Resale price maintenance

Businesses (Suppliers) that sell their goods via distribution networks (Distributors), who in turn sell them to third party consumers need to take care to ensure that they do not engage in conduct amounting to resale price maintenance.  In Australia, this method of ‘resale’ and ‘resale price maintenance’ is subject to the law imposed by the Competition and Consumer Act 2010 (Cth) (Act).

What is resale price maintenance?

Resale price maintenance (RPM) refers broadly to conduct of Resellers in attempting to induce Distributors not to resell their goods at a price less than that which is prescribed by the Supplier.[1]

Section 48 of the Act states that ‘a corporation or other person shall not engage in the practice of resale price maintenance’.   The equivalent predecessor contained in the Trade Practices Act 1974 (Cth) was also section 48.

‘Recommended retail price’ is a phrase often used by wholesalers which proposes the price at which goods should be sold to consumers.  The term ‘recommended’ suggests that such a price should be no more than a guide.  Distributors must be allowed to compete with each other on price and the Supplier must not engage in conduct which is described in section 96(3) of the Act that which would lead to a finding that it had engaged in RPM.

Conduct constituting resale price maintenance

Section 96(3) of the Act contains detailed provisions which, if proven, can amount to resale price maintenance.  An overview of some of the prohibited conduct includes:

• making it known that supply of the goods for resale will be limited unless the Reseller agrees not to resell at the prices specified by the supplier;
• the supplier inducing or attempting to induce the second person not to sell at a price less than those specified by the supplier;
• the supplier entering into an agreement that includes obligations not to sell goods at a price less than specified;
• the supplier withholding sales of goods to the third party because they have sold goods at a rate less than the price specified by the supplier.

Cases involving resale price maintenance and contraventions of section 96 of the Act

Generally proceedings involving retail price maintenance are bought by the regulatory body responsible for enforcing the Act – the Australian Competition and Consumer Commission (ACCC).  However, the right to commence proceedings based on section 48 is not limited to the ACCC.

The case of Australian Competition and Consumer Commission v IGC Dorel Pty Ltd [2010] FCA 1303 (Dorel) concerned retail price maintenance caused by statements of the respondent which manufactured prams.  In a meeting regarding the sale of the prams to an intermediary retailer, a representative of the manufacturer stated to the retailer “We set the prices of Bertini, you are not to discount.  If you’re found to be discounting we’ll send in trucks and we’ll no longer be supplying you.  I don’t want the product bastardised.  I designed this product and it’s well worth the RRP”.  The court found that this conduct was sufficient to breach section 48.

The case of Australian Competition and Consumer Commission v Eternal Beauty Products Pty Ltd [2012] FCA 1124 involved a Distributor of beauty products that engaged in RPM.  In dealing with two (2) of its online retailers, Eternal Beauty attempted to induce them not to sell the products below the specified prices.  The conduct in question involved telephone and email exchanges in which the Supplier requested the price be amended to reflect a standardised price.  When the request was not complied with, it was suggested that the retailer simply stop selling the products altogether.  The respondent consented to orders being made against it for multiple breaches of section 48 of the Act.

The pecuniary penalty ordered was $A80,000.00 against Eternal Beauty and $A10,000 against its director.   The case also contains a useful guide by Justice Murphy at 41, who considered the factors to be taken into account in determining the appropriateness of the pecuniary penalty where an agreement has been reached by the parties.

Can the ACCC authorise resale price maintenance?

The ACCC has the power to approve conduct amounting to RPM pursuant to the public benefit test contained in section 90(8) of the Act.  It has the same power to authorise conduct which amounts to exclusive dealings pursuant to section 88(8).  On 5 December 2014 the ACCC granted conditional authorisation to Tooltechnic Systems (Aust) (Tooltechnic) to set minimum retail prices on its products for a period of three (3) years.

What factors will be considered by the ACCC before granting approval for RPM?

Tooltechnic lodged an application for authorisation based on a proposed amendment to its distribution contracts for its Distributors not to sell below minimum prices.  The ACCC provided in its determination[2] that:

“it can authorise resale price maintenance where it is satisfied that in all the circumstances the conduct is likely to result in public benefits which outweigh the public detriments likely to result from the conduct”.

The ACCC accepted that the proposed conduct would eliminate price competition between Festool dealers selling Festool products in addition to minimising public detriment.  It was accepted by the ACCC that the detriment would be limited by:

• a wide range of trade quality power tools being available to customers; and
• the fact that Tooltechnic had little incentive to set minimum retail prices above competitive levels because doing so would likely reduce sales of Festool products overall; and
• the fact that there was no evidence of coordinated conduct by Suppliers of power tools.

It was accepted that Festool products were complex and highly differentiated, and that the provision of ‘services’ (Services) was important in the pre-sales and after sales process.  Because of this, only full service retailers were in a position to service customers pre- and post-sale.  Without RPM it was said that customers could access retail services from one retailer and then purchase the product from another at a discount.  In other words, one retailer could gain a benefit at the expense of another (Free Riding).  The issue of Service was also considered by the ACCC in the context of allowing Distributors to differentiate themselves via the provision of Services instead of price.

It was considered by the ACCC in making its determination that, on balance, the public benefits (end to Free Riding by some distributors, and increase in Services) would likely outweigh the detriments.

The ACCC’s assessment of Tooltechnic’s application considered the following background facts:

• Tooltechnic has a very small market share in a highly competitive market;
• trade quality power tools are highly differentiated products and Festool products are particularly complex.  In selling Festool products, therefore, customers obtain significant benefit from investment by retailers in both pre- and post-sales services; and
• trade quality power tools are readily sold online or by discount retailers who have not made this significant investment in services but who may benefit from other retailers who have done so.

Whilst it may seem that the ACCC’s authorisation provided to Tooltechnic would open the floodgates to Suppliers with distribution networks, care needs to be taken as the arguments involved complex economic rationale that applied to one particular market.

Takeaways

When considering the creation of distribution contracts, Suppliers must take care to ensure that the rights and obligations of Distributors are consistently applied across the network.  Engaging in retail price maintenance may appear to be a quick fix to presenting a uniform approach to the market, however, there may be other obligations which can be imposed on Distributors to address the issues.

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Cases

Australian Competition and Consumer Commission v Eternal Beauty Products Pty Ltd [2012] FCA 1124

Australian Competition and Consumer Commission v IGC Dorel Pty Ltd [2010] FCA 1303

Australian Competition and Consumer Commission v Mitsubishi Electric Australia Pty Ltd [2013] FCA 1413

Specsavers Pty Ltd v Coastal Contacts (Aus) Pty Ltd [2012] FCA 102

Tooltechnic Systems (Aust) Pty Ltd – Authorisation A91433

Other links

Imposing minimum resale prices – Australian Competition and Consumer Commission

Further information about resale price maintenance

If you need advice on how the retail price maintenance provisions of the Australian Consumer Law apply to your business, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Australian Competition and Consumer Commission v Mitsubishi Electric Australia Pty Ltd [2013] FCA 1413 at 2.

[2] ACCC Determination, Application for Authorisation A91433 lodged by Tooltechnic Systems (Aust) Pty Ltd, Authorisation Number A91433, 5 December 2014.

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