Australia: ACCC issues first-ever draft determination proposing to authorise resale price maintenance

Last Updated: 26 October 2014
Article by Mark McCowan and Alistair Newton

In response to the first ever application for authorisation for resale price maintenance conduct, the ACCC has issued a draft determination proposing to grant a conditional authorisation. While this brings hope to long-suffering manufacturers, importers and wholesalers, those businesses should be mindful that the ACCC's draft determination makes it clear that success in any future case will depend heavily on its particular facts.

BACKGROUND

The practice of resale price maintenance (RPM) – which is broadly defined to include a variety of conduct aimed at preventing the resale of goods or services below a specified minimum price – is strictly prohibited under section 48 of the Competition and Consumer Act 2010 (Cth) (CCA).

The Australian Competition and Consumer Commission (ACCC) has been able to authorise RPM conduct on public benefit grounds since 1995. Until recently, however, no application for authorisation in respect of RPM conduct had ever been made.

In June 2014, Tooltechnic Systems (Aust) Pty Ltd (Tooltechnic) – an importer and wholesaler of Festool-branded power tools and related products – lodged an application for authorisation to impose minimum retail prices on retailers of Festool products. Tooltechnic proposes to revise its retailer agreements to include a contractual obligation on retailers not to resell Festool products below minimum prices nominated by Tooltechnic (Proposed Conduct).

The ACCC has now issued a draft determination proposing to grant conditional authorisation for the Proposed Conduct for a period of three years.

TOOLTECHNIC'S APPLICATION FOR AUTHORISATION

The main elements of Tooltechnic's argument in favour of authorisation were as follows.

  • Festool products are complex, highly differentiated and premium-positioned products, and are aimed primarily at trade users.
  • Sales of Festool products are enhanced by, and Tooltechnic seeks to encourage, high levels of retail service. This includes, for example, knowledgeable retail staff capable of giving sound customer advice, product demonstrations, 'try before you buy' arrangements, informal training, in-store repair facilities and readily available consumables and accessories.
  • Tooltechnic's high-service model is being undermined by so-called 'free riding' by a minority of dealers who under-invest (or do not invest at all) in pre- and post-sales services in respect of Festool products and who take advantage of the investments of others while aggressively discounting prices (including through online sales).
  • Aggressive discounting creates an incentive for retailers to scale back their service offering (to lower costs and enable them to compete against lower priced retailers) and devalues the Festool brand.
  • Tooltechnic has attempted to use contractual arrangements to encourage retailers to provide a high level of service to customers. These contractual arrangements include quality standards, and linked rebates. However, with the onset of aggressive discounting and online sales, these arrangements are no longer effective.
  • In the absence of authorisation, Tooltechnic is likely to implement exclusive territories and/or limitations on independent online sales.

PUBLIC BENEFITS

In its draft determination, the ACCC recognised that RPM conduct can, in certain circumstances, address market failures (such as free-riding) and generate benefits to the public.

The ACCC accepted that public benefits would result from the Proposed Conduct if retail service levels were raised such that some consumers made more informed purchasing decisions, and/or if consumers continued to be offered the choice of purchasing premium products accompanied by a high level of post-sale services.

In assessing whether the Proposed Conduct would actually result in those benefits, the ACCC addressed the following key questions.

Is the provision of pre- and post-sales services important in the sale of Festool products to customers?

On the basis of evidence showing that Festool products are relatively complex and positioned as 'niche, high quality and high price point products', the ACCC accepted that pre-sales services – such as those that serve to inform customers of the functions and durabaility of Festool products and the ways in which they are differentiated from competing products – form an important part of Tooltechnic's distribution model . The ACCC noted that experienced repeat customers may not require pre-sales services, but those customers may still value the opportunity to try the 'feel' of a product. The ACCC also agreed that some Festool customers value access to a high level of post-sales services.

Are retailers best placed to provide these services?

The ACCC accepted that it will be difficult for some customers to assess the features of some Festool products without a pre-sale demonstration by the retailer. As for post-sales services, there was a question as to whether the retailer is best placed to provide these services or whether they could be provided by Tooltechnic itself. However, the ACCC acknowledged that there are advantages to dealers providing some services due to their location and pre-existing customer relationships.

Is there a material risk of under-provision of these services?

The ACCC was satisfied that the presence of aggressive discounters reduces the incentive and ability of other retailers to offer a high level of retail services. Indeed, the ACCC accepted evidence that free riding had already impacted retail service provision. For example, Tooltechnic was able to show that some retailers had refused to stock Festool products in the first place, some had decreased the amount of floor space devoted to Festool products (which the ACCC said was related to service provision in that a feature of Festool's post-sale service is 'convenient access to [a] full range of consumables and accessories) and some had ceased offering demonstration and repair facilities.

Will the Proposed Conduct decrease the risk of under-provision of services?

The ACCC accepted that, in circumstances where price competition is eliminated, some retailers will increase or improve the level of retail services they provide in relation to Festool products. Further, the ACCC considered that the proposed alternative of exclusive territories and/or a ban on independent online sales would be likely to reduce intra-brand competition on both price and service and some customers will face a higher price for Festool products and potentially receive a lower level of services with or without the Proposed Conduct.

What benefits flow from ensuring an adequate provision of services?

