How to avoid engaging in resale price maintenance when dealing with maverick retailers

This note examines what strategies are available to suppliers where a reduction in supply price is not commercially viable, and what to do when one of your customers' heavy discounting results in your other customers threatening to switch supply unless they get lower prices from you or unless you stop supplying the discounting customer.

A supplier's dilemma

In some industries, a new or existing customer with a low cost base ("maverick") sells a product for a price substantially lower than the prevailing or competitive market price. Such conduct puts significant pressure on its competitors which may have higher cost bases and may be forced to lower prices to maintain market share. These competitors ordinarily seek lower prices from suppliers and/or threaten to switch to other suppliers (including imports). They may also request that a supplier ensure that the maverick ceases its cutthroat pricing.

What can a supplier do in such circumstances where reducing price is not commercially viable?

Telling the maverick not to go below a certain price is not an option.

Under competition law, setting or attempting to set a minimum price on resellers, known as resale price maintenance, is prohibited. Such conduct can take many forms including:

• entering an agreement or offering inducements not to advertise, display or sell goods below a specified price;
• cutting off, or threatening to cut off, supply to a customer because it has been discounting goods or advertising discounts below specified prices;
• delaying order shipments because of actual or advertised discounting below specified prices.

Large penalties apply for engaging in resale price maintenance. For companies, the penalty can be the greater of up to $10 million, three times the benefit obtained from the conduct or 10 percent annual turnover in a 12-month period. For individuals, the penalties can be a maximum of $500,000 and/or management bans.

Terminating supply to the maverick

While there is no positive duty by law to supply any particular customer and there may be clear and legitimate business reasons for terminating a supply agreement, a supplier should only terminate supply if:

• termination is in no way connected to the maverick's price discounting conduct;
• there is absolutely and categorically no internal communications or correspondence with the maverick, other customers or anyone else in relation to the adverse effect of the price discounting on the supplier's business; and
• the supplier has internal strategic or commercial documents which explicitly record the legitimate business grounds for ending the supply agreement with the maverick and those grounds are separate and distinct from the maverick's price discounting.

These conditions must be met before terminating supply because the law presumes that a supplier engages in resale price maintenance by refusing supply to a customer where the customer can show that the supplier became aware of its discounting behaviour within the six months prior to termination.

Withholding supply because the maverick is engaging in "loss leader selling"

If the maverick purchases goods with the intention of selling them below delivered cost in order to promote its business or otherwise attract customers to purchase other goods and services, the supplier may legitimately withhold supply if the maverick has resold goods below delivered cost at any time in the prior 12 months. A supplier can only withhold supply without engaging in resale price maintenance if it has evidence that the maverick was selling or advertising below delivered cost for the purpose of promoting its brand or business or seeking to attract consumers to buy other higher priced goods. Such evidence may not be easy to obtain.

Claims of predatory pricing?

In very limited circumstances, suppliers to or competitors of the maverick may seek to allege predatory pricing in respect of the maverick's price discounting conduct. Such claims, however, are likely to be difficult to prove as they require evidence either that the maverick has substantial market power and was taking advantage of that market power for an anti-competitive purpose or that the maverick has a substantial share of market and was supplying goods for a sustained period at a price less than the relevant cost for an anti-competitive purpose. Regulators are unlikely to take action where short term discounting is beneficial to consumers and has no long term detriment (such as increasing prices once competitors are driven out of the market).

Conclusion — what action should you take

Given that:

• resale price maintenance catches many forms of conduct which may otherwise seem legitimate;
• the magnitude of penalties for engaging in such conduct are very serious; and
• the evidentiary burdens associated with proving you haven't engaged in such conduct by terminating or withholding supply are onerous,

you should seek clear and definitive legal advice before terminating or withholding supply from a customer which is engaging in heavy price discounting.