The aim of this essay is to assess the likelihood of a convergence of the European Union (EU) and American regimes with respect to their competition law policy on minimum resale price maintenance. This essay intends to carry out the assessment while factoring in the influence of economic theories on the law as well as the overarching goals of the two regimes. This essay begins by introducing the background of the law and examining the evolution of the legal position of resale price maintenance in the United States (US). The first section highlights the gradual retreat from a per se rule for vertical agreements due to the antitrust goal of efficiency and consumer welfare as stated by Bork in his seminal work Antitrust Paradox, (Simon & Schuster 1993). This essay then examines the legal framework in the European Union and juxtaposes the European ‘object’- ‘effect’ analysis to the ‘per se’ rule and ‘rule of reason’ analysis. The essay then attempts to assess the pro and anti-competitive effects of the resale price maintenance while observing the impact of economic theories on the law. It then looks at the possibility of a convergence, or unification of the transatlantic divide on resale price maintenance by examining the case law in the EU and gauging a trend. This essay upon assessing the US and the EU systems proposes possible changes to the existing legislation in the EU while keeping in mind the ultimate goals of competition policy in both countries.
Minimum resale price maintenance refers to agreements that firms enter into with their resellers to ensure that the resellers sell their products at an established price. The Sherman Act, 15 U.S.C.A §1 (1890) , as per section 1, established that agreements that resulted in a ‘restraint of trade or commerce’ would be illegal. The Supreme court implemented this provision in a literal and harsh manner as seen in U.S. v. Trans Missouri Freight Association 166 U.S. 290 (1897) with no exceptions. This strict approach continued despite the Addyston Pipe & Steel Co. v. U.S. 175 U.S. 211 (1899) ruling which suggested a test of reasonableness for ancillary restraints. With respect to resale price maintenance, the Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) decision held that minimum resale price maintenance agreements fell under the purview of the Sherman Act. Dr. Miles did not overtly address the per se rule; it deliberated on the issue of freedom of trade. Hovenkamp observed that this mere ‘unenforceability’ of minimum resale price maintenance agreements in Dr. Miles was perhaps ‘interpreted as illegal under the Sherman Act’ and thus, the decision fortified the per se rule in section 1. The courts attempted to justify the lack of exceptions of this ‘per se’ illegality rule in Northern Pac R Co., due to the ‘pernicious effect' on competition’ of these ‘unreasonable’ agreements.
However, after the Dr. Miles decision, there was a gradual shift away from the strict per se rule. This began with U.S. v Colgate Co. which allowed the manufacturer to ‘preserve the right of freedom of trade’ and set a minimum resale price maintenance in ‘the absence of any purpose to create or maintain a monopoly’. This ‘Colgate Doctrine’ was reaffirmed in Russell Strover Candies Inc. v. Federal Trade Commission, 718F.2d 256 (8th Cir. 1983) and Monsanto Co. v. Spray Rite Corp., 465 U.S. 752 (1984). Subsequently, vertical agreements such as territorial restrictions in Arnold Schwinn & Co. v. U.S., 388 U.S. 365 (1967) and maximum resale prices as in Albrecht v. Herald Co. , 390 U.S. 145 (1968) that were held as per se illegal were overruled by Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) and State Oil v Khan, 66 L.W. (1997) respectively. This onset of change was due to the ‘demonstrable economic effects’ of vertical agreements. Cases such as Chicago Board of Trade v. U.S. 246 U.S. 231 (1918) and Standard Oil Co. v. U.S., 221 U.S. 1 (1911) addressed the issue of considering the purpose and effect of the restraint. However, the adoption of the rule of reason analysis and the rejection of the ‘last remaining vestige of the per se illegality’, was with respect to resale price maintenance in Leegin Creative Leather Products Inc., v. P.S.K.S. Inc. 551 U.S. 877 (2007). This was anticipated due to the trend that emerged in the Supreme Court owing to the ‘Antitrust Revolution’ which focused on efficiency as the ‘exclusive goal’ of antitrust laws. Leegin, by a narrow majority, overruled the well-established, ninety-six-year-old ruling of Dr. Miles. As Elzinga accurately states, Leegin indeed represents the ‘influence of economists’ upon judicial reasoning in competition law. The impact of Leegin with respect to the pro and anti competitive effects of resale price maintenance will be examined further on in this essay.
Article 101 (1) of the Treaty on the Functioning of the European Union (TFEU) is faintly similar to the Sherman Act as both provisions prohibit agreements that lead to a restraint of trade. Many academics argue that difference in interpretation of the two provisions is largely due to the different individual goals of the two regimes, especially with the ‘overarching consideration’ of integration in the EU. Article 101(1) TFEU prohibition is more specific than the broad Sherman Act that rendered ‘every’ agreement illegal without any exception and left the courts to interpret and substantiate the statute. The agreements under Article 101(1) that result in a restraint of trade are deemed ‘automatically void’ as per Article 101(2) TFEU. The legislation in the European Union is slightly more lenient as compared to the Sherman Act since it provides an exception under Article 101 (3) TFEU for agreements that ‘promote technical or economic progress’. As Whish and Bailey point out, EU law has the ‘bifurcation’ of Article 101(1) and Article 101(3) TFEU which does not exist in the US. The Block Exemption Regulation 2790/1999 and Guidelines on Vertical Restraint are soft laws in place to complement the interpretation of the law and provide assistance to the courts. The vertical agreements in question can be block exempted if the seller or buyer has less than 30% of the market share and the agreement and if the agreement is not a hardcore restriction. However, with respect to context, the resale price maintenance falls under the meaning of hardcore restraint as per Article 4(a). Although the law on vertical agreements such as minimum resale price maintenance did not evolve in the EU like it did in the US, academics find the European approach and the market share analysis more pragmatic.
