Resale price maintenance (RPM) or, occasionally, retail price maintenance is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market), the manufacturer may stop doing business with it.[1] Resale price maintenance is illegal in many jurisdictions.
Resale price maintenance prevents resellers from competing too fiercely on price, especially with regard to fungible goods. Otherwise, resellers worry it could drive down profits for themselves as well as for the manufacturer. Some[who?] argue that the manufacturer may do this because it wishes to keep resellers profitable, thus keeping the manufacturer profitable. Others[who?] contend that minimum resale price maintenance, for instance, overcomes a failure in the market for distributional services by ensuring that distributors who invest in promoting the manufacturer's product are able to recoup the additional costs of such promotion in the price that they charge consumers.
Some manufacturers also defend resale price maintenance by saying it ensures fair returns, both for manufacturer and reseller and that governments do not have the right to interfere with freedom to make contracts without a very good reason.
In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, an English contract law case, tyre manufacturer Dunlop had signed an agreement with a dealer to get paid £5 per tyre in liquidated damages if the product was sold below the list price (other than to motor traders). The House of Lords held that Dunlop could not enforce the agreement. However, this had nothing to do with the legality of resale price maintenance clauses, which was not in any question at the time. The decision was based on the doctrine of privity of contract, as retailer Selfridge had bought Dunlop's goods from an intermediary and had no contractual relationship with Dunlop. In the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, the House of Lords upheld the enforceability of the requirement in the resale price maintenance clause, to pay £5 damages per item sold below list price, on the basis that it was not a penalty clause (which would be unenforceable) but a valid and enforceable liquidated damages clause.
In 1955, the Monopolies and Mergers Commission's report Collective Discrimination: A Report on Exclusive Dealing, Aggregated Rebates and Other Discriminatory Trade Practices recommended that resale price maintenance, when collectively enforced by manufacturers, should be made illegal, but individual manufacturers should be allowed to continue the practice. The report was the basis for the Restrictive Trade Practices Act 1956, specifically prohibiting collective enforcement of resale price maintenance in the UK. Restrictive agreements had to be registered at the Restrictive Practices Court and were considered on individual merit.
In 1964, the Resale Prices Act was passed, which now considered all resale price agreements to be against public interest unless proven otherwise. In 2010, the Office of Fair Trading (OFT) opened a formal investigation into allegations by an Online Travel Agent (OTA), Skoosh, of resale price maintenance in the hotel industry.[2] The investigation focussed on agreements between OTAs and hotels which may have resulted in fixed or minimum resale prices.[3] In September 2015, the OFT's successor, the Competition and Markets Authority (CMA), closed its investigation into suspected breaches of competition law in the hotel online booking sector.[4]
European Union
In relation to competition, Article 101 and Article 102 of the Treaty on Functioning of the EU (TFEU) are paramount over all member states' national laws relating to competition. Both the Court of Justice of the European Union and the European Commission have held that resale price maintenance is generally prohibited.
United States
In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220U.S.373(1911), the United States Supreme Court affirmed a lower court's holding that a massive minimum resale price maintenance scheme was unreasonable and thus offended Section 1 of the Sherman Antitrust Act. The decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel. Subsequent decisions characterized Dr Miles as holding that minimum resale price maintenance is unlawful per se (automatically).
On June 28, 2007, in the landmark decision of Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551U.S.877(2007), the Supreme Court overruled Dr. Miles and held instead that such vertical price restraints as Minimum Advertised Pricing are not per se unlawful but, rather, must be judged under the "rule of reason". This marked a dramatic shift on how attorneys and enforcement agencies address the legality of contractual minimum prices and essentially allowed the reestablishment of resale price maintenance in the United States in most (but not all) commercial situations.
During the Great Depression in the 1930s, a large number of U.S. states began passing fair trade laws that authorized resale price maintenance. These laws were intended to protect independent retailers from the price-cutting competition of large chain stores. Since these laws allowed vertical price fixing, they directly conflicted with the Sherman Antitrust Act, and Congress had to carve out a special exception for them with the Miller–Tydings Act of 1937. This special exception was expanded in 1952 by the McGuire–Keogh Act (which overrode a 1951 Supreme Court decision that gave a narrower reading of the Miller–Tydings Act).[5]
In 1968, the Supreme Court extended the per se rule against minimum resale price maintenance to maximum resale price maintenance, in Albrecht v. Herald Co., 390U.S.145(1968). The Court opined that such contracts always limited the freedom of dealers to price as they wished. The Court also opined that the practice "may" channel distribution through a few large, efficient dealers, prevent dealers from offering essential services, and that the "maximum" price could instead become a minimum price.
