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The ACCC’s debut Resale Price Maintenance Authorisation

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By Jack Newton, Law Graduate, MST Lawyers

In December 2014, the ACCC approved its first (and so far, only) resale price maintenance (RPM) authorisation.

What is resale price maintenance?

 Resale price maintenance (RPM) is where a supplier (ordinarily a manufacturer, importer or wholesaler) requires a retailer not to sell a product below a particular price or in other words, to set minimum prices. RPM can take the form of various types such as a supply agreement containing a clause requiring the purchaser not to sell the goods below a certain price, or withholding supply because the purchaser doesn’t agree not to sell the goods below a certain price.

RPM is prohibited in Australia and is punishable by fines of up to $10 million or 10% of annual turnover (whichever is greatest) and for individuals fines of up to $500,000. The ACCC can authorise a person to engage in RPM if, and only if, the ACCC is satisfied that the public benefits of such conduct outweigh the public detriment.

Notable cases that the ACCC has brought against suppliers include a $3.4 million fine handed down to Jurlique International in 2007, a skincare and cosmetic manufacturer, and a fine of $2.2 million handed down against Mitsubishi Electric in December 2013.

Importantly, it does not include a supplier specifying a recommended price as long as that price is just that – recommended. Additionally, suppliers are permitted to refuse to supply goods to retailers where the retailer engages in “loss-leader selling”.

“Loss-leader selling” is where a retailer sells goods below their cost to promote their business or attract customers who then purchase other goods. The RPM prohibition does not prevent a supplier refusing to supply a retailer who engages in “loss-leader selling”.

The Facts

Tooltechnic is the exclusive importer and wholesaler of a range of power tool brands, one of which is Festool power tools. Festool products are marketed at tradespeople rather than DIY users. Tooltechnic supplies its imported power tools to over 200 dealers across Australia, virtually all of whom supply other brands of tools.

The key factor that separated Tooltechnic and Festool products from other power tools was the high level of pre-sale and post-sale retail service that “Premium dealers” were contracted (through the dealership agreement) to provide. Premium dealers had very particular requirements as to floor space, trade events, demonstrations and other retail services. Partner dealers had far fewer requirements, and Specialist dealers stocked only a limited selection of Festool products.

Tooltechnic experienced a problem of “free-riding” where other retailers would sell Festool products without providing the extra level of retail services. Many retailers who did provide the extra level of retail service did not achieve the sales because customers would use the retail services but then purchase the product from another dealer at a cheaper price (where the second dealer does not provide the retail services and can therefore reduce the price without jeopardising the mark up).

The Application

Tooltechnic Systems (Aust) Pty Ltd (Tooltechnic) applied for authorisation to amend its dealer agreements to require its dealers not to sell any Festool product (a particular brand of power tool) below minimum prices nominated by Tooltechnic.

ACCC view

The ACCC’s view was that RPM can (under some circumstances) address failures in the market. The failure here was the “free-riding” whereby the incentive for retailers to offer extra services rests on the expectation that sales would be increased as a result of those services. In circumstances where the retailers providing these extra services were being undercut by other retailers, the ACCC agreed that this was a failure of the market that could be addressed by RPM.

Setting minimum prices was an appropriate way of avoiding the “free-riding” and encourage retailers to provide better services.

The ACCC acknowledged the public detriment – that some customers would be forced to pay higher prices than what they would have, however the ACCC viewed this detriment as minimal in the context of the wide variety of power tools that are available, particular as Festool products held a relatively small market share of power tools.

The ACCC, in applying the public benefit test, concluded that the extra services that will be provided outweighed the detriment that would result from the proposed conduct. Accordingly, the application was granted (with very strict annual reporting conditions).

Conclusion

Notwithstanding the fact that the ACCC has had these powers since 1995, this application is the first application (and authorisation) ever in Australia.

The application cost alone ($7,500) is enough to turn most businesses off making an application, but clearly it can have obvious benefits particularly where, as is the case here, the supplier is suffering brand damage because of “free-riding” or similar types of behaviour.

As this is the first application and authorisation, we expect that there could be an increase in applications in 2015. Many businesses are, however, reluctant given the high cost of preparing an application and that at this early stage, the chances of success are relatively slim. For some businesses though, the risk could well be worth the reward.

Importantly, the ACCC provided some guidance as to how it would assess these applications in the future, which will assist applicants in ensuring that they have the best chance of succeeding.

For more information or to discuss your regulatory and compliance needs, please contact our Corporate Advisory team by email corporate@mst.com.au or by telephone +613 8540 0200.