Jun 2007

Are you a manufacturer or supplier of goods? Have you ever thought it would be commercially sensible to protect and promote your brand's image by setting the minimum price at which your distributors or retailers market your goods? Be careful if you do so; the practice of setting minimum prices for resellers is called "resale price maintenance" and is prohibited under the New Zealand Commerce Act 1986.

This article examines Resale Price Maintenance practices caught under the Commerce Act and comments on a recent Australian case where the Judge questioned the basis of the prohibition.

Resale Price Maintenance (RPM) occurs when a supplier of goods specifies the minimum price at which a reseller can sell those goods. This practice is prohibited under section 37 of the Commerce Act 1986 (the Act) for the policy reason that RPM restricts the reseller's ability to compete with others on price and therefore is anti-competitive conduct. It is important to recognise though that recommending retail prices to distributors is not prohibited, providing the recommendation is genuine and suppliers do not attempt to enforce compliance with the recommendation.

However, in a recent Australian decision, Australian Competition and Consumer Commission v Jurlique International Pty Limited [2007] FCA 79, the Judge questioned the basis of the prohibition on RPM.

The Jurlique Products Case

The case concerned skin care products produced by the Australian manufacturer Jurlique. Jurlique products are often sold from "Jurlique branded" boutique stores and spas, and are prestigious, all natural and expensive, the average 100ml facial moisturiser retailing for between $70 - $125 Australian dollars. However, Jurlique had engaged in RPM conduct since 1991 by including in agreements with retailers provisions that the retailers would not sell Jurlique products at less than specified minimum prices and that they would not engage in discounting practices which damaged the reputation and image of Jurlique skin care as "prestige" products.

Record Penalty

Following an investigation by the Australian Competition and Consumer Commission (ACCC), Jurlique accepted it had breached the Australian Trade Practices Act provisions on RPM and agreed to pay a significant penalty of $3.4 million Australian dollars. A separate penalty of $200,000 was awarded against the former managing director of Jurlique, Dr Jurgen Klein. Although this was a record penalty for RPM, it is possible the penalty would have been higher had there not been limitation issues which prevented the ACCC from prosecuting conduct prior to 2000. Agreement between the parties on the penalties also suggests that a significant discount was granted for the guilty pleas.

The Judge’s Comments on RPM in Relation to Prestige Products

Jurlique argued that it considered that maintaining its prices through RPM contributed to growth of the brand. Spender J in the Federal Court commented that this raised questions of the appropriate penalty in the context of prestige goods, stating "the fact of the matter is that the attraction of many products to consumers lies in the fact that they are expensive, and have an aura of exclusivity about them". 

He then went on to refer to the Chicago School of Economics and other academics who suggest a number of reasons why vertical price restraints, such as RPM, are not anti-competitive. For example, retailers who discount arguably take a "free ride" on those who do not: "the use of resale price maintenance to prevent retailers taking a free ride is particularly important for prestige goods where a manufacturer substantially invests in creating an image based on quality and prestige to increase demand for its product". The Judge also recognised the argument that the use of RPM to eliminate price competition among retailers forced them to compete on nonprice aspects such as the provision of services to consumers, and that maintenance of prices could lead to increased demand for the product concerned, particularly where that product was a "prestige" item. 

Having outlined the arguments against prohibiting RPM, with particular emphasis on prestige products, the Judge then observed that although the utility of RPM would "no doubt continue to be the subject of serious and genuine debate", he was bound by the law, under which RPM was an offence.

The Elements of Resale Price Maintenance in New Zealand

So what activities will constitute RPM in New Zealand and be in breach of the Act? In New Zealand, the types of activities that are considered to be RPM and are prohibited include:

(a) Suppliers specifying the minimum price for the sale of their goods;

(b) Suppliers inducing resellers not to sell goods at a price less than a specified minimum price;

(c) Suppliers entering an agreement with resellers for the supply of goods where one of the terms involves a specified minimum price;

(d) Suppliers making known to resellers that they will not supply goods, or withholding the supply of goods to resellers, unless they agree not to sell the goods below a specified minimum price; and

(e) Suppliers withholding the supply of goods to resellers because they have previously sold goods at less than a specified minimum price.

RPM Concerns "Goods"

RPM is prohibited in relation to "goods". The term "goods" is defined in the Act as meaning "personal property of every kind (whether tangible or intangible)" and includes such things as ships, aircraft and vehicles, animals, minerals, trees and crops, gas and electricity, water and computer software. The definition, on its face, does not include services.

A "Specified Price" is an Essential Element of RPM

Establishing that a supplier has specified a minimum price below which their distributors must not sell is fundamental to showing the supplier has engaged in RPM. Helpfully, the Act deems a broad range of situations to be "specification" of a price by a supplier. These include the supplier setting a price, or specifying a formula for the setting of a price, or even referring to a third person to either set the price or specify a formula that sets the price. Even a supplier making a statement about price which is likely to be understood by a reseller as setting a minimum price is caught by the Act.

