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Monday, June 21, 2010

Resale Price Maintenance Under the New Guidelines: A Critique and A Suggestion

Posted by D. Daniel Sokol

Yves Botteman & Kees Jan Kuilwijk (Steptoe & Johnson) discuss Resale Price Maintenance Under the New Guidelines: A Critique and A Suggestion.

ABSTRACT: During its recent revision of rules regarding vertical agreements, which culminated in a revised block exemption for certain such agreements and new Guidelines on Vertical Restraints, European Commission initiated a debate on the treatment of (minimum) resale price maintenance ("RPM") under EU competition rules. From the perspective of the supplier of a product, RPM consists of fixing or imposing a minimum retail price that the distributor must charge to consumers. To some degree, the debate in Europe was spurred by the Leegin decision of the U.S. Supreme Court in 2007 which overturned a long standing precedent, Dr. Miles, that treated minimum RPM as a per se violation of U.S. antitrust rules, in favor of a rule of reason analysis. Some commentators have suggested that, given the fact that defendants often succeed in lower courts when restraints are examined under the rule of reason, Leegin would cause minimum RPM to be treated as, in effect, per se legal in many situations.

In Europe, RPM has long been treated as a "hardcore" restriction of competition falling within the prohibition of Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU") with virtually no scope for meeting the strict conditions for exemption under Article 101(3). The latter provision enables the defendant to put forward an efficiency defense that will be balanced against the detrimental effects of the restraint. Given the fact that this defense was de facto unavailable for RPM, this practice has often been considered as a per se violation of EU competition rules. In practice, this meant that suppliers could not impose RPM on their dealers in the EU.

The draft Guidelines, which were published for consultation in the summer of last year, marked a relative softening of the Commission's policy towards RPM. Under the draft, RPM would still be categorized as a hardcore restriction of competition. However, the use of RPM would not necessarily mean that it would be per se illegal. RPM would continue to be presumed (i) to fall within Article 101(1) and (ii) to be unlikely to fulfill the conditions for exemption under Article 101(3). But the Commission would make the presumption rebuttable, leaving open the possibility for firms to plead an efficiency defense. In cases where the efficiency defense was sufficiently supported, the Commission, national competition authority, or court would then have to assess the likely negative effects on competition prior to ruling on whether RPM fulfills the conditions of Article 101(3). The new Guidelines, adopted by the Commission on 20 April 2010, maintain this rebuttable presumption. They also provide insights into the motives for treating RPM as a hardcore restriction and suggest circumstances in which RPM is likely to generate overriding efficiencies.

In this commentary, we discuss the Commission's new approach toward RPM. We also discuss an alternative approach to the assessment of RPM. Before doing so, it is important to note that, although much has been written since Leegin about RPM by economists and legal practitioners alike, there is relatively little empirical evidence on the actual effect of RPM on consumer welfare. At the same time, there seems to be broad recognition that RPM is generally harmful to consumers where there is either a certain degree of market power or a widespread use of RPM in a given market. Conversely, it is equally recognized that RPM can generate efficiencies overriding the negative price effect when it is used by a single or only a handful of suppliers without market power.

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