Why is competition law important in the distribution context?
Article 101(1) of the Treaty on the Functioning of the European Union prohibits anticompetitive agreements or concerted practices. Agreements infringing Article 101(1) are void and may expose your company to fines and/or damages before national courts and/or competition authorities. This is particularly important in the context of distribution agreements where private parties (i.e. your companies’ customers and competitors) are often the most likely to go to court or file complaints with competition authorities. This note is part of a blog series in which we seek to provide guidance on the most relevant topics of EU competition law for distribution agreements. In this first blog we discuss resale price maintenance.
Resale Price Maintenance
Resale price maintenance (“ RPM”) or vertical price fixing is considered a hardcore restriction under EU and most national systems of competition law. Agreements or concerted practices are in principle illegal where they have as their direct or indirect object the establishment of a fixed or minimum price to be observed by distributors. Maximum or recommended resale prices are not illegal, provided that in practice it does not amount to a fixed or minimum resale price as a result of pressure from, or incentives offered by the manufacturer / supplier. The restriction is clear cut in the case of a contractual provision that directly establishes the fixed or minimum price. However, RPM can also be achieved through indirect means, for example: by fixing the distribution margin or the maximum level of discount the distributor may grant from a prescribed price level, by making rebates or the reimbursement for promotional costs subject to the observance of a given price level, by linking the prescribed resale price to the resale price of competitors, or by threats, warnings, or even sanctions (such as penalties, delay or suspension of deliveries of termination of contracts) against a dealer who does not respect a certain price level.
Super Bock judgment no free pass for RPM
In its judgment of 29 June 2023 in Super Bock Bebidas ( C-211/22) the European Court of Justice (“ ECJ”) clarified some key notions of EU competition law in the context of vertical price fixing agreements. The judgment clarifies that a hardcore restriction under the Vertical Block Exemption Regulation (“ VBER”) is not automatically a so-called “by object” infringements of competition law. For by object infringements competition authorities do not have to prove that there are detrimental effects in order to find an infringement of the cartel prohibition. In other words, if an agreement or concerted practice can be qualified as a by object infringement this significantly reduces the investigative effort required by competition authorities to take action against a cartel infringement. In Super Bock the ECJ clarified that the finding that a vertical agreement fixing minimum resale prices entails a “restriction of competition by object” may only be made after having determined that that agreement presents a sufficient degree of harm to competition. Competition authorities will therefore in each individual case have to take into account the specific circumstances of the case. However, the Super Bock judgment should not be seen as a free pass for RPM. The business reality for companies active on the European market is that RPM is and will remain an enforcement priority of many competition authorities in the European Union. The recent fines imposed by the ACM on Samsung and LG for illegal price-fixing agreements involving television sets are illustrative of this.
Key RPM rules
- Agreements that directly or indirectly establish a fixed or minimum price level to be observed by the distributor when reselling a product / service to his customers are almost always illegal;
- Maximum RPM is generally permitted, subject to antitrust scrutiny. The main exception is where the market share of the supplier is high and the maximum resale price is acting as a focal point for pricing;
- Recommended resale prices can be communicated, but not imposed;
- It is illegal to terminate resellers or “punish” them in another way because their prices are too low.
FAQ’s
Is it allowed to “warn” resellers that their resale prices are too low? No, this is very dangerous. If resellers react by increasing their prices, your behaviour could very well be qualified as RPM. Where my company issues recommended resale prices to our resellers who systematically adhere to these prices, is there a risk that this would be seen as RPM? In principle, as long as the reseller unilaterally decides to price at the recommended price, there is no RPM. The key is that there is no expectation or understanding between the supplier and the reseller that recommended resale prices will in practice be used as the actual resale price. There is a danger that if actual prices generally reflect the recommended resale prices, competition authorities will be suspicious and will look hard for evidence that there is some understanding to observe the recommended prices. Is it possible to minimize the risk of recommended resale prices being seen as resale price maintenance? Whilst competition law will always look at the substance of the arrangement, it is important to use clear language wherever there is reference to recommended resale prices. Where sending over a list of recommended resale prices, it is important to include a message to the effect of: "Enclosed are the recommended retail prices. As you will be aware these are simply recommendations. You have complete discretion to set your resale price at any level you wish". If you have any questions about the contents of this note, please contact Minos van Joolingen, Martijn Jongmans or Sophia Wittkämper of Banning’s Competition & Regulatory Team, telephone number +31 73 692 77 52.
