Resolving the Ambiguity between Recommended and Fixed Resale Prices: A Comparative Approach

[Prakhar Bhatnagar and Karan Trehan are II year B.A. LL.B. (Hons.) students at the NALSAR University of Law, Hyderabad]

Definition

Resale Price Maintenance (“RPM’) is a form of price-fixing agreement whereby a producer specifies the maximum, minimum or the exact price at which a retailer must re-sell its products to the consumers. It is a vertical restraint as it operates between the players functioning at different levels of the production chain. RPM agreements are held to be anti-competitive as they take away the freedom of the retailer to set prices, thereby hampering the competition in the market.

Issue

Whether a price stipulation imposed by a producer amounts to RPM or not is dependent upon its ‘binding nature’. It is important to note that only in cases where the stipulation is sufficiently binding, i.e., not in the form of a mere recommendation, the agreement constitutes RPM. Hence, in this light, it becomes imperative to distinguish between the conditions leading to recommendatory and binding price stipulations.  

Comparative Analysis

In order to understand the aforementioned distinction, it is necessary to analyze the manner in which the differentiation has been carved out and applied across various jurisdictions.

EU Law

Under European Law, a recommendatory price stipulation in itself does not amount to an RPM arrangement. It is only in cases where such a stipulation is followed by situations where the producer attempts to influence the behavior of its retailers through application of certain enforcement mechanisms that the agreement is considered to be RPM.

In the decision of JCB v Commission, the European Court of First Instance emphasized upon the requirement of a strict set of instructions or other binding measures along with the stipulations in order to convert mere recommendations into actual price-fixing stipulations. Such enforcement mechanisms can take various forms ranging from price monitoring systems to strict measures such as imposing penalties upon the non-abiding retailers. Furthermore, these mechanisms have to be analyzed against the background of contractual relations between the producers and retailers in order to determine the nature of the price stipulation.

Moreover, the guidelines on vertical restraints issued by the European Commission also lay down the above-mentioned requirements to constitute an RPM arrangement.

A similar line of distinction has also been incorporated in the US and the UK as well.

Indian Law

Section 3(4)(e) of Competition Act, 2002 (the “Act”) defines RPM agreements as follows:

Resale price maintenance includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

[Emphasis supplied]

It is amply clear from the language of the provision that in the absence of a clear statement indicating that a price stipulation is not binding, the stipulation will amount to an RPM agreement. In other words, a recommendatory price stipulation will also constitute RPM unless it is unequivocally stated to the retailers that they are not bound to implement it. This will follow even in cases where no enforcement mechanisms are in place to ensure that the price stipulations are actually implemented.

In M/s ESYS Information Technologies Pvt. Ltd. v. Intel Corporation (Intel Inc.) and others, the Competition Commission of India (“CCI”), while analyzing RPM agreements, construed section 3(4)(e) of the Act in a similar manner. Furthermore, a number of cases under the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) had also adopted this approach.

Hyundai motors Case

However, in case of Fx Enterprise Solutions India Pvt. Ltd v. Hyundai Motors India Limited, the CCI differed from the standard Indian approach and adopted a view point similar to the one existing under EU, UK and US jurisdictions.

The dealership agreement in the instant case permitted the company to prescribe the ‘net delivery price’ or the maximum retail price. The agreement allowed the dealers to sell below the stipulated price on paper. However, the maximum discount that could be offered by the dealers was controlled through an external discount monitoring mechanism in place. Hyundai clandestinely ensured the compliance of its discount policy by engaging “mystery shopping” agencies for policing its dealers through fake customers and by adopting a penalty mechanism.

After analyzing this price fixing scheme, the CCI held that it amounted to an RPM arrangement under section 3(4)(e) of the Act. It further held that the scheme in that case was not merely recommendatory in nature; and it was the scheme coupled with the monitoring and penalty mechanism which amounted to an RPM arrangement and violated section 3(4) of the Act.

Analysis

A clear divergence from the Indian standard can be observed from an analysis of the Hyundai case. If the CCI had adhered to the existing Indian standards, it would not have gone forward and analyzed the monitoring and the penalty mechanisms imposed by the Hyundai Motors. The CCI would have held the arrangement to be an RPM agreement solely on the basis of the fact that there was no clear statement indicating the non-binding nature of the maximum discount stipulation.

The fact that CCI examined the external enforcement mechanisms to hold the discount stipulation as ‘not in the nature of a recommendation’ is what displays the divergence in the approach.

Conclusion

The true nature of the agreement cannot be inferred by just focusing on the form or content thereof. There are several transactions and negotiations that take place in the course of the dealing between the parties and they might change the nature of the agreement itself. Hence, in this light, the requirement of evaluating the conduct of the parties assumes greater significance.

Moreover, it is a settled rule under competition law that for establishing an agreement, “conduct of the parties and surrounding circumstances should be given preference over the form of the agreement”, which was aptly applied in the Hyundai case.

An appeal from the case is currently pending before the National Company Law Tribunal (“NCLAT”). IN our view, the NCLAT ought to uphold this approach as it enables to correctly analyze the nature of the agreement in a particular case and is also in conformity to the well settled principles of competition law.

– Prakhar Bhatnagar & Karan Trehan