24 Mar 2021

Vertical Restraints in the Sights of the Commission for Protection of Competition

In the last few months, the Serbian National Competition Authority (“NCA”) has turned its attention to sanctioning agreements between undertakings where resale prices are maintained.  After taking cases against consumer electronics undertakings, the NCA recently opened an investigation against a general importer and its three car dealers of “Audi” vehicles, in the course of its sectoral analysis of the markets of sales and after-sales services of motor vehicles.

Resale Price Maintenance – What is the Problem?

Resale price maintenance (“RPM”) is a contractual provision where the supplier (usually the manufacturer or general importer) binds the buyer (usually the distributor or retailer) to re-sell the product to customers at a (i) fixed, (ii) minimum, or (iii) maximum price.  Essentially, buyers, as independent market participants, are prevented from forming product prices freely. 

RPM can be achieved through direct or indirect means.  In the former case, the supplier may resort to (i) threats, (ii) warnings, or even (iii) sanctions against a buyer who does not maintain a certain price level (such as penalties, delay or suspension of deliveries or termination of contracts).  In the latter case, RPM is imposed by (i) fixing the margin or the maximum discount the buyer may grant from a prescribed price level, (ii) tying the supplier’s rebates or its reimbursement of promotional costs to the maintenance of a given price level, or (iii) linking the set resale price to the resale prices of competitors.

Basically, setting (i) minimum and (ii) fixed resale prices are considered as a restrictive agreement. Setting the recommended resale price is in principle allowed, provided it does not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties.

Are There Any Justifications?

RPM, as a type of vertical restraint, is the most common type of arrangement investigated by the NCA.  In these cases, the NCA has treated RPM as an infringement by object, reasoning that undertakings infringed competition by merely concluding a contract, i.e. that there is no need to ascertain the effects of the alleged behavior.  Namely, in the case of infringements by object, the parties to the agreement cannot justify the existence of restrictions and thus exempt the agreement from the prohibition.

In that regard, in RPM cases the NCA does not ascertain (i) the negative effects on competition in the relevant market, and (ii) the market power of the undertakings who were fined.  The Competition Act prescribes that restrictive agreements have, as their object or effect, a significant restriction of competition in the territory of the Republic of Serbia.  In that sense, it may be wondered (i) whether the restriction of competition occurs just by concluding an agreement between two market participants whose market power is minor, or (ii) whether the NCA should take a closer look and carry out a “slightly” better analysis of the market in which the parties to a particular agreement operate.

How are Things in the EU?

Guidelines on Vertical Restraints (“Guidelines”), which are applied by the European Commission (“EC”), explicitly state that vertical restraints are generally less harmful than horizontal restraints.  Horizontal restraints may concern an agreement between competitors producing identical or substitutable goods or services, as opposed to vertical restrictions in which market participants participate complementary in the sales or production chain.  Vertical restraints may have an adverse effect on competition only in cases where one of the parties to the agreement has significant market power.

However, after a long time, the EC also shifted its focus to vertical restraints.  In recent cases of Asus, Denon & Marantz, Philips, Pioneer, and Guess, the EC found that manufacturers directly or indirectly imposed minimum or fixed prices thus preventing distributors and retailers from setting product prices freely.

Notwithstanding that the Guidelines qualify RPM as a hardcore restriction, they leave the possibility for market participants to justify the existence of such restrictions in certain situations.  Namely, the Guidelines foresee that RPM can be exempted under paragraph 101 (3) of the Treaty on the Functioning of the European Union in the event of (i) the introduction of a new product by a manufacturer, (ii) a coordinated short-term low price campaign in a franchise or similar distribution system, and (iii) preventing free-riding strategy, where absent RPM, retailers may not be incentivized to provide adequate pre-sale services to consumers.  Also, in some situations, the extra margin provided by RPM may allow retailers to provide (additional) pre-sales services, and particularly in case of luxury or complex products.

EC vs. NCA: Different Approaches to Setting Fines

The NCA and the EC are like chalk and cheese when it comes to fining market participants.  In the above cases, the EC sanctioned only the manufacturers.  Even though two parties participate in the restrictive agreement, the EC did not impose fines on distributors and retailers, taking into account their dependent position in relation to the manufacturer.  In fact, there were no negotiations between the two parties, but distributors and retailers were bound to apply the manufacturer’s pricing policy, otherwise they would be left without delivery of products.

Unlike the EC, the NCA has so far always fined both market participants, including retailers.  This is because the agreement is seen as a contractual relationship which the parties enter into voluntarily.  However, the NCA disregards the negligible or even non-existent bargaining power of the retailer in relation to the manufacturer or importer, as well as the consequences for the retailer in case of non-cooperation.

Changes Afoot

However, there has been a noticeable shift in the NCA’s approach to RPM.  Namely, after the “famous” case against more than 170 market participants on the baby care products retail market, the NCA suspended further proceedings against most retailers, stating the following:

The NCA took into account the fact that the parties against which the investigation is being suspended, due to their size, importance in the role of the buyer, market and financial strength, individually did not have adequate bargaining power, and thus the ability to influence contractual provisions.  Therefore, they were only able to completely abandon the cooperation with the company Keprom or to accept the content of the disputed contractual provisions“.

An approach that accounts for the bargaining power of the retailer can be gratifying, but it requires consistent implementation by the NCA going forward.  This approach was abandoned in the recent case where, in addition to the general importer of Audi vehicles, proceedings were initiated against other dealers (retailers) whose bargaining power was questionable at the time the contract was concluded.  That said, the case is in its infancy and the option to suspend the procedure remains available.

Finally, it remains to be seen whether the NCA will continue to concentrate its resources on fining retailers or shift to more serious competition infringements such as: (i) abuses of a dominant position, (ii) tacit cartels between market participants with significant market shares, and (iii) restrictive agreements which limit and control production, markets, technical development or investments.

Author: Vuk Leković