The ACCC has granted its first authorisation for resale price maintenance – to power-tool importer and distributor Tooltechnic Systems. The authorisation represents a small but significant contribution to the reassessment of resale price maintenance and other vertical restrictions worldwide, typified by the US Supreme Court’s decision in Leegin Creative Leather v PSKS and also reflected in the Harper Review’s draft recommendations on resale price maintenance and third-line forcing, in recognition of the focus of modern competition law and policy on inter-brand rather than intra-brand competition. These developments may point the way to a more nuanced approach to assessing vertical pricing arrangements.

1. Background

On 5 December 2014, the ACCC made its final determination granting its first ever authorisation for resale price maintenance (RPM) – almost twenty years after the opportunity for protection under the authorisation process was extended to RPM on the recommendation of the Hilmer Review.

The ACCC’s decision authorises Tooltechnic Systems (Aust) Pty Limited to set minimum resale prices.  Tooltechnic is an importer and wholesaler of power tools and related products from Europe – primarily the Festool brand of power tools, including drills, drivers, saws, sanders, routers, planers, polishers and angle grinders.

Festool power tools are targeted at trade professionals and sold through a range of online and physical retailers, including Festool Premium Shops which offer extensive pre-sales and after-sales services such as in-store test centres and on-site demonstrations, repairs and loan tools.  As Tooltechnic pointed out in its 420-page application:

Tooltechnic's distribution model is dependent upon high levels of retail services being offered in conjunction with the supply of its goods. This characteristic places the distribution model at high risk of “free riding” by a minority of dealers who “under invest” or do not invest in the supply of retail services necessary to support the sale of Tooltechnic products. Specifically, some dealers focus on “undercutting” other dealers on price alone rather than retail service. This leads to a situation in which the dealer that actually “sold” the product, ie another dealer has offered the expertise, advice and customer experience to the end user, does not get the order as the purchaser has sourced the product at a “discounted” price elsewhere.

The consumer practice of trying out products with a full-service retailer and then buying them more cheaply elsewhere is now known as “showrooming”, and it has become so prevalent that Oxford Dictionaries shortlisted the term for their 2013 word of the year (the winner was “selfie”).  Tooltechnic proposed to solve this problem by imposing a price floor that would prevent its retailers from selling Festool products below a minimum price – that is, through resale price maintenance. 

2. Reconsidering resale price maintenance

Minimum resale price maintenance has historically been prohibited on a per se basis by competition laws around the world, influenced by the 1911 US Supreme Court decision in Dr Miles Medical Co v John D Park & Sons. RPM generally eliminates price competition between different retailers of the same product.  Consumers in particular may feel that this intra-brand competition is the most valuable form of competition, since the exact same product at a lower price is unquestionably a bargain, while a different product may be better in some ways and worse in others, making price comparisons trickier.

However, it is recognised that resale price maintenance preserves – and can even enhance – intra-brand competition on service and other non-price factors, as well as competition between different products. This latter inter-brand competition may in fact be more valuable than intra-brand competition, as it tends to promote innovation and the development of new products rather than simply driving down prices on existing products.

These developments in economic theory have led to a re-evaluation of resale price maintenance internationally, first in the 2007 case of Leegin Creative Leather Products v PSKS, which overturned almost a century of US law in examining resale price maintenance according to the rule of reason rather than assuming per se illegality; and then in the European Commission’s 2010 Guidelines on Vertical Restraints, which at least acknowledge that in certain cases resale price maintenance may not appreciably restrict competition or may provide efficiencies that would exempt it from prohibition.

These developments are referred to specifically in the Tooltechnic application, and are reflected in the ACCC’s reasons for granting authorisation:

The ACCC considers that Festool products are complex products which are highly differentiated in terms of their attributes and quality, and the provision of services to customers is important in the sale of Festool products.  These services include pre-sale explanations, demonstrations and “try-before-you-buy” of Festool products and post-sales services such as repairs, loan tools and training in use of a product.  Full-service retailers are well placed to effectively and efficiently explain and demonstrate these attributes to potential customers, and to provide after-sales services to existing customers.  However, without the Proposed Conduct, customers can access retail services from one retailer but then purchase the product from another retailer (which may not provide retail services) at a discount. That is, some retailers can gain the benefit of, or free ride on, the services offered by other retailers.

