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Vertical restraints in the distribution process under New Zealand competition law Moorman, David Guy 1989

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VERTICAL RESTRAINTS IN T H E DISTRIBUTION PROCESS UNDER NEW Z E A L A N D COMPETITION LAW By DAVID GUY MOORMAN B.Com., University of Auckland, 1985 LLB (Hons.), University of Auckland, 1986 A THESIS SUBMITTED IN PARTIAL FULLFILMENT OF T H E REQUIREMENTS FOR T H E DEGREE OF MASTER OF LAWS in T H E F A C U L T Y OF G R A D U A T E STUDIES (Law) We accept this thesis as conforming to the required standard T H E UNIVERSITY OF BRITISH COLUMBIA October 1989 © D a v i d Guy Moorman, 1989 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. LAW Department of The University of British Columbia Vancouver, Canada Date DE-6 (2/88) 11 ABSTRACT The law relating to vertical restraints in the distribution process has sparked probably more controversy than any other area of competition law over the last 20 years. The debate has been fought out most fiercely between economists of various ideological schools invoking arguments of the importance of economic efficiency versus the need to protect small businesses and the freedom of sellers to choose their own methods of distribution. This has generated an extensive body of literature particularly in the United States. Surprisingly little however has been written in Australia or New Zealand on this subject. This thesis attempts to f i l l the void, although, in so doing, it does not seek to delve into the technical and complex aspects of law and economics in this area. Rather, it seeks merely to raise the basic issues in the New Zealand context from which base a more sophisticated study can subsequently be undertaken. By way of introduction, the nature of vertical restraints in the distribution process are described and some background is provided to the areas of debate. The thesis then breaks up into two parts to examine the current state of the law in the United States, Canada, Australia and New Zealand in respect of, first, vertical price restraints and, second, vertical non-price restraints. Where appropriate, a comparative analysis is made to shed light on the interpretation of key words and phrases in the New Zealand legislation. In respect of each type of restraint, the basic economic issues involved are then canvassed, given the strategic role which economics plays in understanding I l l why ver t ica l restraints are imposed and their compet i t ive effects. Therea f te r , var ious legal and po l icy issues are discussed to assist in d e c i d i n g upon the appropr ia te legal treatment of each type of restraint. F i n a l l y , an attempt is made to prov ide an ana ly t ica l ly coherent f ramework w i th in w h i c h to judge ver t ica l restraints in the context of present compet i t ion po l icy . T h e conclusions reached cal l into question the present total p r o h i b i t i o n against resale pr ice maintenace in New Z e a l a n d and advocate the need f o r more spec i f ic provis ions regard ing both price and non-pr ice vert ical restraints. In par t icu lar , it is suggested that a rule of per se i l legal i ty should only operate for conduct w h i c h attempts to f i x , ma in ta in or control the price at w h i c h products are resold, whi le a structured rule of reason should operate fo r al l other types of ver t ica l restraints based on a market power test administered in accordance wi th guidel ines promulgated by the Commerce Commiss ion . T A B L E OF CONTENTS PAGE ABSTRACT i i T A B L E OF CASES iv T A B L E OF STATUTES xi I INTRODUCTION A. OVERVIEW 1 B. BUSINESS RELATIONSHIPS 4 C. R E L E V A N C E OF COMPETITION LAW & T H E COMMERCE ACT 1986 5 D. RULES OF ANALYSIS 7 E. INTEGRATION OF ECONOMIC T H E O R Y INTO  COMPETITION LAW 9 F. PRESENT COMPETITION POLICY 17 II V E R T I C A L PRICE RESTRAINTS A. G E N E R A L 20 B. C U R R E N T STATE OF T H E LAW (1) United States 22 (2) Canada 31 (3) Australia 36 (4) New Zealand 37 II. V E R T I C A L PRICE RESTRAINTS (cont'd) C. E V A L U A T I O N OF T H E LAW (1) Economic Issues (a) Cartels 50 (b) Free Riding 53 (c) Discounting 66 (d) Pricing 74 (2) Legal and Policy Issues (a) Legislative Policy 78 (b) Comparative Treatment of Horizontal Price Restraints 82 (c) Consignment Sales 88 (d) Minimum vs Maximum Resale Prices 93 (e) Recommended Resale Prices 101 (f) Withholding of Supplies 104 (g) Loss-Leadering 111 (h) Administration and Enforcement 115 D. CONCLUSION 128 III VERTICAL NON-PRICE RESTRAINTS A. G E N E R A L 135 B. CURRENT STATE OF T H E LAW (1) United States 140 (2) Canada 146 (3) Australia 149 (4) New Zealand 155 III VERTICAL NON-PRICE RESTRAINTS (CONT'D) ' " c C. E V A L U A T I O N OF T H E LAW (1) Economic Issues (a) Cartels 174 (b) Barriers to Entry 176 (c) Price Discrimination 179 (d) Free Riding 180 (2) Legal and Policy Issues (a) Legislative Policy 189 (b) Distinguishing Price from Non-Price Vertical Restraints 191 (c) Less Restrictive Alternatives 195 (d) Distribution Arrangements involving Industrial and Intellectual Property Rights 200 (e) Administration and Enforcement 207 D. CONCLUSION 221 IV CONCLUSIONS 225 BIBLIOGRAPHY 234 IV T A B L E OF CASES Page Air New Zealand v. The Commerce Commission [1985] 2 N.Z.L.R. 338 158 Air New Zealand Ltd./Mt. Cook Group Ltd., Decision No. 130, 6 June 1985 160, 216 Albrecht v. Herald Co. 390 U.S. 145 (1968) 24, 93-100 Adoph Coors Co. v. F.T.C. 497 F.2d 1178 (10th Cir., 1974) 183 American Motor Inns v. Holiday Inns Inc. 521 F.2d 1230 (3rd Cir. 1975) 197 Arizona v. Maricopa County Medical Society 457 U.S. 332 (1982) 98 Aspen Highlands Skiing Corp. v. Aspen Skiing Co. 738 F.2d 1509 (10th Cir. 1984) 165 Auckland Regional Authority v. Mutual Rental Cars (Auckland Airport) Ltd. and Ors July 31st, 1987, High Court of Auckland, CP 137/86 16.4-65 Barry Wright Corp. v. ITT Grinnell Corp. 724 F.2d 227 (1st Cir. 1983) 228 B.P. Australia Ltd. v. Trade Practices Commission (1986) A.T.P.R. 701 43, 63 Broadcast Music Inc. v. Columbia Broadcasting Sys. Inc. 441 U.S. 1 (1979) 15, 83, 120, 194 Business Electronics Corp. v. Sharp Electronics Corp. 108 S.Ct. 1515 (1988) 29-30, 193 Chicago Board of Trade v. United States 246 U.S. 231 (1918) 8, 145 Continental T.V. Inc. v. G T E Sylvania Inc. 14, 15, 25, 28, 91,98, 142-45 V Cool & Sons Pty. Ltd. v. O'Brien Glass Industries Pty. Ltd. (1981) A.T.P.R. 42,992 37, 151, 161 -162 Dandy Power Equipment Pty. Ltd. v. Mercury Marine Pty. Ltd. (1982) A.T.P.R. 43,872 152, 157 Direct Holdings Ltd. v. Feltex Furnishings of New Zealand Ltd. and Smith & Brown Ltd. 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S o c o n y - V a c u u m O i l C o . 310 U.S. 150 (1940) 83, 86, 118 U n i t e d States v. T r e n t o n Potteries C o . 273 U.S. 392 (1927) 82, 118 X V i s i o n h i r e Ho ld ings L t d . / S a n y o Renta ls L t d . (1984) 4 N . Z . A . R . 288 159-60, 216 Wattie I n d u s t r i e s / T a y l o r Freezer Ho ld ings (1985) 5 N . Z . A . R . 218 160 W h a k a t u / A d v a n c e d Closure A u t h o r i s a t i o n , Dec is ion N o . 205, 22 Ju ly 1987 161, 169-70 White Motor C o . v. U n i t e d States 372 U.S. 253 (1963) 140-41, 144, 154 Wel l ington F e n c i n g Mater ia ls Assoc ia t ion (Re) [1961] N . Z . L . R . 1121 156 xi T A B L E O F S T A T U T E S Page A u s t r a l i a T r a d e Pract ices A c t 1965 (Cth) 78 T r a d e Pract ices A m e n d m e n t A c t 1971 (Cth) 78, 112 T r a d e Pract ices A c t 1974 (Cth) Sect ion 4 150 4 A 153 4 F 47 45 87, 190, 214 45A 84, 87, 150, 173 46 202 47 18, 149-53, 167, 173, 189-90, 214 48 36, 49 51 153, 172 76 123 88(2) 84 90 153 93 153-54,214 96 36, 43, 47 97 36 98 36, 37, 44, 113 100 36 C a n a d a Combines Invest igat ion A c t 1951 Sect ion 34 31, 112 C o m p e t i t i o n A c t 1986 Section 2 39 38 32-36, 39, 103, 113, 123 47 107 48 91-93 49 146-47, 224 51(5) 202 68 171 Investment C a n a d a A c t 1985 171 xii New Zealand Commerce Act 1975 Section 21 28 80 Commerce Amendment Act 1976 Commerce Amendment Act (No. 2) 1979 Commerce Act 1986 Section 2 3 9(4) 26 27 30 31 32 33 36 37 38 39 40 42 44(1) 45 58 61(6) 63(1) 77 80 81 82 88-90 98-99 169 37, 38, 78 171 37 37 47, 108-09, 156, 157, 172 158, 162-63 122, 208 171 6,7, 84, 94, 96, 99, 117, 121, 132, 155-67, 172, 190-91, 202, 206, 208, 214, 223 84-86, 120-21, 132, 191 84 84 84 6, 7, 99, 117, 132, 174, 191, 202 38-50, 64, 84, 85, 88, 92, 93, 96, 103, 104, 120, 133, 191, 192, 202 38, 202 40, 41,-43, 85, 92, 101 43, 44, 192 44-45, 47, 104 172 172, 202 6, 7, 133, 167 167-68, 218 168 122 7, 123 7, 123 7, 123 123 208 x i i i C o p y r i g h t A c t 1953 Sections 7 & 8 201 Designs A c t 1953 Sections 11 & 12 201 F a i r T r a d i n g A c t 1986 104 Patent A c t 1953 Sections 2, 7 & 30 200 T r a d e m a r k s A c t 1953 Sections 10 & 29 201 T r a d e Pract ices A c t 1958 Section 19 37, 38 20 37 U n i t e d K i n g d o m Resale Pr ices A c t 1964 Sect ion 3 112 Resale Prices A c t 1976 78, 121 U n i t e d States C l a y t o n A c t 1914 Sect ion 3 151 4 124 Sherman A c t 1890 Section 1 9, 22, 23, 25, 89, 140, 193, 214 Soft D r i n k Interbrand Compet i t ion A c t 1980 223 A C K N O W L E D G E M E N T I am very grate fu l fo r the support of f a m i l y and f r iends throughout the wr i t ing of this thesis as wel l as the valuable comments p r o v i d e d by Professor W.T. Stanbury on the in i t ia l dra f t , par t icu la r ly in regard to economic issues and the current state of the law in C a n a d a . T h e usual absolut ion for any error or omission applies. Specia l thanks go to Rosemar ie Page for her patience and d i l igence d u r i n g the typ ing of this lengthy piece of work. PART I INTRODUCTION 1 A . O V E R V I E W D e p e n d i n g upon a number of economic factors such as the basic character of a product , ava i lab i l i t y of management and capi ta l , r isk and most impor tant ly cost, a suppl ier w i l l of ten decide to employ independent d istr ibutors to car ry out the var ious funct ions in the d is t r ibut ion process 1 rather than to operate the entire d is t r ibu t ion process itself. In the contractual arrangements between the parties, it is not u n c o m m o n to f i n d a var iety of restraints a imed at ach iev ing some measure of superv is ion and control over the manner in w h i c h the suppl iers ' products are marketed and d ist r ibuted to the consuming publ ic . A suppl ier has a legit imate interest in so do ing because its reputat ion for qua l i ty , its establ ished goodwi l l and its general compet i t ive posit ion are al l c lear ly dependent upon the methods ut i l i zed by its distr ibutors. Restraints imposed upon a f i r m operat ing at one level of the d is t r ibuton process by a f i r m operat ing at another level of the d is t r ibut ion process, such as a suppl ier upon a d ist r ibutor , are re ferred to as 'ver t ica l restraints' and are to be d is t inguished f r o m 'hor izonta l restraints' w h i c h are restraints between T h e d is t r ibut ion process is essentially the 'condui t ' through w h i c h products f low f r o m a suppl ier to the ult imate consumer. A suppl ier obv ious ly commences the process by p lac ing its products in the f low of commerce. A wholesaler usual ly supplies warehousing fac i l i t ies as wel l as a network of local and regional t ransportat ion services that de l iver the products to retailers. T h e retai ler in turn is responsible for market ing and sale of the products. T o s i m p l i f y the d iscussion, it w i l l be assumed that the d is t r ibut ion process only involves two tiers. 2 f i r m s operat ing at the same level of the d is t r ibut ion process. 2 T h e concern in this thesis is w i th ver t ica l restraints only. V e r t i c a l restraints can be c lass i f ied into two categories. In the f i rst category are restraints w h i c h restrict the d is t r ibut ion of a product and inc lude: (a) resale pr ice maintenance (restrictions on the pr ice at w h i c h products may be resold); (b) terr i tor ia l restrict ions (restrictions on the territories w i th in w h i c h products may be resold); and (c) customer restrictions (restrictions on the customers to w h o m products may be resold). In the second category are those restraints w h i c h l imi t a d istr ibutor 's f reedom to buy f r o m f i rms that compete with the suppl ier and inc lude: (a) ty ing arrangements (arrangements whereby the purchase of one product is condi t ioned upon the purchase of a second product f r o m the suppl ier or f r o m some th i rd party); In the case of a dua l d is t r ibut ion system, where a suppl ier also funct ions at the same level of the d is t r ibut ion process as a d is t r ibutor upon w h i c h it has imposed restraints, the general v iew is that the system should be v iewed as ver t ica l rather than hor izonta l . See A B A Ant i t rus t Sect ion, M o n o g r a p h No . 2, V e r t i c a l Restr ic t ions L i m i t i n g Intrabrand Compet i t ion (1977) at 2 n.3 (hereinafter ci ted as " A B A M o n o g r a p h N o . 2"). See also D o n a l d B. R i c e T i r e  v. M i c h e l i n T i r e Corp . . 483 F. Supp. 750,754 (D .Md . 1980) and R e d D i a m o n d  Supply Inc. v. L i q u i d C a r b o n i c C o r p . 637 F.2d. 1001 (5th C i r . 1981). 3 (b) exclusive deal ing arrangements (arrangements whereby a d istr ibutor agrees not to purchase the products of a compet ing suppl ier) ; and (c) requirements contracts (contracts under w h i c h a d ist r ibutor agrees to purchase al l or some f i x e d proport ion of its requirements f r o m the supplier) . While both categories of restraints are often considered together, they are conceptua l ly d i f fe rent . V e r t i c a l restraints in the f i rst category are essential ly designed to l imi t compet i t ion between a supplier 's distr ibutors. V e r t i c a l restraints in the second category on the other hand are essential ly designed to foreclose or exclude a suppl ier 's r i va ls . 3 T h i s thesis focuses on restraints in the f i rs t category only. Wi th in the category under review, a d is t inct ion is normal ly d r a w n between pr ice and non-pr ice restraints. Pr ice restraints, wh ich wi l l be considered in Part II, are those w h i c h d i rect ly or ind i rect ly dictate the pr ice or range of prices at w h i c h products may be sold or resold, whi le non-pr ice restraints, w h i c h w i l l be considered in Part III, do not d i rect ly or ind i rec t ly dictate prices. It is proposed in respect of each type of restraint to f i rst describe the nature of the restraint and its typ ica l business appl ica t ion and just i f icat ions, then to discuss the legal status of the restraint in the U n i t e d States, C a n a d a , A u s t r a l i a and New Z e a l a n d , and f i n a l l y to evaluate the law (a) by discussing the var ious E . G e l l h o r n . Ant i t rus t L a w and Economics 3rd ed. (St. P a u l , M i n n . , West P u b l i s h i n g C o . , 1986) at 278-81. 4 economic theories advanced to explain the restraint and its effects and (b) by analyzing particular legal and policy issues relating thereto. An understanding of each of the competing economic theories is considered important to help determine an appropriate policy position. A review of the current legal position in other jurisdictions is considered important because of the paucity of cases in New Zealand in this area and to help delineate appropriate guidelines for the treatment of vertical restraints in the distribution process under New Zealand competition law. The primary focus will however be on the law as it applies in New Zealand, although heavy reliance will be placed on Australian precedents in view of the similarity of equivalent provisions in the Australian legislation. In the balance of this introduction, reference will be made to the types of business relationships in which the restraints under discussion arise, there will follow a brief discussion as to why competition law is relevant in this context with a brief mention of the more important provisions of New Zealand's competition legislation, the basic rules of analysis utilized in examining vertical restraints will then be described, the increasing application of economic theory in considering vertical restraints will be noted and finally there will be a brief outline of present competition policy in this area. B. BUSINESS RELATIONSHIPS The business relationships in which vertical restraints in the distribution process are imposed cover a wide variety of contractual arrangements. At one extreme, a supplier may simply provide products for resale purposes to a distributor and will receive its income by way of a markup on products sold. At the other extreme is the 'turn-key' franchise in which the franchisor licences its tradename and trademark, imparts, in confidence, its knowhow, and on a cont inu ing basis, provides guidance and d i rect ion on the precise manner in w h i c h it wants the f ranchisee to carry out its operations. T h e f ranch isor in this case may der ive its income f r o m a combinat ion of an up f ron t payment , royalt ies and on-going management and adminis t ra t ion fees. T h e term "distr ibut ion arrangement" where used throughout this thesis is intended to cover the whole spectrum of business relat ionships where such restraints arise i n c l u d i n g f ranchises , l icences, commission agency, and wholesale and retai l d is t r ibut ion . T h e term "supplier" w i l l hereafter be used to refer to entities at the f i rst level of the d is t r ibut ion process such as f ranch isors , l icensors, manufacturers and suppl iers, whi le the term "distr ibutor" w i l l hereafter be used to refer to those entities author ized by the suppl ier to distr ibute its products and operat ing at the second level of the d is t r ibut ion process such as f ranchisees, licensees, dealers and distr ibutors. C . R E L E V A N C E O F C O M P E T I T I O N L A W A N D T H E C O M M E R C E A C T 1986 T h e imposi t ion of a restraint by a suppl ier upon a d ist r ibutor wi l l almost a lways have some ef fect on compet i t ion, whether it be in t rabrand or i n t e r b r a n d . 4 T h e detr imental ef fects to in t rabrand compet i t ion wh ich i n v a r i a b l y result f r o m such imposi t ion wi l l of ten outweigh any benef ic ia l ef fects to in te rbrand compet i t ion resul t ing f r o m the restraint and it is fo r this reason that compet i t ion law is relevant. In t rabrand compet i t ion involves compet i t ion between distr ibutors sel l ing d i f f e r e n t brands of the same product whereas in terbrand compet i t ion involves compet i t ion between distr ibutors sel l ing d i f f e ren t brands of the same product . 6 The underlying policy of all competition and antitrust laws5 is the preservation and promotion of competition. New Zealand is no exception in this regard. The Commerce Act 1986 (hereafter referred to as "the Act" or "the New Zealand Act" as appropriate)6 has as its underlying objective the promotion and regulation of competition in markets in New Zealand.7 To meet this objective, the Act, inter alia, proscribes, either specifically or generally, various restrictive trade practices which have an adverse effect on competition. In particular, section 27 prohibits entry into a contract or arrangement or the arrival at an understanding containing a provision which has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market. Section 36 contrasts with section 27 by being aimed at purely unilateral practices in prohibiting any person who has a dominant position in a market from using that position for one of a number of proscribed purposes. Section 58 empowers the Commerce Commission ("the Commission"), the regulatory body under the Act with responsibility for investigation, enforcement and decision making of relevant matters, to authorize the entry into and performance of contracts, The term "antitrust law" is the American equivalent for the term "competition law". The two terms are used interchangeably throughout this thesis depending on the context. The Act is the product of the Australia-New Zealand Closer Economic Relations Trade Agreement entered into between the two countries in 1983 under which both undertook to work towards the harmonization of their respective laws on restrictive trade practices (Article 12). This commitment to harmonization was most recently affirmed in the Australia-New Zealand Memorandum of Understanding on Harmonisation of Business Law dated 1 July 1988. The New Zealand Act, as will become apparent, is largely modelled on Parts I V and V I I I of the Australian Trade Practices Act 1974 (Cth). 7 The Long Title states that it is "[a]n Act to promote competition in New Zealand". 7 arrangements or understandings to wh ich section 27, inter a l ia , applies. Important ly , there is no power to author ize conduct in breach of section 36. 8 T h e e f fect of an author izat ion granted under section 58 is that potent ial l i ab i l i ty fo r pecun ia ry penalties (section 80), in junct ions (section 81) and actions fo r damages (section 82) is removed. D. R U L E S O F A N A L Y S I S In eva luat ing the legal i ty of vert ical restraints, the courts, par t icu la r ly in the U n i t e d States, have t rad i t iona l ly adopted either a per se or rule of reason analysis and it is important to appreciate the ef fect and meaning of each. U n d e r a per se analysis, a restraint is held to be i l legal wi thout any considerat ion of the purpose of the restraint or its economic ef fects on the ground that it almost i n v a r i a b l y harms compet i t ion through higher prices and reduced output wi thout any redeeming pro-compet i t ive benefits. A l l that is necessary is to prove the existence of the restraint. T h e appropriateness of and need for per se rules was expla ined by M r . Justice B lack in Nor thern P a c i f i c R a i l w a y v. U n i t e d  States as fo l lows: 9 [TJhere are certain agreements or practices wh ich because of their pernic ious ef fect on compet i t ion and lack of any redeeming vir tue are conc lus ive ly presumed to be unreasonable and therefore i l legal wi thout i n q u i r y as to the elaborate harm they have caused or the business excuse fo r T h e only protect ion w h i c h a person has f r o m the app l ica t ion of section 36 is i f it is party to a contract , arrangement or understanding w h i c h has otherwise been author ized pursuant to Part V of the A c t . H o w e v e r there wou ld seem to be re lat ively few cases where author iza t ion w i l l be granted on this basis. 356 U.S. 1,5 (1958). 8 their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to everyone concerned but it also avoids the necessity of an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable - an inquiry so often fruitless when undertaken. The avoidance of an inquiry into the actual competitive effects of a challenged restraint deemed illegal on its face, means, in particular, that a court does not need to examine a supplier's market power, nor define the market nor evaluate any asserted benefits of the restraint. A per se rule therefore provides several advantages including predictability of legal rules, provision of a brightline deterrent to undesirable conduct and reduced judicial and enforcement costs.10 In contrast, a rule of reason analysis is far more complex requiring a full consideration of the justifications for and economic effects of the restraint including an inquiry into the history of the industry, the parties' intent, competitive benefits and harms of the restraint, definition of the market, determination of market power and so on. Whether a restraint is illegal therefore involves a weighing up of all the circumstances of a case. The classic formulation of the rule of reason was provided by Mr. Justice Brandeis in Chicago Board of  Trade v. United States, where he said:11 The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition. To determine that question the Court must ordinarily consider the facts peculiar to the business to See generally, ABA Monograph No. 2, supra note 2 at 25-32. 246 U.S. 231, 238 (1918). 9 w h i c h the restraint is app l ied; its cond i t ion before and after the restraint was imposed; the nature of the restraint; and its e f fect , actual or probable T h e history of the restraint, the ev i l bel ieved to exist,the reason for adopt ing the par t icu lar remedy, the purpose or end sought to be obta ined are relevant facts. T h i s is not because a good intent ion wi l l serve an otherwise object ionable regulat ion or the reverse, but because knowledge of intent may help the Cour t to interpret facts and to predict consequences. T h e tests appl ied under the general rubr ic of the rule of reason have var ied cons iderab ly to the extent that the d is t inct ion between the per se rule and the rule of reason has become very much b l u r r e d . 1 2 T h e d is t inct ion is however of assistance in unders tanding the U n i t e d States cases on ver t ica l restraints a n d the problems faced in that country of hav ing to construe v i r tua l ly every restraint , whether it be hor izonta l or ver t ica l , in terms of section 1 of the Sherman A c t . T h e per se rule appears to have been a convenient a l ternat ive for those courts u n w i l l i n g to develop an ana ly t ic structure fo r eva luat ing the economic ef fects of a par t icu lar restraint on compet i t ion under a rule of reason analysis. T h i s unwi l l ingness , and even distrust of economic theory, as a basis of legal rule m a k i n g has been nowhere more evident than in cases deal ing wi th ver t ica l restraints, par t icu la r ly those dec ided by the U n i t e d States Supreme Cour t over the last 25 years. E . I N T E G R A T I O N O F E C O N O M I C T H E O R Y I N T O C O M P E T I T I O N L A W J u d i c i a l re luctance to apply economic theory, at least unt i l recent times, was probably jus t i f ied in v iew of the lack of consensus amongst economists as to the economic ef fects of most vert ical restraints. It is f a i r to say that economists are no closer to agreement today; indeed they are probably more d i v i d e d in their views See B. H a w k , "European E c o n o m i c C o m m u n i t y and U n i t e d States Ant i t rus t L a w : Constra ints and Convergences", (1988) 16 A . B . L . R . 282 at 303-06. than they were twenty years ago. What is notable however is the increased sophist icat ion in scholarship over this per iod as economists have sought to integrate economic theory into the area of compet i t ion l a w . 1 3 T h e increased emphasis on economics in antitrust analysis has been led by members of the so-cal led 'Ch icago School ' , in par t icu lar Professors (now Judges) B o r k 1 4 and P o s n e r 1 5 . T h e C h i c a g o School , using pr ice theory analysis , emphasize economic e f f i c i e n c y (both al locat ive and p r o d u c t i v e ) . 1 6 C o n d u c t is c lass i f ied accord ing to whether it is (1) e f f ic ient ; (2) ine f f i c ien t ; or (3) neutra l . It is argued that the law should r e f r a i n f r o m intervening not only when conduct is e f f i c ien t or neutra l , but also when the effects of such conduct can not be pred ic ted s u f f i c i e n t l y . 1 7 T h e test used for determin ing e f f i c i e n c y is the ef fect of a restraint on output. If output increases as the result of a restraint , the restraint is assumed to have made the product more attract ive to consumers and therefore produced a F o r a review of the basic pr incip les of economic theory w h i c h bear d i rect ly on compet i t ion po l icy , see G e l l h o r n , supra note 3 at 45-90. See R. Bork , T h e Ant i t rust Paradox, (New Y o r k , Basic Books, 1978). See e.g., R. Posner, Ant i t rust L a w : A n E c o n o m i c Perspect ive. (Ch icago, U n i v e r s i t y of C h i c a g o Press, 1976). "A l loca t ive e f f i c i e n c y refers to the placement of resources in the economy, the question of whether resources are employed in tasks where consumers value their output most. Product ive e f f i c i e n c y refers to the e f fec t ive use of resources by par t icu lar f i rms". R. Bork , supra note 14 at 91. See also E . F o x , "The M o d e r n i z a t i o n of Ant i t rust : A New E q u i l i b r i u m " , 66 C o r n e l l L . R e v . 1140 (1981) at 1160-61. Bork , supra note 14 at 117. F o r a cr i t ique of this c lass i f ica t ion and the normat ive weight g iven to e f f i c i e n c y , see J . F l y n n and J . Ponsoldt , "Legal Reason ing and the Jur isprudence of V e r t i c a l Restraints: T h e L i m i t a t i o n s of Neoclass ica l E c o n o m i c A n a l y s i s in the Reso lu t ion of Ant i t rus t Disputes", 62 N . Y . U . L . R e v . 1125 (1987). 1 1 posit ive in f luence on compet i t ion and consumer w e l f a r e . 1 8 With the max imiza t ion of consumer wel fare as the basic goal of anti trust, this is best ach ieved , it is argued, i f the marketplace is free f r o m governmental and monopol is t ic output restr ict ions. A monopol ist ic market is seen as par t icu la r ly detr imental to consumer wel fare because of the abi l i ty of the monopol ist to increase prices and restrict output. Prev ious ly accepted social and pol i t ica l values, l ike protect ion of smal l traders and deconcentrat ion of markets, w h i c h character ized the late 1950's and 1960's 1 9 , are rejected. T h u s , their p r imary concern is hor izonta l col lusion w h i c h is seen as the p r i n c i p a l means by w h i c h the output of goods and services can be restr icted and prices raised. Bork for instance argues that antitrust enforcement should be l imi ted to hor izonta l pr ice f i x i n g and market d i v i s i o n , hor izonta l mergers result ing in the acquis i t ion of substantial market shares, and del iberate predat ion engaged in T h e term "consumer welfare" in this context should not be confused wi th the concept of "social welfare", a l though the two are of ten equated by the C h i c a g o School . Here consumer wel fare is d e f i n e d in terms of e f f i c i e n c y , either static or d y n a m i c depending upon the time f rame. (Static analysis looks to opt imal p r ice /output conf igura t ions (Pareto opt imal i ty ) in de termin ing whether al locat ive e f f i c i e n c y exists in the short run . D y n a m i c analysis takes into account new technology, knowledge and tastes in de termin ing e f f i c i e n c y over the long run). Socia l wel fare on the other h a n d is concerned not only wi th e f f i c i e n c y , but the d is t r ibut ion of income. T h e max imiza t ion of consumer wel fare w i l l therefore not necessari ly lead to a max imiza t ion of social welfare. One must accord ing ly d is t inguish economic wel fare f r o m social welfare. E c o n o m i c theory d u r i n g this time co inc ided wi th po l i t ica l and social att itudes that f a v o u r e d d i f f u s i o n of market power, f reedom of oppor tun i ty fo r i n d i v i d u a l traders and f reedom of consumer choice. Not ions of a l locat ive and product ive e f f i c i e n c y were notable by their absence. See H a w k , supra note 12 at 287-88. 12 to e l iminate r ivals f r o m a market or at least delay their entry. V e r t i c a l restraints on the other h a n d are seen as almost always benef ic ia l to the consumer, and therefore adherents of the C h i c a g o School argue that such restraints should be completely l a w f u l . Bork for instance argues that anti trust laws should not concern themselves wi th ver t ica l pr ice maintenance and market d i v i s i o n , ty ing arrangements, exclusive deal ing and requirements c o n t r a c t s . 2 1 Posner, in a s imi lar ve in , proposes that pure ly vert ical restraints i n v o l v i n g no dealer co l lus ion should be per se legal whether they be price or non-pr ice in n a t u r e . 2 2 Newer members of the C h i c a g o School cont inue to espouse s imi lar views. T h e lead ing proponent in more recent times has been Professor (now also Judge) Easterbrook who in seeing the goal of antitrust law as the fac i l i t a t ion of e f f i c ien t resource a l locat ion argues that the free market d isc ip l ines i n e f f i c i e n t f i rms and corrects monopoly faster and better than jud ic ia l in tervent ion , and that the costs of erroneously bann ing e f f i c ien t transactions are greater than the costs of erroneously blessing ant icompet i t ive t ransact ions . 2 3 A s a result, Easterbrook argues, the t rad i t iona l techniques of antitrust analysis should be replaced wi th a B o r k , supra note 14 at 405-06. See also R. Posner, "The C h i c a g o School of Ant i t rus t Ana lys is" , 127 U .Pa .L . R e v . 925 (1979) at 925-33. Bork , supra note 14 at 406. R. Posner, "The Next Step in the Ant i t rust Treatment of Rest r ic ted D is t r ibu t ion : Per Se Legal i ty" , 48 U . C h . L . R e v . 6 (1981). Bork and Posner do however d i f f e r as to the abandonment of anti trust concern in the areas of pr ice d isc r im ina t ion and predatory pr ic ing . See Bork , supra note 14 at 406 and Posner, supra note 20 at 934 and 939-44. F. Easterbrook, "The L i m i t s of Ant i t rust" , 63 Texas L . R e v . 12 (1984) at 15. F o r an excellent review of Easterbrook's thesis, see E . F o x , "The Pol i t ics of L a w and Economics in J u d i c i a l Dec is ion M a k i n g : Ant i t rus t as a Window", 61 N . Y . U . L . R e v . 554 (1986). 13 filter approach whereby conduct is screened out only if it is likely to reduce output and increase price.2 4 The efficiency approach to antitrust analysis has not however been confined to the Chicago School. The Harvard School, although at one time perceived to be diametrically opposed to their Chicago counterparts, has also begun to see economic efficiency as the primary goal of antitrust with consumers as intended beneficiaries of such laws. The inability of smaller firms to survive in the competitive process is said to be justified if it is in the interests of efficiency. Harvard School advocates also counsel a more permissive treatment of vertical restraints, although they do not go so far as their Chicago School counterparts in regard to vertical price restraints.25 Others, like Professor Williamson, also take a more tempered approach.26 Using a transaction cost model, not only are the efficiency gains arising from vertical restraints assessed, but the strategic purposes and effects that accompany such restraints are also evaluated. Williamson suggests that vertical restraints should be presumed to be efficiency-enhancing unless the industry has certain structural characteristics such as a dominant firm or a tight oligopoly. If such characteristics are present, then vertical restraints should be subject to close scrutiny to determine whether the restraints create barriers to entry, regularize 2 4 Easterbrook, id. at 39. 2 5 See 3 P. Areeda and D. Turner, Antitrust Law (Boston, Little, Brown & Co., 1976) and Fox, supra note 16 at 1177. 26 O. Williamson, "Assessing Vertical Market Restrictions: Antitrust Ramifications of the Transaction Cost Approach", 127 U. Pa. L. Rev. 953 (1979). 14 trade or promote greater interdependence. Williamson argues that a firm in such a situation should not be charged with or found to have committed an antitrust violation if it can be affirmatively shown that "non-trivial" transaction cost economies are created by the vertical restraint under scrutiny. These developments in economic theory have had a profound effect on judicial pronouncements in the United States, particularly in the area of vertical restraints. The first major decision to demonstrate a genuine willingness to consider economic efficiency in the vertical restraints area was undoubtedly Continental T.V. Inc. v. GTE Svlvania2 7. In that case, decided in 1977, the Supreme Court expressly relied on the writings of the Chicago School commentators in holding that vertical non-price restraints should generally be subject to the rule of reason. In so doing, the Court reversed the per se rule laid down in United  States v. Arnold Schwinn & Co. 2 8 . decided ten years earlier. Justice Powell, who gave the opinion of the majority in Svlvania. dismissed the entire "populist" tradition in a single sentence, often regarded since as the case's "critical" holding. He said:2 9 Competitive economics have social and political as well as economic advantages ... but an antitrust policy divorced from market considerations would lack any objective benchmarks. 433 U.S. 36 (1977). 388 U.S. 365 (1967). This case, and Svlvania. will be discussed in more detail in Part III infra. 433 U.S. at 53 n.21. Quoted in L. Popofsky and S. Bomse, "From Svlvania to Monsanto: No longer a 'Free Ride'", 30 Antitrust Bull. 67 (1985) at 85. 15 While Svlvania's discussion of the economics of vertical restraints was not particularly sophisticated by current standards, it signalled an entirely new direction in antitrust jurisprudence, one that has flourished since. Later courts have shown an increased willingness to apply the free market theories of the efficiency approach to a wide variety of vertical and horizontal circumstances.30 The early 1980's also witnessed a reversal of enforcement policy by the Antitrust Division of the U.S. Justice Department. During this time it prepared a number of amicus curiae briefs which favoured a more permissive treatment of vertical price restraints31 and in 1984 it issued Vertical Restraint Guidelines3 2 which were quite tolerant of vertical non-price restraints. There has however been a reaction on both political and economic grounds to the so-called 'new-learning' of the 1970's. Critics argue that the Chicago School's exclusive emphasis on efficiency considerations is an inappropriate See e.g. Broadcast Music Inc. v. Columbia Broadcasting System 441 U.S. 1 (1979) and National Collegiate Athletic Association v. Board of Regents of  University of Oklahoma 468 U.S. 85 (1984). For a review of these and other Supreme Court and lower court decisions showing a somewhat hostile view toward governmental interference in the market process, see W. Cann Jr., "Vertical Restraints and the Efficiency Influence - Does Any Room Remain for More Traditional Antitrust Values and More Innovative Antitrust Policies", 24 Am. Bus. L.J. 484 (1986) at 495 et seq. See e.g. Amicus brief filed in Monsanto Co. v. Sprav-Rite Service Corp.. 104 S.Ct. 1464 (1984). 1985 Trade Reg. Rep.l (CCH) No. 687, Pt II. The Vertical Restraints Guidelines have been the subject of much criticism with the National Association of Attorneys General issuing their own Guidelines which take a much stricter approach to vertical restraints. For a discussion of both sets of Guidelines, see Part III C(2)(e) infra. political and non-economic judgement. Some, like Professor Fox, still conceive of efficiency as the major guide to antitrust policy, but believe antitrust law should function to protect the competition process and advance consumer interests. Per se illegality, in her view, should be retained where (1) it is difficult to distinguish between restraints that are anticompetitive and threaten harm to consumers, and those that are neutral or potentially beneficial; (2) it is important to prohibit and effectively deter harmful restraints; and (3) there is little likelihoood of loss to buyers of the product in question from overdeterrence.34 Others advocate a more multi-valued approach to antitrust and therefore would condemn virtually all horizontal and vertical activity as per se illegal on the basis of predictability and deterrence.35 According to these critics, the Chicago School approach is too static and unduly assumes information symmetries. It is said that the traditional price theory that underlies much of the Chicago School analysis may underestimate the dynamic aspects of many business practices.36 What has been the effect on New Zealand competition law of the Chicago School 'new learning' and the possible counter revolution of the so-called 'nouvelle vogue'? There has been some effect in the sense that the Commission and the Courts are increasingly facing arguments and asserted justifications resting on 3 3 See e.g. E. Fox, "The Politics of Law and Economics in Judicial Decision Making Antitrust as a Window", 61 N.Y.U.L. Rev. 554 (1986). 