On 3 December, 2019, Dentons' EU Competition & Antitrust team held its third complimentary webinar in a series dedicated to vertical restraints in the EU. The first two webinars focused on the recent cooperation strategies in vertical enforcement cases (see here) and the current state of play of resale price maintenance (RPM) enforcement in the EU (see here).
On this occasion, the panellists Marieke Scholz (Deputy Head of Unit, DG COMP), Aleksandra Boutin (Partner, Positive Competition) and Yves Botteman (Partner, Dentons) shared their views on the rationale for treating RPM as a restriction by object and the possibility of adopting a more flexible effects-based approach, especially in the context of the ongoing review of the Vertical Block Exemption Regulation (VBER) and the Vertical Guidelines. The panel was moderated by Camille Keres (Associate, Dentons).
RPM: a restriction of competition by object that may be exempted
Under the current rules, an RPM agreement that directly or indirectly imposes fixed or minimum prices on distributors is presumed to restrict competition by object. There is also a presumption that such agreements are unlikely to fulfil the conditions for individual exemption under Article 101(3) Treaty on the Functioning of the EU (TFEU).
However, the 2010 Vertical Guidelines mention that companies that have implemented RPM in their agreements may plead an efficiency defense. In particular, paragraph 225 of the Guidelines refer to:
- The introduction by a manufacturer of a new product;
- A coordinated short-term low price campaign in a franchise or similar distribution system; and
- Free-riding, where absent RPM, retailers may not be incentivized to provide adequate pre-sale services to consumers.
In the context of the ongoing review of the rules on vertical agreements in the EU – which may include a reform of the rules on RPM – this third webinar focused on whether these three scenarios are sufficient to capture all possible efficiency-enhancing situations and whether the rules on RPM should be adapted.
The Commission's perspective: not enough 'real life' examples to change course
At the outset, it was pointed out that the three exceptions mentioned in the Guidelines are not the only possible efficiency defenses that companies can make to justify the use of RPM. Companies should feel free to come forward and provide arguments to the Commission and national competition authorities to justify the use of RPM, even if they do not squarely fall within any of these three scenarios.
In the last two years, RPM enforcement in Europe has experienced a revival, with five RPM cases at EU level (Asus, Denon & Marantz, Philips, Pioneer and Guess) and many more in the Member States. Most, if not all, of these cases concern traditional theories of harm whereby manufacturers would – directly or indirectly – impose unjustified fixed or minimum resale prices on their distributors.
Whilst there are new features in these cases such as the use of pricing software to monitor online price deviations, companies did not try or failed to convincingly justify their RPM practices on account of overriding efficiencies. Similarly, the Commission has seen very few 'real life' examples where RPM generated overriding efficiencies. In the context of the ongoing review of the VBER, the Commission would be interested in learning from stakeholders about real life examples in which RPM would provide such pro-competitive benefits. Likewise, there may be specific situations where the current Guidelines are too vague or fail to provide adequate certainty, e.g. when the supplier engages in direct selling with customers, negotiates the resale price and mandates its distributors to fulfil the orders.
Towards an effects-based approach?
The panel discussed the difference in treatment between vertical mergers and RPM. In particular, when companies vertically integrate and align the resale prices for products, enforcers adopt a lenient approach and even identify pro-competitive benefits, particularly when the transaction does not involve companies with market power. Likewise, when suppliers lack significant market power (i.e. there is vibrant inter-brand competition), RPM should not be capable of harming consumers. Accordingly, from an economic standpoint, many small firms should be allowed to benefit from RPM. However, the lack of legal certainty and the relatively high risk of engaging in RPM is preventing them from doing so.
The panel discussion then moved to a real life example in which a company decided to pursue RPM for the launch of a new product. Faced with the recurrent issue of online resellers offering deep discounts at the time of launching new products, without even having ordered the product or holding any inventories, the supplier engaged in an in-depth assessment as to whether RPM could be implemented for the launch of a truly innovative and novel product in the EU. The assessment involved a review of past product launches. It appeared that the sole purpose of discounting the new product online was to draw traffic to the resellers' websites. As a result, distributors and high street shop retailers were not keen on investing marketing resources and in engaging in pre-sales efforts as the products were already advertised and marketed at deeply discounted prices. Due to misalignment and free-riding on the part of online resellers, the supplier faced disastrous and failed product launches.
With RPM, all actors in the distribution chain enthusiastically ordered large volumes of the product and actively engaged in its promotion, making it both widely visible and readily available to consumers. As a result, the launch proved successful as the product was well promoted and purchased by early adopters that quickly endorsed the product, thereby boosting sales volumes beyond the supplier's initial expectations. The outcome was very positive for the brand supplier, its distributors and consumers, and contrasted markedly with prior episodes. This said, the assessment that led to the recommendation to engage in short- term RPM was costly as the practice is catalogued as a restriction of competition by object and the evidentiary threshold to articulate a robust and bullet-proof efficiency defense is very high.
Next, the audience was asked whether they have ever considered using RPM as a solution to adequately position a product online and, if so, whether they have considered one of the exceptions set forth in the Guidelines. The majority of the respondents answered that they have not considered RPM as it is too risky and the audience was either unfamiliar with the exceptions or found such exceptions too vague to be of any practical use.
The ongoing review of the VBER: timing and possible outcomes for RPM
In terms of the ongoing review of the VBER and Vertical Guidelines, RPM is one of the main topics raised by stakeholders. More precisely, a surprisingly large number of stakeholders raised concerns about the high risk of incurring false positives (i.e. over-enforcement) due to the formalistic approach towards RPM and the lack of legal certainty in the Guidelines regarding possible efficiency defenses.
During the discussion, it was noted that if the rules on RPM are to be changed – for example by expanding the exemptions – stakeholders need to come forward with real life and practical examples of situations where RPM would provide efficiency-enhancing effects and benefit consumers.
Whilst the public consultation is formally over (see here), the Commission appears to be eager to hear further from stakeholders, specifically on real life and practical examples of how RPM may produce pro-competitive benefits.
In terms of the possible outcomes of the review on RPM, there are three possible scenarios:
- The maintenance of the status quo (i.e. nothing changes as regards to RPM);
- An expansion of the efficiency defense scenarios in the Vertical Guidelines; and
- A change from a formalistic ('by object') approach to a more effects-based approach.
Aleksandra Boutin and Yves Botteman agreed that the best possible scenario would be to abandon the formalistic approach and adopt an effects-based approach. This would provide companies with sufficient legal certainty to potentially benefit from RPM. However, at this juncture such a radical change would seem unlikely in the absence of further meaningful contribution from the industry.
The Commission is due to publish a Staff Working Document on the VBER review towards the middle of 2020.
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