Distribution dilemmas – resale price maintenance
It is tempting for manufacturers or suppliers of products to require their wholesalers and retailers (resellers) to sell them at or above a minimum price – a practice known as resale price maintenance (’RPM’). Although there are plenty of commercial reasons for engaging in RPM, there is at least one significant reason not to: the Commerce Act 1986.
As a reseller, you need to be aware of what behaviours are permitted regarding RPM. Manufacturers or suppliers may engage in RPM to prevent their resellers from competing too brutally on price (thus keeping everyone profitable), or to ensure that their resellers are able to recover the costs of promoting their products in the price that they charge. For specialised goods, it may make sense to protect the investment by creating a branding image and demanding that it is based on quality and exclusivity, which could be undermined if some resellers offered heavy discounts on those products. Manufacturers or suppliers may even think it a sensible marketing approach to standardise pricing for their franchise, joint venture, or other distribution arrangements.
Regardless of the reason for setting a minimum resale price, there is a risk of breaching the Commerce Act, which prohibits this behaviour.
What is prohibited and why? At a general level, a manufacturer or supplier is not allowed to require its resellers to sell its products (not services) at or above a minimum price set by them. Resale price maintenance is prohibited under section 37 of the Act because it is considered to be anti-competitive, restricting resellers’ ability to compete on price. Under the Act, examples of RPM include:
- informing the reseller that a manufacturer or supplier will not supply products to them unless they agree on a minimum sale price specified by the manufacturer or supplier;
- offering inducements to a reseller not to sell products at less than the minimum price specified by the manufacturer or supplier;
- entering (or offering to enter into) a contract for the supply of products under which the reseller agrees not to sell the products at a price less than that specified by the manufacturer or supplier;
- withholding the supply of products to a reseller because they will not agree to a minimum resale price as specified by the manufacturer or supplier; and
- withholding the supply of products to a reseller because the reseller has sold (or is likely to sell) the products at a price less than that specified by the manufacturer or supplier.
The Act defines the ‘specifying’ of price in very broad terms. For example, a manufacturer or supplier will be considered to have ‘specified’ the price if it sets a price (in dollar terms), specifies a formula for setting the price, or refers to a third person who sets the price (or a formula for setting the price). If resellers are likely to understand any statement made by a manufacturer or supplier as setting a minimum price, this is also considered as having ‘specified’ the price.
Counting the cost The Act provides substantial penalties for RPM. The maximum penalty for a business can be up to whichever is the highest of:
- $10 million per breach;
- three times the commercial gain that resulted from the breach; or
- 10% of the business turnover. For individuals, the maximum penalty is $500,000.
Recommended price lists
So, what about recommended price lists – are these prohibited under the Act? A manufacturer or supplier is unlikely to be deemed to be engaging in RPM merely because it has provided a recommended price list to its resellers. A price list must clearly state that the prices are “recommended prices only”, and that there is “no obligation to comply with the recommendation”.
Manufacturers or suppliers must, however, take care not to do anything to enforce the recommended price, because that would show the “recommended price” is really an illegally set minimum price.
If in doubt, consult a lawyer.