3 4 Fox, supra note 16 at 1185. 3 5 See e.g. L. Sullivan, Antitrust Law. (St. Paul, Minn.,West Publishing Co., 1977). See also Fox supra note 16 at 1184. See Hawk, supra note 12 at 289-90. 17 Chicago School analysis and efficiency considerations. More importantly, principles enunciated in decisions made by the Commission and the writings of some of its members37 reflect the influence of the developments in the United States over the past two decades. The revolution in United States law is however unlikely to be duplicated in New Zealand because of fundamental differences in policy and legislation. Any lead in embracing Chicago School principles would most likely have to come from Australia to whom New Zealand has generally looked for guidance in the past. F. PRESENT COMPETITION POLICY The present policy position, gained from Australian experience is to view competition as a process of rivalry between firms. This presupposes that a market should be both flexible and adaptable to changing desires and needs so as to allow dynamic interaction between firms. 3 8 The assumption made is that the rivalrous interaction of firms in free and open markets which protects accesss and opportunity for firms without market power is likely to produce the best result for consumers in terms of resource allocation, efficiency and progressiveness.39 Indeed, the concern should be with determining whether or not the rivalry between See e.g. S. Jennings and K. Vautier, "Review Article: Competitive Trading in New Zealand - The Commerce Act 1986 by Bernard M. Hill and Mark R. Jones" [1988] Recent Law 95. Fox, supra note 16 at 1179. Id. at 1158. See also Tru Tone Ltd. et al. v. Festival Records Retail  Marketing Ltd. (Unreported judgement, CA 85/88, 19 September 1988) ["The Act] is based on the premise that society's resources are best allocated in a competitive environment where rivalry between firms ensures maximum efficiency in the use of resources."] and Statement of Hon. David Caygill, Minister of Trade and Industry in introducing the Commerce Bill to Parliament (Hansard, 11 June 1985). 1 8 f i r m s goes beyond what is compet i t ive so as to be unacceptable in the interests of society in terms of e f f i c i e n c y and economic growth. In this regard , the focus should be on keeping barriers to entry low so as to prov ide greater oppor tun i ty for entry and success of new f i rms in the market. Compet i t ion does not require that there be a large number of supp ly ing f i rms or equiva lent ly low rates of market concentra t ion so long as there is actual and e f fec t ive potent ial compet i t ion. T h e C o m m i s s i o n has recognized that a restr ict ion in r i v a l r y between two competi tors or upon an i n d i v i d u a l competi tor does not necessari ly result in a restr ict ion in r i v a l r y . 4 0 Indeed, it is f a l l acy to suggest that the compet i t ion test in the A c t is concerned with the fate of i n d i v i d u a l competitors as opposed to the level of r iva l rous behav iour in a market. F o r , as F i t zgera ld J . said in O u t b o a r d  M a r i n e A u s t r a l i a v. Hecar Investments (No. 6) Ptv L t d . . a case concern ing a re fusa l by O u t b o a r d M a r i n e to supply Hecar with outboard motors and thus al leged to constitute exclusive deal ing under section 47 of the A u s t r a l i a n T r a d e Pract ices A c t 1974 (Cth ) , : 4 1 It w o u l d , I th ink , be an unusual and except ional case in w h i c h it cou ld be shown that compet i t ion in a general ly compet i t ive market was or was l ike ly to be substant ia l ly lessened by a refusal to supply one of a number of compet i t ive retailers in the market wi th a product otherwise f ree ly ava i lab le and compet i tvely marketed. Fur ther , where there is a market w h i c h is general ly compet i t ive , it p la in ly does not fo l low that conduct wh ich af fects the balance of compet i t ion by advantag ing or d isadvantag ing a par t icu lar dealer or dealers or a par t icu lar product necessari ly lessens the compet i t ion in a market. R. A h d a r , "The M e a n i n g of 'Compet i t ion ' and the Commerce A c t 1986", (1986) 6 Otago L .R . 319. (1982) A . T . P . R . 43,980 at 43,990. 19 One must thus d is t inguish between the impact of conduct upon the compet i t ive posi t ion of an i n d i v i d u a l and the e f fect upon compet i t ion in a market. It is the market context rather than the a f fa i rs of i n d i v i d u a l part ic ipants w h i c h must necesar i ly be taken into account. It is wel l beyond the scope of this in t roduct ion or indeed this thesis to discuss the concept of compet i t ion in any detai l and its role in serv ing economic , social and pol i t ica l goals. While economic e f f i c i e n c y is wi thout doubt one of the more important of the Act 's under ly ing objectives, it is hoped that it does not reach the normat ive weight ascr ibed to it by the C h i c a g o School in fu ture compet i t ion pol icy . Both e f f i c i e n c y and economics general ly have a role to p lay in any compet i t ion law analysis but their l imi tat ions must be recognized. E f f i c i e n c y should be one of a number of goals pursued in order to serve consumer interests and make the best use of society's resources . 4 2 F o x , supra note 16 at 1158. PART II VERTICAL PRICE RESTRAINTS 20 A . G E N E R A L T h e most typ ica l ver t ica l pr ice restraint is resale pr ice maintenance ("RPM") otherwise k n o w n as ver t ica l pr ice f i x i n g . R P M basical ly involves a s t ipulat ion by a suppl ier of the price at w h i c h a d istr ibutor may resell its products. T h e st ipulat ion may be 'd irect ' in the sense that the st ipulat ion relates to the price at w h i c h the immediate d ist r ibutor may resell its products, or it may be ind i rect in the sense that the st ipulat ion relates to the pr ice w h i c h a th i rd person may resell its products. In its most usual f o r m , a suppl ier w i l l st ipulate as a c o n d i t i o n of the supply of its products that the d istr ibutor not sell below some m i n i m u m price. H o w e v e r the st ipulat ion may equal ly be that the products not be sold above some m a x i m u m price or that pr ice be determined by reference to some f o r m u l a . T h e pract ice has attractions fo r both suppl iers and distr ibutors, a l though d i f f e ren t interests are of ten at play. F o r the suppl ier , the p r imary mot iva t ion is normal ly to ensure resale pr ice stabi l i ty in re lat ion to its products , par t icu la r ly in a dua l -d is t r ibu t ion si tuat ion. T h u s the suppl ier may wish to ensure that its products are not p r iced by the d istr ibutor above the range fo r w h i c h they were in tended , thereby increasing the distr ibutor 's marg in and decreasing its sales. Converse ly , the suppl ier may wish to prevent its products being specia l led or sold as loss-leaders since this w i l l d isrupt order ly p r i c i n g and might even lead to a loss of reputat ion thereby detr imental ly a f fec t ing goodwi l l and fu ture sales. A suppl ier may even have an interest in pr ice stabi l i ty on the grounds that it . promotes goodwi l l amongst its distr ibutors. If one d ist r ibutor is regular ly sel l ing at prices below those st ipulated and consequently tak ing business away f r o m those distr ibutors who do not, it is l i ke ly that pressure w i l l be brought to bear by these other d istr ibutors to br ing the recalc i t rant d istr ibutor into l ine. If the suppl ier 21 does not take appropr iate act ion such as re fus ing to supply the recalc i t rant d is t r ibutor on terminat ing its d is t r ibutorsh ip , then it may wel l be that the rema in ing distr ibutors cease to promote the suppl ier 's products as v igorously as before ar even cease to purchase at al l . (Other, more subtle means inc lude f a i l i n g to renew a d is t r ibutorsh ip without g iv ing any reasons therefor , grant ing discounts to those distr ibutors who do adhere to st ipulated prices and i n d u c i n g th i rd parties to boycott those who do not adhere). St i l l fu r ther , the suppl ier may wish to adopt a p r i c i n g po l icy w h i c h provides an incent ive for its distr ibutors to engage in increased promot ion and point of sale serv ic ing. It w i l l seek to do this by establ ishing an adequate marg in between the wholesale and the retai l pr ice , such that its d istr ibutors can engage in a certain level of non-pr ice compet i t ion . F r o m the point of v iew of d istr ibutors, it protects them f r o m pr ice compet i t ion and thus provides a more stable market . 1 T h e stabi l i ty p rov ided by R P M has however general ly been seen to have adverse ef fects on the consumer through the e l iminat ion of pr ice compet i t ion , the l imi ta t ion on more e f f i c ien t methods of d is t r ibut ion and general ly higher prices. It is fo r this reason that most jur isdict ions have prohib i ted the pract ice of R P M as w i l l become clear in the next sect ion. 2 See B. D o n a l d and J . H e y d o n , T r a d e Pract ices L a w (Aus t ra l i a , L a w Book C o . , 1978) at 359. and J . Co l l inge , T h e L a w Re la t ing to Rest r ic t ive T r a d e  Pract ices and Monopol ies . Mergers & Takeovers in N e w Z e a l a n d 2nd ed. (Wel l ington, Butterworths, 1982) at 203-04. Resale pr ice restraints were comparat ive ly u n c o m m o n unt i l the latter part of the 19th century and the common law background of R P M is therefore somewhat obscure. T h e r e appears to be no reported E n g l i s h case on the subject pr ior to 1901. In that year, in E l l i m a n v. C a r r i n g t o n [1901] 2 C h . 275, an agreement whereby a dealer bound itself not to sell goods fo r less than spec i f ied prices was uphe ld , whi le in 1915, in D u n l o p Pneumat ic T y r e  C o . L t d . v. Se l f r idge [1915] A C 798, an agreement where the suppl ier c o u l d , at its d iscre t ion , vary the m i n i m u m price was uphe ld . See general ly , D o n a l d & H e y d o n , supra note 1 at 359-61. 22 B. C U R R E N T S T A T E O F T H E L A W (1) U n i t e d States R P M was f i rst held to be i l legal per se in the U n i t e d States in 1911. In that year , the Supreme C o u r t in Dr . Mi les M e d i c a l C o . v. John D. Park & Sons C o . 3 held that an agreement between a manufac turer of patent medic ines and its dealers to ma in ta in a m i n i m u m resale pr ice v io lated section 1 of the Sherman A c t . 4 T h a t section in mater ia l part declares every contract , combina t ion or conspi racy in restraint of trade to be i l legal . In regard to section 1, the C o u r t ru led that a manufac tu re r is not enti t led to restrict the resale of its products through inter ference wi th a purchaser's p r i c i n g decisions. T h e C o u r t equated the ef fects of R P M wi th hor izonta l pr ice f i x i n g between dealers and rejected Dr . M i les ' argument that m i n i m u m resale prices were necessary to protect it f r o m pr ice cut t ing w h i c h wou ld erode its dealer organizat ion. T h e Cour t d i d not however p rov ide any real explanat ion why e l imina t ing price compet i t ion between a manufac turer 's dealers almost a lways const i tuted an unreasonable restraint of trade a n d thus must be condemned as per se i l legal , other than that "agreements or combinat ions between dealers, h a v i n g fo r their sole purpose the destruct ion of compet i t ion and the f i x i n g of prices are in jur ious to the publ ic interest and v o i d " . 5 220 U.S. 373 (1911). While most resale pr ice arrangements in the U n i t e d States have been held i l legal under section 1 of the Sherman A c t , section 2 of thaf A c t and section 5 of the Federa l T r a d e Commiss ion A c t have been used to s imi lar ef fect . See e.g. F T C v. Beech N u t Packag ing C o . 257 U.S. 441 (1922). 220 U.S. at 408. In U n i t e d States v. Colgate & C o . . 6 dec ided eight years after Dr . M i les , the Supreme C o u r t faced the issue of whether Colgate had exercised a l a w f u l un i la tera l r ight to refuse to deal w i th price-cutters. U n l i k e in Dr . M i les , there was no agreement between Colgate and its distr ibutors ob l ig ing the latter to sell above a m i n i m u m price. T h e Supreme Cour t held that there was no v io la t ion of section 1 of the Sherman A c t a n d , in the process, stated that the Sherman A c t "does not restrict the long-recognized r ight of [a] trader or manufac ture r engaged in an ent i re ly pr ivate business f ree ly to exercise [its] own independent d iscre t ion as to the parties wi th whom [it] w i l l dea l" . 7 A c c o r d i n g to the C o u r t , un i la tera l R P M by manufacturers was permissible and therefore a manufac ture r was ent i t led to announce its resale prices in advance and secure adherence by re fus ing to deal wi th those who fa i l ed to comply . While the reasoning of the Cour t was consistent wi th the basic requirements of section 1 that there be a "contract, combina t ion or conspiracy" in restraint of trade, the treatment of R P M i n v o l v i n g an agreement on the one h a n d and uni la tera l rpm on the other was obviously at o d d s . 8 T h e narrowness of the Colgate decis ion, was demonstrated some years later in U n i t e d States v. Parke . D a v i s & C o . 9 where it was f o u n d that the actions of Parke , D a v i s went wel l beyond what was permit ted by Colgate , namely to al low a manufac ture r to ma in ta in resale prices through uni la tera l refusals to deal w i th 6 250 U.S. 300 (1919). . 7 Id. at 307. 8 R. Posner, Ant i t rus t Law: A n E c o n o m i c Perspective (Ch icago. U n i v e r s i t y of C h i c a g o Press, 1976) at 155. 9 362 U.S. 29 (1960). See also Simpson v. U n i o n O i l C o . 377 U.S. 13 (1964). n o n - c o m p l y i n g distr ibutors. Parke , D a v i s was f o u n d to have sol ic i ted retai lers' assistance in report ing discounts by other retai l druggists, assured retai lers that their competitors wou ld main ta in prices i f they wou ld do l ikewise, i n d u c e d wholesalers to refuse to deal w i th retai l druggists at discounts and permit ted druggists who had been cut o f f fo r d iscount ing to repurchase its products after exact ing assurances that d iscount ing would not take place in the f u t u r e . 1 0 T h e Cour t s ta ted : 1 1 When the manufacturer 's act ions, as here, go b e y o n d mere announcement of his po l icy and the simple re fusa l to dea l , and he employs other means w h i c h ef fect adherence to his resale prices ... he has put together a combina t ion in v io la t ion of the Sherman A c t . In 1968, the Supreme Cour t in A l b r e c h t v. H e r a l d C o . 1 2 extended the per se rule against R P M to encompass ver t ica l agreements a imed at establ ishing m a x i m u m resale prices. In this case the defendant newspaper was held to have v io la ted section 1 by re fus ing to sell to the p l a i n t i f f d is t r ibutor after the latter had resold papers to customers at more than the suggested retai l price. T h e C o u r t recognized that m a x i m u m and m i n i m u m pr ice f i x i n g may have d i f f e ren t consequences in many situations but stressed that "schemes to f i x m a x i m u m prices, by subst i tut ing the perhaps erroneous judgement of a seller for the forces of the compet i t ive A B A Ant i t rus t Sect ion, M o n o g r a p h No.2, V e r t i c a l Restra ints L i m i t i n g  In t rabrand Compet i t ion (1977) at 73 (hereinafter c i ted as " A B A M o n o g r a p h No.2"). 362 U.S. at 44. 390 U.S. 144 (1968). 25 market , may severely in t rude upon the ab i l i ty of buyers to compete a n d surv ive in that marke t . " 1 3 Movements to permit exemptions to the per se rule resulted in the passage of the M i l l e r - T y d i n g s A c t in 1937 and the M c G u i r e A c t in 1952 w h i c h a l lowed States to enact so-cal led "fair trade" laws author iz ing suppl iers to establish m i n i m u m or st ipulated resale prices for branded products i f the products were "in free and open compet i t ion wi th other products of the same general class". Most States passed f a i r trade laws a n d , as a result, a large number of suppl iers pract ised R P M as f a i r t r a d e . 1 4 In the 1970's, a number of States repealed their f a i r trade laws a n d , after a debate w h i c h had lasted for quite a number of years, the Consumer Goods P r i c i n g A c t of 1975 was enacted repeal ing the M i l l e r - T y d i n g s and M c G u i r e A c t s , e f fec t ive M a r c h 11, 1976, and thereby re-establ ishing the status of R P M as a per se v io la t ion of section 1. T h e re-establ ishment of the per se treatment of R P M and the subsequent h o l d i n g of the Supreme C o u r t in Cont inenta l T . V . Inc. v. G T E S y l v a n i a Inc. that restr ict ions on the territories w i th in w h i c h a d istr ibutor may sell or the customers w i th w h i c h it may deal were to be judged accord ing to a rule of reason standard resulted in an inconsistency in U n i t e d States law on ver t ica l restraints. T h e major i ty in S y l v a n i a spec i f i ca l ly refused to reconsider the treatment of R P M , reasoning that the i l legal i ty of pr ice restrict ions had been establ ished f i r m l y for Ig\ at 152. T h e M i l l e r - T y d i n g s A c t only appl ied to suppl iers and distr ibutors who were parties to actual agreements and therefore a suppl ier c o u l d not b i n d a d ist r ibutor who had not signed a "fa ir trade" agreement. D. M a r k s and J . Jacobson, "Price F i x i n g : A n Overv iew" , 30 Ant i t rus t B u l l . 199 (1985) at 230-31. many years and i n v o l v e d s ign i f i can t ly d i f f e ren t questions of analysis a n d pol icy . T h e more permissive treatment of non-pr ice ver t ica l restraints led a number of commentators to suggest that the economic basis fo r a per se treatment of R P M jus t i f i ed a r e c o n s i d e r a t i o n . 1 6 T h e Ant i t rust D i v i s i o n of the U n i t e d States Depar tment of Justice under the d i rect ion of Wi l l i am Baxter added support to their cause by f i l i n g a number of amicus cur iae br iefs in 1981-83 urg ing the courts to reassess the per se ru l ing on R P M . T h e most s ign i f icant of these br iefs was that in support of Monsanto's pet i t ion for cer t iorar i f r o m the decis ion of the Seventh C i r c u i t in S p r a y - R i t e Service C o r p . v. Monsanto C o . . 1 7 T h e br ie f urged the Supreme C o u r t to reconsider and ul t imately over turn the per se rule in Dr . M i l e s 1 8 T h e C o u r t chose not to do so but instead to c l a r i f y the app l ica t ion of the rule in that c a s e . 1 9 433 U.S. at 51 n.18. In a concur r ing op in ion however , M r . Justice White suggested that "the e f fect , i f not the intent ion of the Supreme Court 's o p i n i o n is necessari ly to ca l l into question the f i r m l y establ ished per se rule against pr ice restraints." 433 U.S. at 70. See e.g. F. Easterbrook, "Ver t ica l Ar rangements and the R u l e of Reason", 53 Ant i t rus t L . J . 135 (1984). 684 F.2d 1226 (7th C i r . 1982). B r i e f o f the U.S. Department of Just ice. Monsanto C o . v. S p r a y - R i t e Service  C o r p . N o . 82-914, 1983. T h e B r i e f stated, inter alia. ,:"There is no sound basis fo r assuming ... that resale pr ice maintenance is so i n v a r i a b l y ant i -compet i t ive as to just i fy per se condemnat ion .... T h e logic of S v l v a n i a compels the conclus ion that resale pr ice maintenance- l ike other ver t ica l restr ict ions - is unsuitable for per se treatment." Id. at 6 and 19. Monsanto v. S p r a v - R i t e Service C o r p . 104 S.Ct. 1464 (1984). F o r a deta i led discussion of this case, see R. Steuer, "Monsanto and the M o t h b a l l E f f e c t of Ant i t rust" , 30 Ant i t rus t , B u l l . 1 (1985) and J . M c G i b b o n , "Proof of V e r t i c a l C o n s p i r a c y U n d e r Monsanto", 30 Ant i t rus t B u l l . 11 (1985). 27 T h e facts of Monsanto were that Monsanto had sold its herbic ides under a d is t r ibu t ion program where distr ibutors were appointed for one-year terms renewable accord ing to spec i f ied cr i ter ia , i n c l u d i n g f u l l explo i ta t ion of the distr ibutor 's area of p r imary responsibi l i ty and adequate technica l t ra in ing fo r its sales representatives. Monsanto suggested resale prices to its d ist r ibutors and took steps to assure that its suggestions were being fo l lowed . S p r a y - R i t e , a k n o w n pr ice-cutter, became the subject of numerous complaints lodged wi th Monsanto by its other distr ibutors. When the time came for Monsanto to renew Spray -R i te 's d is t r ibutorsh ip , Monsanto refused to do so. S p r a y - R i t e brought suit a l leging that Monsanto had stopped sel l ing to it because it was cut t ing prices and that Monsanto was consp i r ing wi th other distr ibutors to f i x the resale prices of its herbic ides. Monsanto denied the charges, a l leging that the d is t r ibutorsh ip had been terminated fo r non-pr ice reasons, spec i f i ca l l y Spray-R i te 's fa i lu re to use t ra ined salesmen and adequate ly promote sales to distr ibutors. T h e C o u r t held that a conspi racy may not be in fe r red merely f r o m the terminat ion of a d istr ibutor in response to complaints of pr ice cut t ing f r o m compet ing distr ibutors. Ra ther , there must be direct or c i rcumstant ia l ev idence that "tends to exclude the possibi l i ty that the manufac turer and non- terminated 2ft * distr ibutors were act ing independent ly" and that the suppl ier and the c o m p l a i n i n g d ist r ibutor share "a conscious commitment to a common scheme designed to achieve an u n l a w f u l ob jec t ive" . 2 1 In this regard, the C o u r t spec i f i ca l l y 20 Id. at 1471. 2 1 Id. at 1473. 28 i nd ica ted that it wished to f o r t i f y the doctr ines enuncia ted in Colgate a n d S v l v a n i a . T h e C o u r t s ta ted: 2 2 It is of considerable importance that independent act ion by the manufac ture r and concerted act ion on non-pr ice restr ict ions be d is t inguished f r o m p r i c e - f i x i n g agreements. If an in ference of such an agreement may be d r a w n f r o m h igh ly ambiguous evidence, there is a considerable danger that doctr ines enunciated in S v l v a n i a and Colgate w i l l be ser iously eroded. T h e C o u r t also held that where there is proof of a ver t ica l agreement between a suppl ier and one or more of its d istr ibutors, and proof that the te rminat ion of a d is t r ibutor was "part of or pursuant to" the ver t ica l agreement, the te rminat ion w i l l be i l legal i f the ver t ica l agreement is i l l e g a l ' 2 3 T o prove a ver t ica l consp i racy , the C o u r t stated that there must be more than just "a showing that the d is t r ibutor conformed" to the suppl ier 's suggest ions. 2 4 T h e r e must be proof that the suppl ier sought "acquiescence or agreement" f r o m the d is t r ibutor , and proof that the d ist r ibutor "communicated" its "acquiescence or agreement" to the s u p p l i e r . 2 5 Based on the facts, the C o u r t f o u n d proof of a ver t ica l consp i racy and ev idence that Spray-R i te 's terminat ion was "part of or pursuant to" that ver t ica l conspi racy . " l± at 1470. 2 3 Id , at 1472. 2 4 I d at 1471 n.9. 2 5 Id. 29 F o l l o w i n g Monsanto , it was clear that a suppl ier , act ing un i la tera l ly , c o u l d refuse to take on new distr ibutors w h i c h it ant ic ipated wou ld not adhere to its suggested resale pr ices; it cou ld also announce to its exist ing distr ibutors that it in tended to terminate any d ist r ibutor w h i c h d i d not fo l low those prices; and it cou ld actua l ly terminate distr ibutors i f their prices d i d not c o n f o r m . In these cases, there wou ld be no "meeting of the minds" or "common scheme". O n the other h a n d , it was per se u n l a w f u l for a suppl ier to coerce adherence to resale pr ices, or to conspire w i th one of its distr ibutors to terminate another fo r f a i lu re to ma in ta in •„„„ 26 prices. A d is t r ibutor , fo r its part, cou ld "acquiesce" to a suppl ier 's demand and "conform" to the suggested pr ice without creat ing an agreement. O n the other hand it c o u l d not "communicate" its acquiescence to the suppl ier . T h i s is where the C o u r t drew a l ine between uni la tera l act ion and a meeting of the minds. T h e app l ica t ion of the per se proh ib i t ion against R P M was fu r ther c l a r i f i e d by the Supreme C o u r t in its 1988 judgement in Business E lec t ron ics C o r p . v. Sharp  E lec t ron ics C o r p . . 2 8 B u i l d i n g on its reasoning in Monsanto , the C o u r t he ld that the te rminat ion of a low pr ice d istr ibutor by a suppl ier fa l ls w i t h i n the per se p roh ib i t ion only in c ircumstances where there is an expl ic i t or i m p l i e d agreement between the suppl ier and other non- terminated distr ibutors to set resale prices at some level . T h e Cour t rejected the content ion that the existence of an agreement 2 6 Steuer. supra note 19 at 7. 2 7 Id. 28 108 S.Ct. 1515 (1988). 30 cou ld be i n f e r r e d merely on the basis of the terminat ion of n o n - c o m p l y i n g distr ibutors a n d s a i d : 2 9 O u r approach to the question presented in the present case is gu ided by the premises of G T E Sv lvan ia and Monsanto: that there is a presumpt ion in f a v o u r of a ru le -of - reason s tandard , that departure f r o m that standard must be jus t i f i ed by demonstrable economic ef fect , such as fac i l i t a t ion of car te l i z ing , rather than formal is t ic d ist inct ions; that in te rbrand compet i t ion is the p r imary concern of the anti trust laws; and that rules in this area should be fo rmula ted w i th a v iew towards protect ing the doctr ine of G T E Sv lvan ia . Whi le R P M remains i l legal per se in the U n i t e d States, it is notable that the stance taken by the Department of Justice since the early 1980's, and the subsequent na r rowing of the per se rule, have generated extensive concern in Congress. Besides its act ion in prevent ing the Depar tment f r o m presenting its argument in M o n s a n t o 3 0 , legislat ion was in t roduced in 1987 to c o d i f y the per se p roh ib i t ion of R P M and a version of the B i l l was passed by the House of Representat ives in early 1988. 3 1 It is understood that the B i l l has not yet been passed by Senate. T h e Senate Commit tee Repor t a c c o m p a n y i n g the legis lat ion was however extremely c r i t ica l of the A d m i n i s t r a t i o n fo r f a i l i n g to f i l e any R P M cases in recent years and fo r in tervening on behal f o f defendants in several pr ivate ly in i t ia ted cases . 3 2 29 30 31 32 Id, at 1519. See 45 Ant i t rus t & T r a d e Reg . Rep . ( B N A ) 670 (Oct. 27, 1983). T h e R e t a i l Compet i t ion E n f o r c e m e n t A c t , 100th Cong . , 1st Sess. (1987). I. N ie lson-Jones et al . , "Product D is t r ibu t ion and the C o m p e t i t i o n A c t : T h e Treatment of Rev iewab le Matters and Pr ice Maintenance" Paper presented at a C o n t i n u i n g Lega l E d u c a t i o n Society of Br i t i sh C o l u m b i a seminar , (October 1988) at 3.1.50-51. 31 (2) C a n a d a C a n a d a was the f i rst country to uncond i t iona l l y proh ib i t R P M . Sect ion 34 of the Combines Investigat ion A c t 1951 prov ided that no dealer cou ld d i rect ly or ind i rec t l y , by any means, require or induce or attempt to require any person to sell goods at a m i n i m u m pr ice or mark -up or pr ice spec i f ied by the seller. A m e n d m e n t s made in 1975, e f fec t ive 1 January 1976, broadened the proh ib i t ion in a number of respects. F i rs t , the proh ib i t ion was extended beyond the mere spec i f i ca t ion of prices to any attempt to in f luence a pr ice upwards or discourage the reduct ion of prices. Second, the proh ib i t ion was extended beyond mere situations of resale to any si tuat ion where a product is sold , so also ca tch ing leasing and h i r ing . T h i r d , the word "product" replaced the word "goods", so catch ing services. F o u r t h , the word "dealer" was replaced by the word "person" g iv ing rise to the possibi l i ty that the section cou ld apply to both hor izonta l and ver t ica l re la t ionsh ips . 3 3 F i n a l l y , a new of fence was created extending to th i rd parties the p roh ib i t ion against a refusal to supply w h i c h is related to an attempt to enforce pr ice maintenance. A notable nar rowing of the proh ib i t ion resulted f r o m the subst i tut ion of the words "or any l ike means" for the words "or any other means". N o reason appears to have been g iven fo r the change, a l though the major i ty in R. v. Ph i l ips E lec t ron ics L t d . felt that this was a clear ind ica t ion of T h i s possibi l i ty became evident in J L v. Peter C a m p b e l l (1981) 51 C.P .R . 284 where the manager of a rental car company was f o u n d gui l ty of pr ice maintenance by i n d u c i n g two of his competitors to raise their rental rates. See also R , v. Schelew et al . (1982) 63 C.P .R . (2d) 140. Par l iament 's in tent ion to substant ia l ly restrict the type of attempts w h i c h constitute an o f fence under the s e c t i o n . 3 4 These amendments were largely repeated in section 38 of the Compet i t ion A c t 1986 (to be renumbered section 61 under the 1985 R e v i s e d Statutes). Section 38(l)(a) of the 1986 A c t now therefore provides that no person who is engaged in the business of m a k i n g or sel l ing a product shal l , d i rect ly or ind i rec t ly : by agreement, threat, promise or any l ike means, attempt to in f luence u p w a r d , or to discourage the reduct ion of , the pr ice at w h i c h any other person engaged in a business in C a n a d a supplies or o f fers to supply or advertises a product w i t h i n C a n a d a . T h i s p roh ib i t ion also applies to persons who extend credit by way of credi t cards or are otherwise engaged in a business that relates to credi t cards or who have the exclusive rights and pr iv i leges confe r red by a patent, t rademark , copyr ight or registered indust r ia l design. In order to establish an o f fence under this p rov is ion , proof is not requi red that a suppl ier actua l ly succeeded in i n f l u e n c i n g u p w a r d or d iscourag ing the reduct ion of another person's prices. A mere attempt to in f luence prices in this way can su f f i ce . In R v. M o f f a t s 3 5 it was held that acquiescence by a person w h o m the accused had attempted to in f luence was not necessary to support a conv ic t ion . 116 D . L . R . (3d) 298 at 305. In this case, conduct w h i c h presumably wou ld have been caught under the previous word ing was held to be outside the section. (1957), 118 C . C . C . 4. 33 T h e courts have general ly g iven a broad interpretat ion to the requirement of an "agreement, threat, promise or l ike means". A n attempt to in f luence upward or d iscourage the reduct ion of prices in this manner has been f o u n d fo r instance where a rebate was p rov ided on sales made at a manufac turers ' suggested list p r i c e s ; 3 6 special a l lowances were threatened to be removed i f the retai ler in i t ia ted d o w n w a r d pr ice changes; and inducements were o f f e r e d to c o m p l y wi th suggested prices i n c l u d i n g an o f f e r to supply an add i t iona l , h igh ly desired product and an o f f e r to force other retailers to adhere to suggested p r i c e s . 3 8 Sect ion 38(l)(b) of the Compet i t ion A c t makes it a separate o f f e n c e for any person to, d i rect ly or ind i rect ly : refuse to supply a product to or otherwise d iscr iminate against any other person engaged in business in C a n a d a because of the low p r i c i n g pol icy of that other person. T h e e f fect of this prov is ion is to make it an o f fence to refuse to supply on the basis of pr ice d iscount ing . In add i t ion to the o f fence in section 38(1), section 38(6) of the Compet i t ion A c t provides that: N o person shal l , by threat, promise or any l ike means, attempt to induce a suppl ier , as a condi t ion of his do ing business wi th the suppl ier , to refuse to supply a product to a par t icu lar 3 6 R. v. C a m p b e l l (1964) 3 C . C . C . 112. 3 7 R , v. Sunoco Inc. (1986), 11 C .P .R . (3d) 557. 3 8 R , v. H . D . Lee of C a n a d a L t d . (1980), 57 C .P .R . (2d) 186. person or class of persons because of the low p r i c i n g po l icy of that person or class of persons. T h i s p rov is ion is d i rected at cont ro l l ing possible attempts by distr ibutors to ini t iate refusals by their suppliers to supply to compet ing , lower pr ice distr ibutors. V i o l a t i o n of section 38(1) or section 38(6) is an ind ic tab le o f fence and is punishable by a f ine in the d iscret ion of the court or impr isonment fo r 5 years or b o t h . 3 9 In regard to the issue of mens rea. it has been held in a number of cases that it is not necessary fo r the C r o w n to prove that an accused person in tended to have the e f fect of ma in ta in ing h igher - than-compet i t ive pr ice levels. Ra ther , it is s u f f i c i e n t to support a conv ic t ion under section 38 i f the C r o w n shows that the accused k n o w i n g l y car r ied out the acts w h i c h const i tuted the o f f e n c e . 4 0 T h e r e are several exceptions to the pr ice maintenance provis ions that are of importance in the present context. Section 38(2) provides that section 38(1) does not apply in situations i n v o l v i n g a f f i l i a t e d companies or directors, agents, o f f i ce rs or employees of (a) the same company , partnership or sole propr ie torsh ip , or (b) companies, partnerships or sole propr ietorships that are a f f i l i a t e d . In a d d i t i o n , section 38(2) provides that section 38(1) does not apply in situations where the person at tempting to in f luence the conduct of another person and that other person are p r i n c i p a l and agent. Sect ion 38(8). R. v. M o f f a t s . supra note 35. 35 Sections 38(3), (4) and (5) c l a r i f y the treatment of suggested resale prices under the pr ice maintenance provis ions. Section 38(3) prov ides , in e f fect , that producers or suppl iers who make suggestions regard ing the resale prices of their products must, in order to avo id l i ab i l i ty under the pr ice maintenance prov is ions , also make clear to the person to whom the suggestion is o f f e r e d that he is under no obl igat ion to accept the suggestion. In the absence of proof to this e f fect , the m a k i n g of suggestions respecting resale prices is deemed to be proof of an attempt to in f luence the person in accordance wi th the suggestion o f f e r e d . Section 38(4) c la r i f ies fu r ther that advert isements publ ished by a suppl ier of a product , other than a retai ler, that ment ion a resale pr ice for the product , must make clear that the product may be sold at a lower price. Unless this is done, the pub l i ca t ion of such an advert isement is deemed to constitute an attempt to i n f l u e n c e u p w a r d the sel l ing pr ice of any person into whose hands the product comes for resale. It is not therefore u n c o m m o n to f i n d the words "or less" used in advert isements i n c l u d i n g a suggested pr ice. T h e courts have held ' that sections 38(3) a n d (4) do not constitute of fences in themselves. Rather , they are examples of attempts to in f luence prices that may f a l l w i th in the conduct proscr ibed in section 38( l ) (a) . 4 1 Sect ion 38(5) provides that the pr ice maintenance provisions do not apply where the words "suggested price" or "suggested retai l price" are in some way attached to a product or its package or container along wi th the pr ice. (The use of suggested retai l prices w i l l be considered in more detai l later in this Part.) F i n a l l y section 38(9) in e f fect provides a defence to a person charged wi th refusal to supply under section 38(l)(b) where he believes that the person he has re fused to supply has made a pract ice of: (a) using products suppl ied by the person See e.g. R , v. Ph i l ips E lect ron ics L t d . (1981), 2 S.C.R. 264. charged as loss-leaders; (b) using such products not fo r the purpose of sel l ing them at a pro f i t but for the purpose of at t ract ing customers to his store; (c) engaging in mis leading adver t is ing in respect of such products; or (d) f a i l i n g to prov ide the level of service that might reasonably be expected by purchasers of such products. A s w i l l be seen short ly , these exceptions to some extent accommodate the posit ive rationales fo r pr ice maintenance act iv i t ies w h i c h have been advanced by modern antitrust scholars. It is notable, however , that the exceptions in section 38(9) do not apply to the basic o f fence of pr ice maintenance under section 38(l)(a), nor do they apply to the o f fence of inducement to engage in re fusa l to supply under section 38(6). (The loss-leader defence w i l l also be considered in more deta i l later in this Part.) (3) A u s t r a l i a T h e R P M provis ions in the New Z e a l a n d A c t are v i r tua l ly a mi r ro r of the equivalent R P M provis ions in the T r a d e Pract ices A c t 1974 (Cth) (hereafter re ferred to as "the A u s t r a l i a n A c t " ) 4 3 and therefore both can conven ient ly be considered together (as is done in the next section). T h e only s ign i f i can t d i f f e r e n c e is the inc lus ion of a defence along the lines of section 38(9) of the C a n a d i a n Compet i t ion A c t to a suppl ier who wi thholds supplies of goods to a person who, w i t h i n the preceding twelve months, has sold goods obta ined f r o m the suppl ier at less than their cost for the purposes of promot ing business or at t ract ing T h e loss-leader defence was considered in R^ v. H .D . Lee of C a n a d a L t d . , supra note 38. T h e Quebec Supreme Cour t d e f i n e d loss-leader sel l ing as sale at a pr ice below invo ice cost and r e - a f f i r m e d an interpretat ion g iven earl ier in the Ph i l ips case. Sections 48,96,97,98 and 100. F o r a detai led discussion of these prov is ions, see R. M i l l e r , Annota ted T r a d e Pract ices A c t 8th ed. (Aus t ra l i a , L a w Book C o . , 1987). to his place of business persons l ike ly to purchase other goods. T h e exempt ion does not however app ly to genuine seasonal c learance sales of goods not acqu i red fo r the purpose of being sold at the par t icu lar sale nor does it app ly in situations i where the sale took place wi th the consent of the s u p p l i e r . 4 5 (4) N e w Z e a l a n d (i) H is tory R P M arrangements were f i rst brought under the trade pract ice regime in N e w Z e a l a n d in 1958, 4 6 but were not spec i f i ca l l y dealt w i th unt i l 1975. Sect ion 28 of the Commerce A c t 1975 4 7 p rov ided that no person shal l be a party to any agreement or arrangement for the sale or supply of goods "between a wholesaler and a retailer" or "between two or more wholesalers" pursuant to w h i c h there is a direct or ind i rect i n d i c a t i o n of the pr ice of goods sold a n d / o r the imposi t ion of condi t ions of sale a f f e c t i n g the resale pr ice of goods sold. H o w e v e r three exceptions were p r o v i d e d , namely (a) where the par t icu lar agreement or arrangement had been approved in advance by the Commerce C o m m i s s i o n and any condi t ions imposed by ' the Commiss ion compl ied wi th; (b) where the trade pract ice was expressly author ized by any other A c t ; and (c) the agreement or arrangement Section 98(2). See e.g. T r a d e Pract ices Commiss ion v. O r l a n e A u s t r a l i a Ptv.  