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It Takes Two to Tango - Antitrust Investigation over Suspected RPM Terms

It Takes Two to Tango - Antitrust Investigation over Suspected RPM Terms

Serbia
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In January 2020, the Serbian Commission for Protection of Competition (“Commission”) initiated investigations against Imlek and Apatinska Pivara which are two leading national dairy and beer producers, and against a number of retailers, including Metro Cash & Carry and Veropoulos, for allegedly employing resale price maintenance (“RPM”) agreements to restrict intra-brand competition.

Namely, during a sector inquiry into the retail sale in non-specialized stores with food, beverages and tobacco the Commission uncovered distribution contracts with suspected RPM terms triggering several antitrust investigations against the undertakings involved.

Before it passes final decisions, the Commission is expected to come up with its final findings based on evidences collected in the meantime.

That said, it is never redundant to shed more light on the concept of RPM, to briefly comment on legal context surrounding the cases, and contrast them with previous ones.

Indeed, this is not a first crackdown on RPM by the Commission.

On 1 December 2017, the Commission punished N Sport and 15 other wholesale and retail distributors of sports clothing, accessories, and footwear with total of €381.000,00 in fines for entering into agreements with straightforward RPM clauses.

In September 2018, Auto Čačak, an exclusive distributor of Škoda in Serbia, and its network of authorised dealers and repairers suffered total of €183.500,00 in fines in respect of contract schemes fixing maximum discounts to limit intra-brand competition when participating in public procurement for original spare parts and maintenance service aftermarkets.

Following a dawn raid in April 2018, the Commission stormed business premises of Yuglob and Keprom, triggering sweeping investigations against major wholesale distributors of baby care products and 172 retailers for alleged setting of minimum retail prices for baby products (cases are still pending before the Commission).

What is intra-brand competition?

Intra-brand competition concerns distributors’ competition on the basis of the brand product of the same supplier.

What is RPM?

RPM is an agreement between a producer/supplier and a distributor whereby they agree to fix resale prices or set minimum resale price levels to be observed by the later with an object to restrict intra-brand price competition.

Therefore, if a distributor’s freedom to set resale prices is limited by means of an agreement with supplier that is considered as reduction of  intra-brand competition caught by antitrust rules.   

The agreement may come in any form, as a clear-cut contract clause, or as a result of explicit or tacit acceptance by the distributor of the supplier’s price policy expressed, for example, through a mere exchange of emails, or by way of an omission of the distributor to explicitly disapprove the proposed price strategy restricting its freedom to set its prices independently from a supplier.

Indeed, the RPM may be reached indirectly in the form of setting distribution margins, fixing maximum discounts to a prescribed price levels, by pairing rebates with a duty to observe given resale price levels, etc.

To be sure, resale prices recommended by a supplier is a tantamount of the RPM if coupled with “supportive” measures (warnings, threats, penalties, economic incentives) forcing the distributor to effectively collaborate in the implementation of apparently uncompelled pricing strategy or otherwise reducing distributor’s economic incentives to cut price.

Is RPM illegal?

Agreements which have as their object or effect the prevention, restriction or distortion of the competition are, in principle, prohibited, except if excused from the prohibition under proper legal avenues.

Namely, Article 10 of the Competition Protection Act prohibits all forms of agreements, or concerted practices established between independent undertakings which directly or indirectly fix purchase or selling prices or any other trading conditions.

Certainly, the Commission qualifies RPM as a form of a hard core restriction of market prohibited under the Serbian antitrust rules.

Indeed, the Regulation on the Block-Exemption of Vertical Restraints excludes any form of RPM from a benefit of the exemption from the prohibition of Article 10.

The RPM is presumed illegal even if practiced between a supplier and a distributor with relatively weak market power (less than 15% market share, respectively).

As a result, agreement with a RPM term executed before an individual clearance by the Commission is obtained would most certainly qualify as a per se infringement of the Competition Protection Act.

While indeed, companies may seek individual exemption of a RPM contract against claimed efficiencies, given the rigid stance of the law against any form of price fixing, chances of individual clearance of the RPM clause by the Commission are exceptionally limited.  

Nevertheless, to avoid any prosecution, undertakings that feel that RPM is indispensable for implementing an effective and sustainable distribution model (to protect investments in promotion to launch a new product or brand in the market, to promote additional pre-sales services, to organize and protect uniform franchise distribution model, etc.) must seek individual clearance by the Commission before executing the distribution contract with the RPM term.

Maximum resale prices (MRPs) and recommended resale prices (RRPs) are generally not illegal

Yet, they are not completely devoid of regulatory risks either.

In principle, it is not illegal for a supplier to place MRPs or RRPs for its products as long as they do not disguise a mandatory resale price.

In particular, there is a risk of finding indirect RPM if MRPs and RRPs are pooled with rebates, ban on promotional discounts, or effectively enforced through varying forms of pressure, that is when producers keep themselves well-informed about the resale prices and/or intervenes when the resale price is too low often with success.

The Commission may, in particular, suspect the existence of disguised RPM in case there is uniformity of prices actually charged.