Meanwhile, the fair trade laws became widely unpopular among American consumers and consumer advocates during the 1973–1975 recession. They were seen as allowing retailers and manufacturers to maintain artificially high prices at a time when economic relief was desperately needed. As a result, the Miller–Tydings Act and the McGuire–Keogh Act were repealed by the Consumer Goods Pricing Act of 1975.[5]
Several decades after the landmark Dr. Miles decision, scholars began to question the assumption that minimum resale price maintenance, a vertical restraint, was the economic equivalent of a naked horizontal cartel. In 1960, Lester G. Telser, an economist at the University of Chicago, argued that manufacturers could employ minimum resale price maintenance as a tool to ensure that dealers engaged in the desired promotion of a manufacturer's product through local advertising, product demonstrations, and the like. Without such contractual restraints, Telser said, no frills distributors might "free ride" on the promotional efforts of full service distributors, thereby undermining the incentives of full service dealers to expend resources on promotion.
Six years later, Robert Bork reiterated and expanded upon Telser's argument, contending that resale price maintenance was simply one form of contractual integration, analogous to complete vertical integration, that could overcome a failure in the market for distributional services. Bork also argued that non-price vertical restraints, such as exclusive territories, could achieve the same results.
In 1978, the U.S. Supreme Court held that non-price vertical restraints, such as vertically imposed exclusive territories, were to be analyzed under a fact-based "rule of reason". In so doing, the Court embraced the logic of Bork and Telser as applied to such restraints, opining that, in a "purely competitive situation", dealers might free ride on each other's promotional efforts.
In 1980, the U.S. Supreme Court held that the repeal of Miller–Tydings implied that the Sherman Act's complete ban of vertical price fixing was again effective, and that even the 21st Amendment could not shield California's liquor resale price maintenance regime from the reach of the Sherman Act.[6] Thus, from the 1975 enactment of the Consumer Goods Pricing Act to the 2007 Leegin decision, resale price maintenance was again no longer legal in the United States.
Australia
Resale price maintenance is prohibited federally by the Competition and Consumer Act 2010.[7] The law is enforced by the Australian Competition and Consumer Commission. Substantial fines have been issued for violations of this law.[8]
One legal practice that is used by some Australian distributors to maintain a fixed retail price is a "chartered agency" structure. In that structure, rather than a retailer reselling goods purchased from the distributor for profit, the retailer never takes possession of the goods, but receives a commission per sale. Contractually, the goods are sold directly from the distributor to the consumer although the consumer typically visits a retail showroom where the goods are displayed, often next to similar goods from other manufacturers which are sold using the resale model.[9]
The agency structure was popularised in Australia by the high-end white goods manufacturer Miele. It was also adopted by the carmaker Honda in 2021.[10]
The Robinson–Patman Act (RPA) of 1936 is a United States federal law that prohibits anticompetitive practices by producers, specifically price discrimination.
In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses in order to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.
Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.
Bauer & Cie. v. O'Donnell, 229 U.S. 1 (1913), was a 1913 United States Supreme Court decision involving whether a purchaser of a patented product bearing a price-fixing notice incurs guilt of patent infringement by reselling the product at a price lower than that which the notice commands. A divided Court (5–4) held that it was not.
The rule of reason is a legal doctrine used to interpret the Sherman Antitrust Act, one of the cornerstones of United States antitrust law. While some actions like price-fixing are considered illegal per se, other actions, such as possession of a monopoly, must be analyzed under the rule of reason and are only considered illegal when their effect is to unreasonablyrestrain trade. William Howard Taft, then Chief Judge of the Sixth Circuit Court of Appeals, first developed the doctrine in a ruling on Addyston Pipe and Steel Co. v. United States, which was affirmed in 1899 by the Supreme Court. The doctrine also played a major role in the 1911 Supreme Court case Standard Oil Company of New Jersey v. United States.