L t d . (1984) 51 A . L . R . 767 and Coo l and Sons Ptv L t d . v. O ' B r i e n Glass  Industries L t d . (1981) 35 A . L . R . 445. Sect ion 98(3). T r a d e Pract ices A c t 1958, sections 19 & 20. A s amended by the Commerce A m e n d m e n t A c t 1976 (No. 67) and. subsequently by the Commerce A m e n d m e n t A c t (No. 2) 1979 (No. 140). was one under w h i c h the resale pr ice or cond i t ion re lat ing thereto was ind ica ted to be a suggested pr ice o n l y . 4 8 T h e 1986 A c t d i d not repeat section 28 of its predecessor but, as prev iously noted, adopted the equivalent provis ions of the A u s t r a l i a n A c t . (ii) O v e r v i e w of C u r r e n t Provis ions Sect ion 37(1) of the 1986 A c t makes it u n l a w f u l fo r a person "to engage in the pract ice of resale pr ice ma in tenance" . 4 9 T h e var ious acts const i tut ing R P M are set out in section 37(3) and inc lude: (a) M a k i n g it k n o w n to a person that goods wi l l not be suppl ied unless that person agrees not to sell those goods at a pr ice less than spec i f i ed ; (b) Induc ing or at tempting to induce a person not to sell goods at a pr ice less than spec i f i ed ; (c) E n t e r i n g or o f f e r i n g to enter into an agreement for the supply of goods where one of the terms thereof is or wou ld be that a person not sell the goods at a pr ice less than spec i f ied or pr ice that wou ld be spec i f i ed ; F o r a d iscussion of the R P M provis ions of the 1975 A c t , see C o l l i n g e , supra note 1 at 198-208. Section 37 deals wi th 'd irect ' and ' ind i rect ' R P M , whi le section 38 deals w i th R P M enforced by th i rd parties for w h i c h there is no equivalent prov is ion in the A u s t r a l i a n A c t . A s section 38 v i r tua l l y mir rors section 37, only the latter section wi l l be discussed fo r present purposes. 39 (d) Wi thho ld ing the supply of goods for the reason that a person has not agreed not to sell the goods at a price less than spec i f ied or that the person has sold or is l ike ly to sell the goods at a price less than spec i f i ed ; and (e) Wi thho ld ing the supply of goods for the reason that a th i rd person has not agreed not to sell those goods at a pr ice less than spec i f i ed or has sold or is l ike ly to sell those goods at a price less than spec i f ied . Sections 37(4)(a)-(d) deal wi th the question as to when a suppl ier w i l l be taken to have spec i f ied or p r i c e , 5 0 whi le section 37(4)(e) deals wi th the issue of agency and deems any th ing done on behal f of or by arrangement wi th the suppl ier to have been done by that suppl ier . F i n a l l y , section 37(5) def ines the term "sale" to inc lude adver t is ing , d isp lay ing or o f f e r i n g fo r sale, wi th the terms "sell", "selling" a n d "sold" hav ing corresponding meanings It is notable that section 37 only applies to goods and not services, presumably on the basis that services can not general ly be r e s o l d . 5 1 It is therefore obv ious ly important in any par t icu lar case to character ize whether a resale more proper ly involves a contract fo r the sale of goods or a contract fo r services. T h i s character iza t ion w i l l determine whether or not section 37 is to a p p l y . 5 2 It is also A s to the interpretat ion of a "speci f ied price", see M i l l e r , supra note 43 at 311. C f . C a n a d i a n Compet i t ion A c t , section 38 w h i c h refers to the p r o d u c i n g or s u p p l y i n g of a "product", d e f i n e d in section 2 as i n c l u d i n g "an art ic le and service". (Emphasis added) A s to the d e f i n i t i o n of "goods" and "supply of goods", see sections 4(b) and (c). See also T h e Heat ing Centre Ptv L t d . v. T r a d e Pract ices C o m m i s s i o n (1986) A . T . P . R . 40-674. 40 notable that section 37(3) covers only m i n i m u m and not m a x i m u m prices in stating that the resale pr ice must be "not less than" the pr ice spec i f i ed by the suppl ier . It is clear f r o m the var ious types of conduct l isted that the ambit of section 37(3) is extremely wide. Whereas the conduct in (a) requires a person to be made aware of a suppl ier 's in tent ion, the conduct in (b) requires some posit ive act by w h i c h the suppl ier intends to persuade a person to comply , a l though the suppl ier 's e f for ts need not be successful . Most l ike ly to f a l l into this category are threats of terminat ion for non-compl iance and other forms of coerc ion. C o n d u c t under (c) wou ld appear to require that a legal ly b i n d i n g contract be entered into or at least that an o f f e r be made to this ef fect . It is notable in this regard that there is no reference to an "arrangement" or "understanding" as appears in sections 27 and 28 of the A c t and therefore more than a mutua l in tent ion or expectat ion is requi red . F i n a l l y in regard to (d) and (e), any w i thho ld ing of supply as a means of e n f o r c i n g compl iance by a reseller who refuses to adhere to a m i n i m u m resale prices is c a u g h t . 5 3 A n important except ion in regard to any al legat ion of i n d u c i n g or at tempting to induce a person not to sell goods at a pr ice less than spec i f i ed and f a l l i n g wi th (b) above, is that a suppl ier may, pursuant to section 39 of the A c t , recommend prices to its resellers so long as there is no obl igat ion to comply wi th such recommendat ion . 53 F o r a deta i led analysis of the var ious types of conduct const i tut ing R P M a n d f a l l i n g w i th in the equivalent A u s t r a l i a n p rov is ion , see D o n a l d & H e y d o n , supra note 1 at 368-86. 41 (iii) Spec i f i ca t ion of Prices A s can be noted f r o m section 37(3), a major element of each type of conduct l isted is whether the suppl ier has "specif ied" a pr ice. T h e extent to w h i c h a recommended pr ice may be a spec i f ied pr ice is obv ious ly s ign i f i can t fo r a suppl ier i f this results in the benef i t of the exempt ion in section 39 being lost. T h e matter was in fact considered in M i k a s a (NSW) Ptv. L t d . v. Fes t iva l S t o r e s 5 4 where the H i g h C o u r t of A u s t r a l i a he ld , in the context of a p roh ib i t ion against the w i t h h o l d i n g of suppl ies, that it was not possible to ma in ta in a d is t inc t ion between m i n i m u m and mandatory prices. Walsh J . s a i d : 5 5 It wou ld depr ive the prov is ion of any sensible operat ion i f it were to be construed so as to make l a w f u l a w i t h h o l d i n g of supplies for the reason that the potent ial customer was l i ke ly to sell at a pr ice below the pr ice w h i c h the suppl ier wishes to be main ta ined as the sel l ing pr ice , p r o v i d e d that his desired sel l ing pr ice was stated to be a recommended or a sensible pr ice. T h e C o u r t in T r a d e Pract ices Commiss ion v. Bata Shoe C o m p a n y of  A u s t r a l i a Ptv. L t d . 5 6 came to a s imi lar conclus ion in ho ld ing that the fact that the spec i f i ca t ion of a pr ice is couched in terms of a recommendat ion does not necessari ly prevent it f r o m being a spec i f ied pr ice for the purposes of the A u s t r a l i a n equiva lent of section 37. (1972) 127 C . L . R . 671. O n the facts, Spicer C . J . and Smithers J . , of the C o m m o n w e a l t h Industr ia l Cour t , the court of f i rst instance, f o u n d that the suppl iers had gone beyond a mere recommendat ion and had made it clear that the recommended pr ice list was in fact the m i n i m u m pr ice list. Id. at 647. See also B a r w i c k C . J . at 635. 56 (1980) 44 F . L . R . 145. 42 T h e r e is no reason to believe that a s imi lar interpretat ion wou ld not be g iven to the equivalent New Z e a l a n d provis ions. Section 39 is expressly l im i ted in its operat ion to the terms of section 37(3)(b). A c c o r d i n g l y , the fact that the m a k i n g of a recommendat ion as to resale prices may f u l l y accord wi th section 39, it may yet be a su f f i c i en t spec i f ica t ion to sat isfy the requirements of section 37(3)(d). It is important to remember that a pr ice may be a spec i f ied pr ice , but nevertheless not "a pr ice spec i f i ed by the [supplier] as the pr ice below w h i c h the goods are not be s o l d " . 5 7 It wou ld therefore seem safe fo r a suppl ier to legi t imately spec i fy that a cer ta in pr ice is recommended so long as there is no request that this pr ice be adhered to nor any threat of act ion i f it is not. It is clear however that a pr ice can be the spec i f ied pr ice below w h i c h goods are not to be sold without being spec i f ied in precise terms. In T r a d e  Pract ices C o m m i s s i o n v. Pve Industries Sales Ptv. L t d . 5 8 fo r instance, it was held that what was cal led a "go price" and w h i c h could vary between $10-15 up or down was such a pr ice , whi le in the Bata decis ion it was held that it was su f f i c i en t that a pr ice be spec i f i ed as not less than that charged by other establ ished retailers. It is also clear f r o m section 37(4)(d) that where a suppl ier makes a statement to another person of a pr ice that is l ike ly to be understood by that person as the See Peter Wi l l iamson Ptv. L t d . v. C a p i t o l Motors L t d . 1982) 61 F . L . R . 257 at 261 where F r a n k i J . d i d not accept a submission that a re fusa l to supply wou ld convert a recommended pr ice into a spec i f ied pr ice below w h i c h goods were not to be sold. Whether or not the recommendat ion of a pr ice fo l lowed by a refusal to deal where the buyer has sold below the recommended pr ice can convert the recommended pr ice into a spec i f i ed pr ice below w h i c h goods are not to be sold depended, in F r a n k i J.'s v iew, on al l of the c ircumstances. (1978) A . T . P . R . 40-088. U p h e l d on appeal (1979) A . T . P . R . 40-124. 43 price below w h i c h goods are not to be sold , that pr ice is deemed to have been spec i f i ed by the suppl ier as the pr ice below wh ich the goods are not to be s o l d . 5 9 It may be that a statement of pr ice, even i f recommended, may well be l ike ly in par t icu lar cases to be understood by distr ibutors as the m i n i m u m pr ice of the goods. In such cases, the except ion in section 39 would not seem to be a v a i l a b l e . 6 0 (iv) Wi thho ld ing of Supply T h e most pervasive of the acts l isted in section 37(3) to d is t r ibu t ion in general are those set out in paragraphs (d) and (e), namely the w i t h h o l d i n g of supply fo r f a i lu re to main ta in resale prices. By section 40, cer ta in acts are deemed to constitute the w i t h h o l d i n g of supply. T h a t section provides as fo l lows: F o r the purposes of section 37(3)(d) and (e) of this A c t , the suppl ier shal l be deemed to w i thho ld the supply of goods to another person i f -(a) T h e suppl ier refuses or fa i ls to supply those goods to, or as requested by , the other person; or (b) T h e suppl ier refuses to supply those goods except on terms that are disadvantageous to the other person; or (c) In supp ly ing those goods to the other person, the suppl ier treats that person less f a v o u r a b l y , whether in respect o f t ime, method, or place of de l ivery , or otherwise, than the suppl ier treats other persons to w h o m the suppl ier supplies the same or s imi lar goods; or See B.P. A u s t r a l i a L t d . v. T r a d e Pract ices C o m m i s s i o n (1986) A . T . P . R . 701 in regard to the equivalent A u s t r a l i a n prov is ion (section 96(3)(f)). T h e test is objective. D o n a l d & H e y d o n , supra note 1 at 385. 44 (d) T h e suppl ier causes or procures a person to act in relat ion to the supply of goods in the manner spec i f i ed in paragraphs (a), (b), or (c), as the case may be, of this section. 1 T h e ef fect of section 40, when read wi th sections 37(3)(d) and (e), is to remove any argument that l iab i l i ty can be avo ided s imply by s p e c i f y i n g a resale pr ice and leav ing it to a d istr ibutor to vo luntar i l y accept that s t ipulat ion or not. T h u s , what may be l a w f u l conduct in the U n i t e d States under Colgate , is c lear ly not so in N e w Z e a l a n d . F u r t h e r gu idance in the interpretat ion of paragraphs (d) a n d (e) of section 37 is g iven by section 42 w h i c h provides as fo l lows: (1) Where, in proceedings under this A c t against a suppl ier fo r a contravent ion of section 37(3)(d) or section 37(3)(e) of this A c t it is proved that -(a) T h e suppl ier has acted in a manner re fer red to in section 40 of this A c t ; and (b) D u r i n g a per iod ending immediate ly before the suppl ier so acted, the suppl ier had been s u p p l y i n g goods of the k i n d wi thheld either to -(i) T h e person in respect of whom the contravent ion is al leged; or (ii) A person ca r ry ing on a s imi lar business to that person; and (c) D u r i n g a per iod of 6 months immediate ly before the suppl ier so acted, the suppl ier became aware of a U n l i k e under sections 98(2) and (3) of the A u s t r a l i a n A c t , no defence is p r o v i d e d in the N e w Z e a l a n d A c t to a w i thho ld ing of supply on account of the sale of goods at less than their cost (i.e loss-leadering). 45 matter or c i rcumstance capable of const i tut ing a reason re ferred to in section 37(3)(d) or (e) of this A c t — it shal l be presumed, in the absence of ev idence to the contrary , that the suppl ier so acted on account of that matter. (2) N o t h i n g in subsection (1) o f this section applies in respect o f terms imposed by a suppl ier that are disadvantageous or treatment that is less f a v o u r a b l e than the suppl ier accords other persons i f the terms or treatment consists only of a requirement by the suppl ier as to the time at w h i c h , or the f o r m in w h i c h , payment as to be made or as to the g iv ing of security to secure p a y m e n t . 6 2 T h e words "in the absence of evidence to the contrary" in section 42 make it clear that even when paragraphs (a), (b) and (c) of that section are proved , the presumpt ion that the suppl ier was actuated by a desire to ma in ta in resale prices does not arise i f "evidence to the contrary" is produced. What "the contrary" of w i thho ld ing for the "reason[s]" ment ioned in sections 37(3) (d) and (e) means seems to depend on precisely what w i thho ld ing for those reasons means. A number of interpretat ions may be g iven to the word reason in sections 37(3)(d) and (e), namely whether the reason must be the ma in , only or just a reason for w i thho ld ing supply so as to br ing the sections into play. T h i s matter was also considered in the A u s t r a l i a n case of M i k a s a (NSW) Ptv L t d . v. Fes t iva l S tores . 6 3 where M i k a s a , an importer and wholesaler of d innerware w h i c h it marketed under the names ' M i k a s a ' and 'Premiere ' , re fused to supply Fes t iva l , a company operat ing a number of d iscount houses, wi th its M i k a s a brand . Fest iva l al leged that Mikasa 's 6 2 See however U n i t e d States v. Parke D a v i s 362 U.S. 29 (1960) where i f the threat of non-supply is used to cajole compl iance in any way , this requirement may well be sat isf ied. 6 3 (1927) 127 C . L . R . 617. reason f o r re fus ing to supply it w i th this b rand was because Fest iva l dec l ined to abide by the resale prices spec i f ied by M i k a s a in its catalogue. M i k a s a , on the other h a n d argued that for Fest iva l to succeed, it had to show that the only reason actuat ing M i k a s a was its bel ief that Fest iva l wou ld sell at prices below those spec i f i ed by M i k a s a . M i k a s a asserted that in point of fact , the only reason by w h i c h it was actuated was quite d i f fe ren t , namely its bel ief that the ' image' of its product wou ld su f fe r i f it were marketed by Fest iva l . In regard to this issue, C h i e f Justice B a r w i c k in the H i g h Cour t of A u s t r a l i a s a i d : 6 4 In my o p i n i o n it is not correct to so emphasize the par t ic ip le in the phrase fo r the reason that as requ i r ing the w i t h h o l d i n g of the supply to be fo r one reason only . In my o p i n i o n , i f the l i ke l ihood that the would-be purchaser wou ld sell at less than the spec i f i ed pr ice is an operat ive reason for w i t h h o l d i n g that supply , the suppl ier engages in the pract ice of R P M , however many reasons the suppl ier may in e f fect have fo r not s u p p l y i n g the goods to the would-be purchaser. T h e l i ke l ihood of pr ice-cut t ing is not requ i red , in my o p i n i o n to be the predominant reason; it is enough for this to be an operat ive reason, that is to say, a substantial reason in the total i ty of reasons for the w i thho ld ing of the supply . Walsh J . also spoke of a "substantial and operat ive reason" , whi le Menzies J . (with w h o m G i b b s J . agreed) stated that "if the goods would not have been w i thhe ld had it not been fo r the l i ke l ihood of pr ice cutt ing", then the w i t h h o l d i n g w h i c h occurred was i l legal despite the existence of other reasons . 6 6 Id , at 634-35. Id, at 646. Id. at 642. 47 T h e tests p ropounded by B a r w i c k C . J . and Walsh J . i n this case have to a large extent been adopted in section 2(5)(b) 6 7 of the A c t w h i c h provides that a person shal l be deemed to have engaged in conduct fo r a par t icu lar reason i f (a) that person engaged in that conduct fo r a reason that i n c l u d e d that reason and (b) that reason was a substant ial reason. T h e ef fect of section 2(5)(b) in the present context is that a v io la t ion of section 37 wi l l be f o u n d to have occur red where the predominant reason fo r the w i thho ld ing of supply , a l though secondary , was nevertheless present and subs tan t i a l . 6 8 It is clear at least that the par t icu lar reason, need not be the sole reason. T h e result of the interpretat ion placed by the H i g h C o u r t in M i k a s a on the expression "for that reason that" and the operat ion of section 2(5)(b) wou ld appear to be that a suppl ier w i l l be held to have engaged in the pract ice of R P M where (a) in regard to say section 37(3)(d)(ii) it can be in fe r red f r o m a suppl ier 's conduct that a "substantial" reason actuat ing the suppl ier in w i t h h o l d i n g goods f r o m another person was that person had sold or was l ike ly to sell those goods at less than the pr ice spec i f i ed by the suppl ier or (b) the three fac tua l elements in section 42 are proved , and the suppl ier does not rebut the presumpt ion by p r o v i d i n g evidence to the contrary . T h e A u s t r a l i a n equivalent is section 4F . In regard to sections 4 F and 100(1) (the equivalent of section 42(1)) of the A u s t r a l i a n A c t , see Peter Wi l l iamson  Pty. L t d . v. C a p i t o l Motors L t d . (1982) 61 F . L . R . 257 at 263 where it was said that the ' reason' fo r w i thho ld ing supply need not be the sole reason, but it must be one of real s ign i f icance . 68 A s to the appl ica t ion of section 4F(b) of the A u s t r a l i a n A c t to the equiva lent of section 37(3) (namely section 96(3)), see T h e Hea t ing Centre  Ptv. L t d . v. T r a d e Pract ices Commiss ion (1986) A . T . P . R . 40-674 at 47-436-38. 48 In regard to the w i thho ld ing of supply , it is clear that a re fusa l to deal per se does not breach sections 37(3)(d) and (e) . It is only where the re fusa l is for one of the enumerated reasons that a breach may occur. In regard to the equiva lent A u s t r a l i a n p rov is ion , Smithers J . i n T r a d e Pract ices C o m m i s s i o n v. St ih l C h a i n  Saws (Aust.) Ptv. L t d . s a i d : 6 9 T h a t a re fusa l to supply goods to another who requests them on terms w h i c h the suppl ier is u n w i l l i n g to trade wi th that other should be a w i thho ld ing of supplies w i th in the meaning of s.98(l)(a) [the equivalent of section 40(l)(a)] does not in i tself imp ly that the suppl ier by w i t h h o l d i n g the goods is in some way act ing in contravent ion of the A c t . Sect ion 98(1) is concerned not to create or de f ine obl igat ions but to state c ircumstances in w h i c h i f other factors are operat ive in the t ransact ion, the total conduct invo lved may wel l constitute a contravent ion of s.48. T h i s may arise, inter a l ia , by reason of the provis ions of s.96(3)(d) or (e). In other words, unless the conduct d e f i n e d in s.98(l), w h i c h for the purposes of s.96(3)(d) or (e) is deemed to constitute w i thho ld ing of suppl ies, is commit ted for a reason spec i f ied in s.96(3)(d) or (e) no contravent ion of the A c t is invo lved . (v) T e r m i n a t i o n for F a i l u r e to A d h e r e to  Spec i f i ed Prices T h e extent to w h i c h a suppl ier may terminate a d is t r ibutorsh ip where one of the reasons fo r so do ing is the d iscount ing act iv i t ies of a d is t r ibutor was considered in R o n Hodgson (Holdings) Ptv. L t d . v. Westco Motors (Distr ibutors) Ptv.  L t d . . 7 0 It was held in that case that even though a f ranch isor had v a l i d reasons for terminat ion of a f ranch ise , the R P M provis ions of the A u s t r a l i a n A c t were i n f r i n g e d because a substantial and operat ive reason for terminat ion was that the f ranchisee had sold or advert ised or was l ike ly to sell or advert ise the f ranchisors products at a pr ice less than spec i f ied . (1978) A . T . P . R . 40-091 at 17,894. (1980) 29 F . L . R . 307. T h e Federa l Cour t of A u s t r a l i a was cal led upon to consider a s imi lar set of facts two years later in Peter Wi l l iamson Ptv. L t d . v. C a p i t o l Motors L t d . 7 1 where it was al leged that the respondent threatened to w i thho ld the supply of B M W motor vehicles in contravent ion of section 48 of the A u s t r a l i a n A c t . In terms of the equiva lent A u s t r a l i a n provis ions of sections 37(2) and 37(3)(d)(ii), the appl icant c la imed that the respondent was w i thho ld ing the supply of vehicles of the reason that it had sold several vehicles at a pr ice less than a pr ice spec i f i ed by the respondent as the pr ice below w h i c h the goods were not to be sold. T h e appl icant admit ted sel l ing several new B M W motor vehicles at less than the respondent's suggested or recommended retai l prices but c la imed that the respondent had become aware of this at least six months before the date of terminat ion . T h e respondent on the other h a n d pleaded that the appl icant had not f u l f i l l e d its obl igat ions under the relevant agreement and that terminat ion was jus t i f i ed by a number of commerc ia l considerat ions. H a v i n g regard to the A u s t r a l i a n equivalent of section 2(5)(b), F r a n k i J . held that a l though pr ice was a factor in the terminat ion , the pr ice at w h i c h a dealer sold cars was not a concern of the respondent; rather the important fac tor was whether the dealer's business was a "viable proposit ion". A l t h o u g h Hodgson was not c i ted , the tests in both cases appear v i r tua l ly the same, and also accord wi th the meaning of the term "substantial" re fer red to above. (1982) 61 F . L . R . 257. See also T r a d e Pract ices C o m m i s s i o n v. St ihl C h a i n  Saws (Aust) Ptv. L t d . (1978) A . T . P . R . 40-091. F i n a l l y , in D i rec t Ho ld ings L t d . v. Fel tex F u r n i s h i n g s of N e w Z e a l a n d L t d .  and Smi th & B r o w n L t d . 7 2 . the only N e w Z e a l a n d decis ion so f a r to consider section 37 of the A c t , the H i g h Cour t granted an in junc t ion requ i r ing both defendants to resume supply on terms no less favourab le than those imposed on other f u r n i t u r e retailers a n d to prevent act ion being taken in re lat ion to the p l a i n t i f f ' s other suppl iers and trade competitors. T h e evidence disclosed that the f i rst de fendant had increased the wholesale pr ice of its products to the p l a i n t i f f af ter coming under some pressure f r o m the second defendant to rec t i fy the p la in t i f f ' s d iscount ing act ivi t ies or face w i thdrawa l of the second defendant 's custom. T h e nature of the proceedings unfor tunate ly meant that there was litt le analysis of section 37. C . E V A L U A T I O N O F T H E L A W (1) E c o n o m i c Issues (a) Cartels T h e t rad i t iona l economic a r g u m e n t s 7 3 j us t i f y ing the app l ica t ion of a per se rule against R P M are that it involves the mani festa t ion of either a suppl ier or d is t r ibutor cartel . Where this can be proved , there is wide agreement that R P M is ant icompet i t ive and therefore should be prohib i ted . (1986) 6 N . Z . A . R . 245. F o r a comprehensive review of these and the numerous other explanat ions f o r adopt ing R P M , see T . Overstreet , Resale Pr ice Ma in tenance E c o n o m i c  Theor ies and E m p i r i c a l E v i d e n c e (Federa l T r a d e C o m m i s s i o n Sta f f Repor t , 1984). 51 In respect of the suppl ier cartel theory, the general hypothesis is that c o l l u d i n g suppl iers , by imposing R P M , w i l l attempt to make the p r i c i n g system more transparent and thereby make it easier to detect 'ch ise l l ing ' . R P M w i l l thereby preclude shaded wholesale prices f r o m a f f e c t i n g retai l prices and t ranslat ing into add i t iona l sales, thus a i d i n g suppliers in protect ing their monopoly . While most analysts accept this hypothesis as possible, the condi t ions that an e f fec t ive cartel has to meet (for example, few suppl iers to enable easier co-o r d i n a t i o n , homogenous products , no good substitutes and barr iers to entry) are re lat ive ly o n e r o u s . 7 5 T h e hypothesis necessari ly requires al l suppl iers in the market to ma in ta in the cartel pr ice for their products at the retai l level . A single suppl ier w i th a d i f f e ren t ia ted product pract is ing R P M at the retai l level obv ious ly does not f i t the h y p o t h e s i s . 7 6 E v e n general ly , it seems questionable whether R P M wi l l benef i t a suppl ier since the ef fect of setting a m i n i m u m pr ice above the compet i t ive level w i l l be to place a f loor on resale pr ices, whi le setting the retai l pr ice below the compet i t ive level w i l l render R P M superf luous. T h e impact of R P M w i l l seemingly be to reduce a suppl ier 's sales and corresponding ly its prof i ts , fo r wi thout R P M , distr ibutors wi l l sell more at a lower retai l pr ice , but pay the same wholesale pr ice. F . M . Scherer , "The Economics of V e r t i c a l Restraints" 52 Ant i t rus t L . J . 687 (1983) at 691-92. See F. Mathewson and R. Winter, "The E c o n o m i c s of Selected V e r t i c a l Restr ict ions" (Un ivers i ty of Toron to , L a w and E c o n o m i c s Workshop Series, 1984) at 27-29. 76 B. D u n l o p , D. M c Q u e e n and M. T r e b i l c o c k , C a n a d i a n C o m p e t i t i o n Po l icy - A  L e g a l and E c o n o m i c A n a l y s i s (Toronto , C a n a d a L a w Book , 1987) at 250 (hereafter c i ted as "Dunlop"). 52 In respect of the d istr ibutor cartel theory, the general hypothesis is that a suppl ier w i l l be i n d u c e d to main ta in prices at a level w h i c h maximizes distr ibutors ' margins (at the expense of consumers who face higher prices and the suppl ier who loses prof i ts f r o m reduced sales). T h e suppl ier w i l l e f fec t ive ly pol ice and enforce the car te l , thus a v o i d i n g the problems of co -ord ina t ion that large numbers of d istr ibutors h a n d l i n g the same product of ten f a c e . 7 7 Such a hypothesis supports the rat ionale o r ig ina l ly o f f e r e d by the U n i t e d States Supreme C o u r t in Dr . Mi les fo r a per se rule, namely that R P M was e f fec t ive ly equiva lent to hor izonta l pr ice f i x i n g . In that case the Cour t s a i d : 7 8 [T]he compla inant can fare no better w i th its p lan of ident ica l contracts than cou ld the dealers themselves i f they f o r m e d a combina t ion and endeavoured to establish the same restrict ions a n d , thus to achieve the same result, by agreement w i th each other. If the immediate advantage they wou ld thus obta in wou ld not be su f f i c i en t to sustain a direct agreement, the asserted ulter ior benef i t to the compla inant cannot be regarded as necessary to support the system. A s under the suppl ier cartel theory, the condi t ions necessary to achieve an e f fec t ive d ist r ibutor cartel ( for example, few distr ibutors to enable easier inducement , homogenous products, no close substitutes and barr iers to entry) are also o n e r o u s . 7 9 Most analysts agree that co-ord ina t ion in the typ ica l l y f ragmented 77 W. B o w m a n , "The Prerequisites and E f f e c t s of Resale Pr ice Maintenance" , 22 U . C h i . L . R e v . 825 (1955). 7 8 220 U.S. at 408. T h e r e was however no evidence of a d is t r ibutor cartel in this case. Baxter , fo r one, has noted that there was in fact a major hor izonta l anti trust case brought in 1908 or 1909 against a number of d rug manufac turers , i n c l u d i n g Dr . Mi les , and that a consent decree was issued in 1910 en jo in ing a number of practices, i n c l u d i n g R P M , in w h i c h this hor izonta l cartel had engaged. See W. Baxter , "Ver t ica l Pract ices - H a l f -Slave, H a l f Free", 52 Ant i t rust L J 743 (1983). 79 Mathewson and Winter, supra note 75 at 19-27. 5 3 retai l indust ry is d i f f i c u l t to achieve and that barr iers to entry are normal ly l o w . 8 0 T h e on ly real s i tuat ion in w h i c h distr ibutors as a group have the means to organize themselves and the ab i l i ty to d isc ip l ine each other is i f their par t icu lar industry is subject to some legal restr ict ion such as l icensing. E v e n then a more pract ica l move by a group of distr ibutors with monopsony power wou ld seem to be to extract a lower wholesale pr ice f r o m the suppl ier than to seek a f i x e d retai l pr ice. T h e more onerous condi t ions to be met by d istr ibutor cartels suggests that their existence w i l l be even rarer than that of suppl ier cartels. T h i s indeed is supported by a deta i led review conducted by one commentator into the inc idence of R P M allegations in Depar tment of Justice cases for the per iod 1890-1980 and Federa l T r a d e C o m m i s s i o n cases for the per iod 1942-1979 in the U n i t e d Sta tes . 8 1 (b) Free R i d i n g T h e major contemporary economic explanat ion fo r adopt ing R P M has been that it gives a d ist r ibutor at the retai l level a wider spread between its costs and pr ice thereby i n d u c i n g the d istr ibutor to compete on a non-pr ice basis by engaging in add i t iona l pre- and post-sales act iv i ty such as d isplays, demonstrat ions, adver t is ing and after-sales services. F r o m an economic standpoint , the suppl ier w i l l raise the p r i c i n g power of the d istr ibutor wi th the expectat ion that this w i l l lead to more sel l ing act iv i ty on the distr ibutor 's part w h i c h in turn w i l l lead to an D u n l o p , supra note 76 at 250-51. S. Orns te in , "Resale Pr ice Maintenance and Cartels", 30 Ant i t rus t B u l l . 401 (1985) at 415-21. See also Overstreet , supra note 73 at 161-62. Overstreet f o u n d that whi le d istr ibutor cartel behaviour is sometimes evident , a suppl ier cartel explanat ion for R P M is more of ten appl icable . E v e n so, he conc luded that "the evidence ... outside the drug and l iquor trades suggests neither suppl ier nor dealer col lusion explanat ions are l ike ly to apply to al l or even most instances of pr ice maintenance". 54 increase in consumer demand and a consequent increase in the suppl ier 's sales and p r o f i t s . 8 2 If a suppl ier does not set a m i n i m u m resale pr ice , d istr ibutors w i l l lack any incent ive to engage in such add i t iona l sales act iv i ty because consumers can take advantage of pre-sale act ivi t ies engaged in by the h igher pr ice distr ibutors a n d then purchase f r o m the distr ibutors not so engaged who accord ing ly charge a lower pr ice. In other words, low pr ice distr ibutors w i l l ' f ree - r ide ' on the sales ac t iv i ty of the more costly and hence higher pr ice distr ibutors thereby ga in ing the benef i t of extra sales wi thout the concomitant expense of p r o v i d i n g al l these extra services itself . T h e free r ider pr inc ip le had its genesis in an art icle wr i t ten by Professor Lester Telser in 1962. 8 3 Te lser noted that in many instances, demand f o r a par t icu lar suppl ier 's product was a f u n c t i o n of the demand fo r the phys ica l product and the a c c o m p a n y i n g pre- or post-sales services (which he termed "special services") o f f e r e d to prospective customers by a suppl ier 's d istr ibutors. T o take an example, the average consumer who goes into a store to buy a sophist icated personal computer has very l itt le idea of what he or she real ly needs in terms of memory capac i ty , speed of the central processing uni t , b rand of sof tware, type of pr inter and so on. Whether or not this consumer w i l l buy a computer w i l l very m u c h depend upon the ski l ls and expertise of the salespersons ava i lab le to exp la in its operat ions. C l e a r l y this service is not costless . T h u s , Telser pointed out, i f one d is t r ibutor p r o v i d e d this presale service to consumers but cou ld not or d i d not separately charge fo r it, a prospective customer wou ld go to that d is t r ibutor , f i n d F. H a n k s and P. Wi l l iams, "The Treatment of V e r t i c a l Restra ints and the A u s t r a l i a n T r a d e Pract ices Act" , (1987) 15 A . B . L . R . 147. L . Te lser , "Why Should Manufac tu re rs Want F a i r Trade?" , 23 J . L . & E c o n . 86 (1960). 5 5 out al l he or she wanted to know about the attr ibutes of the product and then go down the road to a second distr ibutor w h i c h sold the same product (but wi thout sales assistance) at a lower price. U n d e r these c i rcumstances, the second distr ibutor wou ld have taken a ' free r ide ' on the services p rov ided by the f i rst d is t r ibutor , since without these services, the customer might not have bought the product at a l l . A s s u m i n g that a substant ial number of consumers p laced a va lue on h a v i n g the product exp la ined to them before purchas ing it, it was seen to be in the consumers' interests that distr ibutors prov ide the service. H o w e v e r , wi thout some i n h i b i t i o n upon the free r ider , d istr ibutors wou ld be u n w i l l i n g to prov ide an opt imal amount of such service. T o state the matter in terms of the example above, over t ime the f i rst d istr ibutor would either cease to prov ide sales assistance or wou ld d iscont inue c a r r y i n g the suppl ier 's product at a l l . In either event, d is t r ibut iona l e f f i c i e n c y would be adversely a f f e c t e d . 8 4 T h e special services theory and free r ider p r inc ip le have been largely endorsed by the C h i c a g o S c h o o l . 8 5 Posner, for example, argues that m i n i m u m resale prices enables new manufacturers and manufacturers enter ing new markets to attract competent and aggressive distr ibutors and to induce them to make the k i n d of investment of capi ta l and labour that is often requi red in the successfu l d is t r ibu t ion of products u n k n o w n to the consumer. T h e manufac tu re r is then able T h e forego ing is based on L. Popofsky and S. Bomse, "Sy lvan ia to Monsanto: N o L o n g e r a Free R ide" , 30 Ant i t rus t B u l l . 67 (1985) at 88-89. See R. Bork , "The R u l e of Reason and the Per Se Concept : Pr ice F i x i n g and Marke t D i v i s i o n Pt. II", 75 Y a l e L . J . 373 (1966) and R. Posner, "Ant i t rust Po l icy and the Supreme Court : A n A n a l y s i s of the Rest r ic ted D i s t r i b u t i o n , H o r i z o n t a l Merger and Potent ia l Compet i t ion Decis ions", 75 C o l u m . L . R e v . 282 (1975). to compete more e f fec t ive ly wi th established c o m p a n i e s . 8 6 Posner fu r ther argues that the imposi t ion of a m i n i m u m resale pr ice induces dealers to engage in promot iona l act iv i t ies and to prov ide service and repair fac i l i t ies necessary to the e f f i c i e n t marke t ing of a manufacturer 's product , w i th the concomitant e l iminat ion of the so-cal led ' free r ider ' problem. In Posner's w o r d s : 8 7 T h e manufac turer can choose any level of presale services that he desires his dealers to prov ide and then, by setting the m i n i m u m resale pr ice appropr ia te ly , assure that precisely that level of services is p rov ided . G i v e n these pro-compet i t ive benefits w h i c h are seen to f low f r o m m i n i m u m resale prices in, almost a l l c i rcumstances, Posner, and others, advocate the app l ica t ion of a rule of per se l e g a l i t y . 8 8 Per se legal i ty is said to be jus t i f i ed by the al leged absence of either theoret ical or empi r ica l grounds fo r c o n d e m n i n g pure ly ver t ica l restraints as a n t i c o m p e t i t i v e . 8 9 86 87 88 Posner, i± at 283-85. R. Posner, Ant i t rus t L a w : A n E c o n o m i c Perspect ive (Ch icago , U n i v e r s i t y of C h i c a g o Press, 1976) at 161. R. Posner, "The Next Step in the Ant i t rus t Treatment of Restr ic ted D is t r ibu t ion : Per Se Legal i ty" , 48 U . C h i . L. R e v . 6 (1981) at 23. See also R. B o r k , T h e Ant i t rus t Paradox (New Y o r k , Basic Books, 1978) at 288. J .T . H a l v e r s o n , " A n O v e r v i e w of L e g a l a n d E c o n o m i c Issues a n d the Re levance of the V e r t i c a l Merger Guide l ines" , 52 Ant i t rus t L . J . 49 (1983) at 62. 57 T h e f ree- r ider pr inc ip le has also been spec i f i ca l ly recognized by the U n i t e d States Supreme Cour t . In a passage seemingly unnecessary to the precise issue before it, the Cour t in Monsanto s a i d : 9 0 A manufac ture r and its distr ibutors have legit imate reasons to exchange i n f o r m a t i o n about prices and the recept ion of their products in the market. Moreover , it is precisely in cases in w h i c h the manufac turer attempts to fur ther a par t icu lar market ing strategy by means of agreements on of ten costly nonpr ice restrict ions that it w i l l have the most interest in the d ist r ibutors ' resale prices. T h e manufac ture r of ten w i l l want to ensure that its distr ibutors earn su f f i c i en t pro f i t to pay for programs such as h i r i n g and t ra in ing add i t iona l salesmen or demonstrat ing the technica l features of the product , and w i l l want to see that "free-riders" do not interfere. (Ci tat ions omitted.) Telser 's special services theory took some years to be accepted, one of the ma in reasons being that it was l imi ted to a narrow range of products and d is t r ibut ion practices. T h e theory d i d not apply for instance to s tandard products l ike f o o d , d r i n k and c loth ing where consumers were un l i ke ly to place too much value on pre-sale services in the f o r m of explanat ions or demonst ra t ions . 