Channel strategy: Top five competition law risks

Introduction

Competition law was designed with competition between brands in mind, and also poses risks in an era when brands have multiple competing channels to market. This article highlights the top five competition law risks that require navigation in an increasingly omni-channel world.

When competition laws originated, the world was a simpler place. Other organisations were either competitors, or not. In a standard supply chain, everyone had their own level, and the arrangements were therefore clearly vertical. These days, it is rare for there to be single supply channels. More common are dual structures comprising bricks and mortar and online channels; intermediaries such as Ebay and Amazon have created additional channels to market. Omni-channel distribution is now used by most major brands.

Markets are also often dissected along product, geographical or customer grounds, with various types of networks established. In implementing those networks, manufacturers and brand owners may act in their own capacities and/or appoint licensees, franchisees, distributors, agents, or a combination.

Whilst often commercially and legally sound, competition law risks increase:

• with more complicated arrangements;
• with stricter restraints; and
• in markets that are more concentrated (i.e. where there is less choice).

This article elaborates on how these risks can manifest, lists five key risks under the Australian Competition and Consumer Act 2010 (Cth) (the CCA) and provides some current and recent case examples.

Top five competition law risks in channel management

The CCA relevantly prohibits:

• price fixing or market allocation arrangements amongst “competitors” (known as cartel conduct);
• resale price maintenance; and
• concerted practices or arrangements that have the purpose, effect or likely effect of substantially lessening competition.

The formal legal prohibitions are explained in the Appendix at the end of this article.

1. Pricing

Resale price maintenance (RPM) refers to vertical price control where a supplier:

• uses contractual terms, threats, penalties or other inducements to prevent discounting by a reseller, by specifying a price below which goods or services are not to be sold; or
• uses a statement of price that is likely to be understood by resellers as the price below which goods or services are not to be advertised or sold.

There is no economic or business justification that can save RPM conduct from illegality in Australia, unless authorisation for the conduct is sought and obtained from the ACCC prior to engaging in that conduct. As a consequence, resellers have the right to discount at their discretion.

Nonetheless, it is generally permissible:

• to recommend a price for products or services that will be offered by resellers, provided that it is a pure recommendation; and
• to set a maximum resale price.

2. Exclusivity

It is common for a supplier to mandate that its distributor or other representative only operate in specified areas or under other constraints. Also, a representative may seek to prevent the supplier from supply rights (or only allow limited supply rights) in competition with that representative.

This is often referred to as exclusive dealing, in that the supply or acquisition of goods or services is conditional on dealings being implemented in a way that preserves exclusive or protected segments, be it territories, functional levels of the market, suppliers or customers.

Another category of exclusive dealing, known as “third line forcing”, arises where a supplier mandates that its customer acquire goods or services from specified third parties.

Whilst inherently affecting competitive dynamics, such arrangements often derive from legitimate efficiency drivers and often support effective investment and management of resources and channels. As such, exclusive dealing is only prohibited if it has the purpose, effect or likely effect, of substantially lessening competition.

Exclusivity becomes problematic if it has the purpose or effect of meaningfully foreclosing choice and access by customers to suppliers (and vice versa). This will be made more likely if any aspect of the supply chain is scarce and the restraints (in terms of duration or scope) cannot be justified.

3. Overlapping channels

A supplier / franchisor may participate directly in downstream supply markets itself, not just through distributors or other representatives. Sometimes, then, the supplier / franchisor might compete across customers, geography and/or product/service type with its own supply chain.

Interactions about prices, customer allocations or other strategic matters in those circumstances carry a heightened risk. This is because what might have been permissible in a vertical supply context, is prohibited outright by the prohibitions against cartel conduct, summarised in the Appendix.

Sometimes the cartel issues can be inadvertent, raised by unclear or incorrect legal or operational structuring. However, they can be more overt.

4. Online channels

A good example of an overlapping model is where a manufacturer may run the website and online sales for a product and the franchisees or local distributor are allowed to run physical sales. Most simply, this constitutes market sharing (in so far as the distributor and the manufacturer have agreed to “coexist” and serve different consumer bases). This can usually be managed by appropriate drafting and structuring of the franchise agreement or supply contracts to take advantage of an exception to the cartel conduct. The exception allows such arrangements where they constitute exclusive dealing (as outlined above), and assuming they do not have the purpose or effect of substantially lessening competition.

However, further risks arise because the manufacturer and distributor have to act at ‘arms-length’ and not otherwise coordinate on matters such as pricing, insofar as their customer bases may overlap.

5. Agents

Appointment of agents, instead of distributors, can offer some competition law cover, particularly if price control is an imperative.

However:

• appointing agents on any exclusive basis raises the same considerations set out in section 3 above, in that the appointment cannot have the purpose or effect of substantially lessening competition.
• if an agent is not a ‘true agent’ (and instead has a level of discretion over pricing or other competitive terms) cartel risks arise where the principal and agent both participate, and share some level of rivalry, in the same markets.

Implications and tips

Here are a few tips:

• Be alert to any strategies to reduce discounting by resellers. They are likely to be prohibited.
• Consider the rationale, justification, scope and likely impact of any exclusivity or restraints, especially if your business or your counterparty is one of few alternatives in the relevant market. Seek legal advice if there is a chance that the arrangement could have the purpose or effect of substantially lessening competition.
• In a dual or overlapping model, there are steps that may be taken to lessen risk:

• any coordination (including allocation of territories) between “corporate” and downstream is avoided or managed in accordance with relevant exceptions to the cartel laws (i.e. exclusive dealing);
• agents are managed as “true agents”, and, in particular, do not have pricing discretion; and
• pricing, customer details and other competitively sensitive information pertaining to one arm of the distribution channel is not communicated to the other arm, or received by personnel at head office who might be in roles that could use that information in a manner that lessens the competitive rivalry between the two channels.

• Where an arrangement could amount to cartel conduct or have the effect of substantially lessening competition, authorisation can be sought from the ACCC where the public benefits of the conduct outweigh any detriments (namely anti-competitive outcomes). Authorisation is a public, and sometimes lengthy process. However, it can be a beneficial course forward for long-term structural initiatives that have clear public benefits.
• Remember also, as applicable, the Franchising Code and protections under the Australian Consumer Law.

Contact us

Our competition and consumer markets teams at Norton Rose Fulbright are adept at advising on and supporting compliant channel models. Please contact us if you need assistance.

Appendix – Summary of relevant competition law prohibitions

Cartel conduct

Cartel conduct involves entering into (or giving effect to) a contract, arrangement or understanding (CAU) where two or more parties are competitors or potential competitors, containing a provision that:

1. has the purpose or effect of fixing, controlling or maintaining prices (including discounts, rebates or credit) (commonly referred to as price fixing);
2. has the purpose of preventing, restricting or limiting production, acquisition or supply, or allocating customers.

The extent of the likely impact on the market is not relevant. Cartel conduct is prohibited outright unless an exception applies.

Resale price maintenance

Resale price maintenance (RPM) occurs when a supplier does not let its customers advertise or sell below a specified price. RPM is also prohibited outright irrespective of its effect on competition.

Other anticompetitive dealings

Also prohibited are:

1. CAUs (whether or not with a competitor) that contain provisions that have the purpose, effect, or likely effect of substantially lessening competition in a market; and
2. ‘concerted practices’ that have the purpose, effect or likely effect of substantially lessening competition. Concerted practices means any form of cooperation between two or more firms, or conduct that would be likely to establish such cooperation, where the cooperation replaces the uncertainty of competition.

Penalties

Contravention of these prohibitions can result in significant financial penalties for companies and individuals involved.