Jurisdiction - Australia
Reports and Analysis
Australia – ACCC Authorises Resale Price Maintenance For The First Time.

10 December, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Competition & Antitrust

 

What You Need To Know

 

  • The prohibition on resale price maintenance (RPM) prevents a supplier from controlling the minimum resale price charged by a reseller.
  • This is one of the longest standing prohibitions in modern Australian Competition Law – it has applied since 1971. Following an amendment in 1995, it has been possible to apply to the Australian Competition and Consumer Commission (ACCC) for authorisation of resale price maintenance on public benefit grounds.
  • No one has applied for RPM authorisation, until now: the Tooltechnic decision is the first time the ACCC has considered an application for RPM authorisation.
  • The Tooltechnic decision provides a framework for consideration of RPM authorisation applications, but the ACCC has been careful to emphasise the importance of the particular circumstances. In this case the likely benefits of the proposed conduct outweighed the likely detriment, in circumstances where:
    • Festool products are a highly differentiated and complex niche product, with a small market share
    • there is strong competition between suppliers of trade quality power tools in Australian and a wide range of alternative products available to customers
    • Tooltechnic’s alternative to setting a minimum resale price was to establish territorial exclusivity and limit online sales.
  • There are likely to be more applications for authorisation for RPM, but not an avalanche.
  • The Draft Report of the Harper Review of Competition Law and Policy recommends retaining the prohibition on RPM, but allowing businesses to obtain exemption through the “notification” process which is quicker and less expensive than the current authorisation process.

What Is RPM?


Resale price maintenance (RPM) involves a supplier, such as a manufacturer or wholesaler, specifying or controlling the minimum price at which the supplier’s customer (for example, a reseller) can resell the product or service. This conduct is absolutely or “per se” prohibited under the Competition and Consumer Act 2010 (Cth). A simple example of (illegal) RPM is the supplier stating in a note to its customer (retailer), that it must not sell the product for less than a stated minimum resale price. The prohibition on RPM is drafted broadly to capture a range of ways in which the supplier may attempt to influence the price charged by the supplier’s customer, including withholding supply or inducing the customer not to resell goods or resupply services below a particular price.


Why Is It Illegal?


RPM has the potential to limit, or eliminate, intrabrand price competition. In other words, if a supplier controls the retail price of its goods which are sold by a variety of retailers, there may be no price competition between the different retailers of the supplier’s goods

 

Why Do Suppliers Want To Engage In RPM?


Suppliers have various motivations for wanting to keep the prices charged by their customers above a certain level. For example:

 

  • a higher price may encourage retailers to invest more in the sale of the product or service (for example, by in-store demonstrations etc)
  • a higher price may be considered as contributing to the “prestige” of a particular product or service
  • a supplier may consider that a higher price is desirable to maintain a range of, or key, distributors – for example, in some cases, suppliers receive complaints from some customers in relation to discounting by other customers (especially online discounting).

Further, in some jurisdictions, such as the United States, RPM is no longer “per se” illegal. It is important for multinational companies to be aware that the pricing policies they employ in other countries may be illegal in Australia.


Why Has It Taken So Long For An RPM Authorisation Application?


There are several reasons for this.


There has been a perception that the ACCC would not welcome an application for RPM authorisation. Even after a Federal Court judge acknowledged the economic arguments that may be made in favour of RPM in 2007, the ACCC has continued to prosecute RPM conduct vigorously, and to seek, sometimes surprisingly high, penalties for RPM contraventions.


In 2012, NARTA, an electrical buying group , unsuccessfully applied for authorisation of conduct involving setting minimum advertised prices on particular products offered by its members. This may also have discouraged RPM authorisation applications.
Financially, the authorisation application fee of AUD 7,500 and associated legal fees are likely to have dissuaded applications – particularly given the uncertainty around the ACCC’s likely response.


Finally, a further factor may have been that it has always been possible to “work around” the RPM prohibition, if really required. For example, a supplier may structure its distribution channels by genuinely appointing agents to sell its products – if so, the supplier is quite free to direct each agent as to the terms on which the supplier is willing to contract. However, agency arrangements involve greater risks for the supplier, as a trade-off.


What Test Does The ACCC Apply?


The ACCC can authorise RPM conduct if it is satisfied that the conduct would result, or be likely to result, in such a benefit to the public that it should be allowed to take place. In practice, the ACCC weighs the likely public detriments of the conduct against the likely public benefits to determine whether there is a net public benefit.


