Articles Posted in Resale Price Maintenance

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Contrary to the belief of many of today’s businesspeople, antitrust law’s coverage of distribution did not start with Amazon or even the Internet.  For decades, manufacturers have sold their products to resellers of all types to increase the distribution of their products.  Manufacturers always have been interested in how their products, often with their brands, are resold.  They often have tried to dictate or influence the pricing and marketing tactics of their resellers.

Since 1890, US federal antitrust law has been there every step of the way, drawing the line between permissible and impermissible restraints.  The 2020 edition of Cernak’s Antitrust in Distribution and Franchising summarizes where those lines are today.

In just over one hundred pages, the book provides concise, plain English coverage of all the antitrust topics manufacturers and retailers—and their representatives—need to understand.  Businesspeople can quickly get up to speed on potential distribution options.  Libraries can provide their users, especially students, an efficient way to start their research.  Generalist lawyers can review summaries of the key principles and cases necessary to assist their clients.

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Author: Steven Cernak

Like many crisis situations, the Coronavirus Pandemic has created concerns and even outcry about price gouging for certain products.

If your company manufactures one of these products and your dealers and retailers have suddenly jacked up prices for them, what can you do?

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Author: Steven Cernak

While I was the in-house antitrust lawyer for General Motors, outside counsel on several occasions suggested to me that GM should “institute a Colgate program” or “a minimum advertised price (MAP) program.”  I am confident that all those lawyers could have helped build a fine Colgate program or other method that would restrict how GM dealers and distributors priced and marketed GM products – but the suggestion was still wrong for a few reasons.

First, it vastly overestimated the control that I or any other lawyer had over GM pricing decisions.  More importantly, it assumed that the suggested restraint was right for that GM product at that time, an unsafe assumption given the wide variety of products and services that GM sells in different regulatory and competitive environments.  Before suggesting a tool to use, the attorney should have helped me determine if it was right for GM’s business situation.

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Author: Jarod Bona

You may not realize this, but a lot of people don’t like lawyers. We even have our own genre of comedy that predates Shakespeare: lawyer jokes. Here is a common example: What do you call 1000 lawyers at the bottom of the ocean? A good start!

When you heard that joke for the first time, you probably laughed and laughed, shook your head and said, “funny because it’s true.”

So why do people dislike lawyers? To save you time, I’ll focus on one reason and leave the rest for others: Because lawyers spoil the fun by saying “no.”

This reason for not liking lawyers, of course, comes from the business context where companies consult either in-house lawyers or outside counsel about how or whether to proceed on a project or opportunity.

It is the lawyer’s job and duty to risk ruining the party. The business and sales people look at the opportunity and see upside: revenues, more market share, perhaps an important merger or acquisition.

It is the lawyer that must look at the opportunity to see the downside risks: the lawsuits, the disputes, the government reactions or investigations, the response from competitors. Then, oftentimes, the lawyer says “no.” The music stops and people go back to their offices, sometimes frustrated and angry, perhaps thinking that the lawyer should be on the bottom of the ocean. The lawyer is the bad guy, even if he or she is just doing his or her job.

But this isn’t an article defending lawyers.

To be honest, most lawyers aren’t great, or sometimes even good. The same is true of most people in any profession. Only in Garrison Keillor’s Lake Wobegon, Minnesota is everyone above average (of course, he was talking about the children, but you get the point). And many criticisms about lawyers apply to many of members of this profession, including the fact that they just ruin the party by saying “no” all the time.

I think that the lawyer that just says “no” is a lazy lawyer that offers very little value to his or her client. Sometimes the lawyer must say “no,” but in most instances, there should be more and I don’t just mean justifications for the denial.

Of course, a client might come up to a lawyer and say the following: “As you know, we compete in a market with four main players. It seems silly that we spend so much time trying to undercut each other on price and so many resources trying to come out with new features to our product. Our adversaries may lack social grace, they may smell bad, and they certainly aren’t good looking, but they aren’t bad people. We could all make more money if we could just get together, have a meeting, set the price we are all going to charge, maybe divide up the customer base, probably by geography, and vote on features to add to our products.”

