Fixed/Minimum Retail Price Maintenance in Vertical Distribution Networks

This title suggests that the post below would be a useful cure to insomnia. Ironically, because there is so little clear/correct guidance on this point creating this memo for my firm meant that I actually only left the office at 2:35am. So for the sake of letting the world’s trainees actually go to bed…

Key Points on Legitimate Retails Price Restrictions
1 Summary
1.1 Historically, the EC treated fixed or minimum resale price maintenance (FRPM) as being entirely incompatible with EC competition law. To this end, a 2011 SJB client guidance note and 2011 Ashurst guide on Selective Distribution contained similar statements that:
“it is essential to note that whilst the supplier can impose high standards of quality and service, it cannot seek to control the retail prices charged by its distributors. Imposing a fixed or minimum resale price upon a buyer is not allowed.”
1.2 However, the EC’s 2010 Vertical Guidelines show some softening of the traditional strict stance on this subject. The Vertical Guidelines recognised that resale price maintenance may, in some circumstances, lead to economic efficiencies and therefore meet the test for clearance under Article 101(3) of the Treaty on the Functioning of the European Union (“TFEU”).
1.3 Nonetheless, the guidance suggests that an FRPM would only be acceptable for brief periods of time. That is, any price maintenance is likely to only be exempted under Article 101(3) during an initial product launch period, or for short-run co-ordinated promotions across a franchise or distribution networks. Emphasising this point, in 2002, the Commission exempted certain multi-lateral interchange fees for cross-border payments with Visa cards . However in 2008 the Commission began an investigation into Visa’s multilateral interchange fees, following expiry of the exemption granted in 2002.
1.4 As such common practice guidelines vertical agreements and Article 101(3) regularly state that guidance along the lines of:
“It is highly unlikely that an agreement containing fixed or minimum RPM would meet the criteria for exemption under Article 101(3). Restrictions on a buyer’s ability to determine its minimum resale prices constitute “hard-core” restrictions for the purpose of the new vertical agreements block exemption which, if included in a vertical agreement, mean that the block exemption cannot apply. Furthermore, such clauses cannot be severed from an agreement so the entire agreement is void.”
1.5 The below note sets out the EC’s approach to assessing a FRPM and guidance on the economic context in which it may allow for a FRPM to exist in a select distribution agreement. However, any guidance to clients in this regard should emphasise that:
(a) including FRPM in an agreement gives rise to the presumption that the agreement restricts competition and thus falls within Article 101(1); and
(b) the presumption that the agreement is unlikely to fulfil the conditions of Article 101(3).

2 Legal Background
2.1 Article 101 of the TFEU prohibits agreements that have as their object or effect the restriction, prevention or distortion of competition within the EU and which have an effect on trade between EU member states. As regards vertical agreements the category of restrictions by object includes, in particular, fixed and minimum resale price maintenance.
2.2 The block exemption of vertical agreements does not apply to agreements containing a FRPM. Specifically the Block Exemption notes that: “This Regulation should not exempt vertical agreements containing restrictions which are not indispensable to the attainment of the positive effects mentioned above; in particular, vertical agreements containing certain types of severely anti-competitive restraints such as minimum and fixed resale-prices… irrespective of the market share of the undertakings concerned.” As such, the anti/procompetitive effects of the FRPM will be considered entirely within the framework set out by Article 101(3) .
2.3 For an FRPM to qualify under article 101(3) it must satisfy each of the following conditions:
(a) contributes to improving the production or distribution of goods or promotes technical or economic progress, while
(b) allowing consumers a fair share of the resulting benefit, and which does not:
(i) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(ii) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.
The Commission is unlikely to consider this condition to be satisfied if the agreement does no more than improve the economic position of the parties to the agreement.

