"I want to make sure that my products aren't sold too cheaply"
This is one of the sentences that we hear on a regular basis when advising brand owners using a distribution model.
Understandably, brand owners are concerned about the possible negative impact on their brand image if their products are sold at a price which does not accord to the brand's position in the market. In addition, many brand owners approach us after receiving several complaints from members of their distribution network about certain resellers discounting their products to such an extent that they effectively undercut the majority of the others. This may be great for a consumer who will be able to purchase products well below the brand owner's recommended resale price. Not so great for the brand owner though who may see the brand image slip and who has to deal with discontented network members. So what can be done to avoid this?
Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU") prohibits agreements, decisions and concerted practices by undertakings which may affect trade between EU member states and which have as their object or effect the prevention, restriction or distortion of competition within the internal market. Any restrictions or provisions in agreements which contravene Article 101(1) TFEU are void and unenforceable and the parties may be liable to a substantial fine.
Agreements caught by Article 101(1) TFEU are not, however, automatically outlawed. If the agreement has pro-competitive effects which outweigh the restrictions, it may be exempt under Article 101(3) TFEU.
There is also a specific safe harbour for vertical agreements (i.e. between parties at different levels of the supply chain, such as suppliers and distributors) in the form of the Vertical Agreement Block Exemption Regulation ("VBER").
Under the VBER, restrictions contained in a vertical agreement are presumed to be legal provided the market shares of the supplier and the distributor are each no more than 30% and the agreement does not contain any "hard-core" restrictions.
Resale price maintenance or "RPM" (which arises from any agreement or practice through which a supplier establishes a fixed or minimum resale price) is a hard-core restriction, the inclusion of which prevents the entire agreement from obtaining the benefit of the VBER.
Both direct and indirect forms of RPM are prohibited. This includes, for example:
- introducing incentives, such as granting rebates or reimbursement of promotional costs, subject to the distributor's observance of a specific price level;
- discontinuing or delaying the supply of products to distributors that do not follow the supplier's recommended price;
- withdrawing the right of a 'non-compliant' distributor to use the brand name for online advertising in search engines; and/or
- sending reminders to the distributor to comply with the recommended price e.g. through letters or phone calls.
Competition authorities are increasingly scrutinising resale pricing practices and policies. Recently, the German Federal Cartel Office imposed fines of €3 million to over €15 million on three German mattress manufacturers for engaging in RPM practices similar to those described above.
So, what are the options for a brand owner who fears for its brand image and/or is tired of listening to its resellers complain that so-and-so sells the products too cheaply?
The most obvious is to simply provide a (genuine) recommended price or stipulate a maximum resale price (which is perfectly lawful provided it is not a disguised form of RPM). However, since brand owners are usually more concerned with preventing their products being sold at discounted prices, price recommendations and maximum prices seldom provide a satisfactory solution to the problem.
One option is to raise the price at which the products are sold to the distributor (in the hope of incentivising the distributor to 'pass on' the higher purchase price to end consumers). Of course, commercially this may be difficult, not least because a higher purchase price will not be very attractive to resellers.
A second option is to make use of RPM in the limited circumstances in which it may be permitted. These include:
- where a supplier introduces a new product and RPM is used to facilitate a successful launch and to provide resellers with the incentives to promote the new products; and/or
- where RPM may be necessary to organise a coordinated short-term low price campaign (of two to six weeks) in a franchise network or similar distribution system.
If RPM really is critical to the supplier then another more fundamental option is to move away from a distribution structure and instead adopt an agency model, whereby the agent acts on behalf of his principal (the supplier) to create a contract for the sale of products between the principal and the customer and where the principal can validly retain control over the resale price. However, commercial agents enjoy substantial legal protection including, for example, the right to a payment on termination to compensate the agent for the goodwill that he built for the brand owner during the time of his engagement.
Outside of the above, whether a particular resale pricing policy is risky will depend largely on the circumstances in which it operates in practice, in particular, how it is documented and communicated both internally within the business and externally to distributors. As is often the case, the key here is to identify and manage the potential risks before it is too late.
If you would like to discuss these issues, please do not hesitate to contact us.