| In light of the enactment of the Philippine Competition Act (PCA) in 2015, competitors, manufacturers, retailers and sellers or suppliers, in general, should be wary of price fixing agreements. While price fixing is not specifically defined in the PCA, the US Federal Trade Commission defines price fixing as any form of agreement that raises, lowers or stabilises prices or competitive terms.
There are two types of price fixing agreements: horizontal price fixing and vertical price fixing. Horizontal price fixing involves agreements between or among competitors. In other words, these are businesses that operate at the same level of the supply chain (eg, between manufacturers or between distributors). In almost all anti-trust jurisdictions, horizontal price fixing is per se prohibited. This means that regardless of any justification for fixing the price, it is always illegal. In the Philippines, price fixing between or among competitors is likewise per se prohibited, as provided under Section 14(a)(1) of the PCA. Violation of this provision carries the penalty of fine and imprisonment.
On the other hand, vertical price fixing involves price fixing agreements at different levels of the supply chain. This usually involves an agreement between a manufacturer and its distributors to sell products of the manufacturer at a certain price. This is often referred to as resale/retail price maintenance (RPM). Depending on the agreement, distributors may sell products of the manufacturer using the RPM as the price itself, the minimum, or the maximum thereof. Unlike horizontal price fixing, the legality of vertical price fixing is a more complicated matter.
In the US, jurisprudence on RPM has evolved throughout the years. RPM was previously considered a per se violation before it became subject to the rule of reason doctrine. The rule of reason analysis allows for review of a trade practice to determine if the same constitutes an unreasonable restraint of trade. In 1911, the US Supreme Court decided in Dr Miles Medical Co vs John D Park & Sons Co that agreements between manufacturers and wholesale and retail merchants wherein manufacturers control the minimum prices of its products, including prices for all sales by dealers at wholesale or retail, amounted to restraint of trade under Section 1 of the Sherman Act. In 1968, the US Supreme Court decided in Albrecht vs Herald Co that fixing of maximum prices was a per se violation under Section 1 of the Sherman Act. The ruling in this case was reversed in the 1997 case of State Oil Co vs Khan wherein the US Supreme Court found it difficult to uphold that vertically imposed maximum prices could harm consumers or competition to the extent necessary to justify their per se invalidation. Further, the US Supreme Court decided to abandon the Dr Miles ruling in the 2007 case of Leegin Creative Leather Products, Inc vs PSKS, Inc. In the said case, the US Supreme Court categorically declared that the per se rule is no longer appropriate in RPM arrangements, and that vertical price restraints should be evaluated under the rule of reason.
While the US has relaxed the rule on RPM, EU competition law remains hostile to RPM. In the 2010 Guidelines on Vertical Restraints of the European Commission, RPM is still considered as a hardcore restriction, and that there is still a presumption that it will fall under Article 101(1) of the Treaty on the Functioning of the EU (TFEU), which prohibits price fixing. Nevertheless, the European Commission acknowledges that it is possible to claim potential pro-competitive effects and efficiency gains that may exempt RPM from the application of Article 101(1) of the TFEU.
In the Philippines, vertical price fixing agreement may be governed by Section 14(c) of the PCA, which refers to agreements other than those covered by Section 14(a) and (b), or Section 15 of the PCA, which refers to abuse of dominant position by means of anti-competitive conduct (if the offender is a dominant player in the market). Further, the rule of reason is available as a defence in vertical price fixing agreement since the PCA allows for agreements or conduct “which contribute to improving production or distribution of goods or services within the relevant market, or promoting technical and economic progress, while allowing consumers a fair share of the resulting benefit.” If the agreement between a manufacturer and its distributors or retailers falls under the foregoing, such distributors or retailers should not fear violation of the law.
Absent actual cases involving RPM, it remains to be seen how the Philippine Competition Commission will deal with the matter. While RPM is not a per se violation under the PCA, it may be more prudent for manufacturers to provide their distributors or retailers with a bona fide suggested retail price (SRP), rather than imposing an RPM. This will enable distributors and retailers to independently determine their pricing strategies, and to only take the SRP under advisement. Hopefully, this will truly lead to free and fair competition in the market.
*This article first appeared in Business World, a newspaper of general circulation in the Philippines.
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