9 1 H o w e v e r in the early 1980's, a number of commentators began to reconsider Telser 's work and demonstrated that the range of services w h i c h were ' f ree - r idab le ' 104 S.Ct. 1464, 1470 (1984). A n example is p rov ided by the H.D. Lee case, supra note 38, where the accused argued that its jeans should have a special locat ion in each store, special d isplays wi th mannequins , i n d i v i d u a l hangers and so on. A r m y and N a v y , one of the stores re fused supply because of , among other things, its fa i lu re to prov ide an adequate level of serv ic ing , was said to s imply stack up the jeans on a counter where the customer had to select his size and take it to the cashier! Beauchemin J . succ inct ly repl ied to this argument as fol lows: "However desirable f r o m the supplier 's standpoint is the amount of serv ic ing and promot ion a retailer w i l l give his product , the test of [section 38(5)] is not the level of serv ic ing w h i c h the suppl ier or manufac tu re r might expect but rather the level of serv ic ing w h i c h the purchaser of a product might expect" (IdL at 198). 58 was m u c h broader than Telser had suggested. M o r e important than such obvious items as sales assistance or l iberal warranty and returns pol icies were services broad ly denominated as i n f o r m a t i o n a l , promot iona l and r e p u t a t i o n a l . 9 2 M a r v e l and M c C a f f e r t y fo r example have argued that R P M is designed to ensure that suppl iers obta in cer t i f i ca t ion of the qual i ty and stylishness of their products f r o m reputable d is t r ibu to rs . 9 3 In their v iew, customers may not care where they obta in their supplies of a product but may care that the product is sold at l ead ing retailers s imply because the decis ion of those retailers to handle the product indicates that is it consistent w i th their reputat ions, i n this way R P M may be used to guarantee margins in order to make h igh qual i ty products at tract ive for such retailers. T o the extent that the f ree - r id ing of other retailers exists, the use of R P M is, in their v iew, of benef i t to the publ ic . T h e theory that R P M may be a p r i n c i p a l method of d istr ibutors lend ing their reputat ion to suppl iers was extensively considered in a 1984 study by f i v e academic consultants of the U.S. Federa l T r a d e C o m m i s s i o n into past R P M enforcement act ion B y way of overv iew the study o b s e r v e d : 9 4 P o p o f s k y and Bomse, supra note 84 at 91. See H.P. M a r v e l and P. M c C a f f e r t y , "Resale Pr ice Ma in tenance and Q u a l i t y C e r t i f i c a t i o n " 15 R a n d J. E c o n . 346 (1984); see also H.P. M a r v e l and S. M c C a f f e r t y , "The Welfare E f f e c t s of Resale Pr ice Maintenance" , 28 J. L a w and E c o n . 363 (1985) and F. Mathewson and R. Winter " A n E c o n o m i c T h e o r y of V e r t i c a l Restraints", 15 R a n d J. E c o n . 27 (1984).Maryel and M c C a f f e r t y , supra note 85. 94 L a f f e r t y , L a n d e and K i r k w o o d , Impact Eva lua t ions of F e d e r a l T r a d e  C o m m i s s i o n V e r t i c a l Restra ints Cases (Federa l T r a d e C o m m i s s i o n Sta f f Repor t , 1984) at 34. 59 In each of the R P M studies the consultants f o u n d that ver t ica l restraints were being used to protect the signal of h igh qua l i ty created by the retai lers' general method of do ing business. By c a r r y i n g the manufacturers ' products , retai l stores wi th h igh qual i ty reputat ions signal that the products are of h igh qua l i ty , thereby he lp ing the manufacturers establish or ma in ta in their products ' reputat ions. T h i s s ignal of h igh qual i ty is f ree- r idable ; other retailers cou ld r e f r a i n f r o m the expense of creat ing a qual i ty reputat ion, yet have their sales of the manufacturers ' products benef i t f r o m the cer t i f i ca t ion ef for ts of qua l i ty -s igna l ing dealers. A c c o r d i n g to our consultants, the manufacturers ' desire to prevent the deter iorat ion of this qua l i ty cer t i f i ca t ion through f r e e - r i d i n g exp la ined , in part or in whole, the use of R P M in each of the three R P M cases studied. T h e special services theory has cer ta in ly not been wi thout its cr i t ics , par t icu la r ly those who do not espouse the C h i c a g o School approach to ver t ica l pr ice restraints. O n e of the most voc i ferous has been Professor W i l l i a m C o m a n o r who has argued that it is only in special c i rcumstances that the use of R P M to overcome free r i d i n g yields a net benef i t to offset against the lessening of compet i t ion resul t ing f r o m its imposi t ion. In the absence of R P M , he argues, cer ta in customers would have purchased the product in any case; wi th the advent of R P M , such customers are fo rced to pay a higher p r i c e . 9 5 If there is in fact no f ree- r ider prob lem he argues, there is no need for R P M to ensure the supply of services, since var ious distr ibutors w i l l inev i tab ly prov ide the par t icu lar services demanded by consumers. "Indeed, wi th no f ree-r ider prob lem, there wou ld be more var ie ty in the d is t r ibu t ion services o f f e r e d in the absence of [RPM] and the f u l l range of consumer preferences would be more l ike ly to be s e r v e d " . 9 6 W. C o m a n o r , "Ver t ica l T e r r i t o r i a l and Customer Restr ic t ions: White Motor and Its A f te rmath" , 81 H a r v . L. R e v . 1419 (1968) W. C o m a n o r , "Ver t ica l Arrangements and Ant i t rus t Ana lys is" , 62 N . Y . U . L . R e v . 1153 (1987) at 1157. See also C o m a n o r at 1158 in regard to the free r ider explanat ion being su f f i c ien t to exp la in the t ransferab i l i ty of consumer perceptions f r o m store to brand under the cer t i f i ca t ion theory. 60 A n o t h e r voc i fe rous cr i t ic has been Professor Rober t P i t o f s k y who has seriously cha l lenged the compet i t ive benefi ts al leged to f low f r o m R P M . 9 7 In par t icu lar he has at tacked the arguments that R P M may be necessary to recrui t d istr ibutors and that m i n i m u m resale prices induce d ist r ibutor services. In respect of d is t r ibutor recrui tment , P i to fsky argues that higher retai l prices mean most consumers do not want or need the add i t iona l d istr ibutors w h i c h are attracted by h igher margins, and even i f they do, a suppl ier can achieve the same end by lower ing its own pr ice , w iden ing the marg in for compet ing d is t r ibutors , at t ract ing more outlets a n d thereby benef i t ing consumers through lower prices f r o m enhanced c o m p e t i t i o n . 9 8 In respect of i n d u c i n g d ist r ibutor services, P i t o f s k y argues that not many suppl iers establish m i n i m u m resale prices for this purpose, and even i f they do, there is no guarantee that a d is t r ibutor , once its resale pr ice is ra ised, w i l l engage in the desired level of services unless it is contractua l ly bound . F u r t h e r , a d is t r ibutor can be assumed to know better than its suppl ier the desired level of services necessary to sell a product and w i l l p rov ide such services or go out of bus iness . 9 9 Qu i te natura l ly , P i to fsky , l ike C o m a n o r , very m u c h favours retent ion of the exist ing rule of per se i l legal i ty , a l though he does accept the need fo r nar row, c a r e f u l l y d e f i n e d exceptions to the per se rule in the case of new entrants and new products. A n y such exceptions would only seem just i f iab le on this v iew i f ava i lab le fo r a reasonably short per iod of , say, three years. E v e n products regarded as technica l ly complex and therefore requ i r ing a great deal of exp lanat ion tend to become comprehensible to most consumers w i t h i n a reasonably 9 7 See e.g. R. P i t o f s k y , "In De fence of Discounters: T h e N o F r i l l s Case fo r a Per Se R u l e Aga ins t V e r t i c a l Pr ice F i x i n g " , 71 Georgetown L . J . 1487 (1983). 9 8 Id. at 1494. Id. at 1492-93. 61 short per iod at w h i c h time there is less need for R P M to support post-sale services. T h e personal computer is the obvious example in this case. More temperate in his c r i t ic ism is Professor Scherer , who has argued that, under cer ta in condi t ions , the compet i t ion generated by a number of suppl iers adopt ing a h igh marg in po l icy to induce the prov is ion of services by its d ist r ibutors can lead to too m u c h var iety being o f f e r e d and too m u c h money being spent on s e r v i c e s . 1 0 0 T h e f ragmentat ion of a market through the expansion of margins and services, and perhaps also through the entry of add i t iona l d istr ibutors to take advantage of the h igh margins may result, he argues, in loss of economies of scale or an increase in f i x e d costs, both absolutely and per uni t s o l d . 1 0 1 T h e l ike ly loss of e f f i c i e n c y envisaged by Scherer in this s i tuat ion obv ious ly runs counter to the P o s n e r / B o r k theory that an increase in output necessari ly enhances e f f i c i e n c y . 1 0 2 T h e r e may be some increase in output as a result of the general ly h igher level of services, but this is l ike ly to be adversely a f fec ted by the higher level of prices. A s Scherer n o t e s 1 0 3 : O n a p r io r i grounds, whether quant i ty demanded is increased or not depends upon the elastici ty of demand w i th respect to service on the one h a n d , versus the elastici ty of demand wi th respect to pr ice on the other hand . Y o u cannot tell in this r iva l rous si tuat ion whether e f f i c i e n c y has increased or not. 1 0 0 Scherer , supra note 74 at 701-02. 1 0 1 Id, at 703. 1 0 2 R. Posner, "The R u l e of Reason and the E c o n o m i c A p p r o a c h : Re f lec t ions on the S y l v a n i a Dec is ion" , 45 U . C h i . L . R e v . 1 (1977) at 18 and B o r k , supra note 88 at 290 and 295-96. 103 Scherer , supra note 74 at 703. 62 O n this basis, Scherer argues that R P M should be presumed legal on ly for re la t ive ly smal l upstream f i rms and in situations where its use is not ubi tqui tous. Where these condi t ions are not sat is f ied , he wou ld require those who want to use R P M to bear the burden of p rov ing why it should be a l lowed. Most recent ly , K l e i n and M u r p h y have presented an a l ternat ive theory of how R P M and other ver t ica l rstraints operate to induce desired d is t r ibutor s e r v i c e s . 1 0 4 T h e thrust of their theory is that pr ivate enforcement by way of act ive suppl ier moni tor ing and the threat of suppl ier terminat ion assures d ist r ibutor per formance . T h r o u g h the use of this mechan ism, it is argued that a suppl ier can employ ver t ica l restraints to reduce the short run gains to non-p e r f o r m i n g distr ibutors (by l im i t ing their ab i l i ty to expand output) a n d to increase the long r u n gains to p e r f o r m i n g distr ibutors (by creat ing a quasi -rent stream). It is sa id that the mechan ism is appl icable to any service that a suppl ier wishes a d ist r ibutor to p e r f o r m that is not in the distr ibutor 's own self- interest and where an expl ic i t contract can not be wri t ten and enforced . It is the very inab i l i t y to predict the e f f i c i e n c y enhanc ing or reduc ing ef fects a l luded to by Scherer w h i c h is at the heart of the debate between the economic theorists. There is no doubt that under certa in very l imi ted condi t ions R P M can fac i l i ta te car te l izat ion at the suppl ier or d is t r ibutor l e v e l . 1 0 5 A s shown earl ier , the requirements for a plausible hypothesis of co l lus ion are onerous, par t icu la r ly at the retai l level . However , some industr ies undoubted ly do d isp lay B. K l e i n and K . M u r p h y , "Ver t ica l Restraints as Cont rac t E n f o r c e m e n t Mechanisms", 31 J . L . & E c o n . 265 (1988). See Overstreet , supra note 73 at 81-82 and Ors te in , supra note 81. 63 the character ist ics necessary to sat isfy such r e q u i r e m e n t s 1 0 6 and it is fo r this reason that, at least f r o m an economic standpoint , there w o u l d seem to be some need fo r proscr ipt ive rules regard ing R P M . T h e r e is also no doubt that many suppl iers do institute R P M as a means to give their d istr ibutors more p r ic ing power, increase their margins and thereby induce them to p e r f o r m more in the way of services, and that a number of d istr ibutors w i l l attempt to take a free r ide in this s i tuat ion. H o w e v e r , w i th al l due respect to Posner and other members of the C h i c a g o School , it is submit ted that the ' f ree r ider ' is not as widespread as they would have us b e l i e v e , 1 0 7 nor is R P M the most e f f i c ien t means for accompl ish ing the service and promot ion or ientated goals of a suppl ier who may be concerned about a free r ider problem. In the words of Scherer , it is somewhat of a 'blunt instrument ' to ensure adequate d ist r ibutor service because it raises the price of a product to a u n i f o r m level fo r al l d is t r ibutors , large or smal l , specia l ized or general ized and is not necessari ly pro f i t m a x i m i z i n g . 1 0 8 F o r some distr ibutors, R P M may elevate the pr ice too little. A n example wou ld seem to be the A u s t r a l i a n petroleum indust ry , dominated as it is by 3-4 major competitors sel l ing a heav i ly adver t ised, largely homogenous product that is very m u c h essential to consumers. A case ar is ing out of the use of R P M in this industry is B.P. A u s t r a l i a L t d . v .T rade  Pract ices Commiss ion (1986) A . T . P . R . 701. F o r a discussion of this case, see P .H . C l a r k e , "Resale Pr ice Ma in tenance -Cur ren t Uncer ta in t ies in L a w and Pol icy" , (1987) 15 A . B . L . R . 59. T h i s v iew is supported by a 1984 F T C study w h i c h dealt wi th spec i f ic instances of R P M and conc luded that there was litt le ev idence that R P M was imposed to prevent f ree - r id ing on product spec i f ic [distr ibutor] services". See L a f f e r t y , L a n d e & K i r k w o o d , supra note 94 at 27. See also F . M . Scherer , Industr ia l Marke t Structure and E c o n o m i c Per fo rmance (2ed, 1980) at 593 n.103 where Scherer states that a l though the f ree- r ider prob lem may occur,"its empi r i ca l s ign i f i cance appears modest". 108 Scherer , supra note 74 at 701. 64 T h i s is no prob lem because section 37 of the A c t , l ike R P M provis ions in most ju r isd ic t ions , only relates to m i n i m u m resale prices. If a d is t r ibutor wants to increase the pr ice fu r ther , that is a l lowed. But fo r other d ist r ibutors , par t icu la r ly those sel l ing h igh vo lume products, R P M probably elevates the pr ice above the p r o f i t - m a x i m i z i n g level . " A n d when that is the case, it is no longer general ly true that an e levat ion of pr ice caused by [RPM] w h i c h leads through increased service prov is ion to an output increase necessari ly increases e f f i c i e n c y . " 1 0 9 A s a l ready shown, the special services theory ar t icu la ted by Te lser is also too l imi ted in terms of the types of products to w h i c h it appl ies, namely expensive, technica l ly complex and rap id ly changing rather than low pr ice , f requent ly purchased items. Fur ther , the need fo r R P M to induce post-sale services such as the p rov is ion of warrant ies and repair services and the adopt ion of returns pol icies is not a lways jus t i f ied . It is becoming more and more common for suppl iers to assume responsibi l i ty fo r these funct ions (or even to contract wi th th i rd parties to do so) as wel l as to o f f e r consumers the choice of tak ing a supplementary warranty at an add i t iona l charge. T h u s , in many cases, post-sale services can be separated f r o m the sale of the product itself (al though tied to it), benef i t t ing consumers through a greater range of p r ice /serv ice options on o f fe r . T h e economic explanat ion w h i c h would seem to most accurate ly account for the use of R P M is that advanced by M a r v e l and M c C a f f e r t y l i n k i n g qua l i ty concerns to the free r ider c o n c e p t . 1 1 0 F o r those suppl iers who have been able to 1 0 9 Id. no In two of the case studies dealt wi th in the 1984 F T C Repor t , the special services theory was f o u n d to be either inappropr ia te or an incomplete exp lanat ion , a more sat isfactory explanat ion of R P M in these cases being 65 create a b rand image fo r their products and have obta ined a cer ta in degree of market power w h i c h goes along wi th a product 's acqu i red dist inct iveness, R P M can then be used as a d i f f e ren t i a t ing device to promote that b rand image. H o w e v e r the use of R P M in this s i tuat ion only makes economic sense for cer ta in types of products and suppliers. It is submit ted that the theory is implaus ib le for non-l u x u r y items and for smal l , re lat ively u n k n o w n suppliers. What is of pr ime concern to distr ibutors when mak ing b u y i n g decisions is the ant ic ipated consumer demand fo r the product in question. While that demand may be i n f l u e n c e d by consumers' impressions of the product , it is un l i ke ly to be a f fec ted by the image of a suppl ier , unless that suppl ier is f a i r l y we l l -known. In other words, it should only be in rare cases that the exc lus iv i ty and status associated wi th a h igh p r iced product w i l l result in a reduct ion in demand i f one or more distr ibutors begin to sell below the normal ly h igh pr ice. It def ies basic economic theory to suggest that such a market ing phenomenon applies to al l but the most we l l - known l u x u r y products. Perhaps it is that some suppliers adopt ing R P M do so in the hope of enhanc ing their reputat ion and that of their products. Such an argument was raised in T r a d e Pract ices Commiss ion v. Lo is (Austra l ia ) Pty. L t d . l l l . where the reason given by the respondent for endeavour ing to main ta in the pr ice of its products was to preserve its image as a suppl ier of h igh qual i ty apparel . (1986) A . T . P . R . 40-645. F o r a discussion of this case see P .H . C l a r k e , "Resale Pr ice Ma in tenance -Cur ren t Uncer ta in t ies in L a w and Pract ice", (1987) 15 A . B . L . R . 59 at 63-64. See also Federa l T r a d e Commiss ion v. L e v i Strauss 433 U.S. 36 (1977). (c) D i s c o u n t i n g Those label led ' free r iders ' under the special services theory have normal ly been discounters because of their al leged fa i lu re to o f f e r the mix of pre- and post-sales services that a suppl ier decides is the most e f f i c ien t means of market ing its products. A number of c o m m e n t a t o r s 1 1 2 have however come to their defence, both on a theoret ical and an empi r ica l level , in terms of the contr ibut ions that discounters have made to consumer wel fare and compet i t ive markets. These contr ibut ions , it is argued, are su f f i c ien t to earn discounters special considerat ion 110 in anti trust law. (i) C o n t r i b u t i o n to Consumer Welfare T h e most obvious cont r ibut ion to consumer wel fare is said to be that of lower prices, thereby enabl ing consumers to buy more products fo r less m o n e y . 1 1 4 E v e n f r o m general observations this is undoubted ly true. These lower prices are ach ieved by the ab i l i ty of discounters to buy products in re lat ive ly large 112 113 See e.g. P i t o f s k y , supra note 97 and R. Steiner, "The Na ture of V e r t i c a l Restraints", 30 Ant i t rus t B u l l . 143 (1985). See H . G e r l a , "Discounters and the Ant i t rus t Laws: Faces Sometimes Shou ld M a k e Cases", 12 J . C o r p . L a w 1 (1986). 1 1 4 Irk at 3. Interviews wi th f i ve spokesmen fo r the d iscount in 1982 ind ica ted that the estimated pr ice d i f f e r e n t i a l between discounters a n d non-discounters was in the range of 10-15%. A survey conducted by the N a t i o n a l Mass Retai lers Institute the same year ind ica ted that approx imate ly 30% of its members' sales wou ld be a f fec ted i f R P M was legal ized. A p p l y i n g these f igures to the estimates of the overa l l size of the discount industry in the U.S. at that time suggested that $30-$90 b i l l i on of current d iscount sales might come under R P M i f it was legal ized, thus i m p l y i n g an aggregate consumer loss of $6-$ 18 b i l l i on . See "Foreword: Ant i t rus t and the Discounters ' Case Aga ins t Resale Pr ice Maintenance" , 14 Ant i t rus t L. & E c o n . Rev . 1 (No.3, 1982) at 4. 67 quant i t ies, thereby rece iv ing quant i ty discounts, plus their own d is t r ibut ion e f f i c i e n c y . It is this second element w h i c h is seen as most notable in account ing fo r the consumer pr ice gap between discounters and non-discounters . Consumer sensi t iv i ty to pr ice has a lways seen pr ice being used by discounters as their major compet i t ive weapon. But , over recent years, e f f i c ienc ies ar is ing f r o m innovat ions in management , in terna l iza t ion of wholesal ing funct ions , innovat ions in service concepts ( for example , replacement of sales personnel by self -service) and scale economies in general due to higher sales per store have led to reduct ions in operat ing costs w h i c h cou ld be passed on to c o n s u m e r s . 1 1 5 R P M is seen by discounters as a barr ier to i n n o v a t i o n , because the incent ive to develop more e f f i c i e n t means of getting products f r o m the suppl ier to the consumer is lost. A n y reduct ions in operat ing costs ach ieved by innovat ions can not be passed on to the consumer in the f o r m of lower prices nor can discounters secure for themselves the greater vo lume sought w h i c h might otherwise be ava i lab le i f they c o u l d use these lower prices as part of their market ing strategy. A n assured h igh marg in or a f i x e d number of units is seen to be of no real consolat ion. A n o t h e r important cont r ibut ion to consumer wel fare is said to be the greater choice of product mix and anc i l l i a ry services w h i c h is o f f e r e d , thereby enhanc ing consumer s o v e r e i g n t y . 1 1 6 In this regard the.consumer has a choice between pay ing a higher pr ice and tak ing advantage of a l l the anc i l l a ry services Steiner, supra note 112 at 153-55. G e r l a , supra note 113 at 5. A l l i e d to this is the ab i l i ty of consumers to assess the cost of anc i l l a ry services, and indeed the true cost of the product . D iscounters are thus also said to serve as a source of i n f o r m a t i o n on comparat ive price and value not only to their own customers but v i a their pr ice adver t is ing to other customers as wel l . See Steiner, supra note 112 at 183-87. 68 w h i c h may be o f f e r e d by a par t icu lar d istr ibutor or forego ing those services in cons idera t ion fo r a lower pr ice. In fact there is of ten l i tt le or no d i f f e r e n c e between the overa l l level of services o f f e r e d by a t rad i t iona l retai ler a n d a d iscounter a l though the assortment of these services is of ten d i f fe ren t . De fenders even c l a i m that discounters as a class s ign i f i can t ly ou tper fo rm non-discounters in terms of customer s e r v i c e . 1 1 7 Whether or not this is the case, consumers demand at least some level of service and therefore discounters are guaranteed to lose customers i f they do adhere to the free r ider model of ' reaping where they have not sown' . Professor Steiner, one of the strongest supporters of the discounters estimates that the free r ider scenario accounts for only about 15% of cases i n v o l v i n g ver t ica l restraints such as R P M . In his v iew, the adopt ion of R P M in the balance of cases is determined by the type of product and market share of the distr ibutors i n v o l v e d . 1 1 8 T h e thrust of Steiner's thesis is that a suppl ier can not general ly sell to both discounters and non-discounters in the same market and that a suppl ier 's sales and prof i ts w i l l f a l l i f a switch is made to discounters before they have at ta ined a size s u f f i c i e n t to assure the suppl ier of at least as much sales volume and prof i ts as the non-discounters wi th whom the suppl ier is current ly deal ing. A t that point , it pays the suppl ier to switch because the lower margins of the discounters and the lower consumer prices w i l l increase the suppl ier 's own sales and prof i ts at the same wholesale pr ice. T h i s however poses somewhat of a d i lemma: i f the suppl ier can not a f f o r d to sell to discounters unt i l they have attained a s u f f i c i e n t market share, Steiner, supra note 112 at 155 n.19; P i to fsky , supra note 112, at 1493 n.24. R. Steiner, "D is t r ibut ion Restra ints and the G r o w t h of D i s c o u n t i n g : T h e Importance of V e r t i c a l Compet i t ion" , 15 Ant i t rus t L . & E c o n . R e v . 73 (No. 3, 1984). how do they in fact reach that c r i t ica l level i f no-one is prepared to sell to them? Steiner o f fe rs no solut ion other than that it is important fo r pub l ic po l icy that the growth of new and e f f i c ien t forms of reta i l ing not be inh ib i ted and to achieve this discounters should not be denied the type of product they are most suited to sel l , namely the w e l l - k n o w n , low or m e d i u m pr iced product b rand that does not require a large amount of e x p l a n a t i o n . 1 1 9 Steiner's views on related matters are also interest ing. H e sees the f u n c t i o n of p r o v i d i n g i n f o r m a t i o n , whether it be product spec i f ic i n f o r m a t i o n a n d / o r the reputat ion of the product whose t rademark the consumer is going to respect, as c o n f e r r i n g market power on whoever per forms that f u n c t i o n . When a d is t r ibutor can p e r f o r m that f u n c t i o n , as in the case of a weak brand (that is, where there are a large number of smal l suppl iers whose products do not have a strong consumer f ranchise) , the retai ler can "substitute between d i f f e ren t [suppliers'] brands, p lay one [supplier] o f f against the other, make the [supplier] sell to h i m at marg ina l cost, and capture al l of the potent ial producer -p lus d ist r ibutor surplus fo r [ i tse l f ] ." 1 2 0 If, on the other h a n d , the b rand is strong (that is, where there are a smal l number of suppl iers whose products are we l l -known and c o m m a n d a large market share), then the suppl ier has the abi l i ty to make its d istr ibutors compete more aggressively to the point where the suppl ier can get its d istr ibutors to sell at close to fac tory cost and thereby capture the surplus for i t s e l f . 1 2 1 A s such , Steiner sees suppl iers and distr ibutors very much as competitors fo r that surplus in 1 1 9 Id. at 86 a n d 90-91. 1 2 0 Id. at 89. 121 Id. 70 contrast to the current w isdom that sees suppl iers and distr ibutors in a complementary re la t ionship , supposedly re ly ing on each other's e f f i c i e n c y . T o the party then that controls the f u n c t i o n of p r o v i d i n g product -spec i f i c i n f o r m a t i o n a n d the qua l i ty ce r t i f i ca t ion w h i c h consumers rely on goes the market power and monopoly prof i ts (if a n y ) . 1 2 2 It is only in situations where a manufac tu re r has some f o r m of market power that Steiner believes it is necessary to declare R P M i l l e g a l . 1 2 3 T h u s he sees it as unproduct ive to br ing R P M cases against suppl iers in f ragmented industr ies where such suppl iers have no market power, whi le in the case of a smal l innovat ive f i r m wi th a new product , he views R P M as unobject ionable and possibly even p r o - c o m p e t i t i v e . 1 2 4 F r o m an economic standpoint , Steiner's views seem eminent ly sensible. T h e r e seems l itt le point in an enforcement agency, l ike the C o m m i s s i o n , b r ing ing an act ion against a smal l suppl ier who, because a l itt le pr ice cut t ing has developed in its l ine of products , has i n v o k e d R P M . What wou ld occur i f the pr ice cut t ing cont inued wou ld be that other distr ibutors wou ld drop this l ine , get another and sell it at the previous marg in or more. N o t h i n g wou ld be accompl ished except to 122 Steiner, supra note 112 art 159-60. Irrespective of who gets the market power, Steiner's thesis brings out a fur ther weakness in the special services theory in assuming that it is always e f f i c ien t fo r services to be p r o v i d e d by a d is t r ibutor , even in the case of a new product . T h e f u n c t i o n of p r o v i d i n g product -spec i f i c i n f o r m a t i o n and indeed reputat ion is increas ing ly f a l l i n g on the shoulders of suppliers. T h i s is so it wou ld seem because the scale economies of mass-communicat ion make it more e f f i c ien t fo r a suppl ier rather than a d istr ibutor to do so. So it is also the case that suppl iers are increas ingly p r o v i d i n g the back -up service that goes a long w i th any warranty . 1 2 3 Id. at 196-97. 124 Id. 71 restrict one suppl ier ; consumers would not have gained in any way since there wou ld be no change in aggregate output or prices. T h e r e also seems little point in the C o m m i s s i o n br ing ing act ion against a smal l f i r m wi th a new a n d innovat ive product . A d ist r ibutor w h i c h has invested a great deal of t ime, e f fo r t and money into establ ishing a product deserves some protect ion f r o m what Steiner terms the "missionary f ree-r ider" (that is, d istr ibutors who begin h a n d l i n g a product k n o w i n g that is marketable , a n d who are able to sell it at a lower pr ice because they have not had to bear the expense of promot iona l work) . A t the same t ime, the amount of protect ion need only be fo r a short per iod of t ime s u f f i c i e n t fo r consumers to become aware of the product a n d fo r the d is t r ibutor to recoup its costs plus a l itt le more as some reward fo r its ef for ts . i i) C o n t r i b u t i o n to Compet i t i ve Markets T h e cont r ibu t ion to compet i t ive markets arises through what is termed "intertype compet i t ion", d e f i n e d by Professor Pa lamounta in as "the compet i t ion between d i f f e r e n t types of d i s t r i b u t i o n " . 1 2 5 T h e r i v a l r y between distr ibutors is said to result not only in pr ice compet i t ion per se, but the development of more innova t ive a n d e f f i c ien t modes of d i s t r i b u t i o n . 1 2 6 A s a l ready noted, this has the e f fect of reduc ing operat ing costs w h i c h can then be passed on to consumers in the f o r m of lower prices. 125 126 J . P a l a m o u n t a i n , T h e Pol i t ics of D is t r ibu t ion (1955) at 38. G e r l a . supra note 113 at 6. 7 2 Professor G e r l a has i d e n t i f i e d a number of d i f f e ren t ways in w h i c h discounters have been able to promote in te rbrand compet i t ion , namely by f o r c i n g compet ing distr ibutors to press suppliers for pr ice concessions, by f o r c i n g retai l outlets to create pr ivate brands and by p r o v i d i n g an outlet fo r many l o w - p r i c e d , u n b r a n d e d products and products wi th less-known brand n a m e s . 1 2 7 T h e many examples p r o v i d e d by G e r l a and Steiner of the var ied product categories in w h i c h inter type compet i t ion has p layed a c ruc ia l role in reduc ing margins and prices prov ide undeniab le ev idence that the discount industry has had a bene f i c ia l e f fect on in te rbrand compet i t ion in spite of the C h i c a g o School 's re luctance to accept this f a c t . 1 2 8 T h i s increased compet i t ion f r o m discounters is obv ious ly not a lways welcomed by competi tors especial ly where their own i n e f f i c i e n c y does not al low them to match the discounters' lower margins and prices. T o counter the potent ial loss of sales and drop in prof i ts , recourse is often made to a var ie ty of tactics designed to br ing the discounters back into l ine in terms of pr ice or even to have them completely cut o f f f r o m the source of supply . T h e imposi t ion of m i n i m u m resale prices by a suppl ier and the w i t h h o l d i n g of supply where i n d u c e d by competi tors of the discounters not only risks r u n n i n g a f o u l of compet i t ion laws, as a l ready noted, but stif les and may even remove completely the ab i l i ty of discounters to engage in pr ice compet i t ion as wel l as p r o v i d i n g a d is incent ive to the development of new, innovat ive and e f f i c ien t modes of d is t r ibu t ion . Id. at 6-7. See also text a c c o m p a n y i n g note 137. See e.g. W. Baxter , "Ver t ica l Restraints and Resale Pr ice Main tenance: A R u l e of Reason A p p r o a c h " , 14 Ant i t rus t L . & E c o n . R e v . 13 (No. 4, 1982) at 21; Posner, supra note 88 at 12 and F. Easterbrook, "Ver t ica l Ar rangements and the R u l e of Reason", 53 Ant i t rust L . J . 135 (1984) at 156-57. 73 T h e ef fect on pr ice compet i t ion is l i ke ly to be par t icu la r ly severe where R P M is imposed by a suppl ier w i th a s ign i f icant degree of market power because it is sel l ing a h igh ly d i f f e ren t ia ted branded p r o d u c t . 1 2 9 If a product has a strong b rand this, by i m p l i c a t i o n , means that the degree of in te rbrand compet i t ion fo r that product is l i ke ly to be lower than usual . T h e existence of other brands is said to prov ide neither an al ternat ive source of supply fo r discounters nor an e f fec t ive check on prices charged by a suppl ier in situations where R P M is most l ike ly to be a d o p t e d . 1 3 0 Products wi th strong actual or potent ial b rand ident i t ies are said to be exact ly the products that modern discounters must carry in order to thr ive and prov ide compet i t ion at both suppl ier and distr ibutor l e v e l s . 1 3 1 It must be borne in m i n d when assessing the c la ims of discounters and their adherents that the cont inued proscr ip t ion of R P M is very m u c h in their self-interest. However , f r o m an economic standpoint , the contr ibut ions to consumer wel fare and compet i t ive markets b r ie f l y rev iewed above are unden iab le and therefore this must be borne in m i n d in d e c i d i n g upon the appropr ia te treatment of ver t ica l pr ice restraints. It is important that new and e f f i c i e n t re ta i l ing innovat ions not be d iscouraged by m a k i n g it d i f f i c u l t fo r discounters to obta in lead ing brands and resel l ing them at prices w h i c h ref lect their greater e f f i c i e n c y . In this regard , the focus of the Commission 's attention should be on keeping barr iers to entry low so as to fac i l i ta te new d is t r ibut ion techniques. H a v i n g regard also to the legit imate interests of suppl iers, especial ly where they are smal l , P i t o f s k y , supra note 112 at 1492 n.22. G e r l a , supra note 113 at 18. Id. at 18-19. 129 130 suggests that the Commission should be more concerned with larger suppliers with strong brands. (d) Pricing A number of empirical studies have been undertaken as to the effect of RPM on retail prices but their conclusions are the subject of some debate. The most instructive are those conducted by the Antitrust Division of the U.S. Department of Justice which was able to compare prices before, during and after the "fair trade" years as well as between states that did or did not adopt the laws. A study conducted by the Department in 1956 in which the prices of 119 fair traded items were compared revealed that the prices of these items in the eight cities surveyed exceeded non-fair trade prices by an average of 19%.132 This finding accorded with the results of other independent studies carried out around this time, although these studies showed that the overall price range within which price-maintained items were sold tended to narrow. 1 3 3 See Fair Trade: Hearings on H.R. 1253 before the House Committee on  Interstate and Foreign Commerce. 86th Cong., 1st Sess. 506-7 (1959) (Testimony of Robet Bicks, First Assistant of the Antitrust Division of the Department of Justice). Halverson, supra note 89 at 70 referring to Frankel, "The Effects of Fair Trade: Fact and Fiction in the Statistical Findings", 18 J. Bus. 182 (1955) at 187. 75 A 1970 study by the Department of 78 different consumer products showed that in non-fair trade states, consumers could purchase more than half the products at lower prices than in non-fair trade states.134 This study noted:135 The almost universal pattern developed in this study was higher sales per store in cities or states without resale price maintenance laws, a lower figure for stores in jurisdictions without the non-signer clause in their 'fair trade' acts, and even lower sales figures for stores in resale price maintenance jurisdictions with a non-signer clause. The most recent detailed survey of the empirical evidence regarding RPM in the United States concluded that RPM in most cases increased the prices of products sold, although this was not always the case.136 Those using these studies to support a strict treatment of RPM have also been able to point to specific examples where consumer prices dropped as a result of suppliers being forced to give up RPM (as well as those suppliers being better off than before in terms of sales and profits). The most recent and well-known case is that concerning Levi Strauss in the sale of its very strong brand of apparel. In keeping with the RPM tradition in the industry, Levi Strauss maintained the traditionally high gross margin of close to 50% right through the 1970's jean craze until intervention by the U.S. Federal Trade Commission. After it abandoned ABA Monograph No. 2, supra note 10 at 79 n.327. Fair Trade Laws: Hearings on S.408 before the Subcommittee on Antitrust  and Monopoly of the Senate Judiciary Committee. 94th Cong., 1st Sess. (1975) at 176. The reference to a "non-signer clause" is to those states which required all distributors to adhere to minimum resale prices as long as one of them signed a contract with a supplier to this effect. Overstreet, supra note 73 at 160. 