requires specific investments by the first distributor to develop the market and make the brand known, other distributors which start distributing this brand later may free ride on the initial investments of the first distributor. In that context, it is argued that by introducing a price floor, RPM may prevent later distributors from decreasing their price and so make it possible for the first distributor to recover its costs related to the initial investment;
? RPM may protect the producer’s brand image and quality perception, especially for luxury products that are very vulnerable to discounting policies;
? In the absence of a cartel, RPM is not likely to harm competition because market prices are determined by the actual intensity of competition between producers.
The anticompetitive or pro-competitive effects of RPM and what this diversity of effects shall mean for competition law analysis have been a long debate among economists and lawyers. The current treatment of RPM in the EU is based on the assumption that the efficiency arguments mentioned in support of RPM are not strong enough and that RPM is not an efficient instrument for improving the consumers welfare; thus, in practice, companies will be reluctant to avail themselves of this more flexible approach of the Vertical Guidelines.
However, this does not preclude that further analysis may be needed and this will be an open process, taking into account new developments of the caselaw, the enforcement practice both at EU and national levels and economic theory embraced in view of RPM restrictions.
