India: The Fixation With Fixing Resale Prices

Last Updated: 2 October 2017
Article by Prerna Parashar

Under the Indian Competition Act, Resale Price Maintenance (RPM) is defined under Section 3(4) (e) of the Act as including any agreement to sell goods on the condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

Also known as vertical price fixing, RPM refers to agreements or practices among enterprises at different levels in a distribution channel, wherein an enterprise decides the resale price at which a product or service must be sold by a distributor. As a vertical intra-brand restraint, RPM governs the resale price of products or services of a particular manufacturer. RPM, in its usual form, is the practice of setting a price floor, below which sales cannot occur, as in the case of minimum resale price maintenance. In its classic formulation, RPM is the act of directly controlling the retail transaction price for the manufacturer's products. However, RPM may also be accomplished through some programs under which a manufacturer unilaterally announces its recommended retail prices and stops dealing with retailers that do not follow its suggestions.

CCI's adjudication on RPM

The CCI has adjudicated on the concept of RPM, through three decided judgments.

The first was in the case of M/s Esys Information Technologies Pvt. Ltd. v. Intel Corporation & Anr1 . In this case, the Informant (a distributor) alleged that Intel was a dominant enterprise that inter-alia indulged in the practice of RPM. The CCI however recorded that the mere monitoring of resale price by Intel at a macro level cannot be termed as resale price maintenance in terms of section 3(4)(e) of the Act and cannot by itself be said to be anti-competitive. No evidence was found by the Director General of Investigation (DG) to suggest that the aforesaid act of Intel would in any manner create barriers to new entrants in the market, drive existing competitors out of the market, or foreclose competition.

In Ghanshyam Dass Vij v. Bajaj Corp. Ltd. and Ors., 2 the DG found Bajaj to have indulged in RPM by prescribing rates at which its FMCG products (particularly hair oil) were to be re-sold by the dealers to the retailers including the imposition of vertical restrictions on the dealers along with its decision to terminate the dealership of the Informant. The CCI however, disagreed with the findings of the DG noting that the DG only looked into sales, distribution model and had completely missed conducting a study of other players in the FMCG sector and failed to note that there was no dearth of products of other equally placed and even better brands in the market. The CCI opined that though Bajaj had imposed vertical restraints upon its distributors, the effect on the market had not been shown to have caused Appreciable Adverse Effect on Competition (AAEC), the standard against which RPM has to be measured under Indian law.

For the first time, in Re: M/s Fx Enterprise Solutions India Pvt. Ltd v. M/s Hyundai Motor India Limited,3 the CCI held that the restriction imposed by a company (Hyundai) on the maximum permissible discount that may be given by a dealer to the end-consumer, amounts to an act of RPM, that violated the Act. The CCI found that Hyundai monitored the maximum permissible discount levels through a 'Discount Control Mechanism' which was implemented in the following manner:

  • Hyundai mandated the dealers to adhere to the maximum permissible discount by not authorizing them to give discounts above the recommended range.
  • Hyundai admitted to appointing 'mystery shopping agencies' to collect data with respect to the levels of discount offered by its various different dealers all over NCR.
  • Though Hyundai contended that their discount schemes were recommendatory in nature and that the distributors/ dealers were not mandated to follow the scheme, there was enough evidence to show that a penalty punishment mechanism had been put in place by Hyundai for any non-compliance by the dealers with the discount scheme.

As a result, a penalty of INR 87 crores was imposed. Currently, on an appeal filed by Hyundai, the National Company Law Appellate Tribunal (NCLAT) vide its order dated 18 July 20174 has stayed the fine and recorded that the CCI, by denying Hyundai an opportunity to respond when it changed the definition of the relevant market had violated Hyundai's right to fair hearing and in turn failed to adhere with the principles of 'natural justice'.

CCI's Approach to RPM

The consistent approach of the CCI in all these decisions has been to look into the effect of the RPM on the market rather than adopting a per se approach to fixing resale prices. In Bajaj, the CCI considered the market structure of FMCG products, and in particular, the hair oil segment in India, and opined that it was dynamic, wide, and that consumers had various options to choose from. Bajaj did not hold the position of strength in this sector as other larger players were also present in the market. Any RPM arrangements were therefore not likely to affect the inter-brand competition. No penalty was thus imposed by the CCI as it failed to establish AAEC based on the factors enumerated under Section 19(3) of the Act.

However, in Hyundai, it found that the car manufacturer was a significant player in the market, and by determining the level of discount for each model and variant of its passenger cars, it was able to reduce intra-brand competition. There was also enough evidence before the CCI to show that the conduct of Hyundai resulted in AAEC, and the consumers were made to pay higher prices as a result.