134 135 RPM, its sales increased substantially (as did its profits and share price), it was able to maintain its distribution with lower prices and consumer prices came down materially. The reduced retail gross margin and consumer price of the preeminent Levi Strauss brand also had the effect of forcing down the margins and prices of all other brands so that they could remain viable competitors. Those calling into question the findings of the Department of Justice point to the fact that the pressures of competition rendered the fair trade laws relatively ineffective even before they were repealed in 1975, therefore making comparisons unhelpful. A number of states in fact never passed fair trade laws, courts in a number of other states struck down their statutes as unconstitutional or otherwise unenforceable and out of the 21 states that did at one time authorize fair trade within their jurisdiction, only five had non-signer provisions.138 Thus, distributors in a number of states were able to ignore a supplier's stipulated minimum resale prices, while in others suppliers chose not to enforce compliance because of the costs of enforcement and the fear of losing large distributors as customers. When a significant number of sales of certain products began being made at prices below the fair trade minimum, the entire RPM system for that product tended to collapse. Suppliers who did try to enforce minimum prices found themselves losing sales and thus were forced to abandon the practice in order to maintain market share.1 3 9 For a detailed discussion of this and other cases, see Steiner, supra note 11 at 171-87. Scherer, supra note 107 at 593. Id. at 594. Of the studies conducted in other jurisdictions, particularly Canada, their general conclusions have been that the level of prices and retail margins when RPM is in place tends to be higher than it would be under competitive conditions. It has been noted in each study however that comparisons between competitive prices and maintained prices are difficult to make and that RPM affects the prices of different products in different ways.1 4 0 What the United States and Canadian experiences do suggest then is that RPM generally does tend to increase prices of selected products although this may be as much a result of the structural characteristic of the particular industry involved as well as other factors. This view is supported by the most recent survey of empirical evidence regarding RPM in the United States which found that RPM increased the prices of products sold with RPM in the period under review (namely 1965-1982) although this was not always the case.141 Whether or not the total proscription of RPM is warranted on this basis alone is a moot point, but the effect on prices is certainly also an important factor to be taken into account in deciding upon the appropriate treatment of vertical price restraints. See Interim Report on Resale Price Maintenance (Ottawa, Queens Printer, 1951) [The McQuarrie Report] at 68-69; L.A. Skeoch, Restrictive Trade  Practices in Canada (Toronto, McClelland & Stewart Ltd., 1966) at 160-67, and J.F. Pickering, Resale Price Maintenance in Practice (London, George Allen & Unwin Ltd. 1966) at 138.52. Overstreet, supra note 73 at 160. The FTC study also found that RPM was often useful to relatively small firms selling in structurally competitive markets, but such use was unlikely to be harmful to consumers; it determined that RPM occurred within all types of market structures, but, as noted above, was unlikely to facilitate collusion among manufacturers in the majority of these markets; and it concluded that the per se prohibition of RPM in the U.S. was "extremely difficult" to defend on the basis of economic logic. IcL at 81-82 and 176. (2) Legal and Policy Issues (a) Legislative Policy The adoption of the equivalent RPM provisions of the Australian Act in 1986 appears to have been made in the interests of uniformity without any regard to the extent of the practice in New Zealand or to the justification for a total prohibition. The RPM provisions in the 1974 Australian Act largely mirrored those first introduced in 1971 as an amendment to the Trade Practices Act 1965 which in turn were largely modelled on the United Kingdom Resale Prices Act 1964 (now 1976). A review old New Zealand, Australian and English texts1 4 2 reveals surprisingly little about the legislative policy behind the treatment of RPM in the 1958 and 1975 New Zealand Acts 1 4 3 or the Australian and United Kingdom legislation to which New Zealand would inevitably have had regard. What can be gleaned from these texts is that the prohibitions in the United Kingdom 1 4 4 followed a series of reports by the Monopolies and Mergers Commission which showed that RPM was operating against the public interest in See e.g. J. Collinge, Restrictive Trade Practices and Monopolies. Mergers,  and Takeovers in New Zealand 1st ed. and 2nd ed. (Wellington, Butterworths, 1969 and 1982) (NZ); J. Lever, The Law of Restrictive  Practices and Resale Price Maintenance (London, Sweet & Maxwell, 1964) (UK); and H. Schreiber, J.L. Taylor and B. Donald, Resale Price Maintenace  - A Guide to the Australian Law (Australia, Law Book Co. Ltd., 1972) (Australia). 143 144 Trade Practices Act 1958, section 19(2)(d) and Commerce Act 1975, section 28. RPM still remains permissible in respect of books (Re Net Book Agreement (1957) [1962] 1 WLR 1347) and medicaments (Re Medicaments Reference [1970] 1 WLR 1339). 79 several industries145, while in Australia the legislation appears to have been influenced by pressure from the Australian Council of Trade Unions to allow development of the discount industry and prohibit the withholding of supply.146 As noted earlier, the first country to enact specific legislation dealing with RPM was in fact Canada in 1951147 after a report of the MacQuarrie Committee to study combines legislation in that country had recommended that RPM be prohibited.148 The Committee was unable to accurately assess the extent of the practice in Canada at that time, but was of the view that "the practice ... is widespread, it covers whole classes of goods, and ... is ... of significant and growing proportions".149 The Committee concluded its report by saying:150 The Committee has studied resale price maintenance in the light of the two standards of judgement originally set up, namely, the desirability of a free economy and the need for economic efficiency. This study has led the Committee to the general conclusion that resale price maintenance, on the growing scale now practised, is not justified by either of these standards. It represents a real and undesirable restriction on competition by private agreement or "law" and its general tendency is to discourage economic efficiency. That is why, in our opinion, the prescription and the enforcement of 145 146 See R. Merkin and K. Williams, Competition Law Antitrust Policy in the  United Kingdom and the EEC (London, Sweet & Maxwell, 1984) at 228. See Dunlop and Heydon, supra note 1 at 9. 1 4 7 Combines Investigation Act S.C. 1951 (2nd Sess.) c. 30sl. 1 4 8 Committee to Study Combines Legislation, and Interim Report on Resale  Price Maintenance [The MacQuarrie Report] (Ottawa, Queens Printer, 1952). 1 4 9 Id, at 3. 1 5 0 Id, at 71 of the MacQuarrie Report. 80 m i n i m u m resale prices must be v iewed as mani festat ions of a restr ict ive or monopol ist ic pract ice w h i c h does not promote general wel fare. It is submit ted that this same po l icy pervades the current R P M provis ions in the A u s t r a l i a n and N e w Z e a l a n d A c t s , both Ac ts based as they are on promot ing compet i t ion through enhanced economic e f f i c i e n c y for the benef i t of the pub l ic at large. T h i s v iew is borne out by the comments of fo rmer A u s t r a l i a n A t t o r n e y G e n e r a l N . H . Bower who gave as reasons fo r bann ing R P M in A u s t r a l i a "that the pract ice tends to remove incent ive to sell goods cheaply and that, in general , the pract ice works against the objectives of e f f i c i e n c y w h i c h are so important i f our e f for ts to resist present in f l a t ionary pressures are to s u c c e e d . " 1 5 1 T h e need to control i n f l a t ion as the basis for the bann ing of R P M in C a n a d a also ref lects the op in ion of two C a n a d i a n commentators. T h e y s ta te : 1 5 2 In our v iew it is incorrect to ascribe the in t roduct ion of a pr ice maintenance in 1951 to a desire of Par l iament to use compet i t ion pol icy to protect the interests of smal l business. T h e proximate cause of R P M was the h igh ly regarded M a c Q u a r r i e Commit tee Repor t in 1951 and the h igh rate of i n f l a t i o n being exper ienced at the time. N e w Z e a l a n d also was exper ienc ing in f l a t ionary pressures at the t ime of enactment of the 1975 legislat ion, as indeed was the rest of the w o r l d , but it is doubted that this was in fact the pr ime mot ivat ing factor . R a t h e r , as is of ten the Quoted in C . T a p e r e l l , R. Vermeesch and D. H a r l a n d T r a d e Pract ices and  Consumer Protect ion (Sydney, Butterworths, 1974) at 103. 152 P. G o r e c k i and W. Stanbury , T h e Object ives of C a n a d i a n Compet i t ion Po l icy  1888-1983 (Montrea l , T h e Institute for Research on P u b l i c P o l i c y , 1984) at 127. case, N e w Z e a l a n d had lagged beh ind its C o m m o n w e a l t h counterparts in enact ing spec i f i c provis ions deal ing wi th R P M and it is l ike ly that it was the desire for consistent treatment of R P M as wel l as the general bel ief at that t ime that R P M had the ef fect of suppressing pr ice compet i t ion in the market to the detr iment of consumers that prompted some act ion by Par l iament . C o n c e r n fo r the e l im ina t ion of pr ice compet i t ion such that the consumers may lose the oppor tun i ty to benef i t f r o m the increased e f f i c i e n c y or other compet i t ive advantage of a par t icu lar d is t r ibutor is consistent w i th comments made in the only A u s t r a l i a n case so fa r to 1 ro consider R P M in l ight of the overa l l po l icy of the A c t where it was said: It is c lear ly the intent ion of Par l iament to lay d o w n condi t ions for the conduct of corporate trade and commerce w h i c h w i l l ensure that traders operate in compet i t ive condi t ions and that the publ ic has the benefi ts w h i c h f low there f r o m . So fa r as resale pr ice maintenance is concerned the object of the A c t is to create condi t ions in w h i c h the pub l ic w i l l benef i t f r o m traders compet ing wi th each other in respect of prices unfet tered by pr ice restraints imposed by suppl iers of goods upon retailers. Moves in the U n i t e d States towards a more permissive treatment of R P M appear , somewhat surpr is ing ly , to have gone largely unnot iced in N e w Z e a l a n d or A u s t r a l i a . A n y pol icy change in this d i rect ion by either the N e w Z e a l a n d or A u s t r a l i a n Par l iaments seems un l ike ly in the immediate future . In contrast, C a n a d a may well see a change in its legislat ion i f the recommendat ion by the M a c D o n a l d Commiss ion in 1985 to review that country 's T r a d e Pract ices Commiss ion v. St ih l C h a i n Saws (Aust.) Ptv. L t d . (1978) A T P R 40-091 at 17,895. 82 R P M provis ions is taken u p . 1 5 4 Such a review, it was suggested, might determine that R P M should be i l legal only when its detr imenta l ef fects on compet i t ion outweigh its benef i ts , or a l ternat ively R P M cou ld be made a matter fo r review by an admin is t ra t ive t r ibuna l such as the R T P C as is now the case wi th exclusive dea l ing , t ied sel l ing and market r e s t r i c t i o n . 1 5 5 (b) Compara t ive Treatment of Hor i zon ta l Pr ice  Restra ints Po l icy statements concern ing hor izonta l pr ice restraints are, at least in A u s t r a l i a a n d New Z e a l a n d , also conspicuous by their absence. T h e r e is l i tt le doubt in any ju r isd ic t ion however that pr ice f i x i n g by competi tors is f a r f r o m benign. A s far back as 1927, Stone J. in the lead ing decis ion of U n i t e d States v. T r e n t o n Potteries C o . s a i d : 1 5 6 T h e a i m and result of every p r i c e - f i x i n g agreement, i f e f fec t ive , is the e l iminat ion of one f o r m of compet i t ion . T h e power to f i x pr ices, whether reasonably exercised or not, involves power to control the market and to f i x a rb i t ra ry and unreasonable prices. T h e reasonable pr ice f i x e d today may through economic and business changes become the unreasonable price of tomorrow. O n c e establ ished, it may be main ta ined unchanged because of the absence of compet i t ion secured by the agreement fo r a pr ice reasonable when f i x e d . 154 155 156 R o y a l C o m m i s s i o n on the E c o n o m i c U n i o n and Deve lopment Prospects fo r C a n a d a , Repor t (Ottawa, Queens Pr in ter , 1985) at 224. Id. T h e Commiss ion 's recommendat ion was based on a deta i led study by Mathewson and Winter w h i c h contended that there are c i rcumstances in w h i c h R P M cou ld in fact prov ide s ign i f icant economic benef i ts . T h e study in fact recommended that R P M should be made legal except where it faci l i tates the establishment of a suppl ier or d is t r ibutor cartel . See F. Mathewson and R. Winter, Compet i t ion Po l icy and V e r t i c a l E x c h a n g e (Toronto , U n i v e r s i t y of Toronto . Press, 1985) at 37. 273 U.S. 392,397 (1927). 83 T h i s v iew was f o r c e f u l l y endorsed in 1940 by Douglas J . in U n i t e d States v. S o c o n v - V a c u u m O i l C o . Inc. where he s a i d : 1 5 7 A n y combina t ion w h i c h tampers wi th pr ice structures is engaged in an u n l a w f u l act iv i ty . E v e n though the members of the p r i c e - f i x i n g group were in no posi t ion to contro l the market , to the extent that they ra ised, lowered or stabi l ized prices, they wou ld be d i rect ly in te r fe r ing wi th the free p lay of market forces. With these views in m i n d , hor izonta l pr ice f i x i n g in the U n i t e d States has largely remained unchal lenged as one of the restraints w h i c h is the proper subject of per se i l legal i ty under section 1 of the Sherman A c t . 1 5 8 T h e pract ice in N e w Z e a l a n d was f i rst general ly caught by section 19(2) of the 1958 A c t and in the 1975 A c t , the pract ice was spec i f i ca l l y dealt w i th in section 27 w h i c h made it an o f fence fo r any person to be a party to an agreement or arrangement re lat ing to the prices at w h i c h or terms upon w h i c h goods should be sold. P rov is ion was made in section 29 fo r an agreement or arrangement to be approved , whi le there were also a l imi ted number of e x c e p t i o n s . 1 5 9 310 U.S. 150, 221 (1940). It should be noted however that a trend has developed in a number of recent decisions not to apply a per se rule to hor izonta l pr ice f i x i n g . See e.g. Broadcast M u s i c . Inc. v. C o l u m b i a Broadcast ing System Inc. 441 U.S. 1 (1979) and N C A A v. B o a r d of Regents of U n i v . of O k l a h o m a 468 U.S. 85 (1984). F o r a discussion of these and other recent decisions see F. Sp inne l la Jr. , "Categorisat ions and Presumptions in H o r i z o n t a l An t i t rus t Cases", 22 N . E . L . R . 295 (1987). 159 F o r a discussion of these provis ions, see C o l l i n g e , supra note 1 at 187-98. 84 Relevant provis ions in the present A c t again are largely model led on the equiva lent A u s t r a l i a n p r o v i s i o n s . 1 6 0 Section 30(1) of the 1986 A c t provides: [A] p rov is ion of a contract , arrangement or unders tand ing shal l be deemed for the purposes of [section 27] to have the purpose, or to have or to be l ike ly to have the e f fec t , o f substant ia l ly lessening compet i t ion in a market i f the prov is ion has the purpose, or has or is l i ke ly to have the e f fect of f i x i n g , cont ro l l ing , or m a i n t a i n i n g , or p r o v i d i n g fo r the f i x i n g , contro l l ing or ma in ta in ing of the pr ice of goods or services, or any d iscount , a l lowance, rebate, or credi t in re lat ion to goods or services. (Emphasis added.) T h e pract ica l e f fect of section 30 is that a l l hor izonta l pr ice f i x i n g arrangements are i l legal per se unless author ized under Part V of the A c t . 1 6 1 T h e present A c t also contains a l imi ted number of exemptions i n c l u d i n g joint venture p r i c i n g (section 31), recommended pr ice provis ions where there are not less than 50 parties to the contract , arrangement or understanding (section 32) and joint b u y i n g a n d promot ion arrangements (section 33 ) . 1 6 2 A deta i led discussion of hor izonta l pr ice restraints is wel l beyond the scope of this thesis. T h e br ie f review of section 30 above is in tended however to focus upon the comparat ive treatment of hor izonta l pr ice f i x i n g as the basis fo r assessing whether the treatment of hor izonta l and ver t ica l pr ice restraints is consistent g iven the empi r i ca l ev idence that R P M may in some instances fac i l i ta te col lus ion and Sections 45A(l)- (4) and (7)-(8). F o r a discussion of these prov is ions , see M i l l e r , supra note 43 at 65-69. F o r a discussion of the author izat ion prov is ions, see text a c c o m p a n y i n g Part III, notes 79-81 i n f r a . 162 It should be noted that these exemptions only relate to arrangements f a l l i n g w i th in section 30; such arrangements are st i l l subject to section 27. 85 more general ly that there w i l l also almost always be a contract , arrangement or unders tand ing between a suppl ier and distr ibutor where R P M is i n v o l v e d . A s Monsanto demonstrates, there w i l l be few cases of pure ly un i la tera l ac t ion , such that there is no "meeting of the minds". T h i s w i l l arise fo r example where a suppl ier listens to and acts upon a compla in t f r o m a d is t r ibutor , where a suppl ier urges a pr ice cut t ing distr ibutor to hold the l ine on pr ice , or where a suppl ier expla ins its p r i c i n g preference in repeated or enthusiast ic t e r m s . 1 6 3 O f immediate note is the prov is ion fo r author iza t ion of a pr ice f i x i n g agreement under section 30 in contrast to the absolute p roh ib i t ion of R P M under section 37. Why this is so appears largely unexp la ined , par t icu la r ly in l ight of the fact that section 88(2) of the A u s t r a l i a n A c t spec i f i ca l l y denies author iza t ion fo r arrangements f i x i n g , cont ro l l ing or ma in ta in ing the prices of goods (but not services), subject the equivalent exceptions ment ioned above in sections 31-33 of the N e w Z e a l a n d A c t . If the A u s t r a l i a n experience is any th ing to go by however , few, i f any , author izat ions are l ike ly to be g r a n t e d . 1 6 4 A l s o of note is that section 32, l ike section 39, al lows fo r the recommending of pr ices, a l though noth ing is said about the obl igat ion to comply . It wou ld seem that an unders tand ing that there be compl iance wi th recommended prices w i l l f a l l a f o u l of section 30 itself . Both sections 30 and 37 are comprehensive in their attempt to proscr ibe pr ice f i x i n g , whether it be hor izonta l or ver t ica l . T o this end , one may quest ion why section 37 should not also be subject to a compet i t ion test, l ike section 30, and See cases ci ted in W. A n d e r s e n , "The Ant i t rus t Consequences of Manufac turer -Suggested R e t a i l P r ices -The Case for Presumpt ive I l legality", 54 Wash. L . R e v . 763 (1979) at 777. See M i l l e r , supra note 43 at 66-69. indeed the rest of the trade pract ice provis ions in the A c t . In this regard , it is instruct ive to b r i e f l y refer to the leading A u s t r a l i a n decis ion of R a d i o 2 U E Sydney Ptv L t d . v. Stereo F . M . Pty. L t d . & A n o r . 1 6 5 concern ing the general app l ica t ion of the A u s t r a l i a n equivalent of section 30. In that case, L o c k h a r t J . in the F e d e r a l C o u r t T r i a l D i v i s i o n was cal led upon to consider the actions of two Sydney rad io stations w h i c h o f f e r e d equal adver t is ing time on both stations at combined rates. H i s H o n o u r stressed the importance of d is t ingu ish ing between arrangements w h i c h restrain pr ice compet i t ion and arrangements w h i c h have an inc identa l e f fect on pr ice . In his v iew, not every arrangement between competi tors w h i c h has some ef fect on pr ice is per se u n l a w f u l , nor were the pr ice-f i x i n g provis ions in t roduced to make arrangements u n l a w f u l w h i c h a f fec t pr ice by i m p r o v i n g compet i t ion. Such a view he saw as consistent wi th the approach adopted in the U n i t e d States' cases and he ci ted Socony in s u p p o r t . 1 6 6 H e then s a i d : 1 6 7 It is f u n d a m e n t a l to [the pr ice f i x i n g provisions] that the relevant conduct , in purpose or e f fect , substant ia l ly lessens c o m p e t i t i o n e r wou ld be l ike ly to do so. If compet i t ion is i m p r o v e d by an arrangement I cannot perceive how it cou ld be character ized as a price f i x i n g arrangement w i th in the ambit of those provis ions. While L o c k h a r t ' s approach , seemingly unwi t t ing ly , showed great s imi la r i ty to the trend deve lop ing in the U n i t e d States of d is t ingu ish ing between pr ice and non-pr ice restraints on the basis of mater ia l i ty of ef fect on pr ice so as to a v o i d 165 166 167 (1982) A . T . P . R . 40-318. T h e character iza t ion of conduct depending upon its ef fect on pr ice w i l l be discussed in more detai l in Part IIIC(2)(b). Id, at 43,920. 87 app l ica t ion of the per se rule, the cases upon w h i c h he rel ied scarcely gave h i m support fo r this approach. It was no surprise therefore that the case was the subject of some c r i t i c i s m . 1 6 8 When the case came up on a p p e a l , 1 6 9 the appel lant a l leging that the evidence disclosed a p r i c e - f i x i n g arrangement w i t h i n the meaning of section 45A of the A c t and that such arrangement automat ica l ly i n v o l v e d a breach of section 45 (the equivalent of section 27) of the A c t , the F u l l C o u r t un for tuna te ly f o u n d it unnecessary to consider this second al legat ion in d isposing of the case. T h e F u l l Cour t d i d say h o w e v e r : 1 7 0 In our v iew the word ' f i x i n g ' in s.45A takes colour f r o m its general context and f r o m the words - "control l ing or ma in ta in ing" - and not every determinat ion of a pr ice , f o l l o w i n g discussion between competi tors, w i l l amount to a pr ice ' f i x i n g ' . There must, we bel ieve, be an element of in tent ion or l i ke l ihood to a f fec t pr ice f i x i n g before pr ice " f ix ing" can be established. T h i s w i l l of ten be a matter of in fe rence , requ i r ing no direct ev idence for it to be establ ished. With respect, even this approach seems at var iance wi th the po l icy u n d e r l y i n g the section. T h e r e is no reference to "intention" in section 30; a p rov is ion need only have "the effect" of p r i c e - f i x i n g to come into play. Nevertheless, the approaches taken both by L o c k h a r t J . and the F u l l Cour t may indicate the fu ture approach of the A u s t r a l i a courts in this area a n d , i f so, it cer ta in ly calls into quest ion why hor izonta l p r i c e - f i x i n g , w h i c h has t rad i t iona l ly 1 6 8 See e.g. J . Jackson , "Price F i x i n g Agreements and Sect ion 45A(1) of the T r a d e Pract ices A c t 1974(Cth) \ (1983) 11 A . B . L . R . 310. 1 6 9 (198 3 ) 68 F . L . R . 70. 1 7 0 Id. at 72. been looked upon wi th more d i s f a v o u r than R P M , should be the subject of more permissive treatment. c) Cons ignment Sales A f u n d a m e n t a l issue to the very app l ica t ion of the R P M provis ions of the A c t is the meaning of the term "resale" in section 37. By the use of this w o r d , it is arguable that the section does not come into p lay in a s i tuat ion where an agency r e l a t i o n s h i p 1 7 1 can be said to exist such as where a suppl ier sells products on a consignment basis through distr ibutors. In legal terms, a sale invo lves a t ransfer of property and no such transfer takes place where one person is act ing as agent fo r another. Where a consignment system is being used, the transfer of property takes place between the suppl ier and the ul t imate consumer and therefore no resale is const i tuted as the consignee does not take title at any stage. F r o m this it fo l lows that "the spec i f ica t ion" to a d istr ibutor who is an agent "of the pr ice below w h i c h goods are not to be sold" wou ld not appear to be proh ib i ted . T h e argument is r e i n f o r c e d by the reference to "another person" in section 37(3) w h i c h impl ies that that person has its own legal personal i ty and wi l l sell goods on its own behal f rather than on the suppl ier 's behalf . A n agency re lat ionship between a suppl ier and "another person" wou ld seem to deny this separate legal personal i ty . In legal terms, "agency" is used to connote an author i ty or capaci ty res id ing in one person to create legal relations between another person in the posi t ion of a "pr inc ipa l" and th i rd parties. In the business wor ld however , its s ign i f i cance is by no means thus restr icted. See K e n n e d y v. De  T r a f f o r d [1897] A C 180,188 (per L o r d Hershel l ) . Whether or not an agency re lat ionship exists w i l l depend on the facts in each case. See e.g. Internat ional Harvester C o m p a n y of A u s t r a l i a v. Car r igans Haze ldene  Pastoral C o m p a n y (1958) 100 C . L . R . 644. See D o n a l d and H e y d o n , supra note 1 at 363. Such a legalist ic argument wou ld appear to defeat the economic purpose beh ind the p roh ib i t ion . It has however been used wi th this end in m i n d in a number of s ign i f i can t d is t r ibut ion arrangements. T h e most notable test of its use was in U n i t e d States v. Genera l E lec t r i c C o . 1 7 3 where the U n i t e d States Supreme C o u r t was cal led upon to consider a R P M scheme operated by G e n e r a l E l e c t r i c under w h i c h it reta ined title to its products and merely consigned them to agents f o r resale. In u p h o l d i n g the consignment, the C o u r t said that "genuine contacts of agency" d i d not violate section 1 of the Sherman A c t "because the owner of an art ic le , patented or otherwise" was not proh ib i ted f r o m " f i x ing the pr ice by w h i c h his agents transfer the title f r o m h i m to such c o n s u m e r " . 1 7 4 C r i t i c a l to this case was the f i n d i n g that there was no conspi racy or combinat ion . A n almost ident ica l consignment system came up fo r cons idera t ion in S impson v. U n i o n O i l C o . . 1 7 5 T h i s time however the Supreme C o u r t he ld that there had been a v io la t ion of section 1 of the Sherman A c t and sought to d is t inguish Genera l E l e c t r i c on the basis that there was no coerc ion in that case, un l i ke here. M o r e spec i f i ca l l y , the Cour t held that the consignment agreement was a sham by p lac ing most of the incidents of ownership upon the shoulders of the so-cal led 173 272 U.S. 476 (1926). 1 7 4 272 U.S. at 478. 175 377 U.S. 13 (1964). consignee and that there was in substance a sale for resale purposes. Speak ing fo r the major i ty , M r . Justice Douglas s a i d : 1 7 7 A s we have sa id , an owner of an art icle may send it to a dealer who may in turn undertake to sell it only at a pr ice determined by the owner. T h e r e is noth ing i l legal about that arrangement. When, however , a 'consignment ' dev ice is used to cover a vast gasoline d is t r ibut ion system, f i x i n g prices through many retai l outlets, the anti trust laws prevent ca l l ing the 'consignment ' an agency, fo r then the end result of U n i t e d  States v S o c o n v - V a c u u m O i l C o . ... wou ld be avo ided merely by clever man ipu la t ion of words, not by d i f fe rences in substance. T h e present, coerc ive 'consignment ' dev ice , i f successful against chal lenge under the anti trust laws, furn ishes a wooden f o r m u l a fo r admin is te r ing prices on a vast scale. T h e Supreme C o u r t in U n i t e d States v. A r n o l d . S c h w i n n & Co . . dec ided just three years after S impson, uphe ld a consignment p lan imposing terr i tor ia l and customer restr ict ions on otherwise independent distr ibutors. N o pr ice f i x i n g was i n v o l v e d in S c h w i n n . but the Cour t d i d indicate that pr ice maintenance in a bona f i d e consignment system might be u n l a w f u l . A s w i l l be discussed in Part IIIB, the d is t inc t ion between sale and consignment transactions made in S c h w i n n was T h e consignment agreement spec i f ied that whi le title to the consigned gasoline wou ld remain in the suppl ier and the suppl ier wou ld pay al l property taxes thereon, S impson, as d ist r ibutor , "must car ry personal l i ab i l i t y and property damage insurance ... and is responsible fo r a l l losses of the 'cons igned ' gasoline in his possession, save fo r spec i f i ed acts of God . " Id. at 15. 1 7 7 Id. at 21-22. 178 388 U.S. 365 (1967). 91 strongly c r i t i c i zed in S v l v a n i a 1 7 9 and the decis ion was ul t imately over turned. Where this leaves the law in the U n i t e d States is uncer ta in T h e law is cer ta in ly clearer in C a n a d a . T h e 1975 amendments extending the pr ice maintenance provis ions to situations beyond just resale mean that consignment sel l ing is now caught. Consignment sel l ing was also made a c i v i l l y reviewable pract ice as part of those amendments f o l l o w i n g a number of reports i n d i c a t i n g that it had been used in the past to avo id the pr ice maintenance and pr ice d isc r im ina t ion provis ions of the Combines Investigation A c t . 1 8 1 Sect ion 48 of the C a n a d i a n Compet i t ion A c t of 1986 now empowers the Compet i t ion T r i b u n a l to order that a suppl ier cease the use of consignment sel l ing where the pract ice has been in t roduced by a suppl ier of a product who o r d i n a r i l y sells the product fo r resale for the purpose of either (a) contro l l ing the pr ice at w h i c h a dealer supplies the product or (b) d isc r imina t ing between consignees and other dealers. Whi le no remedia l orders have yet been made under this section, it is clear that a suppl ier 's motive w i l l be cr i t ica l in any case. If there is a sound business reason for 179 180 181 433 U.S. 36 (1977). See however Mes i row v. Pepper idge F a r m Inc. 703 F. 2d 339 (9th C i r . 1983) where a consignment agreement setting wholesale prices was held not to be i l legal . See e.g. Rest r ic t ive T r a d e Pract ices C o m m i s s i o n , Repor t on an Inqui ry into  the D i s t r i b u t i o n and Sale of A u t o m o b i l e O i l . Greases. A n t i f r e e z e . A d d i t i v e s .  T i res . Batteries. Accessories and Rela ted Products (1962) and Rest r ic t ive T r a d e Pract ices C o m m i s s i o n , Repor t re lat ing to the D i s t r i b u t i o n and Sale of  Gaso l ine in the C i t y of Winnipeg and Elsewhere in the P r o v i n c e of  M a n i t o b a (1966). 92 engaging in the pract ice rather than an ant icompet i t ive purpose, then the section is u n l i k e l y to have appl ica t ion . With no case on point in Aust ra las ia , one is f o r c e d to conc lude that, on a strict interpretat ion of section 37, R P M in a bona f i d e consignment arrangement wou ld appear to be l a w f u l a l though, i f the A m e r i c a n experience is to be re l ied on , the per se p roh ib i t ion against R P M cannot be avo ided by clever dra f tsmanship . T h e C o m m i s s i o n and the courts can be assumed to be p r i m a r i l y concerned wi th substance rather than f o r m , and therefore the mere use of the terms 'consignee' or 'agent' w i l l not necessari ly be d e f i n i t i v e . 1 8 3 Where a d is t r ibutor is c lear ly independent such that it acts on its own behal f rather than on behal f o f its suppl ier and takes title to and bears the risk of loss on inventory , then a bona f i d e consignment arrangement w i l l obv iously be held not to exist. Factors po in t ing towards the existence of a bona f ide consignment arrangement on the other h a n d wi l l be i f t itle and r isk in goods remains wi th the suppl ier , a d is t r ibutor has a r ight to re turn unsold goods or a suppl ier has a r ight to demand their re turn and i f payment is only due upon actual sale of the goods rather than w i t h i n some spec i f i ed time. E v e n when a bona f ide consignment arrangement is in use, it is arguable that it may sti l l constitute an in f r ingement i f adopted as part of a del iberate p lan to control the pr ice at w h i c h goods are resold, especial ly i f some f o r m of inducement is invo lved . Section 37(3)(b) wou ld then come into p lay , and it is un l i ke ly that section 39 wou ld be ava i lab le as a defence. 182 183 K a i s e r , supra note 32 at 3.1.14. T P C v. Pve Industries Sales Ptv L t d . (1978) A . T . P . R . 40-088. 93 T h e possibi l i ty of an agency except ion to the R P M prov is ion , whi le i l log ica l when one considers the purpose beh ind those provis ions, wou ld seem un l i ke ly to constitute a ground fo r i n d u c i n g a suppl ier to establish a system of consignment sel l ing or to ver t ica l ly integrate. A large number of other factors w i l l inev i tab ly be taken into account in choosing the appropr iate f o r m of d is t r ibu t ion arrangement i n c l u d i n g the nature of the industry and the nature of the product . Whi le A m e r i c a n a n d C a n a d i a n experience in the past has shown there to be grounds f o r so do ing , no empi r ica l evidence appears ava i lab le to gauge its most recent use. T h e fact that no remedia l orders have been issued by the C a n a d i a n Compet i t ion T r i b u n a l under, section 48 or its predecessor suggests that those provis ions have been ef fect ive . There therefore seems great merit in amend ing section 37 a n d / o r in t roduc ing a simple prov is ion into the N e w Z e a l a n d A c t along the l ines of that in section 48 to cure what appears to be a long over looked and i l log ica l loophole. (d) M i n i m u m vs. M a x i m u m Resale Prices A s noted above, section 37 of the A c t proscribes only m i n i m u m resale prices and not m a x i m u m resale prices. With al l ver t ica l pr ice f i x i n g per se i l legal in the U n i t e d States, one may question why R P M should be treated any d i f f e r e n t l y in N e w Z e a l a n d dependent upon whether it involves the spec i f i ca t ion of m i n i m u m or m a x i m u m resale prices. T h e major i ty in A l b r e c h t v. H e r a l d C o . 1 8 4 o f f e r e d a number of just i f icat ions fo r adopt ing a rule of per se i l legal i ty fo r m a x i m u m pr ice f i x i n g and it is wor thwhi le to consider each in turn. F i rs t , it was said that it l imits the f r e e d o m 390 U.S. 145 (1968). of d istr ibutors to sell at the pr ice they consider most appropr iate . T h i s jus t i f i ca t ion real ly comes down to a question of the extent to w h i c h compet i t ion laws should preserve free and unfet tered compet i t ion and so proh ib i t any contractua l restr ict ion w h i c h inhib i ts a d is t r ibutor f r o m act ing in accordance wi th its own d iscret ion. T h e development of the concept of "workable a n d e f fec t ive compet i t ion" as the d e f i n i t i o n of "competit ion" under the A c t is recogni t ion that complete economic f reedom can not and never w i l l exist except in the most per fect ly compet i t ive market . A l l restrict ions invo lve some l im i ta t ion on f reedom of a c t i o n , 1 8 6 hence the requirement for any lessening of compet i t ion under section 27 of the A c t to be substantial . , T o determine i f a restr ict ion hinders compet i t ion , its ef fects must be measured against the p r i n c i p a l economic concerns of the A c t , namely the prevent ion of restraints to free compet i t ion in business and commerc ia l transactions w h i c h tend to restrict p roduct ion , raise prices or otherwise contro l the market to the detr iment of c o n s u m e r s . 1 8 7 Es tab l ish ing m a x i m u m resale prices does not necessari ly restrict p roduct ion , raise prices or otherwise contro l the market to the detr iment of consumers; such a pol icy wou ld in fact l i ke ly lower pr ices, thereby lead ing to an increase in output f r o m the increase in demand. T o this extent, the f i rs t jus t i f i ca t ion can largely be disposed of. Id. at 152-153 (per White J.) ["... schemes to f i x m a x i m u m prices, by subst i tut ing the perhaps erroneous judgement of a seller for the forces of the compet i t ive market , may severely in t rude upon the ab i l i ty of buyers to compete and surv ive in that market."]. See P. E l m a n , "Petr i f ied O p i n i o n s and Compet i t i ve Real i t ies", 66 C o l u m . L . R e v . 625 (1966). See N o r t h e r n P a c i f i c R a i l w a y v. U n i t e d States 356 U.S. at 4. 95 Second, it was said that a m a x i m u m pr ice may be f i x e d too low to al low a d is t r ibutor to p rov ide the amount of services necessary fo r the type of product being sold or w h i c h a consumer desires and is w i l l i ng to p a y . 1 8 8 T h i s jus t i f i ca t ion assumes, contrary to Posner's concept ion of the special services t h e o r y , 1 8 9 that a suppl ier is unable to determine the pr ice at w h i c h its d istr ibutors w i l l engage in an appropr ia te amount of non-pr ice compet i t ion and at w h i c h the suppl ier w i l l max imize its own sales; that is, i f the m a x i m u m pr ice is set too low, inadequate services w i l l be p r o v i d e d and the suppl ier 's sales w i l l not be m a x i m i z e d . What is being said in essence is that a d is t r ibutor should be enti t led to determine this opt imal pr ice itself. But a pro f i t m a x i m i z i n g pr ice fo r a d is t r ibutor w i l l not necessari ly be the same prof i t m a x i m i z i n g pr ice fo r a suppl ier . If a d is t r ibutor has market power, it may, because of product d i f f e r e n t i a t i o n , locat ion or other economic factors, be able to c o m m a n d supra compet i t ive prof i ts at the expense of a suppl ier . A n example might be a f ranch ised restaurant c h a i n where, because of the par t icu lar locat ion of one restaurant, the relevant f ranchisee is able to charge m u c h higher prices for meals than f ranchisees in other locations. T h e higher sales charged disrupt u n i f o r m i t y across the c h a i n and therefore may a f fec t sales and prof i ts overa l l . In this s i tuat ion, a m a x i m u m pr ice w i l l not only benef i t the suppl ier but consumers and other distr ibutors as wel l . T h i r d , it was said that m a x i m u m price f i x i n g may channel d is t r ibu t ion through a few large or spec i f i ca l ly advantaged distr ibutors who otherwise wou ld A l b r e c h t v. H e r a l d C o . 390 U.S. at 152-53. See Posner, supra note 85 at 291-92. 96 be subject to s ign i f icant non-pr ice compet i t ion. H o w e v e r this is a quest ion of fact depend ing as m u c h on other factors such as a suppl ier 's choice of d ist r ibutors , d is t r ibutor e f f i c i e n c y , p rov is ion of discounts and so o n . 1 9 1 A f o u r t h a n d f i n a l jus t i f ica t ion o f f e r e d was that the actual pr ice charged under a m a x i m u m resale pr ice scheme of ten operates as a de facto f i x e d p r i c e . 1 9 2 A s such , the scheme has al l the attr ibutes of a m i n i m u m resale pr ice f i x i n g scheme If this is the in tended e f fect , then in N e w Z e a l a n d both section 27 and section 37 wou ld apply . O b v i o u s l y i f m a x i m u m resale prices are above the compet i t ive level , d istr ibutors are free to sell below such prices and compet i t ion can not but be enhanced. T h e object ion to R P M is quite the opposite, namely that it keeps prices above the compet i t ive level and thereby precludes c o m p e t i t i o n . 1 9 3 T h e Supreme Cour t in A l b r e c h t v. H e r a l d C o . re l ied on K i e f e r Stewart v. Joseph E . Seagram & S o n . 1 9 4 w h i c h i n v o l v e d hor izonta l m a x i m u m pr ice f i x i n g , to jus t i fy app l ica t ion of a rule of per se i l legal i ty to ver t ica l m a x i m u m pr ice f i x i n g . It w i l l be recal led that one of the t rad i t ional just i f icat ions fo r p roscr ib ing 1 9 0 A l b r e c h t v. H e r a l d Co . 390 U.S. at 152-53. 1 9 1 A B A M o n o g r a p h N o . 2, supra note 10 at 93. 1 9 2 A l b r e c h t v. H e r a l d Co . 390 U.S. at 152-53. 193 194 F o r a discussion of two fur ther just i f icat ions see D. M a r k s and J . Jacobson, "Price F i x i n g : A n Overv iew" , 30 Ant i t rus t B u l l . 199 (1985) at 252 n. 183. 340 U.S. 211 (1951). In this case, the respondent agreed to sell its products only to those wholesalers who wou ld resell below st ipulated pr ice cei l ings. T h e C o u r t he ld that the st ipulated m a x i m u m resale prices inh ib i ted the wholesalers' r ights to select a f a i r pr ice for their products just as e f fec t ive ly as m i n i m u m resale prices. Ir l at 213. m i n i m u m resale prices is that it involves the mani festa t ion of a d is t r ibutor cartel whereby a suppl ier acts as an instrument of the distr ibutors in po l i c ing and e n f o r c i n g the cartel pr ice. In the case of a suppl ier adopt ing a m a x i m u m resale pr ice po l icy on the other h a n d , there is no logical reason why distr ibutors wou ld be mot ivated to col lect ive ly seek a m a x i m u m price. T h e y are un l i ke ly to be concerned about a competi tor ra is ing its pr ice, but only that their own prices are h igh enough to give them an adequate return on capi ta l . T h e benef i t o f a m a x i m u m resale pr ice po l icy wou ld seem to lie p r i m a r i l y wi th a suppl ier who wi l l set a pr ice w h i c h maximizes its own prices. A s H a r l a n J . noted in his dissent in A l b r e c h t . there is no single hor izonta l restraint on otherwise compet i t ive d istr ibutors but merely a series of dist inct ver t ica l restraints between a suppl ier and its d ist r ibutors , w i th no one distr ibutor economica l ly interested in the maintenance of a ver t ica l restraint wi th any other d i s t r i b u t o r . 