The courts have been ‘hostile’ towards resale price maintenance. The decision in Pronuptia must be noted as this case stated that merely suggesting a resale price is not prohibited unless there is a ‘concerted practice’ on the ‘actual application’ of the price. The Binon judgement affirmed that resale price maintenance agreements fell under the purview of Article 101(1) TFEU. This was confirmed in Erauw-Jacquery, with the addition of a caveat that the agreement had to ‘appreciably affect trade between member states’. Despite this ‘appreciable effect’ clause, minimum resale price maintenance cases have not been included from the De Minimis notice. This notice provides an exemption from the Article 101 (1) prohibition for vertical agreements of firms that own less than fifteen percent of the market shares. It seems as though this exclusion of resale price maintenance from the aforementioned notice is unduly harsh as it is unlikely that firms with such a miniscule percentage of market shares would result in an ‘appreciable effect’ on the market.
The EU’s Object and Effect analysis could be seen as superficially similar to the Per Se Rule and Rule of Reason analysis in the US. The Courts find certain agreements ‘by their very nature, as being injurious to the proper functioning of normal competition.’ The term ‘per se’ was used in T-Mobile by Advocate General Kokott to justify per se illegality due to the legal certainty and less administrative costs. The CJEU also found that an evaluation into the ‘concrete effects’ of an agreement is unnecessary if has the object to distort competition. Although the object analysis is different from the US per se rule, Jones and Sufrin suggested that a ‘perception of per se illegality’ has been created due to the difficulty in justifying agreements under Article 101(3). Labelling the ‘object’ approach for vertical restraints as the EU counterpart to the Sherman Act is not entirely correct due to the exceptions provided by the Article 101(3) and the soft law. Nevertheless, it could be argued that the EU’s stance on resale price maintenance agreements, in particular, is akin to a per se rule of illegality due to the unsympathetic nature of the courts and exclusions of these agreements from the De Minimis Notice as noted above. The next section will examine the European Union and American position on the economic assessment of the effects of resale price maintenance.
This section acknowledges that there are both the positive and negative impact of minimum resale price maintenance agreements and looks into the administrative challenges of having economics influence the judiciary. This section attempts to refute some of the economic justifications of resale price maintenance. It is important to note that with regard to minimum resale price maintenance, the US focuses on the eradication of free riding whereas, in the EU, this particular issue is only secondary to the main focus of prevention of infringement.
Leegin held that resale price maintenance can both ‘stimulate and stifle competition’. Its pro-competitive effects result in an increase in interbrand competition through the elimination of free riding. The problem with free riding occurs when there is no minimum resale price and a firm offers additional retail services and information about a product to the consumer who could then purchase the product for a lower price at another retailer. These ‘discount retailers’ essentially free-ride on full-service retailers. However, the relevance of this freeriding argument in Leegin has been challenged. The claim about consumers lacking ‘sufficient expertise’ to evaluate products is valid but only to a certain extent as this ‘confined only to pre-sale services’ and thus, to products that require such pre-sale services. Although Leegin advocated the elimination of free riding, it was not an issue in the case. It is also important to note that freeriding is not necessarily a huge problem to be thwarted as in this modern era, the information of a product required prior to a sale and demonstrations of the product can easily be accessed on the internet by the wither the firm itself or by other consumers. The free riding argument is said to be an ‘unconvincing’ justification for resale price maintenance. Another justification of resale price maintenance that arose as the extension of free riding is the brand image and quality certification, however, its relevance would be limited only to certain products. An important pro-competitive justification of minimum resale price maintenance is the entry of new products into the market due to the ‘higher retail margin’ that leads to greater interbrand competition. This issue is addressed by Breyer J. in his dissenting opinion where he acknowledges this impact but states that it could have been achieved by modifying the per se rule instead of adopting a new rule of reason.
The anticompetitive uses of minimum resale price maintenance are discussed as follows. The facilitation of manufacturer cartels is one of the concerns where manufacturers can use the minimum price to ‘organise and police’ cartels with ease. This definitely is anticompetitive and should be prohibited, the rule of reason in such a scenario is deemed by some academics as ‘unnecessary’. It is also noted that the minimum resale price maintenance could be used to facilitate a dealer cartel if the dealers are able to pressure the manufacturer into setting prices that suit its own motive of increasing profits. The court in its opinion highlighted the possibility of an abuse of power from a dominant position, this could involve a manufacturer ensuring that their retailers do not sell products of weaker smaller or newer competitors. The Supreme Court in Leegin held that the potential anticompetitive impact of setting a minimum price should not be ignored.