An antitrust attorney that hears this from a client, must say “NO,” in all caps, like they are yelling. Of course, after that, they better work on education through antitrust compliance counseling and training. Time to put together an antitrust compliance policy. The Department of Justice would certainly appreciate a strong antitrust compliance policy.

But in most instances—even where the client’s idea creates risk—a simple “no” is not the right approach, at least from a good antitrust attorney.

The scenario I described above—involving price fixing and market allocation (per se antitrust violations)—is a rare example of a situation where the antitrust laws are mostly clear.

In most instances, either the law or the application of law is not straightforward enough to entirely preclude the client’s objective. For example, the question of what is exclusionary conduct under Section 2 of the Sherman Act (Monopolization) is not an easy one to answer. There is still great debate among the courts, academics, and economists. Similar issues can arise if you are trying to determine if an exclusive dealing agreement violates the antitrust laws: Sometimes the answer isn’t clear.

Advising Business Clients on Antitrust Risks

I can’t speak for all antitrust attorneys, but here is how I handle counseling clients on antitrust risks:

First, I understand that the perspective of a business is different than the perspective of the typical lawyer.

The attorney, especially the litigator, has grown up (professionally) in a world where they win or lose a motion or case and where something is or isn’t illegal under the law. There are, of course, grey areas, but a young attorney that receives a research project, for example, is tasked with finding the “answer.” And courts have to give decisions on “the law” in such a way that suggests there is an answer, even when the reality is that it could have gone either way. But opinions rarely say that—when they do, it is a credit to the judge.

Businesses, however, make calculated judgments based upon risk, reward, and resources. Opening another factory has obvious risks and rewards and takes resources. The business executive tries to evaluate the risks, judge the potential upside, and compare both of those to the resources necessary to open the factory.

If you tell the business to not open the factory because there are “risks,” you aren’t helping it. The business executive will just stare at you like you are some sort of fool. Of course there are risks; the skill in running a business is to evaluate those risks and incorporate them into decisionmaking.

I understand this perspective even more clearly now, having run Bona Law for several years. Indeed, my bio now finally reflects that understanding.

Let’s apply this point to antitrust counseling: If a client comes to me with an opportunity, a project, or even a problem, it does the business little good for me to just say “no, there are risks.” That’s the lazy approach, in my view.

My value as the antitrust attorney in that situation is to help the client fully understand the risk. That is, I try to help the client appreciate the likelihood of the risk coming to fruition and the consequences of the risk, if it hits. And, in fact, the counseling is usually more complicated because there are often multiple risks, each with their own structure of probability and harm.

I do this because this is how businesses make decisions: They incorporate risk into the information that they have and make the best call they can.

Second, I work with the client to come up with options with similar rewards or upsides, but less antitrust risk—or some more preferable sliding scale of the risks and rewards.

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European-Union-Online-RPM-300x225Author: Luis Blanquez

On July 24, 2018, the European Commission fined manufacturers Asus, Denon & Marantz, Philips and Pioneer for over €111 million for restricting the ability of online retailers to set their own retail prices for a variety of widely-used consumer electronics products.

Background

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Author: Luis Blanquez

In our prior article, we discussed the European Commission’s final report of its study of the EU’s e-commerce market for consumer goods and digital content.

In this article we describe EU investigations and enforcement actions that arose from the EC’s final e-commerce market study. While the final report itself offers companies doing business in the EU helpful guidance, the Commission’s actual conduct is perhaps an even better indicator of how the EC will implement what it learned.

Since the European Commission published its Final Report, it has opened investigation of about 20 companies.

Below is a summary of the relevant cases that the EC recently opened. We expect additional cases in the future in this area, both at EU and national level.

Geo-blocking cases

Video Games

On February 2, 2017, the EC opened an investigation to analyze bilateral agreements between Valve Corporation, owner of the Steam game distribution platform, and five PC video game publishers:  Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax.

This investigation concerns geo-blocking practices, where companies prevent consumers from purchasing digital content, in this case PC video games, because of the consumer’s location or country of residence.  After the purchase of certain PC video games, users need to confirm that their copy of the game is not pirated to be able to play it.  This is done with an activation key.