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. Vertical restraints are to be distinguished from so-called "horizontal restraints", which are found in agreements between horizontal competitors. Vertical restraints can take numerous forms, ranging from a requirement that dealers accept returns of a manufacturer's product, to resale price maintenance agreements setting the minimum or maximum price that dealers can charge for the manufacturer's product.
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), is a US antitrust case in which the United States Supreme Court overruled Dr. Miles Medical Co. v. John D. Park & Sons Co.Dr Miles had ruled that vertical price restraints were illegal per se under Section 1 of the Sherman Antitrust Act. Leegin established that the legality of such restraints are to be judged based on the rule of reason.
The Antitrust Paradox is an influential 1978 book by Robert Bork that criticized the state of United States antitrust law in the 1970s. A second edition, updated to reflect substantial changes in the law, was published in 1993. Bork has credited Aaron Director as well as other economists from the University of Chicago as influences.
Under a unilateral policy a manufacturer, without any agreement with the reseller, announces a minimum resale price and refuses to make further sales to any reseller that sells below the announced price. Unilateral policy is a form of resale price maintenance that enables a manufacturer to influence the price at which its distributors and dealers resell its products without a formal contract regarding the resale price. The policy was first identified in United States v. Colgate & Co., 250 U.S. 300 (1919).
Competition law theory covers the strands of thought relating to competition law or antitrust policy.
Albrecht v. Herald Co., 390 U.S. 145 (1968), was a decision by the United States Supreme Court, which reaffirmed the law that fixing a maximum price was illegal per se. This rule was reversed in 1997 by State Oil Co. v. Khan, which held that maximum price-setting was not inherently anti-competitive and not always a violation of antitrust law, and should therefore be evaluated for legality under the rule of reason rather than a per se rule.
California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), was a United States Supreme Court case in which the Court created a two-part test for the application of the state action immunity doctrine that it had previously developed in Parker v. Brown.
United States v. Colgate & Co., 250 U.S. 300 (1919), is a United States antitrust law case in which the United States Supreme Court noted that a company has the power to decide with whom to do business. Per the Colgate Doctrine, a company may unilaterally terminate business with any other company without triggering a violation of the antitrust laws.
United States v. Parke, Davis & Co., 362 U.S. 29 (1960), was a 1960 decision of the United States Supreme Court limiting the so-called Colgate doctrine, which substantially insulates unilateral refusals to deal with price-cutters from the antitrust laws. The Parke, Davis & Co. case held that, when a company goes beyond "the limited dispensation" of Colgate by taking affirmative steps to induce adherence to its suggested prices, it puts together a combination among competitors to fix prices in violation of § 1 of the Sherman Act. In addition, the Court held that when a company abandons an illegal practice because it knows the US Government is investigating it and contemplating suit, it is an abuse of discretion for the trial court to hold the case that follows moot and dismiss it without granting relief sought against the illegal practice.
United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), is a 1940 United States Supreme Court decision widely cited for the proposition that price-fixing is illegal per se. The Socony case was, at least until recently, the most widely cited case on price fixing.
A hub-and-spoke conspiracy is a legal construct or doctrine of United States antitrust and criminal law. In such a conspiracy, several parties ("spokes") enter into an unlawful agreement with a leading party ("hub"). The United States Court of Appeals for the First Circuit explained the concept in these terms:
In a "hub-and-spoke conspiracy," a central mastermind, or "hub," controls numerous "spokes," or secondary co-conspirators. These co-conspirators participate in independent transactions with the individual or group of individuals at the "hub" that collectively further a single, illegal enterprise.
United States v. Masonite Corp., 316 U.S. 265 (1942), is a United States Supreme Court decision that limited the scope of the 1926 Supreme Court decision in the General Electric case that had exempted patent licensing agreements from antitrust law's prohibition of price fixing. The Court did so by applying the doctrine of the Court's recent Interstate Circuit hub-and-spoke conspiracy decision.
Dr. Miles Medical Co. v. John D. Park & Sons Co., (1911), was a United States Supreme Court case on anti-trust grounds that ruled that resale price maintenance, a form of vertical restraint, is illegal per se.
1 2 Sheffet, Mary Jane; Scammon, Debra L. (September 1985). "Resale Price Maintenance: Is It Safe to Suggest Retail Prices?". Journal of Marketing. 49 (4): 82–91. doi:10.1177/002224298504900407.
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