Be cautious in setting retail prices
By Patrick Monaghan
Imagine you are a retailer selling luxury automobiles. In order to make a successful sale, you will need to spend countless hours answering questions from prospective customers and educating them about the car’s features and specifications.
You may be asked how your product compares with other luxury cars sold by competing brands, such as Mercedes Benz, BMW, Audi, or Lexus. Certain clients may ask for specialized modifications of the car to suit their particular tastes, which may differ from the standard offerings.
Perhaps most importantly, they may have come to your showroom with a very firm idea of the retail price to be paid for the car model you are selling, based in part on information offered by the manufacturer or on testimonials made by other car buyers.
The more aggressive consumers may try to shop around among other dealerships selling the same or similar models, seeking to lure competing dealers into a bidding war which could ultimately drive down profit margins to an unsustainable level, thus jeopardizing the business and imperiling the manufacturer’s ability to sell its products to local consumers.
Other dealers may benefit from your investment of time and effort if your customer is educated by you but ultimately buys from another dealer, creating a “free rider” problem. To combat these challenges, manufacturers and retailers may seek to establish a consistent and uniform price for the convenience and certainty of all involved.
A consistent price assures the retailer or dealer that his investment of time and money (including support and sales staff) in supporting his customers will ultimately be compensated; in turn, the knowledge and understanding the customers glean from receipt of this support allows them to make distinctions among competing products on an informed basis, thus increasing the likelihood that they will be satisfied with their eventual purchase decision.
On the basis of these and other considerations, both manufacturers and retailers often attempt to justify agreements to restrict discounting the resale prices of their goods via a process known as resale price maintenance (RPM).
While RPM had long been considered per se (automatically) illegal in virtually every jurisdiction, a recent landmark decision in the Leegin case by the U.S. Supreme Court recognized the merits of some pro-RPM arguments and endorsed the application of the more permissive “rule of reason” test, pursuant to which the possible benefits of RPM should be weighed against the countervailing anticompetitive effects (in particular, the limitations imposed on intra-brand competition, such as competition among dealers of the same brand of automobiles).
The Leegin ruling gave hope to retailers and many manufacturers that a more nuanced and permissive view of RPM would soon become the world standard. However, in a recent RPM case involving golf companies, the Korean Fair Trade Commission (KFTC) and the Seoul High Court have declined to follow Leegin and instead have maintained their position that RPM is per se illegal.
In the recent litigation, the respondent golf companies were found to have terminated distributors offering unauthorized discounts to the sales prices of their products, while providing incentives to distributors who charged sales prices designated by manufacturers.
In response to these allegations, the respondent golf companies argued that the legality of any alleged RPM activities should be determined by weighing the positive effects produced by RPM on inter-brand competition against any demonstrated negative impact on intra-brand competition (i.e., the “rule of reason” standard).
Although the petitioners specifically cited the U.S. Supreme Court’s ruling in Leegin as a compelling reason for Korea to liberalize its position, the KFTC and Seoul High Court apparently did not find these arguments persuasive. In its decision, the KFTC maintained that RPM continues to be per se invalid under the Monopoly Regulation and Fair Trade Law, and questioned the validity of the pro-competitive benefits cited by the golf companies.
In addition to a corrective order requiring the respondents to end their RPM practices, the KFTC imposed significant administrative surcharges on the golf companies. In another recent case, the KFTC levied heavy surcharges on pharmaceutical companies found to have engaged in RPM. An appeal of the High Court’s ruling in the golf case is now pending before the Supreme Court of Korea.
These rulings underscore the growing maturity and seriousness of purpose of the KFTC in policing anticompetitive conduct. The KFTC is clearly unafraid to stake out its own positions with respect to major competition law issues, even if its positions are sometimes different from those taken by other competition authorities in other countries. It is clear that the KFTC will now act independently with respect to antitrust enforcement and policy.
These RPM decisions also highlight the importance of manufacturers’ taking due care in setting or guiding retail prices in Korea, due to the severity of potential sanctions. Manufacturers and retailers would be wise to take notice of these policy positions and consult carefully with their legal advisors prior to setting prices.
The author is a foreign legal consultant in Seoul whose specialties include antitrust and competition law. He recently contributed the chapter on antitrust law to Korea’s first business law textbook published in English. He can be reached at email@example.com.