The investigation focuses on whether such agreements require the use of activation keys for the purpose of geo-blocking.

Clothing Company, Guess

On June 6, 2017, the EC opened an investigation against clothing manufacturer Guess.  The EC is analyzing whether Guess’s distribution agreements impose cross-border sales restrictions on (i) retailers making online sales to consumers in other Member States, (ii) or wholesalers, selling to retailers in other Member States.

Interestingly, as a result, other clothing manufacturers such as Mango, Oysho and Pull&Bear have now started to review and revise their distribution agreements.  Other companies, such as coffee machine manufacturer De Longhi, and photo equipment manufacturer Manfrotto, are doing the same (See here).

Hotel Pricing Discrimination

On February 2, 2017, the EC opened another investigation into hotel accommodation agreements between the largest European tour operators on the one hand: Kuoni, REWE, Thomas Cook and TUI, and Meliá Hotels on the other hand.

The EC encourages hotels to develop and introduce innovative pricing mechanisms to maximize room usage.  But the EC is concerned that these agreements may contain clauses that discriminate among customers based on their nationality or country of residence.  As a result, customers may not be able to see the full hotel availability, or book hotel rooms at the best prices, simply because of the consumer’s nationality or place of residence.

Licensed Merchandising Products

On June 14, 2017, the EC opened more investigations into the licensing and distribution practices of Nike, Sanrio and Universal studios.  These three companies license intellectual property rights to manufacturers of merchandising products such as the Fútbol Club Barcelona, Hello Kitty and Minions merchandise, respectively.

The EC is concerned that these companies, in their role as licensors of rights for merchandising products, may have restricted the ability of their licensees to sell licensed merchandise cross-border and online.

Resale Price Maintenance cases

Consumer electronics manufacturers

The EC has opened another investigation against Asus, Denon & Marantz, Philips and Pioneer.  In this case, the EC is concerned that the companies involved might be restricting the ability of online retailers to set their own prices for widely used consumer electronics products such as household appliances, notebooks and hi-fi products.

This is the first resale price maintenance case that the EC has initiated in a long time.  Instead, the Member States themselves have scrutinized resale price maintenance at national level during the last decade.

Germany, for example, has recently published a new guidance note on resale price maintenance. The Competition and Markets Authority (“CMA”) in the UK also published additional guidance on these types of pricing agreements in the form of an open letter, a film, a 60-second summary, and  case studies.

Indeed, the CMA recently fined National Lighting Company (NLC), a light fittings supplier, £2.7 million for restricting online prices. They also sent out warning letters to others in the industry.  In 2016, the CMA also fined two other online companies for resale price maintenance practices: Ultra Finishing Limited (“Ultra”) in the Bathroom fittings sector and ITW Limited in the commercial refrigeration sector.

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Author: Luis Blanquez

  1. BACKGROUND

Over the past two years, the European Commission (“EC”) has been scrutinizing the e-commerce market of consumer goods and digital content in the European Union.  This is a key step on the Commission’s Digital Single Market strategy to improve access to digital goods and services.

Such strategy includes legislation to promote cross border e-commerce through the following:

In May 2015, the EC started in parallel its Sector Inquiry to identify possible competition concerns affecting European e-commerce markets.  Its main purpose was to gather information on companies’ conduct and barriers to cross-border online trade, looking at online sales of consumer goods and digital content.  In September 2016, the EC published a report with its preliminary findings, together with a Staff Working Document.

Finally, in May 2017, the EC issued its Final Report.

You can read our follow-up article to this one about ongoing EC enforcement actions arising out of the E-Commerce Report.

You might also enjoy our articles on EU dominance abuse and antitrust compliance programs in the US and EU.

  1. RELEVANT FINDINGS

The EC outlines in the Final Report what it considers as the key issues in the field of e-commerce.  It acknowledges the changing characteristics and fast-growing tendency of a sector with an increasing economic role in today’s economy. It further identifies business practices and barriers that could restrict competition and limit consumer choice.

The EC reviewed more than 2,600 agreements concerning the distribution of goods in the EU, and received more than 6,800 licensing agreements from digital content providers and rights holders.  The main findings in the Final Report differentiate between consumer goods and digital content.

