By Adrian Faelli (Lawyer) and David Robbins (Principal Solicitor)
The ACCC has confirmed it will not allow Meredith Dairy to stop retailers from discounting its goat cheese products. The ACCC’s decision shows it will not lightly depart from the position that consumers are best served when retailers are free to set their own prices, and that those asking it to approve resale price maintenance (RPM) will need to overcome a high threshold – and provide clear evidence of benefits flowing to the public, not just to the supplier and retailers involved.
What is RPM?
Broadly, RPM occurs when a supplier seeks to stop someone lower in the distribution chain, such as a distributor or retailer, from reselling or advertising goods or services below a certain price.
RPM is unlawful in Australia regardless of its actual impact on competition, and attracts significant penalties. However, it is possible to obtain legal protection from the ACCC if you can satisfy a “public benefit” test. That means persuading the ACCC that the likely public benefits of the RPM conduct outweigh the public detriments. As Meredith Dairy discovered, that is not an easy task, because the ACCC’s default position is that stopping retailers from discounting is bad for competition – and therefore the public.
RPM is permitted in some limited circumstances. Relevantly, it is okay to stop supplying a reseller if they are “loss leading” – meaning buying your products with the intention of reselling them below cost to promote business or attract customers likely to purchase other products. However, this can be very difficult to prove.
Why was Meredith Dairy seeking legal protection for RPM?
Meredith Dairy faced a common situation for manufacturers which rely on independent distributors and retailers to get their products to market. When some retailers started discounting at very low prices, the other retailers naturally assumed they were getting a better deal from Meredith Dairy, and complained about it.
Meredith Dairy believed from the size of the discounts that the products were probably being sold below cost, but found it very difficult to work that out for sure, because it only knew its own price and the final retail price, but otherwise had no visibility of distributor and retailer costs downstream.
Presumably, at some point Meredith Dairy figured it was better to try and get approval from the ACCC to stop the discounting, rather than keep arguing with its resellers.
What was Meredith Dairy’s “public benefit” case?
Meredith Dairy submitted that allowing RPM in the circumstances would result in two main public benefits:
- Reduced transaction costs – because Meredith Dairy would no longer have to spend significant time and resources on a “wild goose chase” investigating each instance of potential loss leading.
- Meredith Dairy would also be able continue its ongoing investment in innovation, efficiency, sustainability and the local community, which it claimed would be jeopardised if these significant discounts became the norm.
The ACCC was not persuaded by these arguments. It said it did not see how reducing the costs incurred by Meredith Dairy to stop discounting was likely to result in any benefit to the public. It also said that if Meredith Dairy was allowed to limit price competition at the retail level to maintain profitability, that would essentially just result in a wealth transfer from consumers to Meredith Dairy and the retailers. In any event, the ACCC was not convinced that Meredith Dairy’s ongoing investment in its business was in jeopardy.
Ultimately, the ACCC concluded that Meredith Dairy had not identified any market failure to show why restricting price competition between retailers would be good for consumers, and that consumer welfare was best enhanced by promoting price competition, not reducing it to protect a particular business.
When will the ACCC grant legal protection for RPM?
The legislation does not define what constitutes a public benefit or public detriment. The ACCC’s guidelines say it will adopt a broad approach and assess matters on a case-by-case basis.
In the past, Tooltechnic has successfully obtained protection for RPM for its sale of Festool and Fein power tools. These are complex tools that require a high level of before and after sales service, such as product demonstrations and training, and therefore significant investment by full-service retailers to provide those services.
In its submissions, Tooltechnic persuaded the ACCC that without RPM, other retailers could effectively “free ride” on the full-service retailers’ investment by not investing in the same levels of service, but then undercutting them on price – and that as a result, the full-service retailers would eventually be forced to stop providing those services altogether.
The ACCC said that in those circumstances, the RPM conduct was likely to result in public benefits, including by allowing customers to make more informed purchasing decisions and assisting retailers to maintain high service levels for trade quality power tools. The ACCC said it was also likely to promote inter-brand competition and increase service-based competition between Festool and Fein dealers.
On balance, the ACCC concluded that those public benefits would outweigh the clear, but limited, detriment resulting from some customers facing a higher retail price for the products through lost discounting.
The take outs
The ACCC’s RPM decisions to date suggest that to satisfy the “public benefit” test, it will be necessary to point to some market failure to justify a departure from its default position that retailers should be free to set prices based on their own business strategies and assessment of market conditions to compete effectively.
“Free riding” is one example of market failure, but there will no doubt be others as the ACCC considers further cases in the future. The prospects of the ACCC granting legal protection will be significantly increased where there is evidence that the proposed RPM conduct will enhance competition and consumer welfare in other ways – such as by increasing the number of retailers or retail channels in the market, the availability, quality and safety of products, or an increase in non-price competition, including service levels.