1 9 5 It is not surpr is ing that the decis ion in A l b r e c h t has been the subject of extensive c r i t i c i s m 1 9 6 to the point where there is now v i r tua l u n a n i m i t y that a rule of per se i l legal i ty against m a x i m u m sale prices makes no economic sense. One commentator has gone so fa r as to s a y : 1 9 7 I know of no economist , respectable or otherwise, who has come up wi th a rat ionale fo r p roscr ib ing m a x i m u m pr ice f i x i n g in recent years. 390 U.S. at 159-60 n.4. See e.g. 32 P. A r e e d a and D. T u r n e r , Ant i t rus t L a w (1978) at 255 n.13, P i t o f s k y , supra note 97 at 1490 n.17; and Scherer , supra note 74 at 705-06. "Panel D iscuss ion on the E c o n o m i c s of V e r t i c a l Restraints", 52 Ant i t rus t L . J . 731 (1983) at 732 (per M . L . Popofsky) . 98 A number of lower courts have sought to c i rcumvent the app l ica t ion of A l b r e c h t 1 9 8 and it is at least arguable that its basis has been u n d e r m i n e d by S y l v a n i a . T h i s arises f r o m the fact that A l b r e c h t . w h i c h i n v o l v e d the assignment of exclusive terri tories to d istr ibutors, was based in part upon the p roh ib i t ion of exclusive terri tories in S c h w i n n . w h i c h p roh ib i t ion was itself expressly overru led in S y l v a n i a . 1 9 9 T h e current enforcement pol icy of the Depar tment of Justice and F e d e r a l T r a d e C o m m i s s i o n in the U n i t e d States also means that few, i f any , cases w i l l be brought cha l leng ing m a x i m u m resale pr ice schemes. In l ight of the forego ing , the present treatment of m a x i m u m resale prices under the more general provis ions of the A c t therefore seems jus t i f i ed . V e r t i c a l pr ice cei l ings should general ly be pro-compet i t ive as a suppl ier who uses them wi l l normal ly be t ry ing to lower prices to consumers a n d , when that is the case, the e f fect should be to increase price compet i t ion at the retai l level . T h i s was general ly recognized in the leading N e w Z e a l a n d decis ion on this point , T r u T o n e  L t d . et al . v. Fes t iva l Records R e t a i l M a r k e t i n g L t d . 2 0 0 T h e respondent in this case See e.g. Jack Walters & Sons C o r p . v. M o r t o n Bldgs. . Inc. 1984-2 T r a d e Cas. ( C C H ) 66,080 (7th C i r . 1984). In this case, Judge Posner argued that a suppl ier - imposed pr ice ce i l ing is in tended to l imi t the power that an exclusive terr i tory gives a d istr ibutor and should be l a w f u l i f the exclusive terr i tory arrangement itself meets a rule of reason test. Id. See also Posner, supra note 102 at 12 ["The logic of S y l v a n i a is that restr ict ions imposed on dealers by manufacturers promote in te rbrand compet i t ion and are therefore not per se i l legal , save perhaps i f the manufac ture r has a monopoly . T h a t logic demolishes Albrecht."] It should be noted however that A l b r e c h t was cited as author i ty in A r i z o n a v. M a r i c o p a C o u n t y M e d i c a l Society (457 U.S. 332 (1982)) so as to condemn as agreement between a group of doctors establ ishing m a x i m u m fee schedules fo r po l icy holders under certa in insurance plans. A l t h o u g h the facts disclosed hor izonta l pr ice f i x i n g , the ver t ica l per se rule was re l ied upon. 200 September 19th, 1988, Cour t of A p p e a l of New Z e a l a n d , C A 85/88. 99 sought to set m a x i m u m retai l prices fo r its records, cassettes and discs as a cond i t ion of supp ly ing them to retailers. It gave evidence that its ph i losophy was to keep its products at a compet i t ive level and general ly below that charged by its competi tors so as to max imize sales in the long term. (One may also assume that it w ished to ensure some measure of pr ice stabi l i ty by i tself adver t is ing the m a x i m u m pr ice nat iona l ly . These seem to be the obvious rationales for adopt ing the pol icy) . E v e n so, the f i x e d m a x i m u m resale pr ice gave the retailers a marg in of 38-43%, compar ing f a v o u r a b l y wi th the marg in of other distr ibutors of as low as 33 1/3%. In the H i g h C o u r t , R P M and m a x i m u m pr ice st ipulat ions were f o u n d to be quite d i f f e ren t in concept and e f fect , the Cour t c o n c l u d i n g that m a x i m u m pr ice st ipulat ions may or may not reduce compet i t ion in a market dependent on the c ircumstances. T h e Cour t of A p p e a l was not requi red to decide this issue, but c i ted a lengthy passage f r o m H a r l a n J.'s dissent in A l b r e c h t in support of the appel lant 's concession that m a x i m u m retai l p r i c i n g is not in i tself i l legal or . • 201 ant icompet i t ive . T h e C o u r t of A p p e a l was in no doubt on the facts that the respondent's m a x i m u m retai l p r i c i n g neither had nor was l ike ly to have the e f fect of substant ia l ly lessening compet i t ion in the relevant market under section 27 of the A c t . T h e C o u r t also rejected the appellant 's content ion that a separate market existed fo r each i n d i v i d u a l record , tape and disc and there was therefore no quest ion of dominance under section 3 6 . 2 0 2 201 Id. at 23. 202 Id. at 20-21 and 26. 100 Simi la r just i f icat ions to those presented by the major i ty in A l b r e c h t were either dismissed or f o u n d to be u n c o n v i n c i n g . In par t icu lar , the appel lants argued that the respondent's enforcement act ion resulted in v i r tua l pr ice u n i f o r m i t y in the retai l p r i c i n g of the respondent's products in contrast w i th a degree of pr ice var ia t ion fo r the products of other suppliers. T h e y d i d not however say how the m a x i m u m pr ice st ipulat ion threatened or a f fec ted their prof i ts and their ab i l i ty to compete nor why they needed a higher mark -up f r o m the respondent in regard to its products than fo r those of other suppliers. Indeed, the ev idence showed that several stores sti l l competed fo r pr ice on the respondent's a lbums and overa l l there was no evidence of any actual or l ike ly lessening of pr ice compet i t ion in the relevant m a r k e t . 2 0 3 T h e Cour t conc luded by s a y i n g : 2 0 4 [I]n a real sense [the respondents] pr ice ce i l ing is pro-compet i t ion in that it provides a check on retailers who through locat ion or otherwise have less compet i t ion - induced constraints over the prices they charge. T o put it another way, there is a real prospect that wi thout m a x i m u m p r i c i n g st ipulat ions retailers in this market w i l l not pass on [the respondent's] costs savings on to the pub l ic . Id. at 26. A s imi lar argument to that raised by the appel lants in T r u T o n e , namely that m a x i m u m prices prevent distr ibutors f r o m obta in ing the benef i t of h igher prices should the market so warrant , was noted in the Repor t to  the H o n . T h e Min is ter of T r a d e and Industry of the Inqui ry into the Terms  of Motor V e h i c l e F ranch ise Agreements (1985) in regard to the m a x i m u m prices spec i f ied by nat ional f ranch ise holders. T h e essence of the motor vehic le dealers' argument was that in a deregulated env i ronment , dealers should be able to charge higher prices i f they wish , par t icu la r ly in respect of makes in short supply . T h e C o m m i s s i o n , l ike the Cour t in T r u T o n e , was not requi red to comment on this issue, the dealers also presenting no evidence. T h e nat ional f ranchise holders obv iously had a legit imate interest in prevent ing their dealers f r o m tak ing f u l l advantage of any s i tuat ion of short supply on the basis that any pr ice increases wou ld cost them long- run goodwi l l and strategic posit ion. Id. at 26-27. T h i s is not to say that pr ice cei l ings are benign. T h e y may in fact be ant icompet i t ive in some situations but in few enough to make a per se p roh ib i t ion inappropr ia te . T h e advantage of the present treatment is that any substant ia l ant icompet i t ive effects can be d iscerned, weighed against any procompet i t ive ef fects and the pract ice struck down i f necessary. N o change therefore seems warranted at the present point in time. (e) R e c o m m e n d e d Resale Prices T h e inc lus ion of section 39 of the A c t a l lowing the recommend ing of resale prices by a suppl ier was undoubted ly i n f l u e n c e d by the Repor t of the U n i t e d K i n g d o m Mergers and Monopol ies Commiss ion on R e c o m m e n d e d Pr ices in 1969 . 2 0 5 T h e Repor t was prompted by evidence that recommended prices were being used to simulate resale pr ice maintenance and were in fact hav ing the desired e f f e c t . 2 0 6 T h e Monopol ies C o m m i s s i o n c o n f i r m e d that this was the case, but took time to consider the al leged advantages of recommended prices. It rejected the submission that such prices reduced adminis t ra t ive costs by assisting resellers to pr ice their goods, there being no reason why independent resellers cou ld not undertake this exercise themselves. T h e Commiss ion d i d however support to some extent the submission that recommended prices make adver t is ing more e f fec t ive , par t icu la r ly fo r new products , by the pub l ish ing of a "de facto" m a x i m u m p r i c e . 2 0 7 2 0 5 R e c o m m e n d e d Resale Prices (1968-69 H . C . 100 2 0 6 M e r k i n & Wi l l iams, supra note 145 at 234. 2 0 7 Id. at 235. 102 A s to the general e f fect of recommended prices on pr ice levels, the Commiss ion 's f i n d i n g s were inconclus ive to say the least. T h e C o m m i s s i o n f o u n d that in trades where the pract ice of recommended resale prices was prevalent , prices tended to be u n i f o r m , a l though they might be higher or lower than in trades where it was not prevalent. More important ly , it was also f o u n d that the number of cases in w h i c h prices w i l l be higher where a recommended pr ice is f o l l o w e d was l ike ly to be s ign i f icant par t icu lar ly where the recommendat ion of resale prices was used in con junct ion wi th practices such as restr ict ion of outlets in terms of terr i tory or product a n d / o r i f there was a monopoly in the supp ly ing industry . In other cases, where, fo r instance, a suppl ier was enter ing the indust ry , it was f o u n d that the ef fect of the pract ice might be to keep prices lower. D e p e n d i n g then on the trade concerned , the pract ice might be either bene f ic ia l or h a r m f u l to the pub l ic interest. H a v i n g reached this conc lus ion , the Monopol ies C o m m i s s i o n d i d not recommend that the pract ice should be banned in al l c i rcumstances but d i d recommend bann ing the recommending of resale prices in selected cases after invest igat ion. Ne i ther A u s t r a l i a nor New Z e a l a n d took up this second opt ion, requ i r ing instead, as a l ready noted, an expl ic i t statement that recommended resale prices are only recommended and that there is no obl igat ion to comply wi th any recommendat ion . C a n a d a s imi la r ly , as also a l ready noted, requires that a producer or suppl ier make it clear that a person is under no obl igat ion to accept a suggested resale pr ice and wi l l in no way su f fe r in its business relations i f it does not fo l low the suggestion. C o m p l i a n c e wi th the C a n a d i a n Compet i t ion A c t fur ther requires that suppl iers of a product , other than retailers, must indicate that the product can 103 be sold at a lower p r i c e . 2 0 8 Does the mandated use of recommended prices e f fec t ive ly legal ize R P M , by a l lowing suppl iers to do ind i rec t ly what the law forb ids them to do d i rec t ly , even wi th these strict requirements? It was shown in Part IIB that there is some risk in the spec i f ica t ion of a recommended price being seen as the spec i f ica t ion of a pr ice below w h i c h goods are not to be sold and therefore being caught by section 37. But suppl iers are of ten able to use subtler techniques such as pret icket ing , catalogues, pr ice lists, and promot ional l i terature to take advantage of the exempt ion. Pret icket ing and so on strongly suggest that a d is t r ibutor should sell an i tem at the set pr ice. A d v e r t i s i n g by a suppl ier a n n o u n c i n g the recommended resale pr ice of a product wi l l l ike ly make a d istr ibutor reluctant to charge a d i f f e ren t pr ice , otherwise the d istr ibutor may be requi red to create, develop and pay fo r its own adver t i sements . 2 0 9 A distr ibutor may well use a recommended resale pr ice for comparat ive adver t is ing purposes but this in itself runs the risk of Section 38(3) and (4). These provisions were brought in wi th the 1975 amendments, the si tuat ion before this t ime being that suggested prices were not at tacked p rov ided that noth ing was done to enforce them. It is notable that the M c Q u a r r i e Repor t , supra note 148 at 71, o r ig ina l ly recommended that it should be made an o f fence for a suppl ier "[t]o recommend or prescribe m i n i m u m resale prices fpr his products", a l though the Commit tee was concerned to ensure that the established pract ice of issuing pr ice lists not be in ter fer red with. A suppl ier may also enter into some f o r m of joint adver t is ing arrangement wi th a d is t r ibutor , cond i t ion ing its cont r ibut ion upon the d ist r ibutor agreeing not to advert ise a product at a pr ice less than recommended by the suppl ier . But even this sort of arrangement may be at r isk. See T r a d e  Pract ices Commiss ion v. Sharp Corpora t ion of A u s t r a l i a Ptv. L t d . (1975) 8 A . L . R . 1255 (Hear ing on December 11th, 1975, noted at p. 17 of 1975-76 A T P R Report ) where the T P C alleged that the subsid izat ion by Sharp of 50% of a reseller's adver t is ing costs was dependent on the reseller sel l ing at Sharp's recommend retai l prices. A f ine of $5,000 was imposed. C f . P D O .  Inc. v. N issan Motor C o r p . 577 F.2d 910 (1978). 104 i n f r i n g i n g the F a i r T r a d i n g A c t 1986 whereby an advert isement may be held to be mis lead ing and decept ive i f it compares a sel l ing pr ice wi th a higher ' recommended pr ice ' and leads consumers into the erroneous bel ief that the d i f f e r e n c e between the two in fact represents an actual saving. There may obv ious ly be a sav ing i f the ' recommended pr ice ' is the pr ice hab i tua l ly charged, but more of ten than not the usual pr ice charged is less than the recommended pr ice and closer to the adver t ised pr ice. T o this extent, the consumer is l ike ly to be misled or deceived. T h e use of recommended resale prices obviously has var ious advantages in terms of pr ice u n i f o r m i t y and stabi l i ty . It does however have al l the ha l lmarks of outr ight R P M by reduc ing pr ice compet i t ion, especial ly where a large number of a suppl ier 's d istr ibutors adhere to the recommended resale pr ice rather than engaging in their own pr ic ing . V e r y real arguments can therefore by made for the repeal of this exempt ion i f the present treatment of R P M is to be cont inued . (f) Wi thho ld ing of Suppl ies It w i l l be recal led f r o m the previous section that a suppl ier may be held to have engaged in the pract ice of R P M where in regard to, say, section 37(3)(d)(ii) of the A c t , it can be i n f e r r e d that a "substantial" or "operative" reason actuat ing the suppl ier in w i t h h o l d i n g goods f r o m a reseller is that (a) the reseller has sold or is l ike ly to sell the suppl ier 's goods at a pr ice less than spec i f i ed , or (b) the three fac tua l elements ment ioned in section 42 are proved and the suppl ier does not rebut the presumpt ion by p r o v i d i n g evidence to the contrary . See text a c c o m p a n y i n g notes 61-70 supra 105 F r o m this, the question arises as to the extent to w h i c h a suppl ier is free to adopt a market ing strategy that involves selecting only cer ta in d istr ibutors to market and sell its products. In other words, is a suppl ier obl iged to deal w i th 'a l l -comers' regardless of its market ing strategy. A supplier 's f r e e d o m to deal is countered by the compet ing claims of d istr ibutors (par t icu lar ly new and smal l distr ibutors) to be able to carry on business without inter ference f r o m the restr ict ive d is t r ibut ion practices of suppl iers and by the interests of consumers in more e f f i c i e n t d is t r ibut ion and lower prices. A suppl ier 's decis ion to restrict its channels of d is t r ibut ion may be fo r any one or more of the f o l l o w i n g reasons wh ich are total ly unconnected wi th R P M : (a) a suppl ier may, fo r example, decide to supply wholesalers on ly , and not retailers or indeed consumers; (b) a suppl ier may decide to deal only wi th , say, special ist c lo th ing stores to the exc lus ion of department or discount stores; (c) a g iven quant i ty may be too large to be suppl ied wi thout d is rupt ing a suppl ier 's p roduc t ion , storage or d is t r ibut ion , or conversely it may be so smal l as to be unpro f i tab le ; ^ (d) a d is t r ibutor may refuse to sell other products of the suppl ier ; (e) a d is t r ibutor may lack the technica l expertise to handle products requ i r ing complex service or insta l la t ion; 106 (f) a d istr ibutor may lack the f i n a n c i a l resources necessary to handle a product requ i r ing a large investment in terms of promot ion and d is t r ibut ion fac i l i t ies ; (g) the credi t status of a d istr ibutor may be suspect or u n k n o w n to the suppl ier , or there may be a history of u n p a i d or overdue accounts; (h) a suppl ier may wish to ensure that the market ing of its products attains a cer ta in standard and that the presentat ion of its products appeals to the market segment for w h i c h it is in tended; (i) the expense of t ransport ing products to a d is t r ibutor may be exorb i tant ly h igh or t ransportat ion may be just p la in ly unfeas ib le and imprac t ica l ; and (j) a suppl ier may not have the resources to ma in ta in contact wi th and prov ide ongoing technica l , market ing and sales assistance to a large number of d i s t r i b u t o r s . 2 1 1 A w i t h h o l d i n g of supply for market ing reasons such as these should not be caught by the A c t unless there are serious ant icompet i t ive c o n s e q u e n c e s . 2 1 2 See general ly A u s t r a l i a n T r a d e Pract ices C o m m i s s i o n , G u i d e l i n e on R e f u l s a l  to Supp ly . In format ion C i r c u l a r N o . 17 (30 June 1976). In general terms, the A c t does not prohib i t a re fusa l to deal per se nor does it place an obl igat ion upon a person to deal w i th anyone or everyone. If a suppl ier is in a dominant posit ion in a market and it refuses to supply a d is t r ibutor or potential d ist r ibutor , this may amount to the use of a dominant posi t ion fo r the purpose of restr ict ing the entry of or e l imina t ing a d ist r ibutor f r o m the market , or prevent ing or deterr ing compet i t ive 107 Invar iab ly however , a w i thho ld ing of supply is for reasons connected wi th R P M because pr ice is so of ten an element in a market ing strategy w h i c h calls for selective d is t r ibut ion . T h e problem lies in d is t ingu ish ing those situations in w h i c h the maintenance of resale prices is not the real reason for the w i t h h o l d i n g f r o m those in w h i c h it i s . 2 1 3 Examples of the former might be:-(a) a suppl ier may want its distr ibutors to undertake a cer ta in level of instore promot ion and adver t is ing in the market ing of its products and wi l l only supply those who are prepared to put in the necessary e f fo r t and i n c u r appropr iate costs. Those distr ibutors seeking to ' f ree- r ide ' on the market ing ef for ts of other, may cause the latter group to cur ta i l or even cease altogether their p romot ion and adver t is ing of the supplier 's products i f they feel they are bear ing an u n f a i r burden . T h e suppl ier 's sales w i l l inev i tab ly f a l l as a result. conduct in the market so as to contravene section 36. F u r t h e r a suppl ier who refuses to supply a d istr ibutor in order to induce the d is t r ibutor not to deal w i th a th i rd party may be said to have entered into or g iven e f fect to a p rov is ion in a contract , arrangement or understanding that substant ia l ly lessens compet i t ion in a market so as to contravene section 27. (In this s i tuat ion also, a suppl ier may be at r isk under section 36). A u s t r a l i a n author i ty gives some support for a re fusal to supply where there have been no pr ior deal ings, even i f there is no al ternat ive suppl ier (see M a c L e a n &  A n o r v. Shell C h e m i c a l (Austra l ia ) Ptv. L t d . (1984) A . T . P . R . 40-462 and Queens land Wire Industries Ptv. L t d . v. T h e Broken H i l l Propr ie tary  C o m p a n y L t d . & A n o r . [1988] A . T . P . R . 40,841. C a n a d i a n author i ty on the other hand places a special obl igat ion on those in a dominant posi t ion to supply (see Restr ic t ive T r a d e Pract ices C o m m i s s i o n , Repor t C o n c e r n i n g the  M a n u f a c t u r e . D is t r ibu t ion and Sale of A m m u n i t i o n in C a n a d a (Ottawa, Queens Pr in ter , 1959) and R. v. E lec t r i c R e d u c t i o n C o . of C a n a d a . (1970) 61 C .P .R . 235) Section 47 (to be renumbered section 75) of the C a n a d i a n A c t also al lows the R T P C to order one or more suppl iers to accept a customer w i th in a spec i f ied t ime on usual trade terms i f certa in condi t ions are met. T h e posi t ion is quite d i f f e ren t however once a d ist r ibutor has been appointed and supplies have been made ava i lab le , unless there are good commerc ia l reasons for the subsequent re fusal . See U n i t e d Brands  Cont inen ta l B .V . v. Commiss ion [1978] E . C . R . 207. T h e problem is largely ev ident iary wi th sur round ing facts of ten compl ica t ing the matter fo r example, per iod ic refusals to supply whi le accounts remain outstanding, errat ic supply in response to compla ints to authori t ies and del iberate late de l ivery . 108 (b) a suppl ier may want to prevent its products f r o m being 'specia l led ' or ' loss- leadered' either (i) to protect its smaller d istr ibutors f r o m excess pr ice compet i t ion or (ii) to a v o i d b r ing ing the reputat ion of its products into disrepute and thereby detr imenta l ly a f fec t ing goodwi l l and fu ture sales. If smaller d istr ibutors are d r i v e n out of the market or those who do adhere to spec i f i ed prices are unable or u n w i l l i n g to meet the discounted pr ice , the reduced number of distr ibutors or reduced promot ional e f for t may lead to a decrease in sales overal l . (c) a suppl ier may bel ieve, as empi r ica l evidence has shown in some cases, that the opt imal pr ice at w h i c h the sale of its products w i l l be most successful is not necessari ly the lowest pr ice. Cer ta in ly in regard to products a imed at the more a f f luen t segment of the market , h igher prices may make products more appeal ing as an ind ica t ion of qual i ty . If the products become the subject of pr ice cut t ing , their image may be tarn ished, certa in segments of the market may cease to buy them and those distr ibutors normal ly cater ing to this market segment w i l l reduce or even cease stocking the p r o d u c t s . 2 1 4 If R P M is an element of a supplier 's market ing strategy, then a w i t h h o l d i n g of supply in any of the above situations wi l l seemingly be condemned no matter how substantial any non-pr ice related reasons may be. T h i s prob lem arises because section 2(5)(b) only requires that the reason why a person engages in certa in conduct (which by vir tue of section 2(2)(a) See K . L i n d g r e n and L . E n t r e k i n , "Resale Pr ice Ma in tenance in the L i g h t of M a r k e t i n g Strategy Invo lv ing Selective D is t r ibut ion" , (1973) 1 A . B . L . R . 130. inc ludes "refusing to do any act") need be "a" substantial reason rather than "the" substant ial reason. T h e mot iva t iona l analysis w h i c h the present A c t requires the C o m m i s s i o n a n d the Cour ts to undertake is f raught wi th d i f f i c u l t i e s g iven that any business dec is ion involves mixed motives. T h e present analysis also renders the C o m m i s s i o n a n d the Cour ts unable to weigh up the ant icompet i t ive ef fects of any market ing strategy i n v o l v i n g R P M . A number of solutions may be proposed. (a) a suppl ier may be a l lowed complete f reedom to w i t h h o l d supplies f r o m any d ist r ibutor it c h o o s e s . 2 1 6 T h i s a l ternat ive is however unpalatable g iven the ant icompet i t ive effects w h i c h may result where the suppl ier possesses market 217 power; (b) the situations in w h i c h a suppl ier may legi t imately w i t h h o l d suppl iers as part of its market ing strategy may be l isted (for example , inadequate promot ion of a suppl ier 's products, d isproport ionate emphasis on a compet ing suppl ier 's brands, poor payment record , f raudu lent sales practices and so on). Such Sect ion 2(2)(c) goes on to prov ide that a refusal to do any act inc ludes "(i)[r]efraining (otherwise than inadvertent ly ) f r o m do ing that act; or (ii) [m]aking it k n o w n that that act wi l l not be done". T h e converse is to impose a duty on suppliers to deal wi th distr ibutors who meet some threshold of responsibi l i ty . T h i s may be appropr ia te when jus t i f ied by social and pol i t ica l ends but is whol ly inappropr ia te f r o m an economic standpoint in regard to this par t icu lar issue. Cf \ A n d e r s o n , supra , note 163 at 790. N o case has yet been heard under the present A c t dea l ing wi th a pure re fusa l to deal . 110 a list is however l ike ly to be extensive, and even then inadequate ly and c lumsi ly d rawn . (c) the situations in w h i c h a suppl ier may not legi t imately w i thho ld supplies may be l isted in more sophist icated and narrower terms than is at present the case. A s in (b), a suppl ier should be able to w i thho ld supplies f r o m a second person fo r reasons unconnected wi th R P M (for example, where the suppl ier legi t imately doubts the distr ibutor 's credit worthiness or decides that the d ist r ibutor may not prov ide adequate services). A g a i n , such a list is l i ke ly to be d i f f i c u l t to draw. (d) any pract ice, whether or not it involves an element of R P M , wou ld be subject to the general tests of the A c t , namely a "substantial lessening of compet i t ion" test in respect of any contract , arrangement or unders tand ing or a 'use of dominant posi t ion ' test in respect of uni la tera l act ion by a suppl ier possessing a su f f i c i en t degree of market power. T h e problem wi th this a l ternat ive is that a suppl ier 's actions are judged merely on the basis of their e f fect on compet i t ion and so a suppl ier may be compel led to deal wi th distr ibutors who do not f i t in wi th its market ing strategy yet prov ide a great deal of pr ice compet i t ion. It can be seen that none of the above solutions can achieve the perfect result but, w i t h i n the pol icy of the A c t , it is submit ted that i f a suppl ier has a predominate ly l a w f u l purpose for w i thho ld ing supplies f r o m one or more distr ibutors as part of its market ing strategy and such strategy does not have ant i -compet i t ive ef fects , then it should not be condemned as u n l a w f u l even though it contains an element of R P M . T o this extent, solut ion (d), or at least a m o d i f i e d f o r m thereof , wou ld seem to be most appropr ia te , necessitat ing the repeal of some, I l l i f not a l l , of the present R P M provisions. H o w this recommended treatment of the w i t h h o l d i n g of supplies should f i t in wi th the overal l treatment of R P M under the A c t w i l l be discussed in the conclus ion to this Part. (g) Loss -Leader ing T h e omission of a defence of loss- leadering in both the 1975 and the 1986 A c t s is notable when one compares the C a n a d i a n , A u s t r a l i a n and also the E n g l i s h legislat ion. O f a l l the just i f icat ions for re ta in ing R P M , it was the fear of loss leader sel l ing w h i c h was most commonly raised in arguments by suppl iers, and the factor w h i c h most accounted for the in i t ia l re luctance to legislate against R P M . 2 1 8 T h e concern of suppl iers was that loss leader ing tended to br ing the reputat ion of their products into disrepute and thereby detr imenta l ly a f fec ted the goodwi l l and fu ture sales of their products. A related concern of suppliers was that products f requent ly used as loss-leaders might cause some distr ibutors to cease promot ing or even to d iscont inue sel l ing the suppl iers ' brands because it was unpro f i tab le to do so. T h i s wou ld thereby leave suppliers wi th fewer outlets and a l ike ly drop in sales. Indeed, loss-leader tactics might even cause some distr ibutors to go out of business where the products in question const i tuted a major part of their business and they were able to surv ive at compet i t ive but not loss-leader prices. Loss leader sel l ing was the subject of a major i n q u i r y by the Restr ic t ive T r a d e Pract ices Commiss ion ("RTPC") in C a n a d a in 1955 . 2 1 9 T h e R T P C f o u n d that T h e need to prevent loss leader ing was accepted by the L l o y d - J a c o b Commit tee in the U n i t e d K i n g d o m in 1949 as su f f i c i en t jus t i f i ca t ion fo r p roh ib i t ing col lect ive R P M and not i n d i v i d u a l R P M . 219 Restr ic t ive T r a d e Practices C o m m i s s i o n , Repor t on an Inqui ry into Loss  L e a d e r Se l l ing . (Ottawa, Queen's Pr inter , 1955) at 261-66. 112 the term "loss-leader sell ing" may be appl ied to any level of p r i c i n g , extending f r o m a pr ice in any degree lower than a supplier 's suggested resale pr ice to a pr ice at or below net purchase cost. T h e evidence up to the t ime of the i n q u i r y ind ica ted to the R T P C that sales below net purchase cost were made in f requen t l y , and when such sel l ing was engaged i n , it was general ly fo r periods of short dura t ion by merchants of comparable standing. N o need was therefore seen to recommend legislat ive act ion to control or suppress the pract ice. Despite the 1955 Repor t , a legislat ive amendment was passed in C a n a d a in I 9 6 0 2 2 0 to prov ide fo r a defence to a refusal to deal w h i c h was based on a prospect ive customer's pract ice of loss- leadering. Section 3 of the Resale Prices A c t 1964 ( U K ) p r o v i d e d a s imi lar defence by way of an except ion to the general rule that goods may be wi thhe ld f r o m "dealers" who have cut or wou ld be l ike ly to cut the suppl ier 's resale p r i c e 2 2 1 and A u s t r a l i a fo l lowed suit in enact ing its R P M legislat ion in 1971. T h e po l icy of the A u s t r a l i a n A c t is to al low a suppl ier to protect i tself f r o m a reseller who engages in the sale of the suppl ier 's goods at a loss in order to attract custom or to promote the reseller's business in some way, resul t ing in the suppl ier 's goods ga in ing a reputat ion as in fe r io r goods and damaging the market S.C. 1960 c. 45, section 14 add ing section 34(5) to the Combines Invest igat ion A c t (now section 38(9) of the Compet i t ion Act ) . See L e v e r , supra note 142 at 95-96 and In R e Net Book Agreement (1957) [1962] 1 W L R 1347 where impract ica l i ty of prevent ing the use of goods as loss leaders without an e f fec t ive system of R P M was recognized in the case of books. 113 prospects of the s u p p l i e r . 2 2 2 A c c o r d i n g l y , as prev iously noted, a suppl ier can l a w f u l l y w i thho ld the supply of goods to a second person who, w i th in the preceding twelve months, has sold goods obtained f r o m the suppl ier at less than their cost fo r the purpose of at tract ing or otherwise promot ing business f r o m persons l i ke ly to purchase other g o o d s . 2 2 3 However , in tak ing advantage of that defence , the suppl ier cannot use as the reason fo r the w i t h h o l d i n g of supplies a genuine seasonal or clearance sale of goods that were not acqu i red fo r the purpose of being sold at that sale, or a sale that takes place wi th its c o n s e n t . 2 2 4 T h e except ion for loss-leadering has however proved to be of l i tt le pract ica l s ign i f i cance wi th only three cases hav ing been dec ided in A u s t r a l i a to date and only f o u r in C a n a d a . T h i s supports the v iew expressed by the R P T C in its 1955 Repor t where in it f o u n d little evidence of sales below cost. In this regard , a d is t inc t ion must be made between a sale below cost and a sale y ie ld ing no net p r o f i t . 2 2 5 Examples of the latter are fa r more prevalent. It is not u n c o m m o n for a 222 See D o n a l d & H e y d o n , supra note 1 at 381. 2 2 3 Sect ion 98(2). 224 225 Sect ion 98(3). See also C a n a d i a n Compet i t ion A c t , section 38(9) and text a c c o m p a n y i n g note 42 supra. Some d i f f i c u l t y has been exper ienced in d e f i n i n g the terms "cost" and "loss" in the context of the loss-leader provis ions. In T r a d e Pract ices Commiss ion  v. Or lane A u s t r a l i a Ptv. L t d . (1984) 51 A . L . R . 767, the A u s t r a l i a n F e d e r a l Cour t was of the op in ion that "cost" re fer red to "the cost of obta in ing or l a n d i n g the goods: that is, ' l anded ' or de l ivered cost or, as it is put, net acquis i t ion cost". In regard to the expression "loss", the Cour t saw the "simplest and most obvious meaning" as being "a sel l ing pr ice that is below the de l ivered cost to the seller ... any departure f r o m the acquis i t ion cost test is f raught with d i f f i c u l t i e s of appl icat ion". (Id. at 772-76). See also R v. H D Lee of C a n a d a L t d (1980) 57 C .P .R . (2d) 186. ["The term used in the statute is not ' leader' w h i c h is d e f i n e d in Webster as 'an art ic le o f f e r e d at an attract ive special low pr ice to stimulate business", but ' loss-leader' w h i c h 114 d is t r ibutor to sell a strongly branded product at or close to its cost pr ice in order to attract customers who, once in the store, w i l l buy other items on w h i c h substant ial prof i ts can be made. O f course, a d is t r ibutor w i l l p ro f i t f r o m such a market ing strategy only to the extent that consumers f i n d the low pr ice so attract ive that they w i l l patronize the distr ibutor 's store. It is conceivable that successive o f fe r ings of a product at very low prices may ul t imately a f fec t the value of the product in the consumer's eyes, but more of ten than not, the strategy is a imed at b u i l d i n g t r a f f i c in the product itself. A suppl ier , especial ly where a product is reasonably new to a market , may wel l support a d istr ibutor 's actions to push through large volumes of the product at low prices i f the product is l i ke ly to receive large exposure and result in higher long-term sales through customer awareness. T h e use of a product as a loss-leader in this s i tuat ion is obv ious ly very m u c h in the suppl ier 's interest. It must not be forgotten however that the risk of a reputat ion being lost depends on there being a reputat ion to be uphe ld in the f i rst place. T o this extent, many supplier 's concerns may well be overstated. If a suppl ier is concerned about possible loss-leader se l l ing, it can always adjust its wholesale pr ice upwards, thereby m a k i n g it less prof i tab le fo r a d is t r ibutor to engage in this practice. A l te rna t i ve ly , it can refuse to sell to d istr ibutors that are l ike ly to discount its product heav i ly , g iven of course that there has been no pr ior record of deal ing. T h i s presumes however that the d is t r ibutor is not in a posit ion of market power. It is of ten the case that a d is t r ibutor has su f f i c i en t clout to induce a suppl ier to supply it wi th a large vo lume of products at a low or even unreasonably low price fo r a special promot ion under threat of d iscont inu ing its purchases i f supply is not so made. T h e suppl ier must then decide whether or not to accede to the threat in order to c lear ly indicates a meaning of sel l ing at a loss or at least wi thout a prof i t . (Id. at 197)]. 115 keep the d ist r ibutor in question as a customer in the long term. If the suppl ier does accede, it then faces the risk of losing its other distr ibutors who may not be able to compete at the low pr ice , whi le the d istr ibutor in quest ion may i tself eventua l ly switch suppl iers leav ing the or ig ina l suppl ier in real d i f f i c u l t i e s . T h e problem in re fus ing to supply is whether or not the price sought by the d ist r ibutor is in fact below the supplier 's f u n d a m e n t a l acquis i t ion cost or real ly just ref lects a quant i ty d iscount . Because ' loss- leader ing' as such is except ional and sporadic in nature and because it is un l i ke ly that suppliers are in fact pre jud iced in the long- term by such a pract ice ( indeed, they are more l ike ly to benef i t ) , there seems no need to incorporate a defence into the A c t along the lines of that in A u s t r a l i a , C a n a d a or the U n i t e d K i n g d o m . (h) A d m i n i s t r a t i o n and E n f o r c e m e n t Re fe rence has been made at var ious times in the forego ing pages to the d i f f e ren t rules of analysis advocated by par t icu lar commentators depending upon the School to w h i c h they belong and the theories they espouse. In the m a i n , the choice of a par t icu lar rule comes down to the economic ef fects w h i c h these commentators bel ieve the pract ice has on compet i t ion a n d , impor tant ly for immediate purposes, the costs and e f f i c i e n c y of admin is t ra t ion and enforcement . A t one extreme is the rule of per se i l legal i ty adopted by the f o u r jur isd ic t ions under review and advocated by, most notably , Professors C o m a n o r and P i to fsky as wel l as by smal l d istr ibutors and not so smal l discounters. T h e former support the rule on the basis of a mixture of economic theory and social 116 and po l i t ica l v a l u e s , 2 2 6 whi le the latter have a more personal interest, seeing the end of per se treatment result ing in the loss of a s ign i f icant barga in ing tool in their re lat ionships wi th s u p p l i e r s . 2 2 7 T h e y base their argument on pr ice compet i t ion being the l i f eb lood of commerce. It w i l l be recal led f r o m the in t roduct ion that a per se rule of i l legal i ty deems a pract ice so typ ica l ly h a r m f u l to compet i t ion and so devo id of credib le benefi ts to be presumed u n l a w f u l without any proof of purpose or intent and without any i n q u i r y into the effects of the pract ice. T h e rule has a number of advantages f r o m an admin is t ra t ive and enforcement standpoint in that it avoids d i f f i c u l t and costly l i t igat ion, it provides predictable results fo r p l a n n i n g purposes, it saves enforcement agencies and courts f r o m engaging in u n w i e l d y economic analysis and last, but not least, it contr ibutes to e f f i c ien t e n f o r c e m e n t . 