Does Your Distribution Agreement Contain A "Resale Price Maintenance" Clause?

by Ong Johnson

22 April 2018

“The goods must not be sold below the minimum price of RM124.99.”

That is a classic Resale Price Maintenance Clause that is commonly found in many distribution agreements for the suppliers and manufacturers in restricting their distributors and retailers from selling the products below the minimum price.

Most businesses are putting a strong emphasis on their brand reputation and image stability. Especially in today’s economy where studies and researchers have shown that consumers are associating the price of a product proportionate with the quality of a product – the higher the price, the higher the quality, and hence the stronger the brand reputation and image stability.

Therefore, one of the most direct and immediate methods for suppliers and manufacturers to strengthen their brand reputation and image stability is to simply include a Resale Price Maintenance Clause in the distribution agreements with their distributors and retailers.

The playbook sounds simple: if you (distributors and retailers) want our (suppliers and manufacturers) products, then you have to agree to not sell our products below the minimum price of RM124.99, otherwise, we will either raise our wholesale price, or to simply withhold our supply to you. ‘But why would any business sell their goods at a low price, or even below their cost price’, you may ask. This is because great discount may attract more customers, drive more traffic to both online and/or physical stores, and they may also purchase other goods within the stores, and it eventually will boost the overall business’ sales.

It is just that a Resale Price Maintenance Clause is, arguably, illegal per se, pursuant to the Competition Act 2010, as it may be viewed as a form of vertical price fixing, and ‘in general, the MyCC will take a strong stance against minimum RPM and find it anti-competitive. Any other form of RPM including maximum pricing or recommended retail pricing, which serves as a focal point for downstream collusion would also be deemed as anti-competitive’, stated in the MyCC’s Guidelines on Anti-Competitive Agreements. In June 2017, a supplier of domestic light fittings in the United Kingdom was penalized £2.7 million by the Competition and Markets Authority (CMA) for imposing a minimum price on its resellers. ‘This decision should act as a warning to companies that resale price maintenance is illegal and that warning letters issued by the CMA are to be taken seriously and not to be ignored’, stated by the Director of CMA.

Hence, it is the time to have a check on your distribution agreement, and make sure it does not contain a Resale Price Maintenance Clause.

Resources:
1.MyCC’s Guidelines on Anti-competitive Agreements | 2. Press Release Lighting company fined £2.7 million for restricting online prices


For further information on this topic of Competition Law please contact Ong Johnson by email (ongjohnson@loico.com.my). 

Ong Johnson is a legal practitioner that leads the Competition Law Department. He also manages a diversified portfolio of legal cases, from representing a Malaysian political figure in a defamation suit, to personally handle both contentious and non-contentious matters for employment litigation, commercial and civil dispute, and also head and practice in the emerging practice areas like Competition Law, Personal Data Protection, and FinTech.