In June 2007, a majority in the US Supreme Court in Leegin Creative Leather Products v PSKS Inc overturned the per se prohibition on resale price maintenance (RPM) that had existed since the Court's 1911 decision in Dr Miles. RPM is the control by a supplier of the minimum wholesale or retail price of goods or services for resale or resupply.
Unlike the majority of other vertical arrangements, RPM remains a per se offence in Australia. It is keenly pursued by the Australian Competition and Consumer Commission and is subject to the substantial penalties applicable to Part IV. Earlier this year total penalties of $3.4 million were imposed for RPM engaged in by Jurlique.
Leegin throws open the question of whether RPM in Australia should be prohibited only if it has the purpose or effect of substantially lessening competition.
Until Leegin, RPM was per se illegal in the US as a contract in restraint of trade or commerce in breach of Section 1 of the Sherman Act. The rationale for the prohibition on RPM was that a manufacturer or supplier should not have any right to deprive the public of 'whatever advantage may be derived from competition in the subsequent traffic'.
The US Supreme Court overturned Dr Miles, concluding that the economic rationale on which it was based no longer supported the per se prohibition, nor did the economic effects of RPM. The Court found that RPM does not belong to the group of restraints that always or almost always restrict competition and decrease output. While RPM can facilitate cartels at both the manufacturer and retailer levels, the economics literature is replete with its pro-competitive justifications. For example, by eliminating free-riding and intrabrand competition, retail services are encouraged that promote interbrand competition. RPM can also facilitate the entry of new companies and brands to markets.
As a consequence of Leegin, like other vertical restraints, RPM in the US is now subject to the rule of reason. Under the rule of reason, RPM will be assessed on a case by case basis to assess whether it imposes an unreasonable restraint on competition. This permits a distinction to be made between restraints which are anticompetitive and restraints which in fact stimulate competition and are beneficial to the consumer.
In subjecting RPM to the rule of reason, the majority of the US Supreme Court commented that 'the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated'. Indeed, it cautioned courts 'to be diligent in eliminating [the] anticompetitive uses' of RPM.
It remains to be seen how US courts will apply the rule of reason to RPM. Some indications may be gleaned from the manner in which lower courts have applied that test to non-price vertical restraints. This and comments made by the US Supreme Court might suggest the introduction of a threshold requirement of market power and perhaps additionally market concentration. Whether RPM is initiated by a manufacturer or retailer may also be a relevant consideration, as RPM initiated by a retailer is more likely to have anticompetitive effects.
The US Supreme Court's reasons for overturning the per se prohibition on RPM appear equally applicable to Australia and calls into question whether, as it stands, the Trade Practices Act unnecessarily restricts certain pro-competitive practices. Unlike the US, Australia's per se prohibition on RPM is statutory and any consideration of its necessity would need to be undertaken by the legislature. Recent legislative changes in the trade practices arena suggest that the climate may not be right for such consideration. The legislature is perhaps more likely to side with the dissenting opinion of Breyer J, joined by Stevens, Souter and Ginsburg JJ, according to whom 'the majority has not shown new or changed conditions sufficient to warrant overruling a decision of such long standing.'
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