By Matt Hansen, Senior Associate
30 March 2021.
On October 2020 the Australian Competition and Consumer Commission (ACCC) went to the Federal Court alleging that B & K Holdings (QLD) Pty Ltd, trading as FE Sports, engaged in resale price maintenance in relation to cycling and sporting products. On 24 March 2021 the Federal Court declared by consent that FE Sports had indeed engaged in resale price maintenance and has ordered FE Sports to pay a penalty of $350,000. FE Sports has also agreed to a compliance program, which we discuss in depth below.
FE Sports is a wholesale distributor of cycling and sporting products that operates in Brisbane, QLD.
The ACCC alleged that between February 2017 and June 2019, FE Sports provided 328 agreements to existing or prospective dealers containing terms prohibiting the dealer from advertising or promoting certain brands of products online for less than the recommended retail price (RRP). RRPs are generally provided by wholesalers as an indicative sale price, usually coming from or on behalf of the original manufacturer, however, these RRP prices are not indicative of what competitors are actually selling the products for, and have no real bearing on the market other than to act as a suggested resale price. With some limited exceptions at law, it must be up to the retailer to decide what they resell product for. In this case, FE Sports eventually entered into 242 of those 328 agreements with dealers, containing the problematic provisions forcing the retailers to apply a hard floor on their sale prices. The agreements were for supply of bicycle accessories and sporting products under the brands Wahoo, Pirelli, 100%, 3T and Stages.
In other words, FE Sports entered into agreements with dealers that prevented them from selling certain brand products for less than the RRP, artificially setting a floor on prices. This is a form of resale price maintenance, which is strictly prohibited under the Competition and Consumer Act 2010 (Cth) (CCA), and it is prohibited because of the adverse impact on consumers and competition generally. Retailers must be provided goods and then allowed to sell at whatever price they wish, unless they are engaging in predatory pricing or loss-leader selling. Selling goods at cost, or even below cost, may be acceptable if it is not for one of these purposes, and wholesale providers such as FE Sports are not legally allowed to prevent it by imposing a price floor such as in this case.
What is “resale price maintenance”?
Resale price maintenance occurs where a supplier prevents, or attempts to prevent, independent retailers from advertising or selling products below a specified price.
This includes situations where manufacturers or suppliers:
- pressure a distributor or retailer to charge their recommended retail price or any other set price by threatening to not supply unless that distributor or retailer agrees to advertise or sell at a price not less than that set price;
- provide or offer inducements to retailers to not advertise or sell below a set price;
- take actions, such as withholding supply to a distributor or retailer that has advertised or sold at a price below a set price, or doing so to stop them from continuing to sell at a price below the set price.
That said, it is permissible for manufacturers or suppliers to take certain actions such as withholding supply to prevent retailers from engaging in “loss-leader selling”, namely, where the retailer heavily discounts goods without the manufacturer or supplier’s consent for the purposes of promoting the retailer’s business or attracting customers who are likely to purchase other goods or services. This does not apply to genuine clearances, however, so this exception would only apply in circumstances where a retailer is actively and aggressively discounting the goods to the detriment of the manufacturer or supplier (or their brands) in an ongoing fashion, and not for the purposes of a limited sale or clearance. Similarly, it is not acceptable for a retailer to engage in predatory pricing, which occurs where a retailer (usually a powerful, larger retailer) sells products at a low price in an attempt to undermine competition and drive other players out of a market.
To be clear, it is permissible for manufacturers or suppliers to have recommended pricing lists, as long as such lists are provided purely as recommendations only and there is no penalty attached for selling below these prices. We see such lists in many industries, including automotive where “manufacturer’s suggested retail price” or “MSRP” is commonly used. Manufacturers and their dealer networks are generally separate entities, so while the manufacturer is able to suggest prices by way of the MSRP, and even advertise prices as “recommended driveaway prices” in some advertising communications, dealers must be free to set their own prices in the secondary market.
For clarity, it is generally acceptable for wholesalers to set maximum prices for their products in the secondary market, but they must not set a minimum price such as FE Sports in this case.
What did the Federal Court decide?
The Federal Court declared by consent that FE Sports engaged in resale price maintenance in relation to the RRP pricing limit it set in relation to the relevant cycling and sporting products. This means that FE Sports did not contest the allegations, but rather, admitted liability and made joint submissions to the Court with the ACCC, including on the issue of a penalty.
The Court ordered FE Sports to refrain from including terms prohibiting discounting in its contracts with dealers, and to write to affected dealers indicating that they are free to set their own prices. In addition to the penalty, FE Sports was also ordered to implement a compliance program.
What is a compliance program and how can it affect my clients or my business?
Compliance programs are one of the many enforcement mechanisms used by regulators in Australia, including the ASIC and ACCC. A compliance program is an internal system or process imposed upon an entity, usually for a set period, when that entity has indicated a lack of understanding of their compliance or regulatory obligations. Compliance programs are essentially a punishment and a safety measure for the market, that is designed to:
- identify and reduce the risk of that entity breaching the CCA again;
- remedy any breach that may occur before it occurs; and
- create a culture of compliance within the organisation.
When a compliance program is imposed by the ACCC, the relevant entity essentially enters into a series of undertakings with the ACCC whereby it promises to implement certain processes within a specified period of time to ensure compliance with the CCA, which will include providing documentation to the ACCC for review and approval in advance, and the supply of ongoing compliance reports to the ACCC. This can also involve employing a compliance officer to report back progress and compliance to the ACCC. Compliance programs can be imposed for a range of CCA breach events, such as RPM issues as in this case, but also for misleading and deceptive conduct, pricing issues, or other compliance problems.
Based on the above, you can see that compliance programs can often be administratively burdensome on businesses and very expensive to implement and maintain, as well as, in many instances, limiting the scope of what an entity may be willing or able to do throughout the term of the compliance program. They are designed as an enforcement tool for the ACCC, and are reserved for businesses that commit more serious breaches of the CCA. In our experience, where imposed in relation to advertising or marketing regulatory problems such as misleading conduct and similar, compliance programs can also stifle creativity and responsiveness, add considerable time and cost to the clearance process, and significantly undermine brand value as a result. Therefore, a compliance program is not an enforcement tool to be taken lightly by brands or their agencies.