(A) CONSUMER GOODS

Contractual Restrictions on Cross-Border Sales: Geo-Blocking

The Sector Inquiry identifies contractual restrictions between operators in the online market that the EC believes could cause problems.  Unilateral decisions by non-dominant firms, however, fall outside the scope of EU competition law.

But before telling you which contractual restrictions are problematic, let me explain first what the term “geo-blocking” means.  Basically, it refers to practices that prevent cross-border sales in the EU.  These include the following:

  • Blocking access to websites by users located in another Member State—for example when a customer located in Madrid tries to acquire a product via a French website, and is prevented from doing so because the website has been blocked due to its Spanish IP address;
  • Automatic re-routing of a customer to another website of the same or a different service provider—for example when a customer located in Madrid trying to access a French website is directly re-routed to the company’s Spanish website; or
  • Payment refusals based on the place of residence of the customer—for example when the payment to the French website is refused because the credit card used is linked to an address in Spain, or the delivery to Spain is denied based on the customer’s residence.

So back to the relevant contractual restrictions now:  The EC is concerned about how retailers face contractual restrictions from suppliers, which prevent such cross-border selling on-line.

These questioned agreements are ones that (i) are not covered by the EC “safe harbor” under the Vertical Block Exemption Regulation (“VBER”) – this is if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, (ii) preventing cross-border sales between Member States in distribution agreements, may infringe EU Competition rules.

Restrictions on the use of online marketplaces

An online marketplace is a website that facilitates shopping from different sources, such as Amazon or eBay.

An absolute ban on online selling is considered a hard-core restriction under EU law.  There is, however, an important ongoing debate in Europe as to whether an absolute ban on selling via marketplaces is contrary to EU rules.

In Germany, the Bundeskartellamt issued an infringement decision against Asics on its ban to sell via online marketplaces. In April 2017, the Dusseldorf Regional Higher Court found that only the price comparison tool restrictions involved in the case were anticompetitive.

At EU level there are currently two preliminary rulings pending.  One the Coty case, where the high EU court has been asked to analyze the restrictions imposed on a selective distribution agreement by manufacturer Coty on one of its authorized distributors to sell products via third party online platforms. The second one is the Samsung and Amazon case, concerning a ban on resale outside a selective distribution network and on a marketplace, by means of online offers on several websites operating in various Member States.

In its Final Report, the EC does not consider marketplace selling bans as hardcore restraints.  It may, however, still scrutinize them on a case by case basis, if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, according to the VBER.

Selective distribution agreements: Requirements for brick-and- mortar shops

Contractual requirements to operate at least one brick-and-mortar shop under a selective distribution agreement are compatible with the EU competition rules, as long as they are linked to quality or brand image.

The EC, however, states in its Final Report that brick-and-mortar shop requirements imposed for the sole purpose to exclude online operators from the market, may infringe EU competition rules.

Pricing restrictions: Resale Price Maintenance (“RPM”) and Price collusion

E-commerce has significantly increased price transparency, competition on price and opportunities for users to compare different options in the internet.  According to the EC’s investigation, almost 30% of manufacturers systematically track resale prices: 67% track resale prices manually, whereas 38% use specific software (spiders).

The Final Report highlights that this may also increase the risk of RPM or collusion between competitors.

Resale Price Maintenance (RPM)

The imposition of minimum resale prices is considered a hardcore restriction under EU Competition law.  Similarly, when manufacturers seek to enforce compliance with recommended prices through contractual restrictions or some form of coercion, they may also infringe competition rules.

The EC is concerned that online price transparency may facilitate such practices, making it easier for manufacturers to detect deviations and enforce RPM provisions.

You can read articles on The Antitrust Attorney Blog on Resale Price Maintenance here.

Price collusion

Price fixing between competitors is considered one of the most serious infringements under EU competition rules.

The Final Report found that almost 50% of retailers track online prices of competitors, and 78% of them use software to monitor rivals’ prices, adjusting their own prices accordingly.

The EC is thus concerned that price monitoring may facilitate or strengthen collusion between retailers, by making the detection of deviations from the collusive agreement easier, while allowing them to counteract by adjusting their prices.

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