3 When might an FRPM satisfy the 101(3) Conditions:

    Guidance Specific to Selective Distribution Networks

3.1 The EC Vertical Guidance detail a number of circumstances when the article 101(3) conditions might be met. With respect to selective distribution networks, the EC particularly emphasises that, subject to the nature of the product being suitable, the following economic rationales may apply:
(i) resale price maintenance may be justifiable to eliminate free-riding, on the basis that retailers which invest in additional customer services may cut back on such services if they are undercut on price by retailers which do not provide such services ; or
(ii) resale price maintenance may help create a brand image by imposing a certain measure of uniformity and quality standardisation on the distributors, thereby increasing the attractiveness of the product to the final consumer and increasing its sales. This can, for instance, be found in selective distribution and franchising.
NOTE: However the EC does emphasise that whether consumers actually overall benefit from extra promotional efforts depends on whether the extra promotion informs and convinces and thus benefits many new customers or mainly reaches customers who already know what they want to buy and for whom the extra promotion only or mainly implies a price increase.
3.2 In general the above arguments will be strongest for new products, for complex products, for products of which the qualities are difficult to judge before consumption (so-called “experience products”) or of which the qualities are difficult to judge even after consumption (so-called “credence products”).
3.3 In relation to context the “Free-Rider” rationale above, the Vertical Guidance notes however that for there to be “a real free-rider issue” the following criteria must apply:
(i) it can only occur on pre-sales services and other promotional activities, but not on after-sales services for which the distributor can charge its customers individually;
(ii) the product will usually need to be relatively new or technically complex or the reputation of the product must be a major determinant of its demand, as the customer may otherwise very well know what he or she wants, based on past purchases;
(iii) the product must be of a reasonably high value as it is otherwise not attractive for a customer to go to one shop for information and to another to buy; and
(iv) it must not be practical for the supplier to impose on all buyers, by contract, effective promotion or service requirements.

    Guidance Relating to Resale Price Restrictions in General

3.4 The Vertical Guidance suggests that the following arguments may be used by an undertaking to justify FRPM in its agreements;
(i) in relation to a manufacture launching new product,
(A) FRPM may provide the distributors with the means to increase sales efforts and if the distributors in this market are under competitive pressure this may induce them to expand overall demand for the product and make the launch of the product a success, also for the benefit of consumers;
(ii) In relation to franchise system or similar distribution system;
(A) FRPM may allow for the coordination of a uniform distribution format or short term low price campaigns (2 to 6 weeks in most cases) which will also benefit the consumers; or
(iii) in relation to experience or complex products,
(A) the extra margin provided by RPM may allow retailers to provide (additional) presales services.
3.5 When assessing an FRPM within the framework of Article 101(3) The EC will consider the following:
(a) efficiency gains of the FRPM must fully off-set the likely negative impact on prices, output and other relevant factors caused by the agreement.
(b) an analysis of remaining competitive pressures on the market and the impact of the agreement on such sources of competition.
NOTE: The assessment of restrictive agreements under Article 101(3) is made within the actual context in which they occur and on the basis of the facts existing at any given point in time.
3.6 The Vertical Guidance notes that once the parties substantiate that likely efficiencies result from the inclusion of a FRPM in their agreements and that all the conditions of Article 101(3) are fulfilled, it is then for the EC to assess the likely negative effects on competition and consumers. In this regard the EC will be particularly conscious of the risk that the FRPM will:
(i) facilitate collusion between suppliers by enhancing price transparency in the market;
(ii) eliminate intra-brand price competition or facilitate collusion at the distribution level;
(iii) generally soften competition between manufacturers and/or between retailers;
(iv) negatively affect the public by preventing distributors from lowering their sales price for that particular brand;
(v) 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;
(vi) lead to the manufacturer foreclosing smaller rivals; or
(vii) reduce dynamism and innovation at the distribution level by preventing price competition between different distributors and/or hinder the entry and expansion of distribution formats based on low prices.

Annex A:
Case Law

Uniform Eurocheques
Uniform Eurocheques is an example in which an individual exemption was granted for what was in effect a price-fixing agreement. The 15,000 financial institutions operating the eurocheque system had entered into a five-year agreement relating to the acceptance of eurocheques, which provided for a uniform commission of 1.25% to be charged.

The Commission was prepared to grant an exemption on the basis of the benefits of the system as a whole, which enabled customers to know that they would have the benefit of a common charge in each member country. The fixed commissions were relatively small and reasonably necessary for the overall benefits.