Currently, a matter relating to RPM in the online space is pending investigation. In M/s Jasper Infotech Private Limited v. Ms. Kaff Applicances (India) Pvt. Ltd.5, the CCI prima facie held that "the Opposite Party was having an arrangement/agreement with its authorized dealers under which the dealers were given the 'Market Operating Price (MOP) price list' for its product. Such an agreement hinders the ability of dealers/distributors to compete on the price of the product. The Commission feels that such prescription of MOP by the Opposite Party to its dealers and insistence to follow MOP pricing regime prima facie seems to be in contravention of section 3(4)(e) read with section 3(1) of the Act."

RPM in other jurisdictions

In the United States, Section 16 of the Sherman Act makes it per se illegal for a manufacturer and its distributor to agree on the minimum price that the distributor can charge for the manufacturer's goods.

A landmark decision of the U.S. Supreme Court discussed the concept of RPM in Leegin Creative Leather Products, Inc. v. PSKS, Inc..7 Leegin had decided to refuse sale to retailers if they intended to discount its products below their recommended retail price. Five years after this policy was introduced, Leegin discovered that Kay's Kloset was violating the policy by marking down the Leegin products by 20%. When Kay's refused to comply with Leegin's policy, Leegin cut them off. PSKS, the parent company of Kay's, sued charging that Leegin had violated antitrust laws when it entered into agreements with retailers to charge only those prices fixed by Leegin. The District Court excluded expert testimony about Leegin's pricing policy's pro-competitive effects on the ground that Dr. Miles Medical Co. v. John D. Park & Sons Co8., makes it per se  illegal under Section 1 of the Sherman Act for a manufacturer and its distributor to agree on the minimum price the distributor can charge for the manufacturer's goods. This scenario changed when the U.S Supreme Court overruled Dr. Miles by holding in Leegin that a better legal analysis would be the "rule of reason," under which price minimums would be held illegal only in cases where they could be shown to be anticompetitive. RPM was no longer to be considered a per se violation and was subjected to the 'rule of reason' approach – similar to the approach followed by the CCI.

In contrast, the European Commission (EC) has defined RPM as "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."9 Under the Commission's Guidelines on Vertical Restraints, though it is theoretically possible to claim that an agreement containing RPM does not fall within the prohibition of Article 101(1) Treaty on the Functioning of the European Union (TFEU), if it produces efficiencies pursuant to Article 101(3) TFEU, in practice, the EU competition authorities still presume RPM to fall within the scope of Article 101(1) TFEU.

Most major EU countries such as Germany and France treat RPM as a per-se violation. In the United Kingdom, as well, there is a relatively strict prohibition on minimum RPM arrangements. Very recently, the Competition and Markets Authority (CMA) fined a bathroom supplier £826,00010 for restricting the prices at which online retailers could resell its bathroom products. The supplier, Ultra Finishing Limited (Ultra), supplied its bathroom products to various online retailers for resale. Ultra had issued the retailers with 'recommended retail prices' for these products, but these were not genuine recommendations. Rather, retailers were threatened with sanctions (including loss of supply) if they did not price at or above the 'recommended' price.  These penalties included charging the non-conforming retailers higher prices for future products supplies, withdrawing their rights to use Ultra's brand images online or, in some cases, ceasing supply altogether. It was argued by Ultra that it had introduced the 'recommended' pricing guidelines in an attempt to protect its brand. The CMA held that the practice undertaken by Ultra finishing limited constituted RPM in the sense that it limited the retailers' ability to offer lower prices than the 'recommended' retail prices to potential customers.

Conclusion

In its first substantive decision on RPM, the CCI has opined that any agreement that has a direct or indirect object of establishing a fixed or minimum resale price level, may impede competition, provided that it has an AAEC on the market. RPM, through the Hyundai Case has been broadened to include any conduct that fixes the distribution margin, fixes the maximum level of discount, grants rebates, shares the promotional costs conditional to the adherence to a given price level, links resale price to resale prices of competitors, or uses threats, intimidation, warnings, penalties, delay or suspension of deliveries as a means of fixing the prices charged by the retailers.

It is yet to be seen what impact this judgment will have. Whether it will actually deter manufacturers from resorting to stringent actions – including termination of dealerships, etc, whenever there is a non-compliance of the prescribed/ recommended discount by their dealers, or not, is something that only time will tell.

­­­ ­­­­ ­­­­ ­­­­ ­­­­ ­­­­ ­­­­ ­­­­ ­­­Footnotes

1 CCI order dated 16.01.2014 in Case No. 48 of 2014.

2  CCI order dated 12.10.2015 in Case No. 68 of 2013.

3 CCI order dated 14.6.2017in Case No. 36 of 2014.

4 Competition Appeal (AT) No. 06 of  2017

5 CCI order dated 29.12.2014 in Case No. 61 of 2014.

6 Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

7 127 S. Ct. 2705 (2007).

8 220 U.S. 373 (1911).

9 Commission notice - Guidelines on Vertical Restraints, Official Journal C 130, 19.05.2010.

10 Case CE/9857-14: https://assets.publishing.service.gov.uk/media/573b150740f0b6155b00000a/bathroom-fittings-sector-non-conf-decision.pdf

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