In this case, the ACCC accepts that there is a market failure caused by free riding by some Festool retailers. That is, there is a material risk that full-service retailers will not achieve a sufficient return on the sales of Festool products to continue to provide these pre- and post-sales services, or to provide a sufficient level of these services.

The ACCC recognised that, given the small market share of Festool tools, Tooltechnic would have little incentive to price too high, or consumers would simply go elsewhere. Similarly, setting minimum resale prices for Festool products was unlikely to facilitate market-wide coordination between trade tool suppliers.

The Leegin case is also considered in the Draft Report of Professor Ian Harper’s Competition Policy Review, which notes that:

Like many forms of vertical trading restrictions, in many circumstances RPM may have little effect on competition in a market. This will be the case if the product is subject to strong rivalry from competing products.  In those circumstances a manufacturer or importer would be unable to specify a minimum price that is above the level determined by competition. Further, in a competitive market RPM may be beneficial to competition and consumers.  The usual purpose of imposing a minimum retail price within distribution arrangements is to create a financial incentive (through the retail margin) for a retailer to invest in retailing services (whether in the form of store fit-out or retailing staff).  Otherwise, retailers that invest in their stores and staff training may be vulnerable to undercutting by ‘discounter’ retailers that do not make that investment.

The Draft Report recommends that section 48 of the Competition and Consumer Act (CCA) continue to prohibit RPM on a per se basis – but that the cheaper and faster notification process be extended to RPM.  Under that process, conduct that would otherwise breach the CCA will automatically be exempted after 14 days of being notified to the ACCC – unless the ACCC investigates and revokes notification on the basis that its anti-competitive effects would outweigh any public benefits.

3. Where to now?

The recommendation of the Draft Report represents a small but important step on the long road to legitimacy for resale price maintenance in Australia.  This is a road with four stations: in 1974 resale price maintenance was prohibited per se without the possibility of exemption; in 1995 its per se prohibition was tempered with the possibility of authorisation; perhaps in 2015 it will be permitted the nimbler process of notification, and one day – around 2035 if things don’t speed up – it may no longer be prohibited per se but judged according to its effect on competition.

Another vertical restraint, third line forcing, has always been a station ahead of RPM on this journey.  In 1974 it was prohibited per se but with the benefit of authorisation; the Hilmer Review recommended the competition test but that would have missed a step; instead, in 1995 it was granted access to the notification process.  The Dawson Review again recommended the competition test, but it was still too soon.  Now the Harper Review has joined its voice to theirs, and even the ACCC agrees: surely in 2015 third-line forcing will be freed from its per se prohibition.

In the meantime more than 4,000 third-line forcing notifications have been lodged with the ACCC, and only a dozen have been revoked, a clear demonstration that third-line forcing does not lessen competition frequently enough to warrant a per se prohibition.  If the notification process is extended to RPM, the results may not be quite so overwhelming, as the pro-competitive effects and other public benefits are not always as obvious – though they will become clearer in time.

In 1978, Robert Bork asserted that “Analysis shows that every vertical restraint should be completely lawful,”1  and in 1981 Richard Posner argued that in relation to distribution restrictions, including resale price maintenance, “it is time to adopt an entirely new standard, namely, per se legality.” On the other hand, the Leegin case split the Supreme Court 5 to 4, with a robust dissent by Justice Breyer that will provide plenty of material for arguments that resale price maintenance should continue to be presumed to be anti-competitive.  Moreover, many US state laws still prohibit minimum resale price maintenance on a per se basis.

The ACCC is proceeding cautiously in its draft determination, granting authorisation for four years compared to the more usual five requested and requiring Tooltechnic to provide annual information relating to revenues, wholesale and retail prices before and after the authorisation, changes to dealer arrangements and any complaints received.  The ACCC can be expected to pay close attention to the Tooltechnic experiment, which may also play a part in the response to the Harper Review.  In its submission on the Draft Report, the ACCC argues that resale price maintenance should remain prohibited per se and should not be exempted through notification, including because the kinds of conditions it imposed on Tooltechnic are only available under the authorisation process.

However, ACCC’s acceptance of the fundamental arguments in favour of resale price maintenance provides a clear basis for additional applications for authorisation where manufacturers or distributors face issues of free riding, and ultimately suggests that a more limited prohibition on resale price maintenance may be appropriate.