The above pro and anti-competitive benefits that were used in Leegin are all based on economists’ theories. An increased economic analysis and a goal towards efficiency is what motivated the shift towards a rule of reason in the US. However an important consideration is that this product of economic analysis, that this rule of reason, is highly unstructured. Moreover, the use of economics in antitrust law is not always going to result in legal certainty due to the varied aims of economics such as efficiency, or profit maximization and conflicting views of the theorists. As Breyer J notes in Leegin, the law is indeed an administrative system and a rule of reason would not only increase the time and money expended but also invite excessive judicial intervention through scrutiny into the technicalities of agreements. There is no denial that minimum resale price maintenance has both positive and negative effects, however the frequency and extent of the harm is also an important consideration as noted by Breyer J. Through the above analysis, the arguments for the pro-competitive effects seem rather weak and they could be addressed through an alternative way instead of creating a rule of reason.
The inconsistent approach towards economic analysis leads Colino to describe the rule of reason as the ‘Loch Ness Monster of EC Competition Law’; widely spoken about but not seen in action. Colino argues that despite the EU goal of achieving the single market, it does ‘apply a certain rule of reason analysis’ for vertical agreements. This can be seen in Delimitis, which emphasised on the effect of the agreements. This analysis, however, is very different from the rule of reason adopted in Leegin. The rule of reason employed in the U.S. is seen as ‘imprecise’ in the EU. The EU in its Regulation 2790/99 identifies the positive impact of resale price maintenance as established in Leegin. However, it relies on ‘clear rules and guidelines as opposed to a balancing test’ skewed towards the pro-competitive features of the agreements. The possibility of an ‘EU rule of reason’ can be examined in the case law, however, this is still unclear. The Societie Technique Miniere decision ‘ignited academic disparity’ as it held that a contextual understanding of the agreement is required with respect to Article 101(1) . Cases such as Montecatini and Metropole, however, cast doubts on the ‘existence of a rule of reason’. Metropole held that the flexible interpretation of Pronuptia, Societie Technique Miniere, Delimitis cannot be ‘interpreted as establishing a rule of reason’. Academics argue that this ‘influx of US terminology’ and extension of Article 101 (1) would lead Article 101(3) to be ‘superfluous’.
With respect to Resale price maintenance in the European Union, it would be inaccurate to state that even a limited EU rule of reason approach is used here due to it being a hardcore restraint. A possibility to reconcile the pro-competitive benefits and the EU’s approach would be to modify Article 101(3) to some extent rather than conflate the ‘object’ and ‘effect’ meaning as per Article 101 (1). As Sufrin and Jones clearly note, Article 101(3) is the ‘appropriate forum’ for assessing agreements for their pro and anti-competitive effects.
This essay is of the opinion that adoption of a new rule of reason for resale price maintenance is not ‘ideal’ and a modification of the per se rule to allow for exceptions would have been a better solution. However, this essay acknowledges the absence of an exception in the legal framework of the Sherman Act and thus understands that this could be justified to some extent in the United States. However, in the European Union, with the existing legal framework for exceptions, it seems rather ill-advised for the EU to abandon its existing legal position and adopt the US Rule of Reason. This will contradict stare decisis in the EU but it more importantly, it would face criticism as it is extremely likely that such a decision would lead to uncertainty especially with respect to implementation and is thus not ideal keeping while taking business realities into account. Moreover, the underpinning concept of efficiency drives the Rule of reason in the United States. Economic efficiency and consumer welfare are not goals of the European Union and thus embracing the US rule of reason is likely to be an unwelcome change. This essay proposes that rather than creating a new rule of reason for the explanations highlighted above, the change needs to occur incrementally. A modification of the existing Article 101(3) TFEU and an increase in its leniency would be more acceptable approach. This essay also suggests the inclusion of minimum resale price maintenance in the De Minimis notice is also necessary before thinking about adoption of the US rule of reason.
Thus, it has been demonstrated that although the concept of minimum resale price maintenance exists and affects both regimes, the EU and US have different interpretations of the law that governs this competition law concept. The adoption of the rule of reason in the US occurred mainly due to the inadequacy of exceptions in the Sherman Act; this problem in legislation is not evident in the EU, although the law has demonstrated itself to be harsh through the cases discussed above.
The use of economics in the law in order to improve efficiency and consumer welfare was one of the main developments seen in the US. However, these goals of the US such as efficiency and consumer welfare are not the primary goals of the EU and thus such a radical change from their social market and integration aims are highly unlikely to take place. This does not mean that the EU disregards the use and value of economics in the law, but it focuses on established guidelines that were framed while considering economic theories in relation to the supranational goals of the EU.
A transatlantic divide is indeed present and evident and a partial convergence could occur by reading into the effects based approach but this does not equate the US rule of reason. This essay thus concludes by suggesting a relaxation of the strict legislation towards minimum resale price maintenance rather adoption of a new, foreign concept which will lead to uncertainty and confusion.
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