The Tooltechnic Application


Tooltechnic applied for RPM authorisation in relation to its Festool brand of power tools, which are highly differentiated, trade quality power tools and particularly complex. As a result of these qualities, Tooltechnic claimed that customers obtain a significant benefit from pre-and post-sales services. Pre-sales services include highly trained sales staff, product demonstrations and “try-before you buy” arrangements. The post-sales services include follow up information and informal training, quick repair times and loan tools, and stocking the full range of consumables and accessories. Tooltechnic claimed that while many of its Festool dealers invested to provide the pre- and post-sales services, others focussed on price cutting, rather than service. The undercutting dealers were “free-riding” on the investment made by the high service retailers. Setting a minimum retail price for Festool products would allow Festool to prevent this “free-riding” and limit the brand damage that was occurring as full service retailers cut back their service to meet lower price dealers. Tooltechnic claimed that the imposition of a minimum price:

 

  • was efficient
  • would not eliminate or restrict competition (competition for Festool products would continue, on non-price terms and competition with other products would be increased)
  • would benefit consumers
  • would be less restrictive than its alternative strategy of implementing exclusive territories and limiting online sales.

The ACCC Decision


The ACCC stated that “that resale price maintenance can, in certain circumstances, address market failures and thereby generate benefits to the public”. But the ACCC also cautioned that this “will depend heavily on the circumstances of each case”. In this case, the ACCC accepted that there was market failure caused by free-riding by some Festool retailers. The ACCC found that there was a material risk that full-service retailers would not achieve a sufficient return on the sales of Festool products to continue to provide preand post-sales services, or to provide a sufficient level of those services. The likely benefits identified by the ACCC were:

 

  • some customers making more informed decisions in purchasing trade quality power tools
  • power tool customers continuing to be offered the choice of a premium trade quality power tool product which is accompanied by a high level of post-sales services.

Against these benefits, the ACCC found that the likely detriment was the elimination of price competition between Festool dealers, causing some customers to face higher prices, but that this was limited by:

 

  • the wide range of alternative trade quality power tools available to customers
  • the fact that Tooltechnic has little incentive to set minimum retail prices above competitive levels because doing so would likely reduce sales of Festool products overall.

On balance, the ACCC found that the likely public benefits outweighed the clear, but limited, detriment.


The ACCC noted both the “finely balanced nature of the decision” and that this was the first RPM authorisation and therefore granted the application:

 

  • for a shorter time than requested by Tooltechnic (4 years instead of 5); and
  • subject to reporting conditions which require Tooltechnic to provide annual information regarding retail and wholesale prices, sales volumes, dealers and customer complaints.

Will We See More RPM Authorisations?


The decision may seem to clear a path for arguments that online sellers are free-riding and suppliers need to set minimum resale prices to ensure that customers receive adequate service.


However, the ACCC was careful to emphasise the particular circumstances of the Tooltechnic application that caused the benefits of the proposed minimum resale price setting to outweigh the benefits, as described above. The conditions imposed by the ACCC also point to the ACCC’s desire to continue monitoring the arrangement and the competitive effect of the use of a minimum resale price.


To be successful, future RPM authorisation applications will likely need to illustrate how the proposed imposition of a resale price, or minimum resale price, addresses a market failure, and how this benefit outweighs any detriments (particularly the detriment associated with the reduction in price competition). This is likely to be more difficult where:

 

  • the relevant market is not competitive;
  • the product concerned is not highly differentiated or has a significant market share; or
  • there is no credible alternative less-competitive strategy.

If the recommendations on RPM in the Draft Report of Professor Harper’s Review of Competition Law and Policy are adopted, businesses may obtain exemption through the “notification” process which is quicker and less expensive than the current authorisation process. The notification process involves notifying proposed conduct to the ACCC, with immunity granted immediately or after a short specified period, unless the ACCC objects to the particular conduct.

 

Ashurst Logo

 

For further information, please contact:

 

Bill Reid, Partner, Ashurst
bill.reid@ashurst.com


Peter Armitage, Partner, Ashurst
peter.armitage@ashurst.com


Ross Zaurrini, Partner, Ashurst
ross.zaurrini@ashurst.com


Darren Grondal, Partner, Ashurst
darren.grondal@ashurst.com


Alice Muhlebach, Partner, Ashurst
alice.muhlebach@ashurst.com

 

Ashurst Competition & Antitrust Practice Profile in Australia

 

Homegrown Competition & Antitrust Law Firms in Australia

 

International Competition & Antitrust Law Firms in Australia

Comments are closed.