Recently, on 29th June 2023 a significant paradigm shift in the regulatory approach of the European Union (EU) towards Resale Price Maintenance (RPM) has been observed in the decision of the Court of Justice of the European Union (CJEU) in the Super Bock Bebidas (Super Bock) matter. While, some may find it as a reiteration of a well-established EU competition law rule, what holds more significance is its application for the very first time in a matter relating to vertical price-fixing agreement.
RPM is a type of vertical restraint where the upstream manufacturer or supplier exerts control over the resale prices set by downstream retailers or distributors. This control is achieved by either specifying a minimum retail price (price floor) or a maximum retail price (price ceiling).
This transition from a rigid (per se) approach to a ‘rule of reason’ approach towards RPM not only marks a new dawn in the EU competition law regime, but it also holds the potential to serve as a guiding light for other jurisdictions, which may gain an insight into the regulatory approach for RPM. A ‘rule of reason’ approach essentially demands the authority to undertake a thorough analysis of both pro and anti-competitive effects of an agreement and decide its legality accordingly. In India RPM is not per se illegal and rather, for it to be considered anti-competitive, the Competition Commission of India (CCI) is required to prove that as a result of RPM, there is an Appreciable Adverse Effect on Competition (AAEC) in India and that no offsetting efficiencies are available with this restraint.
Jurisprudential highlights on RPM in India & CJEU’s decision in Super Bock matter
In the matter of Maruti Suzuki India Limited (MSIL), in 2021, the CCI found MSIL guilty of contravening the provisions of the Competition Act, 2002 (Act) by indulging in the practices of fixing and placing a minimum retail price. MSIL brought in a discount policy mechanism imposing a limit on the maximum discount that could be given by the dealers. This policy required the dealers to follow the prescribed limit on discounts, while offering them to end consumers. Dealers were compelled to take MSIL’s prior approval before offering extra discounts, failing which they were threatened with no supplies or subjected to a penalty. MSIL had also appointed mystery shopping agencies to intimate them regarding any diversion in the practice by the dealers.
Based on its findings, the CCI observed that the issuance of threats and penalties by MSIL, regardless of any participation by the dealers, results in RPM. It also determined that MSIL’s RPM had an AAEC in India, thereby rendering it anti-competitive. As a result, the CCI, under Section 27(a) and (b) of the Act, issued a cease and desist order and imposed a hefty penalty of INR 2 billion on MSIL.
There are various theories of harm resulting from RPM that make its legality questionable. Some of them include the tendency of retailers indulging in cartels via a common manufacturer, reduction of interbrand and intrabrand competition, which ultimately affects end consumers through higher prices and harms the efficient retailers as the beneficiaries of increased competition.
RPM, on the other hand, is also observed as a very effective tool to prevent freeriding by end consumers and other retailers and to ensure better incentivization to retailers for investing in the sale of the products.
Thus, it is upon the CCI to look at the two sides of the coin carefully and determine whether the cons for the competition and consumer welfare outweigh the pros of the same and penalise accordingly. RPM apparently may appear anticompetitive in many matters but under a ‘rule of reason’ approach, it is essential to consider the compelling reasons for the manufacturers to indulge in the same. If they seem necessary and fit in the eyes of the competition regulators, then manufacturers and retailers may escape the liability under the Act. In India, ‘compelling reasons’ can be substantiated by the provision of section 19(3) of the Act, which provides several factors that the CCI must look at for determining the possibility of an agreement to cause AAEC under Section 3 of the Act (anti-competitive agreements).
The same principle as has been mostly followed in India, is regarded as the correct approach by the CJEU for evaluating RPM matters in the EU. The CJEU in Super Bock reaffirmed that RPM does not inherently become anti-competitive and thus, it does not disentitle the parties of the block exemptions and efficiency defence under Article 101(3) of the Treaty of the Functioning of the European Union (TFEU). Legal and economic factors (‘degree of harmfulness to the competition’) are to be considered for assessing whether RPM is constituting a violation of the competition law. This is in line with the competition law practice of the US, wherein following the Leegin matter in 2007, a ‘rule of reason’ approach has consistently been adopted for assessing RPM.
In India, the CCI in several of its decisions (involving Snapdeal, Intel, etc.) have taken a ‘rule of reason’ approach and did not consider the existence of RPM per se illegal under the Act. However in 2017, the CCI is seen deviating from its usual decisional practice to impose a hefty penalty on Hyundai. It found the existence of the discount control framework in the agreement as illegal, without delving into its possible effects on competition. It was the first RPM matter where the CCI imposed a penalty and there was an important divergence in its practice from what was followed in the previous matters. Unlike in other matters, no evidence of cartelisation was produced. The decision in the said matter also portrayed inconsistencies that the CCI has in terms of its approach towards RPM.
Legal position of RPM in the EU in Pre-SuperBook Era
For many years, the EC has faced a lot of criticism for its rigid (per se) approach towards RPM and for disregarding the efficiencies resulting from RPM or any mitigating factors. Irrespective of it, the rigidity followed. The CJEU has in various instances recognized price competition as very crucial and the practice of fixing minimum retail prices as ‘hardcore restriction’ under Block Exemption and a restraint on competition by object under TFEU. Hence, there is a rebuttable presumption of RPM being violative of Article 101(1) TFEU for it being a ‘hardcore restriction’ from the EU competition law standpoint.
Conclusion
This decision by the CJEU is noteworthy as it would certainly open doors for parties indulging in RPM to opt in for exemptions under the law and also bring in a flexible approach for assessing RPM on a case-to-case basis. This is a much needed reform in the practice as it is observed that
As discussed earlier, RPM has many efficiencies to offer, which often get overlooked within a rigid framework. Following this, the EU would begin analysing each matter carefully to avoid a departure from rule recognised by the CJEU.
On several occasions, India has been considerate of many mitigating factors in RPM matters and that afforded the parties concerned a chance to reap benefits of the RPM, like incentives to the retailers for investing on product sales and prevention from freeriding. This ultimately ensures remarkable growth of businesses, thereby reinforcing their competitiveness. Post Super Bock, the EU businesses may also be enabled to avail such benefits, fearless of them being under the European Commission (EC) radar and entangled in competition litigation.
India has been relying on well-established jurisdictions like the EU, for considering a new legislation for regulating the digital markets, ‘Digital Competition Act’. Super Bock matter, along with the learnings from the US’s approach, may as well be regarded as an opportunity to draw a consistent approach, i.e., ‘rule of reason’ for the assessment of RPM to analyse both legal and economic factors underlying RPM. As discussed earlier, Hyundai matter sparked concerns regarding the CCI’s conflicting approaches towards RPM. A one-size-fits-all rule is certainly an improper regulatory measure for imposing deterrence upon RPM and it risks unnecessary competition disputes harming the innocuous RPM agreements. This concern may be treated as a call for a consistent, proper and flexible framework for RPM, which already exists in jurisdictions such as the US and which is in practice in majority of Indian RPM matters. Nonetheless, what the author believes is in strengthening the CCI’s usual and wider decisional practice, i.e., a ‘rule of reason’ framework, for assessing RPM matters in India. This would serve the concerns shared by several stakeholders in RPM.
*****
Soujanya Boxy is a fourth year B.A.LL.B (Hons.) student at National Law University, Odisha. (Competition Law, Competition Act)
Author Bio