Visa Payment Schemes
In Visa payment schemes, the Commission found that the multilateral setting of the interchange fee constituted a restriction of competition but that such a fee, as it was set in a reasonable and equitable manner (including a close linkage to costs for certain transactions), had sufficient countervailing benefits for it to be eligible for exemption.

In 2008, the Commission began an investigation into Visa’s multilateral interchange fees, following expiry of the exemption granted in 2002. The Commission is investigating the Visa interchange fees in accordance with the principles established in the MasterCard case. In April 2009, the Commission sent a statement of objections to Visa alleging that the multilateral interchange fees set directly by Visa in the EEA for point of sales transactions with consumer payment cards (both cross-border transactions and domestic transactions in nine member states) restrict competition between banks, contrary to Article 101(1) of the TFEU, and do not meet the conditions for exemption under Article 101(3) (Commission MEMO/09/151; see Legal update, Commission sends statement of objections to Visa). In December 2010, the Commission decided to make binding commitments offered by Visa to address the competition concerns that it had identified in relation to the MIFs set directly by Visa Europe in the EEA for point of sales transactions with immediate direct debit cards (see Legal update, Commission accepts binding commitments from Visa Europe).

Mastercard
In December 2007, the Commission announced that it had found that MasterCard’s EEA multilateral interchange fees constituted a restriction of competition and breached Article 101(1). The Commission had found that the interchange fees restricted price competition in that they artificially inflated the base prices charged by banks for accepting payment cards.

Unlike in the 2002 Visa case (above), the Commission did not accept that the MasterCard fee had sufficient countervailing benefits for it to be eligible for exemption. It found that the fees were neither necessary for innovation or efficiency. The Commission stated that it was up to the parties to provide robust proof of any objective efficiencies resulting from the restriction. Any such efficiencies must do more than merely benefit the member banks.

In this case, the methodologies used by MasterCard to calculate the fees were not such as to ensure that both cardholders and merchants obtained a fair share of the benefits of the arrangements (Commission press release IP/07/1959).

MasterCard was required to withdraw its EEA multilateral interchange fee within six months. MasterCard did temporarily repeal the multilateral interchange fee, but subsequently introduced revised terms. In April 2009, the Commission announced that MasterCard had agreed to amend its methodology for calculating cross-border multilateral interchange fees. On the basis of these undertakings, the Commission does not currently intend to take any action against MasterCard for non-compliance with the 2007 decision (Commission press release IP/09/515; see Legal update, Commission statement on MasterCard’s decision to give undertakings in relation to multilateral interchange fees).

MasterCard appealed the Commission’s decision to the General Court. On 24 May 2012, the General Court dismissed the appeal in its entirety. The General Court found, in particular, that the Commission had not erred in concluding that the MIF was not ancillary to the MasterCard system as a whole. It agreed with the Commission that the MIF is not objectively necessary for the functioning of the MasterCard payment system. The General Court also upheld the Commission’s finding that the MIF had a restrictive effect on competition. It also supported the Commission’s conclusion that the MIF did not contribute to technical or economic progress and so did not meet the conditions for exemption under Article 101(3) (Case T-111/08 – MasterCard and others v Commission; see Legal update, General Court dismisses MasterCard appeal).

MasterCard has appealed against the General Court’s judgment to the ECJ (Case C-382/12 – MasterCard, Inc., MasterCard International, Inc. and MasterCard Europe).

Pierre Fabre Dermo-Cosmétique
Whilst this case relates to physical sale restrictions in a selective distribution system, it operates by analogy to demonstrate how the ECJ will consider the economic context of such restrictions and by analogy of FRPM.

On 13 October 2011, the ECJ ruled that, in the context of a selective distribution system, a clause which prevents internet sales by requiring that cosmetics and personal care products are sold in a physical space in the presence of a qualified pharmacist, amounts to a restriction by object within the meaning of Article 101(1) if it is not objectively justified.

This case demonstrates that:
(b) consideration of the objective justification of the clause requires an individual and specific examination of the content and objective, and the legal and economic context of which it forms a part, with regard to the particular properties of the products.
(c) Such a clause will prevent the application of the vertical agreements block exemption.
(d) Such a clause may benefit from individual exemption if the conditions for exemption under Article 101(3) are met, but the burden of proof lies with the undertaking and is onerous.

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