17 October, 2015
Resale Price Maintenance
Resale Price Maintenance (RPM) occurs when a supplier requires a distributor or retailer to resell its goods or services at a fixed or minimum resale price.
RPM prevents resellers from competing aggressively on price which can ultimately harm consumers who may have to pay higher prices for products and services.
RPM can also be used to disguise a price-fixing arrangement between competing distributers or retailers.
How is RPM treated under the Competition Ordinance?
Unfettered price competition is a key tenant of Hong Kong's competition law. RPM prevents price competition and, although it has previously been common practice, is now high risk in Hong Kong.
RPM falls within the realm of the First Conduct Rule (FCR). The FCR prohibits an agreement or arrangement between two parties that has the object or effect of harming competition in Hong Kong.
RPM can take many forms. It can be a contractual term, or simply a non-binding, not legally enforceable "request" or requirement. A refusal to deal because a reseller has been selling at discounted prices will also be RPM. An attempt to engage, or to induce another to engage, in RPM can be enough to breach the FCR.
What types of agreements are likely to contain RPM clauses?
RPM is a type of restraint that is often found in agreements between manufacturers, suppliers, distributors and retailers.
Agreements that you will need to review for RPM include any distribution, supply, agency, franchising and licencing agreements. It is important to be aware that, although a written agreement may not contain an RPM clause, the way in which the agreement or relationship with the contracting party is administered may include conduct which is RPM. An example might be refusing a particular level of discretionary discount because the reseller has been selling at low prices.
RPM can be indirect as well as direct
RPM involves fixing a specified minimum price or a component of the price, which includes discounts, rebates, allowances or price concessions.
RPM can be achieved indirectly by fixing the distributor's margin or the maximum discount the distributor can grant from a specified price. It can also occur when the supplier will only grant rebates or reimburse promotional costs if the distributor observes a particular or minimum price. Another way might be to link the resale price to the resale price of competitors.
RPM also arises where there are threats, intimidation, warnings, penalties, delays or refusals to deal for failure to adhere to a particular or minimum resale price.
Are there any circumstances in which RPM can be permissible?
From an anti-competitive perspective, RPM can be implemented by a supplier in response to pressure from a distributor or retailer (for example, where the retailer wants to prevent its competitors from selling the product more competitively, including online). A supplier may also be motivated to engage in RPM itself to foreclose its competitors by eliminating the incentive for the distributor or retailer to deal with its competitors. In each of these situations, RPM will be prohibited under the FCR.
On the other hand, there may be justifiable reasons for RPM and where RPM can deliver consumer benefits. For example, RPM can be used to ensure that ancillary services are provided to enhance the customer's experience, to overcome free-rider problems, at the inception of a new product to allow it to establish itself in the market, in a franchise distribution system or for complex products. RPM may be allowed on a case-by-case basis in such situations where there are efficiency justifications or where it does not have the object or effect of harming competition in Hong Kong.
Can you specify maximum or recommended resale prices?
Merely recommending or setting a maximum resale price (RRP or MRP) is allowed so long as it does not have the effect of harming competition. Setting an RRP or MRP is risky where such RRPs or MRPs are treated as the price which must be followed or used to facilitate coordination. This risk is greater where the proportion of the market affected is significant.
A RRP or MRP that is enforced as a minimum resale price will be treated in the same way as RPM and is likely to be illegal.
When is RPM allowed? When will an exclusion apply?
RPM may be allowed in a few circumstances where, on the facts, the effect of harm on competition is small. It may be allowed if the fixed resale price is competitive, for a limited time only, and would assist the launch of a new product in the market.
There are few exclusions that apply if the RPM amounts to 'serious anti-competitive conduct'. The Competition Commission has indicated it will take a hard-line and clearly states in the guidelines that RPM may amount to 'serious anti-competitive conduct'.
RPM is not illegal where the supplier appoints a true distribution agent who is acting as the supplier and bears no or insignificant risk.
Under these circumstances, the Competition Commission will consider that the supplier and distribution agent forms a single economic unit, and the FCR will therefore not apply. This however will require a very careful assessment as an agreement titled 'agency agreement' can in many cases still contravene the law.
RPM will be excluded from the FCR if it enhances overall economic efficiency. However this operates as a defence and the onus rests on the supplier to demonstrate the required efficiencies.
The exception for 'agreements of lesser significance' is likely to have limited application as it will not apply where the RPM is classified as serious anti-competitive conduct.
What are the consequences of engaging in RPM?
The Competition Commission has indicated it will take a strong stance against RPM. Many companies and associations are already amending their practices to comply with the new law.
There are two possible enforcement approaches the Competition Commission can take depending on the seriousness of the alleged offence:
- issue a warning notice, providing an opportunity to cease or alter the offending conduct; or
- institute proceedings in the Competition Tribunal without first issuing a warning.
If the Competition Tribunal finds the supplier has committed an offence, it can issue a fine of up to 10 per cent of its group turnover in Hong Kong for duration of the infringement (with a three-year cap) for each offence.
For further information, please contact:
Kathryn Edghill, Partner, Bird & Bird
kathryn.edghill@twobirds.com