The ACCC accepted that customers will be likely to have greater access to the information necessary to make a fully informed decision about the products they are purchasing and will likely receive a higher level of post-sales service. However, the ACCC noted that not all Festool customers are likely to benefit, as experienced users may not require pre-sales services and would tend to be satisfied with a relatively low level of post-sales services.

PUBLIC DETRIMENTS

The ACCC acknowledged that the Proposed Conduct will eliminate intra-brand price competition between retailers, and that as a result some customers will face higher retail prices for Festool products.

However, the ACCC considered that this detriment is likely to be limited because Festool products are constrained by a wide variety of competing brands, and Tooltechnic will have little incentive to set minimum retail prices above competitive levels (since doing so would merely reduce sales of Festool products overall).

A further issue considered by the ACCC was whether the Proposed Conduct would facilitate illegal cartel conduct at the wholesale and/or retail level of a market. However, the ACCC considered that the Proposed Conduct is unlikely to do so, given, among other things:

  • the Festool brand's small market share;
  • the significant number of other (larger) suppliers of trade-quality power tools; and
  • the highly differentiated nature of power tools (which requires suppliers to compete on reliability, performance and service in addition to price).

CONDITIONAL AUTHORISATION PROPOSED

On balance, the ACCC considered that the public benefits likely to result from the Proposed Conduct (i.e. an end to free riding and an increase in retail service levels) outweigh the clear, but limited, detriments (i.e. some customers will face higher retail prices for Festool products). Accordingly, the ACCC proposes to authorise the Proposed Conduct.

However, this is the first occasion on which the ACCC has been invited to authorise RPM conduct, and for that reason the ACCC understandably proposes a relatively conservative approach to authorisation. In particular, the ACCC proposes to grant authorisation for a three-year term (instead of the five-year term proposed by Tooltechnic). The ACCC also proposes a monitoring regime, under which Tooltechnic must provide information to the ACCC on an annual basis, including:

  • the minimum retail prices set by Tooltechnic;
  • changes in the type of Festool retailers (for example, when a retailer becomes a "premium" retailer with dedicated floor space and more highly trained staff); and
  • the addition or removal of any demonstration or repair facilities for Festool products.

IMPLICATIONS FOR BUSINESS

The draft determination represents a significant development in the ACCC's administration of the prohibition against RPM, and potentially signals a more accommodative regulatory stance. It also aligns the ACCC with conventional economic theory (which recognises that RPM conduct can have pro-competitive effects) and with regulatory trends overseas (for example, RPM has not been strictly prohibited in the United States since 2007, or in Canada since 2009).

That said, the draft determination's impact may be more limited than appears at first glance. For example:

  • The ACCC will be keen not to "open the floodgates" on RPM authorisations and it is likely to view further applications with a sceptical eye. The ACCC will likely require convincing evidence of a market failure (such as a free rider problem) capable of being remedied by the proposed RPM conduct and strong inter-brand competition. The ACCC may also be unwilling to grant authorisation unless there have already been genuine (and perhaps long-standing) efforts to remedy the market failure by other means.
  • It's not clear whether the ACCC would accept a free rider argument that relates purely to promotional or advertising investments (as opposed to investments that improve pre- or post-sales service levels). That issue will be particularly important for suppliers of fast-moving consumer goods that generally do not rely on, or benefit substantially from, pre- and post-sales service but who undertake significant promotional/advertising activities from which all downstream retailers (including aggressive discounters) benefit.
  • It's notable that the draft determination does not directly address Tooltechnic's argument that aggressive discounting damages the Festool brand, which suggests that the ACCC afforded that argument relatively little weight.
  • Tooltechnic's case was undoubtedly assisted by the fact that the Festool products have a relatively small market share and compete against a wide range of other, more established, brands. Other potential authorisation applicants may not operate in such a market.
  • The clear implication of the ACCC's proposed monitoring regime is that, if the authorised RPM conduct isn't effective in maintaining or improving customer service levels, then the ACCC won't re-authorise it. If the minimum pricing structures that Tooltechnic implements in the meantime become central to its business model, then it may be exposed to significant commercial risks when its authorisation expires in three years' time.

At the same time, business should not assume that the arguments accepted by the ACCC in the Tooltechnic case are the only ones available. For example, economic theory suggests that RPM conduct can assist a new entrant (or a new brand offered by an existing market participant) to overcome incumbency advantages, including by offering retailers protection against intra-brand price competition and thereby incentivising them to stock the new (relatively untested) brand alongside established rivals (which may be heavily advertised). It's not clear whether the ACCC would accept that as a sufficient public benefit to overcome any detriments, although it seems likely to do so in an appropriate case.

BROADER CONTEXT

Finally, the draft determination comes at a time in which the CCA's strict approach to RPM is being questioned. For example, the Law Council of Australia made submissions to the current 'root and branch' review of competition law and policy (known as the Harper Review) arguing that RPM should not be strictly prohibited, including for the reason that in circumstances where there is strong inter-brand competition, RPM will have a limited effect on competition and indeed may be pro-competitive. By contrast, the ACCC submitted that the strict prohibition should be retained.

In response to these and other submissions, the Harper Review panel's draft report proposes a middle path through which RPM would continue to be strictly prohibited but also subject to a simpler and more cost-effective process of notification (in addition to the existing authorisation option). If notification becomes available, then business will gain a more attractive (and practical) option for gaining immunity for RPM conduct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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