Indeed, the risk of investigation is higher if RRPs and MRPs are employed by a supplier which has a significant market power.

What is required for the Commission to establish the infringement by the RPM?

The RPM agreements are considered restrictions of competition by object, meaning that the Commission is not required to establish anticompetitive effect in order to prove infringement of the Competition Act.

In addition, the defence that the RPM clause was not effectively implemented by contract parties is not an exculpating fact, though it may reduce the size of penalties.

That said, the existence of the RPM agreement still must be proven.

Namely, the Commission must establish existence of restrictive pricing policy of the supplier and expression of an acquiescence of a buyer to the supplier’s restrictive plan in any form to the requisite standard of proof.

Where RPM is intercepted in formal, unambiguous and straightforward contract term this would be a clear-cut case.

On the other hand, ambiguous contract terms or unsolicited calls from a supplier to distributors to align prices, though suspicious, may still require from the Commission to access the precise purpose of the contract terms in their actual legal and economic context and/or adduce additional evidence establishing, unequivocally, acceptance by the distributor of the unilateral pricing policy of the supplier.

Penalties for RPM in Serbia

The contract containing RPM term renders entire contract illegal and unenforceable and the Commission can impose fines to a maximum of 10% annual turnover calculated at the level of a corporate group.

RPM is qualified as the most severe restriction of competition under the Commission’s guidelines on setting fines in antitrust cases.

So far the Commission have been penalizing suppliers (usually an initiator of RPM) and distributors alike, even though the later are typically weaker parties to the agreement.

Should Imlek and Apatinska Pivara be worried?

These antitrust cases share a common feat, concerning similar contract practice requiring buyers to refrain from in-store pricing practices considered unfair and exorbitant with distorting effect to the suppliers’ goodwill and to fair competition. 

According to its statements, the Commission appears confident at having a definite case against Imlek and Apatinska Pivara. 

The Commission asserts that contract terms provided by producers prohibiting distributors from engaging in retail price practices that would tarnish suppliers’ goodwill and/or reputation of their products by means of the exorbitant and excessive price undercutting, including, by reselling products bellow the purchasing price are equivalent to direct RPM.

Furthermore, the Commission stresses that the alleged RPM terms were reinforced by the suppliers’ right to withdraw rebates and/or avoid distribution contract in case buyers fail to observe the clause protecting reputation of suppliers.

In the Commission’s view, by accepting these contract terms, the distributors, agreed explicitly, not to resell products bellow the purchasing price with an object to restrict the intra-brand competition.

The suspected clauses were not unconditional, however.

Namely, right to cancel rebates and/or to avoid agreement due to reselling below the purchasing price was subject to cumulative pre-conditions that a supplier establishes existence of long-term exorbitant in-store pricing practice, which is a direct consequence of an exercise of the buyer’s market power with an effect of eliminating actual competitors or preventing new market entries.

In other words, the parties’ “agreement” is that the supplier may cancel rebates due to reselling bellow the cost of purchase only in case it establishes that the buyer holds and abuses dominant market position by employing exorbitant pricing.

Besides, the Serbian Trade Act, condemns exorbitant pricing practices as a form of an unfair commercial practice, though, unlike the contract terms, it does not specify if reselling products bellow the purchase price fits in the legal definition.

That said, reselling below the purchasing price, if part of the strategy to drive away competitors, or to discredit the image of another product or establishment, is, indeed, a conduct condemned in some EU Member States’ legislation as an unfair commercial practice.

While the relevance of the Trade Act and comparative law to the cases may be disputed, the fact remains that the Commission must establish that the suspected contract terms “constitute[] the faithful expression of the parties’ intention (emphasis added)” to conduct themselves on the market in a specific way which is restrictive.

Indeed, not so straightforward RPM case.

Comment

RPM terms are considered hard-core competition restriction.

If discovered, the Commission is not required to supply evidence on potential or actual anti-competitive effects, hence, making RPM cases notoriously easy to prove.

It takes two to tango, however.

Indeed, as a first step, the Commission must establish unequivocally that the suspected terms of uncovered contracts constitute the faithful expression of the joint intent of suppliers and buyers to implement RPM as a common plan.

This is especially important since contested contract terms provide the non-dominant buyer with enough power to disapprove any supplier’s attempt to control its pricing policy, that is to resist its invitation to dance.

Certainly, deleterious effects on competition of less than straightforward RPM terms, in our view, may not be presumed without thorough assessment of actual legal and economic context of application of suspected clause, and if needed, without production of sufficient evidence to support RPM hypothesis. 

One may wonder if reading into the text of suspected contract terms more than actually stipulated is sufficient to establish buyer’s acquiescence to alleged supplier’s resale price plan, absent any additional evidence to support existence of collusion more convincingly.

That said, coupling economic incentives to a particular expectation regarding distributors’ resale pricing policy, must be always resisted, not least, because enforcement actions involve intrusive investigations, which are costly, draining and attract bad publicity.

Given the risks, the safest policy is to avoid drafting any term in contracts that the market regulator may associate with RPM, however innocuous or legitimate it may appear to parties to the contract.

By Zoran Sretic, Legal Counsel, Stojkovic Attorneys

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