Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Commissioner Wright discusses proper legal treatment of resale price maintenance agreements under antitrust laws, (Apr 11, 2014)

By Linda O’Brien, J.D., LL.M.

FTC Commissioner Joshua Wright discussed the economic impact of resale price maintenance agreements and the appropriate legal treatment of such agreements under the antitrust laws in an April 9 speech before the British Institute of International and Comparative Law in London.

Wright began his address, entitled “The Economics of Resale Price Maintenance & Implications for Competition Law and Policy, “ by noting that identifying the appropriate legal rule to govern minimum resale price maintenance (RPM) agreements is a challenging issue which has a long history in the United States. Since 1977, the U.S. Supreme Court has abandoned the per se treatment of vertical restraints like RPMs in favor of applying a rule of reason analysis that assesses the competitive effects of such agreements on a case-by-case basis. This shift was a positive development in U.S. competition law and policy, in Wright’s view.

Despite this change, considerable debate remains concerning the appropriate legal treatment of minimum RPMs in the United States, Wright continued. There are many options, ranging from a full-blown rule of reason analysis, to a so-called “structured” rule of reason test that would impose a rebuttable presumption of illegality. RPM agreements remain per se unlawful in many states. Moreover, Congress has proposed legislation that would undo the shift to the rule of reason for minimum RPMs in favor of returning to the per se standard.

Wright stated that a quick survey of jurisdictions around the world reveals that the debate over the appropriate legal treatment of minimum RPM agreements is not limited to the United States. In many jurisdictions, minimum RPM agreements are regarded as serious competition law violations. As an example, the U.K. Office of Fair Trading, taking a strong stance on prosecuting RPM cases, issued “statements of objections” in two separate cases alleging anticompetitive RPM agreements. While the European Commission does not apply a per se rule to minimum RPM agreements, such agreements are considered “hardcore restrictions” and cannot make use of the block exemption.

The appropriate treatment of minimum RPM agreements also is an issue in emerging markets, Wright observed. The key question is not whether a per se rule or rule of reason standard should apply. In Wright’s view, a better question to ask would be what does economic theory and the body of empirical evidence about the competitive effects of such arrangements show about which RPM rule is most likely to maximize consumer welfare.

In order to construct a rule that maximizes consumer welfare, it is necessary to employ a framework that considers three key factors, according to Wright. The framework must (1) consider the probability that the challenged business arrangement is anticompetitive; (2) evaluate the magnitude of the social cost created by any errors in assessing antitrust liability; and (3) acknowledge the administrative costs of implementing alternative legal rules. That framework is the standard “decision-theory” or “error-cost” approach to legal rules which is well-suited for designing appropriate legal rules for assessing antitrust liability, in Wright’s view.

Wright next discussed the two general categories of anticompetitive theories of minimum RPM agreement—collusion and exclusion. With respect to collusion, minimum RPM agreements potentially help facilitate dealer-level cartels by using manufacturers to establish pricing behavior that leads to price fixing. Regarding exclusionary theories of harm, minimum RPM agreements can be used by dominant dealer to request a price floor in order to avoid competition from more efficient rival dealers. Wright stated that economic literature also is replete of examples of procompetitive justifications for minimum RPM agreements.

To identify the appropriate legal rule for minimum RPM, the empirical evidence on the subject must be examined to determine whether the procompetitive or anticompetitive models associated with RPM has greater predictive power, Wright noted. As is the case with many vertical restraints, empirical literature is relatively modest. However, recent studies offer evidence that minimum RPM are not always anticompetitive and support the conclusion that, at least in the United States, minimum RPM is more likely to be procompetitive than anticompetitive.

In light of the existing economic evidence on RPM and other vertical restraints, it is hard to justify a per se approach to analyzing minimum RPM agreements, according to Wright. The rule of reason allows courts and antitrust enforcers to determine, on a case-by-case basis, whether a particular minimum RPM agreement is anticompetitive and offers consumers the best opportunity to realize the benefits of the vast majority of minimum RPM agreements. It is important to continue to accumulate evidence on the competitive effects of RPM, both in the United States and around the world. A focus on economic evidence and a shared goal of selecting rules that maximize consumer welfare provides a common language and terms upon which to advance the discussion about the appropriate treatment of minimum RPM, Wright concluded.

News: Antitrust FederalTradeCommissionNews