It is apparent from this that it is not necessary for a supplier to specify an exact price. In one Australian case, Bata Shoe Co of Australia Pty Ltd (No 2), a supplier informed a retailer that the price was to be "somewhere near" the selling price of another company. The Court found that this approximation of price was sufficiently specific to be a specified minimum price. Similarly, stating a range of prices below which a seller must not sell has also been found to amount to specification of a price.

Recommended Retail Prices

Suppliers are permitted to provide resellers with "recommended retail prices". These prices must be genuine recommendations and it must be clear from the supplier's words or conduct that the reseller is not obliged to sell at the recommended prices.

Accordingly, suppliers are not permitted to punish, or discriminate against, resellers who discount the recommended price. An act of coercion by the supplier to enforce the recommended retail price, will have the effect of "converting" the recommended price to a specified minimum price, and will result in a breach of the RPM provisions of the Act.

Conversion of a recommended retail price into a specified price occurred in Commerce Commission v Aquanut Pty Limited. In that case, the diving equipment provided dealers with recommended retail prices. However, when the supplier became aware that two customers of one dealer had negotiated a 10% discount on the recommended prices, the supplier called the dealer to complain about "bartering" on prices and shortly afterwards, terminated the dealership. The Court considered that the supplier had attempted to induce the dealer not to sell at less than a specified price and a penalty was awarded against Aquanut of $60,000 plus costs.

"Withholding Supply"

Coercion can also occur through withholding the supply of goods. So what activities by a supplier constitute "withholding supply"? Merely refusing to supply goods is not RPM, as suppliers are not obliged to provide goods to all distributors who request supply. However, withholding supply because a distributor has refused to agree to a specified minimum price for goods, or because they are likely to, or already have, sold goods at less than a specified price, will breach the Act.

Section 40 of the Act provides an extended meaning for the phrase "withholding supply". A supplier will be considered to have withheld supply where it refuses to supply goods as requested by the reseller, or where it does supply goods but on terms which are disadvantageous or unfavourable in comparison to other persons who also receive supply of the goods. On this basis, it is not necessary to completely withhold goods from a reseller in order to breach the Act – it is enough to act in a discriminatory way.

A threat to discriminate was found to be in breach of the Act in Commerce Commission v Morning Star Computer Limited. In that case, a computer parts supplier provided set prices to distributors and also advised them that those distributors who sold below the set prices would have their wholesale prices increased. Distributors who complied with the prices would receive a "special deal". The Court agreed that Morning Star had breached the Act by threatening to impose a penalty for non-compliance and a benefit for compliance and awarded a penalty of $50,000 plus costs.

Finally the Act includes a presumption the supplier has engaged in RPM where the supplier withholds goods it previously supplied, and where in the 6 month period prior to withholding, the supplier became aware the reseller would not agree to a minimum price or sold below a minimum price. In the absence of evidence to the contrary, proof of these matters will result in a finding that the supplier has engaged in RPM.

Penalties

The penalties for engaging in the practice of RPM can be significant. An individual who engages in RPM conduct may be liable to pay a maximum penalty of $500,000, while a business may be liable for the higher of $10 million per breach, three times the commercial gain resulting from the breach, or 10% of turnover.

The maximum penalty for RPM in New Zealand has been $250,000 plus costs. This was awarded against Toyota New Zealand Limited in 1997 for inducing or attempting to induce franchisees not to provide discounts for fleet purchases over an 18 month period. Toyota was concerned to protect itself against reputational damage it thought would result from over-discounting Toyota cars. As in the Jurlique case, the penalty was agreed with the Commerce Commission, and may have been higher had the matter gone to trial.

Conclusion

One Australian Judge recently was willing to recognise that the assumption that restraints on retail pricing are always anti-competitive may be questionable, in particular, in relation to prestige goods. His willingness to look at the arguments raises some questions as to whether the prohibition on RPM as it currently stands is properly formulated. In light of the academic comments, would it more appropriate to ask whether RPM conduct results in a substantial lessening of competition in the market for the relevant goods, rather than measuring the conduct against set elements, as set out above? The presumption that retail pricing restraints are anti-competitive, for the reason that the reseller's ability to compete on price is restricted, would then be measured against the reality of the effect of the conduct in the market.

RPM as it stands, however, is good law in New Zealand and is expressly prohibited. The RPM provisions in the Act are comprehensive, covering a wide range of acts and methodologies for setting or maintaining minimum prices. And, it is apparent that the penalties can be substantial, especially where the conduct is repeated and over the course of time, as illustrated by the Jurlique, and to a lesser degree, Toyota, cases.

With that in mind, take note of the RPM prohibition in the Act, and seek legal advice if you have any concerns about business practices.

This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.