2 2 8 A t the other extreme is a rule of per se legal i ty supported predominant ly by members of the C h i c a g o School who argue that R P M is a lways bene f ic ia l to consumers. U n d e r such a rule, R P M would be l a w f u l , no matter what the market share of the s u p p l i e r . 2 2 9 T h e under ly ing premise is that economic e f f i c i e n c y provides the only workable standard f r o m w h i c h an appropr iate rule can be 2 2 6 2 2 7 2 2 8 2 2 9 Both commentators do concede the need for some care fu l l y d r a w n exceptions such as for new entrants and weak competitors. See C o m a n o r , supra note 96 and P i to fsky , supra note 97. G e r l a , supra note 113. M . M c K i b b e n , "The Resale Pr ice Ma in tenance C o m p r o m i s e - A Presumpt ion of I l legality", 38 V a n d . L. R e v . 163 (1985) at 184-85. See e.g. Bork supra note 88 at 289-91. der ived . T h e e f f i c i e n c y approach claims the same advantages as a rule of per se i l lega l i ty , namely clear and predictable rules fo r dec is ion -mak ing , j u d i c i a l economy and legal c e r t a i n t y . 2 3 1 A rule of reason analysis is f a v o u r e d by those adopt ing the midd le g r o u n d . 2 3 2 In the N e w Z e a l a n d context, this wou ld mean subject ing R P M to the more general provis ions of the A c t , namely sections 27 and 36. T h e p r i n c i p a l advantage of the rule of reason is a recogni t ion that there may be var ious e f f i c ienc ies f l o w i n g f r o m the use of R P M , and that the pro-compet i t ive effects of the pract ice in any par t icu lar case may be weighed against its ant icompet i t ive effects. T h e r e is no doubt that the rule of reason is theoret ical ly the best rule but it has dist inct disadvantages f r o m an adminis t ra t ive and enforcement standpoint . Its disadvantages are those w h i c h make the per se rules so appea l ing , namely l i t igat ion may become protracted, d i f f i c u l t and expensive because of the extensive economic analysis w h i c h must be conducted on each occasion into the compet i t ive ef fects of the par t icu lar pract ice, p lann ing is somewhat unpredic tab le because of the development of a number of of ten c o n f l i c t i n g modes of analysis , and enforcement is less e f f ic ient . It is the very inab i l i t y , or at least d i f f i c u l t y , w h i c h courts and enforcement agencies wou ld have in a r r i v i n g at an object ive s tandard by w h i c h to determine the reasonableness of a pr ice that has mi l i ta ted against the See W. Baxter , "Responding to the React ion: T h e Dra f tsman 's V iew" , 71 C a l i f . L . R e v . 618 (1983) at 621. Posner, supra note 88 at 22-26 and R. Bork , "The Ro le of the Cour ts in A p p l y i n g Economics" , 54 Ant i t rus t L . J . 21 (1985) at 24. See e.g. J . M e e h a n , Jr. and R. L a r n e r , " A Proposed R u l e of Reason for V e r t i c a l Restraints on Compet i t ion" 26 Ant i t rus t B u l l . 195 (1981) and A . Ph i l l ips and J . M a h o n e y , "Unreasonable Rules and Rules of Reason: E c o n o m i c Aspects of V e r t i c a l P r i c e - F i x i n g " 30 Ant i t rus t B u l l . 99 (1985). 118 adopt ion of other than a rule of per se i l legal i ty in hor izonta l pr ice f i x i n g cases. T h e most we l l -known statement to this ef fect was that made by Douglas J . in U n i t e d States v. S o c o n v - V a c u u m O i l C o . Inc. where he s a i d : 2 3 3 T h e reasonableness of prices has no constancy due to the d y n a m i c qual i ty of business facts u n d e r l y i n g business structures. Those who f i x e d reasonable prices today wou ld perpetuate unreasonable prices tomorrow, since those prices wou ld not be subject to cont inuous admin is t ra t ive superv is ion and readjustment in l ight of changed condi t ions. Those who contro l led the prices wou ld control or e f fec t ive ly dominate the market . A s also said in U n i t e d States v. T ren ton Potteries C o . 2 3 4 [I]n the absence of express legislat ion requ i r ing it, we should hesitate to adopt a construct ion m a k i n g the d i f f e r e n c e between legal and i l legal conduct in the f i e l d of business relations depend upon so uncer ta in a test as whether prices are reasonable - a determinat ion w h i c h can be sat is factor i ly made only after a complete survey of our economic organizat ion and a choice between r iva l phi losophies. While such an argument may be appropr iate fo r hor izonta l pr ice f i x i n g cases, the greater forces of compet i t ion at the d istr ibutor level make the argument less compel l ing fo r ver t ica l pr ice f i x i n g cases. E c o n o m i c and business condi t ions also do not vary so constantly as to require the level of moni tor ing by enforcement agencies suggested. A f o u r t h rule f a l l i n g also between the two extremes is a rule of presumptive i l legal i ty . T h i s rule seeks to balance the interests of suppl iers, d is t r ibutors , consumers and enforcment agencies. T h e major premise of the rule is that R P M 310 U.S. at 221. 234 273 U.S. at 397-98. See also W. Pengi l ley , "Comments on Arguments in Jus t i f i ca t ion of Agreements in Restra int of T r a d e - T h e U n i t e d K i n g d o m , A u s t r a l i a n and N e w Z e a l a n d Exper ience" , 19 Ant i t rus t B u l l . 273 (1974). 119 more of ten than not is ant icompet i t ive in nature and that a suppl ier , as the party responsible fo r its imposi t ion , should bear the burden of p r o v i d i n g evidence to the c o n t r a r y . 2 3 5 O f the few commentators who have suggested such a rule of analysis , no consensus seems apparent on how the analysis should be under taken. One U n i t e d States commentator proposes that courts make a p re l im inary f i n d i n g that the R P M scheme in question has a reasonable chance of passing the rule of reason test, and i f so, then a f u l l i n q u i r y accord ing to this rule is to be u n d e r t a k e n . 2 3 6 What this threshold is, is not stated. E v e n the approach suggested by Scherer , who advocates its use where R P M is adopted by "leading f i rms in concentrated markets" or when its adopt ion is "nearly ubitquitous," is somewhat unclear . Whether the market power of a suppl ier is to be assessed or an i n q u i r y made into the use of R P M throughout a par t icu lar industry is also not stated. Put t ing aside this lack of consensus, a rule of presumpt ive i l legal i ty retains the benef i ts of the per se rules, namely e f f i c i e n c y and certa inty , and also accommodates a rule of reason approach for those special cases in w h i c h R P M may be socia l ly benef ic ia l . T h e d i f f i c u l t y for administrators is to determine when a R P M scheme has a reasonable chance of passing the rule of reason test a n d / o r when the appropr ia te threshold is reached. Such a determinat ion may of ten be M c K i b b e n , supra note 209 at 197. Id, at 199. Scherer , supra note 74 at 707. 236 120 arb i t rary and indeed may invo lve as much time and expense as a f u l l b lown a n a l y s i s . 2 3 8 A f i f t h and somewhat h y b r i d rule w h i c h bears special considerat ion in the N e w Z e a l a n d context is to combine sections 30 and 37 into one. A s noted above, it is almost a lways the case that ver t ica l pr ice f i x i n g involves a contract , arrangement or unders tanding in much the same way as hor izonta l pr ice f i x i n g . T h e joint considerat ion of hor izonta l and ver t ica l pr ice f i x i n g cou ld easi ly be ach ieved by insert ing the words "or resold" af ter the word "resuppl ied" in section 30 (l)(b) and delet ing the words "in compet i t ion wi th each o t h e r " . 2 3 9 A d o p t i o n of a rule a long these lines has the advantages of the per se rules, yet al lows parties w i l l i n g to bear the appropr iate expense, to apply for an author iza t ion where the scheme in quest ion is seen to be of benef i t to the publ ic . T h e r e is no need fo r the C o m m i s s i o n to make any pre l im inary determinat ion as to whether the scheme is l ike ly to pass an appropr iate test or whether a par t icu lar threshold of market power has been reached; a determinat ion is only requi red af ter the parties to the contract , arrangement or understanding have dec ided to make an app l ica t ion for author iza t ion at w h i c h time the scheme can be judged against the cr i ter ia la id T h e U.S. Supreme Cour t has t rad i t iona l ly shown litt le interest in rules of presumpt ive i l legal i ty . It rejected the suggestion in S c h w i n n when Professor Posner, who was then arguing for the U.S. G o v e r n m e n t , urged a rule of presumpt ive i l legal i ty rather than a rule of per se i l legal i ty . H o w e v e r in the hor izonta l f i e l d , rules of presumptive i l legal i ty or 'qu ick looks' are somewhat in vogue. See e.g. Broadcast M u s i c . Inc. v. C o l u m b i a Broadcast ing  Svs. Inc. 441 U.S. 1 (1979). 239 T h e words "in compet i t ion wi th each other" do not add a n y t h i n g to section 30 a n d in fact create a risk that some agreements w h i c h should be caught may not be. See Jackson, supra note 168. down in decisions w h i c h have had to consider the author iza t ion provis ions of the A c t . 2 4 0 In cons ider ing the procedure fo r author izat ion under either a rule of reason test under section 27 or under the h y b r i d test under section 30, one may note the d i l e m m a w h i c h wou ld inev i tab ly be faced by those d e c i d i n g whether or not to make an app l ica t ion . T h i s arises out of the fact that the C o m m i s s i o n occupies the role of both invest igator , dec is ionmaker and enforcer . A n app l ica t ion is a tacit admission that an arrangement is ant icompet i t ive . T h u s , i f an app l ica t ion fo r an author iza t ion is unsuccessful because the appl icat ion is unable to meet the cr i ter ia la id down by the A c t , the appl icant then faces the risk of enforcement proceedings being inst i tuted by the C o m m i s s i o n , w h i c h wi l l of course have been i n f o r m e d of the scheme, or indeed of a pr ivate act ion for damages or in junc t ion . A s has been n o t e d : 2 4 1 T h i s prospect may well have the result that rather than apply fo r an author iza t ion , the inc l ina t ion of a party to a par t icu lar pract ice may be to 'sit t ight' a n d , in the event of any act ion under the [Act] as regards the pract ice, to dispute that it has an ant icompet i t ive ef fect or that there has otherwise been the wrongdoing compla ined of. A s imi lar rule la id down in the Resale Prices A c t 1976 (U .K . ) requires the Rest r ic t ive Pract ices Cour t to grant an exemption to a R P M scheme i f the l isted detr iments w h i c h might result i f the scheme can not be imposed outweigh the drawbacks of the scheme being imposed. T h e detr iments are (a) substant ial reduct ion in the qual i ty or var ie ty of goods ava i lab le ; (b) substant ial reduct ion in retai l outlets; (c) long term pr ice increases,; (d) danger to health f r o m publ ic misuse of goods; or (e) cessation or substant ial reduct ion in point -of -sale or post-sales services reasonably necessary to protect the pub l ic f r o m in jury or to confer other pub l i c benefi ts. See M e r k i n & Wi l l iams, supra note 145 at 230-32. D. Wi l l iams, G . R icket ts and F. Q u i n , "The Commerce Ac t " (New Z e a l a n d L a w Society Seminar , A p r i l / M a y 1986) at 16. H o w serious this r isk is is very much a moot point. F r o m the writer 's exper ience, there has been no abuse of posit ion by the C o m m i s s i o n that has u n d u l y pre jud iced any appl icant . T h e r e has however been some reluctance to obta in letters of comfor t f r o m the Commiss ion because adv ice g iven by the C o m m i s s i o n is not b i n d i n g upon it in any later proceedings. F r o m an admin is t ra t ive standpoint then, the present per se rule of i l legal i ty has dist inct advantages in terms of e f f i c i e n c y of enforcement and savings in costs to al l parties. A good case can however be made out fo r a more permissive treatment of R P M under a rule that retains the benefi ts of per se treatment, yet a f f o r d s the f l e x i b i l i t y to consider schemes that may have v a l i d benefi ts. T h e present expertise of Commiss ion members and the pool of q u a l i f i e d personnel avai lable to the H i g h Cour t assure that detai led economic analysis can be car r ied 242 out in appropr iate cases. A s fa r as enforcement itself is concerned , one may consider whether the present ar ray of remedies provides the opt imal mix and serves the desired funct ions in R P M cases. T h e consequences of a contravent ion of any of the restr ict ive trade pract ice provisions of the A c t inc lude pecuniary penalt ies of up to $100,000 fo r in f r ingements by i n d i v i d u a l s and up to $300,000 fo r in f r ingements by Appointees of the C o m m i s s i o n , of wh ich one must be a barr ister or sol ici tor of at least 5 years standing, are requi red to have "knowledge of or experience in indust ry , commerce, economics, law, accountancy , pub l ic admin is t ra t ion or consumer a f fa i rs" to q u a l i f y (Section 9(4)). F o r appeals against determinat ions of the C o m m i s s i o n , the H i g h Cour t is requ i red to sit w i th at least one "lay member", being a person appointed by the G o v e r n o r G e n e r a l h a v i n g regard to that person's "knowledge or experience in indust ry , commerce, economics, law or accountancy" (Section 77). 123 companies (which may be imposed by the Commiss ion o n l y ) ; 2 4 3 in junct ions to restrain conduct in contravent ion of the A c t (which may be sought by the C o m m i s s i o n or any p e r s o n ) ; 2 4 4 and damages fo r any loss or damage caused by par t icu lar conduct (which may be sought by any person s u f f e r i n g l o s s ) . 2 4 5 E n f o r c e m e n t act ion is not c r i m i n a l and therefore the c i v i l s tandard of proof applies. A lmost ident ica l enforcement and remedy provis ions per ta in under the A u s t r a l i a n A c t a l though the pecuniary penalties are somewhat lower at up to $50,000 in the case of an i n d i v i d u a l and up to $250,000 in the case of a body 246 corporate. T h e d is t inct ive feature of the C a n a d i a n legislat ion is the app l ica t ion of a c r i m i n a l s tandard to the R P M provisions wi th f ines fo r both i n d i v i d u a l s and corporat ions being at the d iscret ion of the Cour t and impr isonment of up to f i v e years for i n d i v i d u a l s . 2 4 7 2 4 3 Sect ion 80. 2 4 4 Sections 81 and 88-90. 2 4 5 Section 82. 246 247 Sect ion 76. F o r a discussion of the A u s t r a l i a n prov is ions, see M i l l a r , supra note 43 at 223 et seq. T h e highest penalty so fa r imposed in an R P M case is $120,000: T r a d e Pract ices Commiss ion v. Pye Industries Sales Pty L t d . (1978) A . T . P . R . 40-089. U p h e l d on appeal: (1979) A . T . P . R . 40-124. See general ly M i l l e r , irL at 106-07. Section 38(8). T h e highest f ine so far imposed is $150,000 in R , v. L e v i  Strauss of C a n a d a Inc. (1980) 45 C.P .R. (2d) 215 (Ont. C o . Ct.), a l though the charge in this case invo lved eight counts. A f ine of $75,000 on a single count was imposed in A p r i l 1984 on Imperial O i l . See general ly G . K a i s e r , Somewhat in contrast to the remedy provisons in the other three jur isd ic t ions are the damage rules in the U n i t e d States where, by v i r tue of section 4 of the C l a y t o n A c t , a pr ivate p l a i n t i f f " injured in his business or property by reason of any th ing f o r b i d d e n in the antitrust laws may sue a n d ... and shal l recover threefo ld the damages by h i m s u s t a i n e d . " 2 4 8 T h e government is however l imi ted to recovery of only actual damages, the rat ionale being that treble damages promote pr ivate enforcement of antitrust laws in the pub l ic interest. In junct ive re l ie f , whi le ava i lab le , is rarely appl ied for . T h e somewhat d i f f e ren t costs rules and the cont ingency fee system prov ide an incent ive not only for pr ivate p l a i n t i f f s but also for lawyers to ini t iate actions. Class act ions, whereby groups of in jured may sue in one representative class and w h i c h character ize U n i t e d States law, are rare in regard to R P M , especial ly where the scheme is not incorporated into a wr i t ten i 24Q document . T h e possible award of treble damages in an anti trust suit i n v o l v i n g R P M in the U n i t e d States and the s ign i f icant penalt ies w h i c h may be imposed under the R P M provis ions of the other three jur isdict ions ref lects the seriousness wi th wh ich R P M is v iewed by the var ious legislatures. T h e object is c lear ly one of deterrence, and to a lesser extent compensat ion. Compet i t ion L a w of C a n a d a (New Y o r k , Mathew Bender , 1988) at paras. 4.06 a n d 14.08. 15 U .S .C . 15(a) Supp. 1986. A B A Ant i t rus t Sect ion M o n o g r a p h N o . 13, T reb le -Damages R e m e d y (1986) at 12-16 (hereafter ci ted as " A B A M o n o g r a p h N o . 13"). Proposals have been put f o r w a r d to Congress for m o d i f i c a t i o n of the current law whereby, subject to a l imi ted number of exceptions, only single damages wou ld be awarded for antitrust of fences. IcL at 58-60. 125 A s noted in one A u s t r a l i a n case: T h e penalty should constitute a real punishment proport ionate to the de l iberat ion wi th w h i c h the defendant cont ravened the provis ions of the A c t . It should be s u f f i c i e n t l y h igh to have a deterrent qua l i ty , and it should be kept in m i n d that the A c t operates in a commerc ia l env i ronment where deterrence of those m i n d e d to contravene its provis ions is not l i ke ly to be ach ieved by penalties w h i c h are not real ist ic. It should ref lect the w i l l of Par l iament that the commerc ia l standards la id down by the A c t must be observed, but not so h igh as to be oppressive. In ana lys ing the nature and level of penalties and damages necessary to deter R P M , one must bear in m i n d that a suppl ier 's management w i l l assess the probab i l i ty of its actions being detected, invest igated and punished as against the ant ic ipated returns f r o m engaging in R P M . O b v i o u s l y i f the returns are greater, it makes economic sense to contravene. Factors w h i c h are relevant in this regard are the att i tude of a suppl ier 's management towards r isk, the expected length of time before any penalt ies or damages are imposed and the size and l i ke l ihood of any gains to be made. F o r penalties and damages to be a s u f f i c i e n t deterrent therefore, they should be set at such a level and imposed w i th in a s u f f i c i e n t l y short per iod of t ime that a suppl ier and its management, tak ing into considerat ion the probabi l i ty that their conduct w i l l be detected and punished and their att i tude towards r isk, w i l l be deterred. T r a d e Pract ices Commiss ion v. St ih l C h a i n Saws (Aust.) Ptv. L t d . (1978) A . T . P . R . 40-091 at 17,896. See also T r a d e Pract ices C o m m i s s i o n v. M o b i l O i l  A u s t r a l i a Ltd.(1985) A . T . P . R . 40-503 at 46,027 and R , v. B r o w n i n g A r m s  C o m p a n y of C a n a d a L t d . (1974) 18 C . C . C . (2d) 298 (Ont. C A . ) at 303. 126 T h e r e is a vast l i terature on the theory of penalties and damages w h i c h is wel l beyond the scope of this thesis to r e v i e w . 2 5 1 It is notable however that C h i c a g o School commentators have also sought to fur ther their e f f i c i e n c y theories in this area. T h e basic theory requires a damages rule that results in the m a x i m u m output of goods and services at the m i n i m u m overa l l cost to s o c i e t y . 2 5 2 O n e uses a cost-benef i t analysis for this purpose; that is, when the level of enforcement reaches the theoret ical point at w h i c h the cost of fu r ther enforcement outweighs the savings gained by prevent ing fur ther v io la t ions, then no fu r ther enforcement should o c c u r . 2 5 3 In the rea lm of R P M , are the present remedies the best ava i lab le in terms of deterrence and compensat ion concerns? Fur ther , should pr ivate remedies be permit ted at a l l or should enforcement act ion be restr icted to the Commiss ion? D e a l i n g wi th the second question f i rst , it may be argued that pub l i c enforcement is general ly less costly, the penalty to be imposed in a government suit is more predictable than in a pr ivate suit and a pub l ic body is less l ike ly to chal lenge "eff ic ient" antitrust v i o l a t i o n s . 2 5 4 It is not necessari ly the case however See general ly the texts and articles c i ted in A B A M o n o g r a p h N o . 13, supra note 249 at 24 et.seq. Id. at 24. E c o n o m i c theory sees deterrence as the only goal of enforcement ; compensat ion of v ic t ims is considered to be an economica l ly neutra l event a d d i n g noth ing to the output of goods and services and therefore it has no economic ideal . Id, at 35. Id. at 29 and P. A r e e d a , "Ant i t rust V io la t ions Without Damage Recover ies" , 89 H a r v . L . R e v . 1127 (1976). Id. at 63. that pub l i c enforcement is less costly when one considers typ ica l government bureaucracy . F u r t h e r , w i th l imi ted resources, there is the risk that the C o m m i s s i o n w i l l be unable to take act ion against al l i n f r i n g i n g parties a n d , even i f it c o u l d , the deterrent value wou ld be somewhat lower because appropr ia te remedies are un l i ke ly to be sought wi th the same level of enthusiasm. B u r e a u c r a c y also poses another r isk by causing Commiss ion staf f to d iverge f r o m an otherwise e f f i c ien t enforcement po l icy ; that is, actions may be taken only against those parties where the probab i l i ty of success is h igh and enforcement against others e m p l o y i n g schemes that have s ign i f icant ant icompet i t ive effects may be subject to considerable delay where evidence is d i f f i c u l t to obta in and the case is otherwise complex. T h e advantage of pr ivate enforcement as a tool of compet i t ion law enforcement is that the self- interest of competi tors, a f fec ted parties and consumers provides a special deterrent to compet i t ion law violat ions. Pr ivate act ions also prov ide a necessary supplement to pub l ic enforcement where an enforcement agency lacks the w i l l 2 5 5 a n d / o r the resources to take act ion against cont raven ing parties. O n this basis, there seems no reason to d iscont inue wi th pr ivate enforcement in regard to R P M . T u r n i n g back to the f i rst quest ion, the not insubstant ia l pecuniary penalt ies w h i c h may be imposed by the Commiss ion would seem to be an adequate deterrent so long as the penalt ies that are in fact imposed are of s u f f i c i e n t magni tude. T h e r e is no reason to believe that the t rebl ing of damages is any more an e f fec t ive deterrent than the present single damages by increasing the chance of detect ion 255 T h i s is t y p i f i e d by the actions of the U.S. Depar tment of Justice and F e d e r a l T r a d e C o m m i s s i o n in regard to R P M since the early 1980s. 128 and heightening management's aversions to risk. The fact that managers themselves may be liable under the Act in addition to the suppliers they represent should be a sufficient deterrent in itself (although it will often be the case that they are compensated in some way if a penalty is imposed). Single damages also decrease the probability of nuisance suits being brought in that there is more incentive to mitigate losses than if there is the chance of receiving more than the actual amount of damages sustained. 2 5 6 The present range of remedies and, in particular, the high maximum pecuniary penalties provide the Commission with flexibility to impose or seek whatever remedy it sees fit depending on the circumstances of each case. Finally, as regards the applicable standard of proof, there seems no reason to make it any more difficult to establish RPM than on the balance of probabilties. The risk of being fined and sent to prison under a criminal provision may be somewhat more of a deterrent, but, as a remedy, it is somewhat antiquated for a practice that is currently the subject of such divergent opinions as to its pro-and anti-competitive effects. D. CONCLUSION In considering the appropriate treatment of RPM, it has been seen that one is faced with very divergent schools of thought and an issue which, probably more than any other, has dominated antitrust literature over the past decade. At one extreme is the Chicago School promoting the view that vertical price restraints Professors Breit and Elzinga argue that this perverse incentives effect justifies the abolition of all private antitrust damage actions in the U.S. and their substitution by a greatly increased fine as the exclusive penalty. ABA Monograph No. 13, supra note 249 at 37. 129 should be v iewed as almost a lways, or at least more of ten than not, b e n e f i c i a l to consumers. O n this basis, commentators such as Bork and Posner p r o p o u n d that such restraints should be completely l a w f u l . A t the other extreme are commentators l ike C o m a n o r and P i to fsky who vehement ly oppose the abandonment of a rule of per i l legal i ty . Both accept that economic concerns should be paramount in anti trust analysis, but bel ieve the present rule should be reta ined because the pract ice does not contr ibute to e f f i c i e n c y and is det r imenta l to the consumer. T h e not ion that R P M is always bene f ic ia l fa i ls to consider cases in w h i c h a suppl ier sets prices above the prof i t max imiza t ion level of h igh ly e f f i c i e n t d istr ibutors and that the use of R P M by a suppl ier in connect ion wi th a strong b rand product may be par t icu lar ly deter imental to compet i t ion i f consumers are thereby unable to take advantage of lower prices, a number of p r i ce /se rv ice options and more e f f i c ien t modes of d is t r ibut ion . F o r these reasons, a rule of per se legal i ty can be d iscounted. T h e not ion that R P M is always detr imenta l fa i ls to consider cases in w h i c h the procompet i t ive ef fects of a par t icu lar scheme outweigh its ant i -compet i t ive effects. T h e assumption to the contrary under a rule of per se i l legal i ty means that var ious e f f i c ienc ies and other benefi ts f l o w i n g f r o m the use of R P M in any par t icu lar case can not be recognized. One might d iscount a rule of per se i l legal i ty fo r this very reason i f it were not fo r the s ign i f icant advantages f l o w i n g f r o m the rule in regard to admin is t ra t ion and enforcement . T h e r e is obv ious ly no problem wi th the use of ver t ica l pr ice restraints in a compet i t ive market because the r i v a l r y between suppl iers and distr ibutors and the 130 existence of substitute products means that consumers are not pre jud iced in any way by being f o r c e d to pay higher prices or to buy cer ta in products. Indeed, as has been seen, it is un l i ke ly that a suppl ier wou ld ever engage in R P M in this s i tuat ion because a m i n i m u m resale pr ice set above the compet i t ive level w i l l lead to a f a l l o f f in sales and hence prof i ts . But compet i t ion to this degree is rarely evident in most markets in N e w Z e a l a n d , t y p i f i e d as it is by a smal l number of re la t ive ly large suppl iers in a number of industr ies. It is in these very concentrated industr ies where most, i f not a l l , o f the suppl iers i n v o l v e d wi l l be l ike ly to be employ ing R P M . It may be employed as a device to fac i l i ta te and pol ice hor izonta l pr ice co l lus ion among themselves, or more l i ke ly , one or more of them may have been able to create a strong b rand ident i ty through product d i f f e ren t ia t ion . T h e use of R P M in these c i rcumstances either serves to induce distr ibutors to engage in pre- a n d post-sales ac t iv i ty (such as demonstrat ions, adver t is ing or warranty service) to keep the b rand strong, or a l ternat ive ly it may be one of those products where a h igher resale pr ice provides cer t i f i ca t ion to consumers as to the qual i ty of the products at hand . T h e r e seem no other reasons why a suppl ier wou ld be interested in m a i n t a i n i n g the retai l pr ice of its products. In theory, a suppl ier 's pr ice to a d is t r ibutor (and hence its p ro f i t of each uni t sold) remains the same whatever pr ice the d is t r ibutor sells to the ul t imate consumer. Since the lower the distr ibutor 's pr ice , the greater the demand fo r a product is l i ke ly to be, it would in theory be in the suppl ier 's interest to encourage the reduct ion of retai l prices in order to max imize sales. In short, the suppl ier should favor lower retai l prices because the lower the distr ibutors m a r g i n , the greater its prof i ts . 131 T h e use of R P M to induce pre- and post sales ac t iv i ty w i l l in most cases be procompet i t ive but its jus t i f i ca t ion as a means to combat f r e e - r i d i n g is u n d e r m i n e d g iven the empi r i ca l ev idence w h i c h shows that the pract ice is not as widespread as some commentators wou ld have us believe. T h e need fo r promot ion and market ing of new and innovat ive products does however lend weight to the need to permit R P M in the case of smal l and not so smal l f i rms without market p o w e r . 2 5 7 It has been suggested that the level of promot ion and services that a suppl ier believes is most suited for its products can be more adequately ach ieved by contract , it can o f f e r d irect f i n a n c i a l rewards fo r services p e r f o r m e d or it can employ a system of non-pr ice ver t ica l r e s t r a i n t s . 2 5 8 E a c h of these al ternat ives however has dist inct disadvantages. Cont rac t ing wi th a large number of d istr ibutors may be p la in ly imprac t ica l , especial ly i f the contracts require detai led spec i f i ca t ion of the par t icu lar types of act iv i ty w h i c h must be under taken. A d m i n i s t e r i n g the payment of f i n a n c i a l rewards may be cumbersome and expensive whi le non-pr ice ver t ica l restraints are, as w i l l be seen in Part III, only c o n d u c i v e to certa in products and where the number of d istr ibutors in a certa in geographica l area is smal l . While R P M itself may be somewhat of a "blunt instrument" to achieve the promot ion and service or ientated goals of a suppl ier , it is easily inst i tuted, re lat ively simple to administer and enforce and c o n d u c i v e to products hand led by a large number of distr ibutors. It is arguable that the spec i f ica t ion of m i n i m u m resale prices in this s i tuat ion is in fact fruit less. A s there is no market power associated wi th the product , any attempt by a d istr ibutor to charge a pr ice above that of compet i t ive products w i l l result, in most cases, in an immediate loss of business. M a r k s & Jacobsen, supra note 193 at 249. 132 G i v e n the potent ia l just i f icat ions fo r R P M and its i n s i g n i f i c a n t e f fect on compet i t ion when employed by suppliers sel l ing products wi thout strong brands, a suggested approach to the treatment of R P M might be to require the C o m m i s s i o n , or other a f fec ted party to demonstrate that the suppl ier in quest ion possesses the requ i red degree of market power (given that a strong b rand necessari ly gives rise to market power) and then to require the suppl ier to adduce evidence that the pract ice restraint is not ant icompet i t ive in nature. T h e C o m m i s s i o n or other a f fec ted party wou ld obv ious ly bear the ul t imate burden of proof . U n d e r such an approach , restraints i n v o l v i n g a contract , arrangement or unders tand ing wou ld be considered under section 27 whi le str ict ly uni la tera l act ion on the part of a suppl ier wou ld be considered under section 3 6 . 2 5 9 P roof of any hor izonta l co l lus ion between suppl iers or, on those rare occasions, d istr ibutors cou ld be considered under section 3 0 . 2 6 0 Such an approach also accommodates the interests of d iscounters to have access to strong brands and the f reedom of suppliers to deal w i th w h o m they wish and to adopt a market ing strategy that they bel ieve to be in their best interests. Consumers also benef i t f r o m the lower prices and more e f f i c ien t modes of d is t r ibut ion o f f e r e d by discounters, whi le hav ing a greater selection of products and services o f f e r e d by suppliers through the var ious combinat ions of pr ice and services they o f fe r . T h e test in section 36 requ i r ing a person to have a "dominant posit ion" in a market is arguably too h igh to capture ant icompet i t ive practices engaged in by even most large suppl iers, but a f u l l d iscussion of section 36 is beyond the scope of this thesis. T h e r e is no question that any arrangement between competi tors to set m i n i m u m prices fo r the products they sell ought, l ike al l hor izonta l agreements, to be struck down because it almost in al l cases h inders rather than promotes compet i t ion and e f f i c ien t resource, a l locat ion. 133 While this suggested approach is theoret ical ly the most op t ima l , it suf fers the same disadvantages as a rule of reason by not y i e l d i n g the k i n d of pred ic tab i l i ty and j u d i c i a l e f f i c i e n c y w h i c h make a per se rule of i l legal i ty so attract ive. T h e per se rule is so wel l established and legislat ive po l icy so clear, that the prospects fo r a change in the present treatment of R P M seems remote, at least in the immediate fu ture . A compromise approach then to that of the f u l l rule of reason, and one w h i c h would l ike ly be more palatable, is to p rov ide a pub l i c benef i t except ion by way of an author izat ion procedure under section 58. T h i s c o u l d be done either by cons ider ing hor izonta l and ver t ica l restraints under the same prov is ion as was mooted in the previous section or by h a v i n g a spec i f ic p rov is ion in section 37 a l lowing for appl icat ions to be made. Those con f iden t enough that the schemes they are engaged in are c lear ly in the pub l i c interest may then have them subjected to a ba lanc ing by the C o m m i s s i o n of their respective-benef i ts a n d detr iments. A s discussed in the previous sect ion, such a system has dist inct advantages f r o m an admin is t ra t ive and enforcement v iewpoint in terms of reduced costs and increased e f f i c i e n c y . Fur the r jus t i f i ca t ion fo r such an approach comes f r o m the inab i l i t y of empi r ica l ev idence to date to determine wi th any certa inty the actual consequences of R P M on prices. It wou ld mark a re turn to the system under the 1975 A c t a l lowing persons in tend ing to car ry on the pract ice of an i n d i v i d u a l resale pr ice arrangement to apply to the C o m m i s s i o n for the approva l of their pract ice. Somewhat surpr is ing ly , there appear to have been only three appl icat ions heard d u r i n g the per iod 1975-1986, but this in i tself should not be seen as conclus ive that most suppl iers perceived their schemes to be contrary to the pub l i c interest. T h e mandated use of recommended resale pr ices, both d u r i n g this per iod and since 1986, has e f fec t ive ly a l lowed suppl iers to use R P M as part of 134 their marke t ing strategies wi th l itt le apparent opposi t ion f r o m po l icymakers , d istr ibutors or consumers. R P M is c lear ly more than just a legal and economic issue wi th any move towards l iber iza t ion h a v i n g important pol i t ica l and social overtones. It is h igh t ime however that a review was under taken by a panel of economic , indust ry , po l i t ica l and legal consultants to achieve some sort of consensus on the approach that should be taken. It wou ld seem l ike ly that such a rev iew wou ld show the present treatment to be inconsistent w i th long term consumer interests, especial ly in f ragmented industr ies where suppliers do not have market power. Such a review may also f i n d that the present treatment w i l l eventual ly l imi t compet i t ion in the retai l market to the larger and more power fu l d istr ibutors, many of w h o m are now operat ing as discounters. T h i s may well foster pr ice compet ion in the short term but is is d o u b t f u l that economic concentrat ion of business is a purpose the A c t was designed to serve. T h e A c t may in other words achieve the very opposite result of what was in tended- ru inous compet i t ion in the short term and e l im ina t ion of a l l but the largest competi tors in the long term. PART III V E R T I C A L NON-PRICE RESTRAINTS 135 A . G E N E R A L V e r t i c a l non-pr ice restraints take a number of fo rms , i n c l u d i n g exclusive dea l ing arrangements, requirements contracts, ty ing arrangements and restr ict ions on the terri tories w i th in w h i c h and the customers to w h o m a d is t r ibutor may sell. A s noted in the in t roduc t ion , the concern in this thesis is only wi th the last two of these restraints a l though they are very of ten interrelated. In this sect ion, the var ious types of terr i tor ia l and customer restr ict ions wi l l each be descr ibed a n d then their respective business appl icat ions, mot ivat ions and just i f ica t ions w i l l each be discussed. (i) T e r r i t o r i a l Restr ic t ions T e r r i t o r i a l restrict ions come in a number of guises. T h e norma l type involves the exclusive assignment to a par t icu lar d is t r ibutor of a par t icu lar terr i tory w i th in w h i c h the d istr ibutor is the sole author ized d ist r ibutor of the suppl ier 's b rand of products. T h e restr ict ion may however of ten only a f fec t the locat ion of a distr ibutor 's place of business or area of operat ion. T h i s type of restr ict ion wi l l usual ly invo lve either a locat ion clause, area of p r imary responsibi l i ty or a pro f i t pass over agreement. A locat ion clause speci f ies the place at w h i c h a d ist r ibutor may carry on its business, whether under its own name or that of the suppl ier . Such a clause operates to restrict the d ist r ibutor and is therefore to be contrasted wi th the usual f o r m of terr i tor ia l restr ict ion i n v o l v i n g the exclusive assignment of a par t icu lar terr i tory to a d is t r ibutor w h i c h restricts the suppl ier - in the latter case, the suppl ier normal ly convenants not to author ize any of its other distr ibutors to carry on business in the exclusive terr i tory or to do so i tse l f . 