On Friday, the Australian Competition and Consumer Commission (ACCC) made a final determination to grant a conditional authorisation for resale price maintenance (RPM) to Tooltechnic Systems (Aust) Pty Ltd. This formally confirms the ACCC's decision after a draft determination was published a number of weeks ago.
This is the first authorisation for RPM to have been granted in Australia and it provides critical guidance for anyone seeking to make or contest future applications.
Under the conditional authorisation, Tooltechnic, an importer and wholesaler of power tools, is now permitted to set minimum resale prices that retailers must charge for Festool power tool products, of which it is the sole Australian importer.
The ACCC has had the power to authorise this otherwise prohibited conduct for almost 20 years, where it is satisfied that a public benefit requirement is met. However, Tooltechnic's application is the first that it has been requested to determine.
Consistent with international trends, this authorisation by the ACCC confirms that wholesalers, importers and manufacturers can now consider the setting of minimum retail prices as a legitimate pricing strategy in certain circumstances.
Although the ACCC's determination emphasises the fact-specific nature of these circumstances, for the first time the ACCC has expressly set out the approach it is likely to take in assessing an application under the relevant authorisation provisions. This is an important development that may have ongoing ramifications across the wholesale and retail sectors.
In this eBulletin, we look at the decision, the approach that the ACCC is likely to take in assessing an application of this nature, and its implications for future applications.
Prohibition against resale price maintenance
Under s 48 of the Competition and Consumer Act 2010 (Cth) (CCA), the practice of setting minimum retail prices is strictly prohibited as a form of RPM. Conduct that constitutes RPM is defined broadly under Part VIII of the CCA. It includes a wide range of circumstances in which a supplier prevents or discourages a person from reselling the suppliers products or services below a specified minimum price. This is because RPM can restrict competition in the relevant retail market, as retailers are prevented from competing with one another on price for that brand of goods.
Increasingly however, there has been judicial and regulatory recognition, particularly in the US and Europe, that RPM may in some instances actually be pro-competitive. While it may restrict intra-brand competition between resellers, RPM can promote competition between different brands and limit potential market failures from some retailers free-riding on the services provided by others. For this reason, since 1995, the ACCC has been able to authorise conduct that constitutes RPM where it is satisfied that the proposed conduct should be allowed because it would result (or be likely to result) in a benefit to the public.
In support of its application, Tooltechnic submitted that the introduction of a minimum retail price was necessary to prevent some retailers from free riding on the customer service being provided by higher priced competitors. Tooltechnic submitted that this practice undermined its business strategy of providing high levels of retail service and damaged its premium branding; placing the entire Festool supply chain under threat.
In making its case, Tooltechnic emphasised that Festool power tools are complex, highly differentiated, premium products that are targeted at trade-users, rather than do-it-yourself (DIY) customers, and that the provision of advice, training and product demonstrations is essential to its distribution model for these products.
On this basis, Tooltechnic argued that the setting of minimum retail prices was not only the best way to address the free riding problem and limit damage to the Festool brand, but also provided an overall public benefit by, among other things, increasing the supply of retail services, broadening customer choice and fostering inter- and intra-brand competition.
In applying the public benefit test, the ACCC undertook a process of comparing the public benefits and detriment likely to arise in the future where the proposed conduct occurs, as opposed to where it doesn't.
The ACCC acknowledged that RPM can, in certain circumstances, address failures in the market generated by free riding. The ACCC noted that the incentive for retailers to offer advice, information, training and other services that they do not directly charge for largely depends on the volume of sales that such services are likely to generate. Where retailers that provide these services are undercut on price by retailers that don't, they may be crowded out of the market and customers may not be able to access such services.
On this basis, and following its own market enquiries, the ACCC accepted Tooltechnic's submission that there has been a market failure occurring, caused by free riding by some Festool retailers. The ACCC also accepted that the setting of minimum retail prices was likely to limit the free riding behaviour and to encourage retailers to offer better services to attract customers. The ACCC determined that this was likely to result in public benefits, including customers continuing to be offered the choice of a premium trade quality power tool product accompanied by a high level of post-sale service.
The ACCC acknowledged that Tooltechnic's proposed conduct would result in a clear public detriment, as some customers would be forced to pay a higher price than previously required. However, the ACCC determined that the extent of this detriment would likely be limited by the wide range of trade quality power tools available to customers, and the corresponding disincentive for Tooltechnic to set minimum retail prices above levels competitive with other brands.
The ACCC also considered that the conduct proposed by Tooltechnic was unlikely to result in coordinated anti-competitive conduct by suppliers of power tool products due, amongst other things, to the small market share of Festool products, the large number of wholesalers of power tools, and the highly differentiated nature of the products.
Balance of public benefit and detriment and conditional authorisation
On balance, the ACCC granted the authorisation on the basis that the likely public benefit resulting from the increase in the provision of retail services outweighed the clear, but limited, detriment resulting from the fact that some customers would face a higher price.
Given the fine balance of the assessment and the fact that Tooltechnic's application was the first that the ACCC had assessed, it did however grant the authorisation on a conditional basis for a period of four years, rather than the five years requested by Tooltechnic. The conditions imposed by the ACCC require Tooltechnic to provide the ACCC with a wide range of sales related information on an annual basis.
Implications for future applications
In its determination, the ACCC placed strong emphasis on the importance of the specific facts that need to be taken into account on a case-by-case basis. The determination indicates that while the ACCC will take a rigorous approach to investigating and considering the balance of the public benefit and detriment flowing from proposed RPM conduct, it is open to considering authorisation in circumstances where there is a clear market failure or free riding by retailers.
This approach is in line with trends in other jurisdictions, including the US, Canada and the European Union, where RPM is no longer strictly prohibited and the likely effects on competition are increasingly assessed on a case by case basis. This is an approach that was put forward in the recent Harper Competition Policy Review, which finally recommended amendments to introduce a simpler notification process, rather than the more onerous application for authorisation.
Regardless of whether these recommendations are implemented, wholesalers, importers and manufacturers, should now carefully consider whether they would benefit from an authorisation to set minimum resale prices for particular products. As the Tooltechnic authorisation has shown, this option may be particularly appealing to wholesalers of products that are easily sold online or by discount retailers that undercut the investment in services provided by other retailers.