The Australian Competition and Consumer Commission (ACCC) has issued the first ever draft determination proposing to authorise resale price maintenance. This comes at a time when both local and global attitudes towards resale price maintenance are acknowledging that the practice is not always bad for competition.
Tooltechnic Systems (Aust) Pty Ltd (Tooltechnic), the exclusive importer and wholesaler of Festool power tools and related products in Australia, proposes to amend its retailer agreements to include a requirement that prevents retailers from selling Festool products below minimum prices nominated by Tooltechnic (Proposed Conduct). This practice is known as resale price maintenance (RPM) and is ordinarily prohibited outright under section 48 of the Competition and Consumer Act 2010 (Cth)(CCA).
The ACCC can authorise RPM where it is satisfied that the conduct is likely to result in such benefit to the public that it should be allowed to take place.2 This requires the ACCC to be satisfied that the public benefits will outweigh the public detriment, including any lessening of competition.
Until the application by Tooltechnic in June 2014, no such application for authorisation of RPM conduct had been made, despite the regime being available for nearly 20 years. Revealing your price strategy to the community at large, in circumstances where there it may be difficult to demonstrate the public benefits, has likely served as a deterrent to businesses wishing to engage in authorised RPM to date.
The application for authorisation and favourable draft determination comes at a time when Australian courts have queried why RPM is outlawed as anti-competitive in all cases, following the movement of other jurisdictions, such as the European Union, United States of America and Canada towards a case-by-case assessment of likely competition impacts. This also aligns with observations made in the current review of Australia’s competition policy and laws (the “Harper Review”). Relevantly, the Competition Policy Review Draft Report3 has favoured a quicker, less expensive means for business to seek exemption from the currentRPM prohibition contained in the CCA.
Tooltechnic’s application for authorisation
Tooltechnic put forward the following arguments in support of its application:
- Festool power tools are complex, highly differentiated and premium products, primarily aimed at trade users, rather than “do-it-yourself” consumers.
- Festool power tools require a high level of both pre- and post-sale retail service support including highly trained staff capable of explaining product characteristics and providing advice to customers, product demonstrations, “try-before-you-buy” arrangements, informal training, in-store repairs and the supply of readily available consumables and accessories.
- Tooltechnic’s distribution model has been undermined by minority and online retailers ‘free-riding’ on Tooltechnic’s investment in the necessary retail services while discounting prices. Free-riding discourages the provision of services, as full service retailers forced to price match at discounted rates will have a significantly reduced average margin on Festool products.
- Price undercutting, in the form of aggressive discounting and online sales, damages the image and status of the product.
- RPM can enhance inter-brand competition generally and intra-brand competition on non-price items such as the provision of retail services.
- Authorised RPM is a less restrictive and more efficient means to address ‘free-riding’ and limit damage to its brand than Tooltechnic’s alternative strategy, which may have been to implement a distribution model that designates exclusive territories for its retailers and limit or ban online sales.
Public benefit and detriment
In its draft determination, the ACCC recognised that RPM can provide certain benefits to the public, largely agreeing with the arguments raised by Tooltechnic. Most notably, RPM can address market failures such as “free-riding” by eliminating discounting (in turn keeping profit margins high) and encouraging retailers to offer better services. Further public benefits ensue from improved retail services including increased sales, customers making more informed purchasing decisions and improved customer satisfaction.
Other benefits include more efficient pricing, increased inter-brand competition and preservation of brand reputation, with higher prices re-enforcing the brand’s status. Nonetheless, the ACCC also observed the possibility of some public detriments.
The primary detriment likely to result from the Proposed Conduct is that some customers will face higher retail prices for Festool products. This is because the Proposed Conduct removes the ability for retailers to set their own prices, effectively eliminating intra-brand price competition. However, the ACCC reasoned that this detriment would be limited due to the wide range of alternative trade-quality power tools available to customers and because Tooltechnic has little incentive to set minimum retail prices above competitive levels since doing so would likely reduce sales of Festool products overall.
The ACCC also considered the possibility that the Proposed Conduct could facilitate coordinated or cartel conduct at the wholesale and/or retail level. However, the ACCC again reasoned that this was unlikely due to the small market share of Festool products, the history of entry and expansion into the market, the highly differentiated nature of the power tools and the innovative nature of the power tool industry.
The ACCC further noted that the future without the Proposed Conduct could be more detrimental to customers than with the Proposed Conduct. This is because the alternative strategy of introducing exclusive territories and banning online sales would remove inter-retailer rivalry to a greater extent. This would likely lead to both a reduction in intra-brand price competition and a lower standard of service.
Conditional authorisation proposed to be granted
On balance, the ACCC considered that the above listed public benefits outweigh the detriments and, accordingly, proposes to grant authorisation for the Proposed Conduct. However, as this is the first application for authorisation of RPM, the ACCC has adopted a fairly conservative approach.
The ACCC proposes to grant authorisation for three-years, instead of the five years sought by Tooltechnic, and has imposed conditions on authorisation including requiring Tooltechnic to provide certain information to it, such as the minimum retail prices set, on an annual basis. This will allow the ACCC to monitor the impacts of the RPM over the three year period.
The draft determination is an exciting development in the regulation of RPM. It marks the utilisation of an approach similar to the ‘rule of reason’ approach, favoured in some foreign jurisdictions, such as the United States of America. The ACCC’s authorisation consideration also looks to public benefits of the conduct.
In addition, the Harper Review recognises the prevalence and growing problem of “free-riding”, especially with the emergence of digital-based retailing, which could be addressed through RPM. It is the Harper Review’s preliminary view that conditions should be made easier for pro-competitive forms of RPM to occur. This could be achieved through the simplification of the authorisation process and a move towards a notification process, more similar to that which currently exists for third line forcing.
Until now, manufacturers of premium products might have been discouraged from submitting an application for authorisation due to an apprehension that the ACCC would not consider there to be sufficient public benefit arising from the conduct. To that end, the monitoring regime to apply under the draft determination allows the ACCC to check whether or not the Proposed Conduct is effective in minimising “free-riding”, maintaining profit margins or improving customer service. If not, the ACCC may be hesitant to reauthorise Tooltechnic’s, or other, RPM conduct in the future.
Business should be aware that the ACCC’s determination clearly indicates that success in any future applications for authorisation of RPM will depend heavily upon the particular facts of the case and market characteristics associated with the brand. Businesses must also remember that application for authorisation is a public process and that disclosing pricing strategies may not be desirable, especially if applications are not approved.
With all that said, and with the possibility of the adoption of a simpler authorisation regime for RPM coming out of the Harper Review, the clear message is that there are opportunities for businesses to engage in pro-competitive forms of RPM. This is particularly the case for manufacturers of sophisticated products that require a high-level of service support to be provided by their resellers.