Introduction

The Competition Commission (the “Commission”) commenced proceedings in the Competition Tribunal on 15 September 2022 against a company (“TC”) for its engagement in resale price maintenance (“RPM”). The Commission alleged that TC had contracted with its two main local distributors to set minimum resale prices for a certain monosodium glutamate (MSG) powder (“Gourmet Powder”).

Resale price maintenance

RPM occurs whenever a supplier establishes a fixed or minimum resale price to be observed by its distributors, including retailers, when they resell the product. RPM can be achieved indirectly by, for instance, fixing the distributor’s margin or the maximum level of discount the distributor can grant from a prescribed price level. The supplier might also make the grant of rebates or the reimbursement of promotional costs subject to the observance of a given price level by the distributor, or link the prescribed resale price to the resale price of competitors. The supplier might equally use threats, intimidation, warnings, penalties, delays in, or the outright suspension of, deliveries to achieve RPM.

The Commission takes the view that the arrangement may have the object of harming competition. However, whether this is in fact the case turns on a consideration of the content of the agreement establishing the RPM, the way the arrangement is implemented by the parties and the relevant context. RPM may be considered as having the object of harming competition if:

1.       a supplier implemented the RPM in response to pressure from a distributor (e.g. retailer) seeking to limit competition from competitors of the distributor (e.g. other retailers) at the resale level; or

2.       the RPM is implemented by a supplier solely to foreclose competing suppliers.

 

Where RPM does not have the object of harming competition, it will be assessed based on its effects including any possible efficiencies.

Statutory regime in the Competition Ordinance

The first conduct rule (the “First Conduct Rule”) in Cap. 619, Competition Ordinance (the “Ordinance”) governs arrangements both between competitors and undertakings at different levels of the supply chain. This rule applies where the Commission demonstrates an agreement has either an anti-competitive object or an anti-competitive effect. The Ordinance makes a distinction between “serious anti-competitive conduct” (“SACC”) and “non-serious anti-competitive conduct”. RPM, as a form of price fixing (vertical price fixing), is classified as one of the four SACC defined in the Ordinance, meaning the Commission can bring the case to the Competition Tribunal directly and without issuing a warning notice to the relevant parties. RPM prevents distributors or retailers from competing with each other by offering lower prices, which will result in harm to competition in many cases.

The Commission’s case

It is the Commission’s case that since the Ordinance came into full effect on 14 December 2015 until at least 27 September 2017, TC continued to give effect to and/or engage in RPM arrangements, which began in 2008, by establishing minimum resale prices for the Gourmet Powder to be charged by its two main local distributors at the time. In particular, the Commission observed the following:

1.       TC’s distribution agreements obliged distributors to "avoid improper price competition".

2.       TC entered into agreements with its distributors which stipulated the minimum resale price to be charged by them and which must not be changed without TC's consent.

3.       TC issued letters and instructions to the distributors to update the minimum resale prices, observe these prices and/or to refrain from discounting.

4.       When one distributor began to complain against the other distributor's discounting, T C used disincentives, threats and/or penalties to secure compliance with the resale prices it set.

The Commission has reasonable cause to believe that TC engaged in RPM conduct which had the object of harming competition in Hong Kong in contravention of the First Conduct Rule under the Ordinance, and constituted serious anti-competitive conduct as defined in the Ordinance. The present proceedings are still ongoing and may be subject to further development.

Acceptable pricing practice

In the Guideline on the First Conduct Rule issued by the Commission on 27 July 2015, the Commission distinguishes genuine "recommended resale prices" from situations where "recommended resale prices" function in reality as RPM. Where a supplier merely recommends a resale price to a distributor or requires a reseller to respect a maximum resale price and the reseller remains free to adjust prices to compete in the market, the Commission will not consider this to have the object of harming competition but will instead assess whether the arrangement has an anti-competitive effect. Problems may arise when the recommended or maximum prices (i) serve as a “focal point” for reseller pricing (that is, where the distributors generally follow the recommended or maximum price); and/or (ii) soften competition between suppliers or otherwise facilitate coordination between suppliers. The more market power the supplier has, the more likely would such agreements have the effect of harming market competition.  

Moreover, the Commission does not simply look at what an agreement says but considers how it works in practice. Therefore, the so-called recommended or maximum resale price arrangements, when they are combined with measures that make them work in reality as fixed or minimum prices, will be assessed in the same manner as RPM. Suppliers and distributors should avoid, for example, retaliating or threatening to retaliate if the recommended resale prices are not followed by distributors, or granting/accepting rebates or other incentives subject to a distributor's observance of a certain price level.

On the other hand, RPM arrangements may sometimes lead to efficiencies that benefit consumers. This is referred to as the “efficiency exclusion” provided under section 1 of Schedule 1 to the Ordinance, which can apply where a fixed retail price is imposed for a short introductory promotional period to allow a new product to establish itself in the market, thereby enhancing overall economic efficiency. This type of promotional activity can result in consumers enjoying greater choices and benefitting from greater competition in the long run. However, when relying on this approach, the specific facts of the promotion must be carefully considered

Takeaway

In light of the above enforcement action, businesses are  reminded to review their current agreements for any potential RPM arrangements, and beware that anti-competitive acts which span the periods before and after the Ordinance taking effect on 14 December 2015 can be subject to investigation.

 

For enquiries, please feel free to contact us at:

E: competition@onc.hk                                                      T: (852) 2810 1212 W: www.onc.hk                                                                    F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022