In December 2014, for the first time in the history of modern Australian competition law, the Australian Competition and Consumer Commission (ACCC) was asked to “authorise” resale price maintenance (RPM) conduct on the basis that the public benefit arising from the conduct would outweigh any public detriment.
Surprisingly, the ACCC granted authorisation to the applicant, a supplier of power tools, to engage in RPM conduct for 4 years despite accepting that the relevant conduct would be likely to result in customers paying higher prices for products.
What do you need to know?
Although the ACCC’s decision in this case is unlikely to result in a flood of new authorisation applications for RPM, you should consider applying for authorisation if the competitive effects of the relevant conduct are likely to be negligible and the RPM would increase consumer welfare.
Authorisation for RPM conduct is more likely to be granted in circumstances where the market in which your products are sold is competitive, you have no incentive to increase prices to above market levels, the RPM will result in some public benefit (such as better quality services, increased consumer choice or more informed consumer decision making), and there is no other credible alternative strategy to achieving the same objective. Authorisation however is a costly and time consuming process (6 months).
While other countries such as the US have recently decided that RPM should no longer be outright illegal but should be subject to a competitive effects test, the Harper (Root and Branch) Review has proposed that RPM continue to be outright illegal but that it be allowed where the public benefits outweigh the public detriments by way of notification process to the ACCC (a simpler and quicker administrative process than authorisation).
What is RPM?
A supplier engages in RPM if it seeks to set a “floor” price for which its products can be sold by another person. RPM conduct includes:
- attempting to induce a person not to sell the supplier’s products at less than a price specified by the supplier;
- informing a person that the supplier will not supply the person unless he or she agrees not to sell below the supplier’s specified price;
- entering an agreement that provides that the purchaser will not sell below the supplier’s specified price; and
- withholding supply because the purchaser has not agreed not to sell below the supplier’s specified price or has sold the supplier’s goods below that price.
RPM is an automatic breach of the Competition and Consumer Act 2010 (regardless of its effect or likely effect on competition). RPM however can be authorised by the ACCC in circumstances where the ACCC is satisfied that the public benefits arising from the conduct outweigh any public detriments including any lessening of competition.
What was the relevant conduct in this case?
Tooltechnic Systems (Tooltechnic), the exclusive importer and wholesaler of Festool power tools, proposed to amend its agreements with its dealers to include a requirement that they not sell any Festool products below minimum prices nominated by Tooltechnic.
Festool products were complex premium end products with a high level of features and functions and a wide array of complementary accessories and consumables. In comparison to standard power tools, Festool products focussed on longevity, non-standard features, innovation adaptability and integration with complementary products. They were also characterised by important pre-sales services (including explanations, demonstrations and “try before you buy” arrangements with products and accessories) and post-sales services (including training, repair, support and availability of accessories). Tooltechnic also engaged in a range of activities to ensure dealers were properly trained in respect of Festool products.
Tooltechnic sought authorisation for RPM because it claimed that some dealers were “free riding” on others by under investing in the supply of associated retail services necessary to support the sale of Festool products and were accordingly only seeking to compete on price without providing those services.
This resulted in:
- customers only obtaining information from dealers that provided retail services but charged a higher price and then acquiring Festool products from dealers offering discounted prices and no associated retail services;
- dealers that provided the retail associated services ceasing to supply or market Festool products or ceasing to provide those services; and
- dealers that were discounting were not providing any associated retail services to customers.
Tooltechnic claimed that existing contractual obligations on dealers to meet quality standards in order to obtain a rebate were not effective in preventing the free riding conduct as dealers were foregoing the rebate to make increased sales of Festool products at discounted prices (but without the associated retail services).
The RPM conduct however would give Festool dealers the necessary margin on sales to compensate them for providing the associated retail services (for which they did not charge).
Tooltechnic accordingly wished to engage in RPM to eliminate free-riding by discounting dealers, preserve its distribution model and protect the Festool brand image. It argued that RPM was efficient, would not restrict competition, would benefit customers and was preferable to the likely alternative of exclusive territories for dealers.
What were the public detriments arising from the conduct?
Although the ACCC accepted that the RPM conduct proposed to be engaged in by Tooltechnic may result in customers paying higher prices for Festool products and there was ample evidence of customer appetite for discounted products, the ACCC said detriment was limited because:
- the market for power tools was highly competitive with many large suppliers;
- Tooltechnic was a smaller supplier in the market and accordingly would have no incentive to set high prices for Festool products;
- dealers stocked a range of products so may cease supply of Festool products if prices were too high.
The ACCC also determined that the RPM conduct was unlikely to result in coordinated conduct in the market given the large number of suppliers, the differentiated nature of power tool products across the price and quality spectrum (not homogenous) and the low barriers to entry/expansion.
What were the public benefits arising from the conduct?
The ACCC determined that the RPM conduct would result in the following public benefits:
- an increase in the important associated retail services to Festool customers enabling them to become more informed about purchasing decisions and meeting expectations associated with a premium brand;
- the continuation of premium products being offered to customers accompanied by high level retail services. That is, without the RPM conduct, free riding by discounting dealers will result in other dealers not providing the associated retail services at all; and
- an improvement in the range of products and quality of services available to customers;
The ACCC also noted that economic literature supported the proposition that RPM can remedy free riding and as a result increase competition and consumer welfare.
What was the counterfactual? What would have happened without authorisation?
The ACCC determined that without RPM and authorisation, dealers would continue to set their own prices for Festool tools resulting in discounted prices and “free riding”. The ACCC also found that the provision of associated retail services would decline without authorisation.
The ACCC accepted Tooltechnic’s submission that in these circumstances where it was not allowed to engage in RPM (via ACCC authorisation) it would be likely to address the issue of free riding either by endeavouring to enforce compliance with contractual obligations on, or introducing exclusive territories for, dealers.
The ACCC considered that these alternatives were unlikely to minimise free riding and encourage competition and consumer choice because:
- there were inherent difficulties in enforcing contractual obligations as to the quality of services; and
- exclusive territories would result in a reduction in the number of dealers which in turn would decrease the availability of Festool products and result in a lower sales. This outcome would not be commercially viable for Tooltechnic in the medium to long term
In light of the above and despite accepting that the conduct would result in Festool customers paying higher prices for products, the ACCC authorised the RPM conduct on the basis that the public benefits (of informed consumer decision making, provision of premium products and accompanying services and increased consumer choice) arising from the conduct would outweigh the public detriments (which were limited due to the competitive constraints on Festool from competitors and dealers).
As this was the ACCC’s first authorisation for RPM conduct, it imposed as a condition of authorisation annual reporting obligations on Tooltechnic for the duration of the authorisation including providing the ACCC with information on retail prices, wholesale prices, value of sales, number and type of dealers, changes to agreements, enforcement action against dealers and complaints.