Resale price maintenance (“RPM”), or vertical price fixing, involving a supplier’s imposition of minimum resale prices on resellers, is a particular enforcement priority of the Federal Cartel Office (“FCO”) in Germany. Recent high profile cases include one of the most complex cartel proceedings conducted to date by the FCO. The case involved RPM (and a “hub-and-spoke” aspect) in the grocery sector in Germany, in which fines of over EUR 260 million (approximately $325 million U.S.) were imposed against 27 firms. Other RPM proceedings have involved the resale of toys, mattresses, cosmetics, engine-driven tools, and navigation devices.
The furniture case discussed below is the most recent. While in itself rather ordinary, the case is a useful starting point to take stock of the current state and the evolution of the German law on RPM.
The FCO Decision in the Furniture Case
During the second half of 2016, the FCO imposed fines of EUR 4.43 million on five manufacturers of furniture (as well as four managers) for enforcing RPM on retailers. According to the FCO, the object of the basic agreements was to ensure minimum price/maximum rebate levels vis-à-vis retailer sales to consumers. While there were differences in the details, the basic agreements were enforced through various means, but in particular through:
- Recommended resale prices (RRP) that served as focal points for minimum prices/maximum rebates;
- Understandings between individual manufacturers and their retailer customers about the timing and products which were exempted from the basic agreement for promotional purposes;
- A price surveillance system in which deviations from RRPs were actively monitored either by manufacturers or by other retailers that could and did complain about retailers that failed to obey the RRPs;
- A quasi-automatic system of sanctions for violations of RRPs according to which retailers were first warned and in case of recidivism punished by the manufacturer, typically through refusals to supply;
- In some cases there also were restrictions on online sales in order to ensure “stable price levels,” that were enforced through refusals to supply or through terminations of supply contracts.
The FCO considered the agreements and enforcement measures sufficient to support RPM cases claiming violations of the prohibition on restrictive agreements under to Section 1 of the Act against Restraints of Competition (“ACR”) / Article 101 (1) TFEU. Notably, the FCO did not – unlike in the groceries case mentioned above – prosecute any horizontal arrangement among the manufacturers, but solely focused on the vertical relationships.
Of interest, the published version of the case summary does not refer to any possible justification or exemption, in spite of the fact that the sale of furniture seems to be a market particularly prone to high-standard pre-sale services. This is noteworthy given that in the economic literature, markets in which pre-sale services are important are usually prime examples of vertical restraints that may generate significant efficiencies, and are thus procompetitive. Economic theory suggests that RPM may tackle free riding problems that arise when retailers invest in pre-sale services but cannot reap the entire benefit because other retailers that do not provide such services can offer the goods in question for a cheaper price, as they do not have to bear the cost of the pre-sale service. Consumers in turn are incentivized to enjoy the services of the first group of retailers but to purchase from the latter. However, according to the FCO firms often do not even attempt to justify RPM on this basis in Germany.
In sum, the furniture case highlights two prevalent issues in the law on vertical price fixing: first, which practices amount to price fixing? Second, what is the appropriate analytical framework to assess RPM?
The Evolution of the Law on Vertical Price-Fixing in Germany
Initially, there was a dual approach towards vertical price fixing in Germany: RPM for branded goods was generally allowed (when notified with the FCO), whereas RPM for all other goods was prohibited but exempted under certain conditions. In the late 1970s, this bifurcation was eliminated and only non-binding RRPs for branded goods remained legal.
In 2005, when the German ACR was aligned with EU competition law, the special rules on vertical RPM were mostly abolished. Since then, vertical RPM has been subject to the general prohibition on restrictive agreements according to Section 1 ACR, and subject to an exemption only under Section 2 ACR, a provision largely similar to Article 101 (3) TFEU. Only agricultural products, press products, the supply of water, and books remain subject to special regimes, pursuant to which RPM remains permissible.
According to the case law of the German courts, RPM constitutes a by-object restriction of competition (in US antitrust terminology: a per-se prohibition), the very purpose of which is considered to be anticompetitive without any need to assess the practice’s effects. German law thus follows the case law of the European Courts and the EU Commission’s guidelines, but differs from the stance towards RPM in the United States after Leegin.
Moreover, for a finding of illegal vertical price fixing, no proof of an express agreement is necessary. It suffices if the effects of the practice in question results in RPM. A typical example of such ‘non-binding’ vertical price fixing are RRPs in conjunction with “enforcement measures,” as the furniture case attests.
A particularity of the German jurisprudence is that even though RPM is considered a by-object restriction, usually the effects of the practice in question are analysed, but not the effects on the market or on general welfare. Instead, the focus is on the party on which RPM is enforced. The most recent example of this approach is a judgment of 2016 of the Higher Regional Court of Celle. While the court confirmed the qualification of RPM as a by-object restriction, it subsequently found that the anticompetitive effects of the vertical price fixing at issue were not “appreciable,” and therefore could not be considered restrictive of competition. Accordingly, the court saw no need to scrutinize a possible efficiency justification. While the court in principle acknowledged that efficiencies could be taken into account, its focus was entirely on the affected undertaking’s freedom to set its prices autonomously. Given that the practice in question was limited in time and scope, it found that competition was not restricted to a relevant degree. Thus, even though the court could presumably have reached the same result by assessing the measure’s effects on consumer welfare, it opted to focus on an aspect rather foreign to ‘modern’ antitrust law, i.e., individual actors’ ‘economic freedom’. This is similar to the FCO’s finding in the furniture case, in which the authority also focused on retailers’ freedom to set prices, but less on the possible efficiency justifications for vertical price-fixing.
Differences Between German and EU Law
The emphasis on resellers’ ability to choose their selling prices is a salient difference between German and EU law on RPM. While EU law primarily aims at protecting and enhancing consumer welfare, the focus of the FCO and the German courts appears to lie equally on protecting market participants’ “economic freedom.” This difference is starkly elucidated in the EU Commission’s and the FCO’s approach to RPM in the food retailing sector. In a recent consultation paper, the FCO stressed that “the autonomous decision-making process of a trading partner with regard to its pricing policy is to be protected in order to safeguard price competition on the retail level.” By contrast, the EU Commission has stated that “EC competition law is not concerned with particular outcomes of negotiations between parties unless such terms would have negative effects on the competitive process and ultimately reduce consumer welfare.” While it is not very likely that the German authorities would decide a case based on the same facts entirely differently from their EU counterparts, the parameters guiding the analysis can be slightly different.
Prospects: Vertical Price Fixing in the Digital Age
The furniture case discussed above dealt for the greater part with conventional vertical price-fixing. However, it also touched upon a more topical issue in antitrust: vertical restraints in the internet economy. While the FCO has already decided a number of cases concerning RPM in the context of online sales, it also has considered a number of new issues relating to vertical restraints in general, and RPM in particular, including: (i) dual pricing/rebates for conventional sales on the one hand and online sales on the other; (ii) general bans on online sales; and (iii) so-called price-parity-clauses imposed by, for instance, hotel booking platforms. In particular with respect to the latter two, the FCO has acknowledged that the conventional analytical framework does not lend itself easily to assess these types of business practices. This comment, and the growing importance of online sales, suggests that vertical restraints in digital markets will continue to dominate this particular debate in the years to come.