NOERR FINANCE & TAX

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LUIZA BEDROS

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RUSANDRA SANDU

  |  26.06.2014

Hardcore sales restrictions – the competition law perspective

The competition law dictates that the buyer/reseller must remain free to determine his own resale prices. However, the contractual means, the particularities of an industry and the economic context are always key elements which need in-depth analysis.

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NOERR FINANCE & TAX

LUIZA BEDROS

LUIZA BEDROS

NOERR FINANCE & TAX


RUSANDRA SANDU

RUSANDRA SANDU

PARTNER, HEAD OF CORPORATE/ M&A DEPARTMENT at NOERR FINANCE & TAX

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.

 

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