1 A n area of p r imary responsibi l i ty is a par t icu lar terr i tory fo r w h i c h the d is t r ibutor is spec i f i ca l l y responsible, a l though the d ist r ibutor may car ry on business outside that terr i tory and other distr ibutors may car ry on business w i th in it. T h e d ist r ibutor normal ly convenants to use its best endeavours to market , sell a n d distr ibute the suppl ier 's products in the terr i tory and i f the covenant is breached or some m i n i m u m level of per formance is not reached (for example unit or dol lar sales), then the d istr ibutor is at r isk of h a v i n g the d is t r ibu t ion arrangement terminated. T h e obvious contrast wi th the usual type of terr i tor ia l restr ict ion is that in the latter, the d istr ibutor is prevented f r o m c a r r y i n g on business outside the. terr i tory and other distr ibutors are prec luded f r o m c a r r y i n g on business w i th in the terr i tory. F i n a l l y , under a pro f i t pass over agreement, a d is t r ibutor who makes a sale outside its assigned terr i tory is requ i red to make a payment or p rov ide some other f o r m of compensat ion to the d is t r ibutor in whose terr i tory the customer is situated. T h e payment or other f o r m of compensat ion is in tended to compensate the other d is t r ibutor fo r any costs and expenses it may have or w i l l incur in promot ing and serv ic ing the product s o l d . 3 (ii) Customer Restr ic t ions L i k e terr i tor ia l restr ict ions, the normal type of customer restr ict ion involves the exclusive assignment of par t icu lar customers (for example, government departments, export accounts or large customers) for w h i c h the d is t r ibutor is the A B A Ant i t rus t Sect ion, M o n o g r a p h N o . 2, V e r t i c a l Res t r ic t ion L i m i t i n g  In t rabrand Compet i t ion (1977) at 3 n.5 (hereinafter c i ted as " A B A M o n o g r a p h N o . 2"). Id, at 3 n.6. 3 Id. at 4 n.7. 137 sole author ized suppl ier of the supplier 's b rand of products. T h e restr ict ion may however be less strict in requ i r ing a d ist r ibutor to devote its p r i m a r y e f for ts to a par t icu lar type of customer or potent ial customer. (i i i) Business A p p l i c a t i o n s T e r r i t o r i a l and customer restr ict ions are common to al l d is t r ibu t ion arrangements and are usual ly employed where the products i n v o l v e d are not m a n u f a c t u r e d by the d istr ibutor (al though they are by no means c o n f i n e d to such situations). T h e type of products i n v o l v e d are normal ly large special ty items such as cars, f u r n i t u r e and household appl iances where a distr ibutor 's promot ion of a suppl ier 's b rand is important . (This contrasts wi th the convenience type products such as f o o d a n d drugs w h i c h are normal ly i n v o l v e d where R P M is in use, where a suppl ier is of ten t ry ing to achieve as wide and as concentrated a d is t r ibut iona l spread as possible). With larger specialty items, consumers are of ten concerned about the range of services w h i c h are p r o v i d e d upon the sale of these types of products and w i l l shop a round before m a k i n g their purchas ing decisions. T o attract customers therefore, a suppl ier w i l l want to ensure that its d istr ibutors prov ide a s u f f i c i e n t level of services and wi l l otherwise engage in adequate adver t is ing and promot iona l act ivi t ies. If a d istr ibutor does not receive some protect ion f r o m in t rabrand compet i t ion , it w i l l feel less i n c l i n e d to engage in extensive adver t is ing and promot ion of products because the existence of others in the market makes its direct return uncer ta in . T e r r i t o r i a l and customer restr ict ions p rov ide this protect ion. 138 (iv) Business Motivations and Justifications Like RPM, territorial and customer restrictions have attractions for both suppliers and distributors although different interests are often at play. In regard to territorial restrictions, a supplier's motivation is often to attract superior distributors who are willing and able to make the kind of investment in inventories and service provision that consumers demand, who will provide higher quality maintenance and repair that is important for continued sales of complex durable products and who will increase market penetration through greater promotional and sales efforts. (This is particularly important in the case of new products.) A supplier may want to ensure a certain spread of outlets so that distributors do not concentrate exclusively on the more lucrative areas rather than those which are slower moving and/or remote. In this way, a better ratio between outlets and customers can be achieved with distributors concentrating their efforts in territories for which they are responsible rather than competing against each other. The justification normally offered by suppliers for these restrictions is thaf they promote interbrand competition by creating a more efficient system of distribution and a strengthened competitive position against other suppliers. Distributors on the other hand justify such restrictions by arguing that freedom from intrabrand competition allows them to exploit a product more fully through specialization on sales and service, they are more willing to devote time and money to promotional and service efforts because they are not subject to free-riding by others and they are prepared to invest more heavily in inventory and service provision. 139 In regard to customer restr ict ions, a suppl ier may be mot ivated by the incapac i ty of some distr ibutors to service large accounts because they lack t ra in ing or k n o w h o w or the inab i l i t y of some distr ibutors to meet the compet i t ion of other suppl iers because these other suppl iers can o f f e r lower prices and more e f f i c i e n t serv ic ing fo r large orders. A suppl ier may in fact be mot ivated by self - interest to keep cer ta in lucrat ive accounts fo r i tself w h i c h it has deve loped at some expense. F u r t h e r , the spec i f ica t ion by a suppl ier that a d is t r ibutor only sell to cer ta in customers who themselves w i l l be on-sel l ing may be mot ivated by concerns s imi lar to those where R P M is i n v o l v e d , namely that the customers be q u a l i f i e d to handle the products concerned and w i l l engage in a su f f i c i en t level of pre -and post- sales act iv i ty . F o r the d is t r ibutor , its interests wi th regard to customer restr ict ions are m u c h the same as wi th terr i tor ia l restr ict ions, namely it desires protect ion f r o m the f ree - r id ing of other distr ibutors where it has devoted a great deal of e f fo r t to the cu l t i va t ion of cer ta in customers. Just i f ica t ions fo r both suppl iers and distr ibutors are basica l ly the same as fo r terr i tor ia l restr ict ions. 4 A s w i l l be noted in the next sect ion, the jur isd ic t ions under rev iew have tended to adopt a more permissive treatment of terr i tor ia l and customer restr ict ions than of R P M wi th proh ib i t ion only af ter an analysis of compet i t ive ef fects in each case. 5 See general ly W. Pengi l ley , "Exc lus ive D e a l i n g under the T r a d e Pract ices Ac t" , (1975) 3 A . B . L . R . 174 at 182 et seq., E . G e l l h o r n , An t i t rus t L a w a n d  E c o n o m i c s 3rd ed. (St. P a u l , M i n n . , West P u b l i s h i n g C o , 1986) at 295-96 and B. D o n a l d and J . H e y d o n , T r a d e Pract ices L a w (Aus t ra l i a , L a w Book Co . , 1978) at 326-34. A t common law terr i tor ia l and customer restr ict ions are dealt w i th under the doctr ine of restraint of trade. T h e approach taken is to consider f i rs t whether the restraint goes fur ther than to a f f o r d adequate protect ion to the party in whose f a v o u r it is granted; secondly whether it can be jus t i f ied as being in the interest of the party restra ined; and th i rd ly whether it must be 140 B. Current State of the Law (1) United States The law in the United States in this area is marked by a trilogy of cases which have had a significant impact on the treatment of territorial and customer restrictions during the time these cases have held sway and also show the fluidity and considerable cyclical variation in interpretation of section 1 of the Sherman Act. The first of these cases was White Motor Co. v. United States6 where the Supreme Court refused to condemn out of hand the territorial and customer restrictions imposed in dealer franchise contracts by the White Motor Company, a truck manufacturer with sales of over $500 million at the time. The Court declined to express an opinion of the legality of such restrictions stating:7 We do not know enough of the economic and business stuff out of which these arrangements emerge to know whether they merely stifle competition or whether they may be the only practicable means a small company has for breaking into or staying in business. We need to know more than we do about the actual impact of these arrangements on competition to decide whether they have such a pernicious effect on competition and lack ... any redeeming virtue ... and therefore should be classified as per se violations of the Sherman Act. held to be contrary to the public interest. See Nordenfelt v. Maxim  Nordenfelt Guns & Ammunition Co. [1894] AC 535 at 565 (per Lord MacNaghten) and Esso Petroleum Co Ltd. v. Harpers Garage (Stourport) Ltd. [1968] AC 269 at 300 (per Lord Reid). 372 U.S. 253 (1963). 7 372 U.S. at 263. 141 The Court therefore remanded the action to the District Court for an analysis of the restrictions under the rule of reason.8 Nevertheless, only four years later, the Supreme Court in United States v. Arnold. Schwinn & Co. 9 obviously believed that it now knew all it needed to know about the impact of territorial restrictions on competition to make a definitive ruling on their legality. Schwinn marketed its range of bicycles through intermediate distributors to franchised retailers under several distribution plans, including both outright sales and consignment arrangements. Each distributor had a defined geographical area within which it had the exclusive right to supply franchised retailers, but in consideration, the distributor was prohibited both from selling to non-franchised retailers and from making sales outside its assigned territory. The Court upheld the territorial and customer restrictions under a rule of reason analysis where the distributors acted as Schwinn's agents and consignees but found illegal those restrictions on distributors who acted as ordinary wholesalers.10 In a widely quoted passage, Mr. Justice Fortas, who delivered the judgement of the Court, said:11 White Motor was eventually settled by a consent decree and therefore never reached a trial at which the facts could be presented (United States v. White  Motor Co. 1964 Trade Cas. 91,71,195 (N.D. Ohio, 1964)). 388 U.S. 365 (1967). The Court decided that these latter restrictions were illegal because they "would violate the ancient rule against restraints on alienation and open the door to exclusivity of outlets and limitation of territory further than prudence permits (Id. at 380)". The Court did not however say why the authorization of restrictions on distribution was imprudent in the Schwinn context. Id, at 379. 142 U n d e r the Sherman A c t it is unreasonable wi thout more fo r a manufac ture r to seek to restrict and c o n f i n e areas or persons wi th w h o m an art icle may be t raded after the manufac tu re r has parted wi th d o m i n i o n over it. T h e decis ion in S c h w i n n and the foregoing statement, par t icu la r ly the words "without more", were the subject of much c r i t i c ism w h i c h was not settled unt i l 10 years later in the th i rd of the cases, Cont inenta l T V Inc. v. G T E S y l v a n i a Inc . 1 2 . T h e decis ion conta ined an extensive discussion of the analysis adopted by the Supreme C o u r t in S c h w i n n as wel l as an examinat ion of relevant economic issues. S y l v a n i a was a manufac ture r of te levision sets w h i c h had prev ious ly sold its products to independent or company owned distr ibutors who in turn resold to a large and diverse group of retailers. F a c e d wi th a dec l in ing market share of 1-2% of nat iona l te levis ion sales, it adopted a new market ing strategy by sel l ing its te levis ion sets d i rect ly to a smaller and more select group of f r a n c h i s e d retailers. A n acknowledged purpose of the change was to attract more aggressive and competent retailers who wou ld hope fu l l y improve the company's market posi t ion. While each f ranchisee was requi red to sell S y l v a n i a products f r o m only the locat ion or locat ions at w h i c h it was f r a n c h i s e d , a f ranchise d i d not constitute an exclusive terr i tory and S y l v a n i a reta ined sole d iscret ion to increase the number of retailers in an area depend ing upon the success or fa i lu re of exist ing retailers in deve lop ing their markets. F u r t h e r , S y l v a n i a imposed no restrict ions on the r ight of a f ranchisee to sell the products of compet ing manufacturers . 433 U.S. 36 (1977). E v e n before this dec is ion , a number of lower Cour ts began to interpret Schwinn as not creat ing a broad per se rule p roh ib i t ing al l terr i tor ia l restraints. See e.g. G T E S y l v a n i a Inc. v. Cont inen ta l T . V . Inc. 537 F. 2d 986 (9th C i r . 1976) at 997 where the C o u r t said: "We see a clear t rend against interpret ing S c h w i n n as establ ishing a per se rule of i l legal i ty , i n d i s c r i m i n a n t l y i n v a l i d a t i n g al l ver t ica l terr i tor ia l restraints wi thout any considerat ion of their reasonableness in terms of their overa l l compet i t ive effect". 143 T h e case arose f r o m dispute between S y l v a n i a and one of its f ranchisees, C o n t i n e n t a l , about the f r a n c h i s i n g of a retai ler in close p rox imi ty to Cont inenta l 's exist ing premises, and Sy lvania 's re fusa l to al low Cont inen ta l to open another outlet in an area S y l v a n i a a l ready considered to be wel l served by exist ing retai lers. T h e major c la im was that S y l v a n i a had v io la ted section 1 o f the Sherman A c t by enter ing into and en fo rc ing f ranchise agreements that p roh ib i ted the sale of S y l v a n i a products f r o m other than spec i f ied locations. T h e s imi la r i ty in act iv i t ies of both S c h w i n n and S y l v a n i a through the adopt ion of their respective f ranchise systems, thereby enabl ing them to regulate the amount of compet i t ion among their f ranchisees by prevent ing f ranchisees f r o m sel l ing f ranch ised products f r o m outlets other than those spec i f i ed in the f ranchise agreements, meant that the Supreme C o u r t in S v l v a n i a . i f it was unable to d is t inguish S c h w i n n . had to overrule it. It i n fact took the latter course, being c o n v i n c e d of the need fo r c l a r i f i c a t i o n of the law in this a r e a . 1 3 T h e C o u r t was especial ly c r i t i ca l of the d is t inct ion d rawn in S c h w i n n between sale a n d non-sale transactions to just i fy the appl ica t ion of a per se rule in one s i tuat ion and a rule of person in a n o t h e r . 1 4 Indeed, one is at a loss to f a thom why the C o u r t in S c h w i n n adopted a per se rule fo r outr ight sales yet uphe ld ident ica l restr ict ions under a rule of reason fo r consignment sales. T h e Cour t d i d not show how the restr ict ions were more 13 14 T h e C o u r t c i ted numerous scholar ly art icles in support of its views. 433 U.S. at 52-57. 144 ant icompet i t ive or less just i f iab le in their operat ion when they took the f o r m of a sale rather than a c o n s i g n m e n t . 1 5 T h e Cour t acknowledged that ver t ica l restraints reduce in t rabrand compet i t ion by l im i t ing the number of sellers of a par t icu lar product compet ing fo r the business of a g iven group of buyers, but pointed to the d is t r ibu t ion e f f i c ienc ies w h i c h may be achieved by ver t ica l restr ict ions in the way that they promote in te rbrand c o m p e t i t i o n . 1 6 G i v e n these "redeeming virtues" and lack of ev idence in this case that the restrict ions had or were l ike ly to have a "pernicious e f fect on compet i t ion", the Cour t reverted to the s tandard ar t icu la ted in N o r t h e r n  P a c i f i c R a i l w a y and reiterated in White Motor , namely that such restr ict ions should not be "conclusively presumed to be unreasonable and therefore i l legal wi thout elaborate i n q u i r y as to the precise harm they have caused or the business excuse for their u s e . " 1 7 T h e Cour t stressed that it d i d not foreclose the possibi l i ty that par t icu lar appl icat ions of ver t ica l non-pr ice restraints might jus t i fy per se p roh ib i t ion under N o r t h e r n P a c i f i c but it d i d make clear that "any departure f r o m the rule of reason standard must be based upon demonstrable economic e f fect rather than as in S c h w i n n upon formal is t ic l ine d r a w i n g " . 1 8 1 5 A s Bork c y n i c a l l y observed: "Ant i t rust is capable of susta in ing meaningless d ist inct ions and sterile paradoxes, but those of S c h w i n n were too many and too obvious to persist fo r long. T h e precedent s u f f e r e d a t imely and a deserved demise R. Bork , T h e Ant i t rus t Paradox (New Y o r k , Basic Books, 1978) at 285. 1 6 T h e C o u r t p laced heavy rel iance on the wri t ings of a number of C h i c a g o economists to show how such restrict ions enable manufac turers to compete more e f fec t ive ly and how consumers may benef i t . 1 7 356 U.S. at 5. See Part I, note 9 supra. 433 U.S. at 59. O n e gets the impression that the Supreme C o u r t in S v l v a n i a went out of its way to overru le S c h w i n n to re-establish a rule of reason approach in testing ver t ica l non-pr ice restraints and thereby br ing the law back to where it was at the start of the t r i logy. A s M r . Justice White, who concur red wi th the major i ty in d ismiss ing the appeal , pointed out, the Cour t only needed to hold that a locat ion clause held by a manufac turer wi th negl igible economic power in the product market had a compet i t ive impact less than the S c h w i n n restraints to jus t i fy a rule of reason s t a n d a r d . 1 9 In S c h w i n n . the restrict ions whol ly forec losed i n t r a b r a n d compet i t ion by prevent ing distr ibutors f r o m sel l ing outside their exclusive territories. In contrast, in t rabrand compet i t ion was preserved in S v l v a n i a because there was no restr ict ion on the customers to whom or the terr i tories in w h i c h f ranchisees cou ld sell . F u r t h e r , S c h w i n n was the dominant m a n u f a c t u r e r in the indust ry wi th a nat ional market share of 22.5%. T h i s contrasted wi th the 1-2% nat iona l market share held by S y l v a n i a where the dominant m a n u f a c t u r e r had a 60-70% share. Despite these obvious cr i t ic isms, Sv lvan ia was well received and has been v i r tua l l y unan imous ly fo l lowed since in requ i r ing a rule of reason analysis fo r terr i tor ia l and customer restrict ions. T h e only prob lem that has been faced by lower courts is that S v l v a n i a d i d not prov ide any more object ive cr i ter ia by w h i c h to judge whether restr ict ions wou ld constitute an unreasonable restraint of trade, than the factors set out in C h i c a g o B o a r d of T r a d e . 2 0 Id. at 67-68. 20 246 U.S. at 238. See Part I, note 22 supra and R. Posner "The Next Step in the Ant i t rus t Treatment of Restr ic ted D is t r ibu t ion : Per Se Legal i ty" 48 U . C h i c . L . R e v . 6 (1981) at 14-15. 146 (2) Canada The Competition Act includes within the scope of those practices which are civilly reviewable that of "market restriction". The practice is defined in section 49(1) (to be renumbered section 77 under the 1985 Revised Statutes) as: [A]ny practice whereby a supplier of a product as a condition of supplying the product to a customer, requires that customer to sell or supply the product only in a defined market, or exacts a penalty of any kind from the customer if he supplies any products outside a defined market. In order to be the subject of a remedial order by the Competition Tribunal ("the Tribunal"), the Director of Investigation and Research ("the Director") must establish that, because it is engaged in by a major supplier of a product or is widespread in relation to a product, the practice of market restriction is likely to substantially lessen competition in relation to the product. 2 1 Several exceptions to section 49(3) are of direct relevance in the present context. In particular, section 49(4)(a) provides that the Tribunal may not make an order in respect of market restriction when this practice is engaged in only for a reasonable period of time to facilitate entry of a new supplier of a product into a market or of a new product into a market, while section 49(4) also goes on to provide that no order may be made in respect of market restriction among enterprises that are affiliated. For the purposes of this latter exception, enterprises are deemed to be affiliated in situations in which: (a) one company is the subsidiary of the other or both are subsidiaries of the same company or each of them is controlled by the same person; (b) two companies are affiliated with the Section 49 (3). 147 same company at the same time; and (c) a partnership or sole propr ie torsh ip and another par tnership , sole propr ie torship or a company are contro l led by the same 22 person. In a d d i t i o n , enterprises are deemed to be a f f i l i a t e d in situations where there is an agreement under w h i c h one party grants to another the r ight to use a trade mark or trade name to iden t i fy the business of the grantee. T h e business must however be related to the sale or d is t r ibut ion pursuant to a market ing p lan or system prescr ibed substant ia l ly by the grantor, of a mu l t ip l i c i t y of products obta ined f r o m compet ing sources of supply and a mul t ip l i c i t y o f suppl iers , and no one product may dominate the bus iness . 2 3 F i n a l l y , section 49(6) provides that businesses are also deemed to be a f f i l i a t e d where there is an agreement whereby one person supplies or causes to be suppl ied to another person an ingredient or ingredients fo r use in the f o o d and beverage industry . T h i s prov is ion applies only where the second person processes the ingredients by the add i t ion of labour and mater ia l into an art ic le o f f o o d or d r i n k that he then sells in associat ion wi th a trade mark that the f i rs t person owns or in respect of w h i c h the f i rst person is a registered u s e r . 2 4 T o date there have been no appl icat ions by the D i rec tor to the Rest r ic t ive T r a d e Pract ices C o m m i s s i o n ("RTPC") or the T r i b u n a l in respect o f the pract ice of Sections 49(5)(a)-(c). Sect ion 49(5)(d). T h i s is of ten k n o w n as the "soft d r i n k bottler's exemption". 23 market restr ict ion. However in the case of D i rec tor of Invest igat ion and  Research v. Bombard ie r L t d . . 2 6 w h i c h i n v o l v e d an app l ica t ion by the D i rec tor to the R T P C for an order requ i r ing Bombard ie r to cease its pract ice of exclusive dea l ing wi th respect to snowmobi le products and to supply a number of dealers it had terminated for sel l ing compet ing brands, interpretat ions were g iven of two of the important phrases conta ined in the market restr ict ion prov is ion . In de termin ing the factors relevant to the d e f i n i t i o n of a "major suppl ier" of a product , the R T P C s ta ted: 2 7 A major or important suppl ier is one whose actions are taken to have an appreciable or s ign i f icant impact on the markets in w h i c h it sells. Where ava i lab le , a f i rm 's market share is a good ind ica t ion of its importance since its ab i l i ty to ga in market share summarizes its capabi l i t ies in a number of d imensions. Other character ist ics of a suppl ier w h i c h might also be used in assessing its importance in an indust ry are its f i n a n c i a l strength and its record as an innovator . O n the basis of Bombardier 's h istor ical posi t ion in the indust ry , its strong par t ic ipa t ion in i n n o v a t i o n , t ra i l setting and rac ing and its market share of approx imate ly 30%, the R T P C ru led that is was a major suppl ier to the N o r t h A m e r i c a n market . T h e Di rector 's app l ica t ion was however dismissed because the exclusive dea l ing arrangement engaged in by Bombard ie r was f o u n d not to lessen O n e i n q u i r y has however been under taken by the D i rec tor into al leged pract ices of market restr ict ion, namely Te lephone A n s w e r i n g Services  Inqu i ry , a l though this was later d iscont inued. See G . K a i s e r , C o m p e t i t i o n  L a w of C a n a d a (New Y o r k , Mathew Bender , 1988) at para. 5.02. (1980), 53 C .P .R . (2d) 47. 27 Id. at 55. 149 compet i t ion substant ia l ly nor was it l i ke ly to, either at the reta i l , d is t r ibu t ion or m a n u f a c t u r i n g levels. In reaching this conc lus ion , the R T P C considered the ease of entry into the market , the ava i lab i l i t y of exist ing and potent ia l dealers, the changes in relat ive market sales shares and the ef fect of the pract ice on compet i t ion. T h e evidence disclosed that entry into the market was easy, suppl iers were easi ly able to recrui t new dealers, and that there was an expansion of sales and dealerships by Bombard ier 's competitors over the per iod in quest ion. T h e r e was also no ev idence that the level of sales at tained by Bombard ier 's competi tors was i n s u f f i c i e n t to permit them to support adequate d is t r ibu t ion systems now that B o m b a r d i e r was the only dealer in a number of communi t ies . These interpretat ions are l ike ly to be h e l p f u l when a n d i f an app l ica t ion is made by the D i rec to r in regard to "market restr ict ion". (3) A u s t r a l i a U n l i k e wi th R P M , the A u s t r a l i a n and New Z e a l a n d provis ions dea l ing wi th terr i tor ia l and customer restrict ions d i f f e r to some degree, but an extended analysis of the relevant A u s t r a l i a n provis ions is jus t i f ied in v iew of the general ly s imi lar treatment accorded such restrict ions and the interpretat ion g iven to a number of key words and phrases common to both jur isd ic t ions. Sect ion 47 of the A u s t r a l i a n A c t prohibi ts the pract ice of "exclusive deal ing" under w h i c h label are i n c l u d e d terr i tor ia l and customer restr ict ions. Sect ion 47(2)(f) prohib i ts any corporat ion m a k i n g a cond i t ion of any supply or o f f e r to supply goods and services that a person not resupplv goods (i) to par t icu lar persons or classes of persons or to persons other than par t icu lar persons or classes of persons; or (ii) i n par t icu lar places or classes of places or in places other than 150 par t icu lar places or classes of places. A s imi lar p roh ib i t ion exists in section 47(3)(f) where a corporat ion refuses to supply or o f f e r to supply goods and services to a person because that person does not agree not to resupply to par t icu lar persons or places or classes of persons or places. Converse ly , i f a person acquires or o f fe rs to acqui re goods and services on these condi t ions , it also is deemed to engage in the pract ice of exclusive d e a l i n g . 2 8 T h e term "resupply" is d e f i n e d in section 4(e) to inc lude a reference to a supply of goods to another person in an altered f o r m or c o n d i t i o n , and a supply to another person of goods in w h i c h the f i rst ment ioned goods have been incorporated . Notwi ths tand ing this d e f i n i t i o n , the impos i t ion of terr i tor ia l and customer restrict ions in a d is t r ibut ion arrangement where the d is t r ibutor is responsible fo r the manufac ture of the goods or the prov is ion of services wou ld not appear to be caught because there is no resupply. T h e same applies where there is a consignment arrangement because the "other person" is act ing as an agent. T h e term "condi t ion" is d e f i n e d in section 47(13)(a) to inc lude a reference to any cond i t ion the existence or nature of w h i c h is ascertainable only by in fe rence f r o m the conduct o f persons or f r o m other relevant c i rcumstances. T h u s the section is not l imi ted to the imposi t ion of a strict cond i t ion of supply but may arise by imp l i ca t ion f r o m the circumstances in w h i c h the goods and services were s u p p l i e d . 3 0 Sect ion 47(4). T h e p roh ib i t ion also only af fects corporat ions, not persons, the latter being subject to the more general provis ions of section 45 re lat ing to contracts, arrangements and understandings. See D o n a l d & H e y d o n , supra note 4 at 289-90. See R e K u r i n g - g a i Co-operat ive B u i l d i n g Society (No. 12) L t d . (1978) 36 F . L . R . 134 at 167. B y v i r tue of section 47(10), the p roh ib i t ion only comes into e f fec t i f the conduct in quest ion, together wi th conduct of the same or a s imi lar k i n d and engaged in by the corporat ion or a body corporate related to that corpora t ion , has "the purpose or has or is l ike ly to have the ef fect of substant ia l ly lessening compet i t ion". T h e phrase "substantial ly lessening compet i t ion" and par t icu la r ly the word "substantial ly" has p r o v i d e d the A u s t r a l i a n courts wi th some d i f f i c u l t y because of its somewhat imprecise and ambiguous meaning K e e l y J . said in C o o l &  Sons Ptv L t d . v. O ' B r i e n Glass Industries Ptv L t d . 3 1 that the A c t requ i red any lessening of compet i t ion to be "real or [of] substance" as d ist inct f r o m a lessening that is " insubstant ia l , i ns ign i f i can t or m i n i m a l " , 3 2 whi le on a p p e a l , 3 3 F o x J . de fe r red f r o m g i v i n g the phrase any meaning , p re fe r r ing to leave it to the " i n d i v i d u a l assessment" of judges in each case in l ine wi th the tendency in the U n i t e d States when consider ing the phrase under section 3 of the C l a y t o n A c t to leave it " u n d e f i n e d , and commonly , to associate it wi th the subject matter..." 3 4 . A m u c h more considered and economica l ly based analysis of the phrase was p rov ided (1981) A . T . P . R . 42,992. Id. at 43,003 F r a n k i J . in Hecar Investments No . 6 Ptv L t d . v. O u t b o a r d  M a r i n e A u s t r a l i a Ptv L t d . (1982) A . T . P . R . 43,699 adopted a s imi la r d e f i n i t i o n in a rgu ing that the word "substantial ly" refers to "an e f fect on compet i t ion w h i c h is at least ' real ' or 'of substance' or 'of s ign i f icance '" (Id. at 43,705). (1983) A . T . P . R . 44,449. Id. at 44,455. In a s imi lar ve in , F r a n k i J . said that whether or not conduct has the purpose or e f fect of substant ia l ly compet i t ion in a market should be left to one's "own inst inct ive impressions". Irk at 44,464. by Smithers J . in D a n d y Power E q u i p m e n t Pty L t d . v. M e r c u r y M a r i n e Pty L t d . . where he said: T o apply the concept of substant ia l ly lessening compet i t ion in a market , it is necessary to assess the nature and extent of the market , the probable nature and extent of the market , the probable nature and extent of compet i t ion w h i c h w o u l d exist therein but fo r the conduct in quest ion, the way the market operates and the nature and extent of the contemplated lessening. T o my m i n d one must look at the relevant s ign i f icant por t ion of the market , ask oneself how and to what extent there wou ld have been compet i t ion therein but fo r the conduct , assess what is left and determine whether what has been lost in re lat ion to what should have been is seen to be a substantial lessening of compet i t ion. Some d i f f i c u l t y has also been exper ienced wi th the word "purpose", par t icu la r ly because of the rather u n h e l p f u l d e f i n i t i o n of this word in section 4F . A g a i n however , Smithers J . in the same decis ion o f f e r e d the f o l l o w i n g reasoned e x p l a n a t i o n : 3 7 [T]here is a real question as to whether the purpose re fer red to in s.47(10) is the purpose in the m i n d of the person who engaged in the relevant conduct or is the purpose at t r ibuted to the act of engaging in that conduct and to be ascertained f r o m the nature of that act of engaging in that conduct . T h i s is a f o r m of words hard ly apt to refer to the subject ive purpose of the person p e r f o r m i n g the. relevant act and apt to induce an objective rather than a subject ive approach . F i n a l l y in regard to the interpretat ion of section 47(10), section 47(13) c la r i f i es the market in w h i c h the ef fect of par t icu lar conduct on compet i t ion is to (1982) A . T . P . R . 43,872. I± at 43, 887-88. (1982) 64 F . L . R . 238 at 276. be evaluated by p r o v i d i n g that a reference to "competit ion" is deemed to be a reference to "competi t ion in any market" in w h i c h the corporat ion engaging in the conduct or any body corporate related to it deals or wou ld otherwise dea l , or in w h i c h any person restr icted by the conduct in question deals or otherwise wou ld dea l , but for the conduct . Important exemptions f r o m the app l ica t ion of section 47 operate where (a) the conduct is engaged in by and between related corporat ions (as extensively d e f i n e d in section 4 A ) 3 8 ; (b) any one of the general exceptions in section 51 re lat ing to the engaging in prohib i ted conduct in associat ion wi th the grant ing or l icensing of patents, t rademarks, designs or copyr ights is appl icab le ; (c) an author iza t ion is obta ined under section 90 of the A c t ; or (d) a no t i f i ca t ion is lodged under section 93. In regard to the latter two exemptions, an author iza t ion w i l l be granted where the T r a d e Pract ices Commiss ion ("TPC") is sat is f ied that the proposed conduct wou ld result or be l ike ly to result in a benef i t to the pub l ic that wou ld outweigh any detr iment to the publ ic consti tuted by any lessening of compet i t ion resul t ing or l ike ly to result i f the proposed conduct was engaged i n . 3 9 T h e ef fect of a no t i f i ca t ion is to prov ide statutory protect ion fo r conduct w h i c h may otherwise contravene section 47 unt i l such time that the T P C determines that the conduct is l i ke ly to have the ef fect of substant ia l ly lessening compet i t ion and in a l l the c i rcumstances either (a) no pub l ic benef i t has resulted or is l i ke ly to 38 Section 47(12). 3 9 Sect ion 90(6). 154 result f r o m the conduct , or (b) any pub l ic benef i t l i ke ly to result wou ld not outweigh the detr iment to the pub l ic consti tuted by the lessening of c o m p e t i t i o n . 4 0 U n f o r t u n a t e l y there have been few decisions in A u s t r a l i a w h i c h have spec i f i ca l l y had to consider terr i tor ia l and customer restr ict ions. O f these few decis ions, none have reached the appellate level and al l were handed down in the ear ly 1970's. T h e approach taken in these decisions was s imi lar to that in White  Motor whereby restr ict ions of this nature were not regarded as per se ant i -compet i t ive but were a l lowed i f the ef fect on compet i t ion was not substant ia l . T h u s a number of restr ict ions w h i c h related to the whole of A u s t r a l i a were a l l o w e d 4 1 as wel l as to the whole of one or more A u s t r a l i a n States . 4 2 In T w y f o r d s  (Austra l ia ) Ptv L t d . 4 3 for example, exclusive deal ing arrangements ( incorporat ing terr i tor ia l restrict ions) entered into by a manufac turer of v i treous c h i n a wi th 10 N e w South Wales and A u s t r a l i a C a p i t a l T e r r i t o r y d istr ibutors were not thought to substant ia l ly lessen compet i t ion because the distr ibutors were not otherwise restr icted w i th in the st ipulated areas, they d i d not normal ly trade outside those areas and the manufac turer had less than 10% of the relevant market . L i k e w i s e in G i l b e r t L o d g e & C o . L t d . 4 4 . where a manufac turer of cer ta in " l i f t ing and p u l l i n g units" reserved to itself a l l A u s t r a l i a n or State government business, it was held 4 0 Section 93(3). 4 1 See T P C determinat ions cited in W. Pengi l ley , "Exc lus ive D e a l i n g under the T r a d e Pract ices Ac t " (1975) A . B . L . R . 174 at 198 n.67. 4 2 Ig\ at 199 n.70. 4 3 (197 4) T . P . R . 449. (1974-5) A . T . P . R . (Com.) 8,703. 155 that the restr ict ions on the manufacturer 's d istr ibutors d i d not have the e f fect of substant ia l ly lessening compet i t ion in the relevant market because there was considerable import compet i t ion , a large number of substitutable A u s t r a l i a n products were ava i lab le , there were also a large number of a l ternat ive suppl iers and the restr ict ion on each of the a f fec ted distr ibutors was not o n e r o u s . 4 5 T h e approach to be taken in fu ture A u s t r a l i a n cases is un l i ke ly to be any d i f f e ren t w i th only those restr ict ions hav ing a s ign i f i can t ly adverse e f fect on compet i t ion as judged by the facts in each par t icu lar case being l i ke ly to be struck down. (4) N e w Z e a l a n d (i) O v e r v i e w of C u r r e n t Prov is ions T h e major prov is ion of the New Z e a l a n d A c t ca tch ing ver t ica l non-pr ice restraints is section 27 w h i c h provides as fol lows: (1) N o person shal l enter into a contract or arrangement , or a r r ive at an unders tanding , conta in ing a p rov is ion that has the purpose, or has or is l ike ly to have the e f fect , of substant ia l ly lessening compet i t ion in a market . (2) N o person shal l give ef fect to a prov is ion of a contract , arrangement , or understanding that has the purpose, or has or is l i ke ly to have the e f fect , of substant ia l ly lessening compet i t ion in a market. (3) Subsect ion (2) of this section applies in respect of a contract or arrangement entered into, or an unders tand ing a r r i v e d at, whether before or after the commencement of this A c t . See also M a z d a Motors Ptv L t d . (1975) A . T . P . R . (Com.) 15,905 and Hoover  A u s t r a l i a (Ptv.) L t d . (1976-77) A . T . P . R . (Com.) 15,901. (4) N o prov is ion of a contract , whether made before or after the commencement of this A c t , that has the purpose, or has or is l i ke ly to have the ef fect , of substant ia l ly lessening compet i t ion in a market is enforceable . T h e terms "contract", "arrangement" and "understanding", w h i c h describe the type of col lus ive act iv i ty proscr ibed by section 27, are taken d i rec t ly f r o m the relevant provis ions of the A u s t r a l i a n A c t . U n f o r t u n a t e l y the A c t does not spec i f i ca l l y d e f i n e these terms, but it is clear that no f o r m a l or legal ly enforceable agreement need exist, and that the Commiss ion and the Cour ts w i l l be look ing fo r substance rather than fo rm. T h e terms "arrangement" and "understanding" are par t icu la r ly broad and cover , in e f fect , a l l c i rcumstances where there can be said to be mutua l in tent ion or expec ta t ion . 4 6 A s such , there seems litt le d is t inc t ion in pract ice between the conspi racy requirements in section 1 of the Sherman A c t and the requirements to sat isfy section 2 7 . 4 7 Sect ion 27 on ly prohib i ts arrangements w h i c h have the purpose or have or are l ike ly to have the ef fect , of substant ia l ly lessening compet i t ion in a market. In regard to the term "purpose", section 2(5)(a) of the A c t provides: In T o p Per fo rmance Motors Ptv L t d . v. Ira Berk L t d . (Old) L t d . (1975) 24 F . L . R . 286 at 290, Smithers J . said: "The word 'arrangement ' is apt to describe something less than a b i n d i n g contract or agreement, something in the nature of an understanding between two or more persons - a p lan ar ranged between them w h i c h may not be enforceable at law." See also R e  Wel l ington F e n c i n g Mater ia ls Assoc ia t ion [19611 N Z L R 1121 at 1129-30. A s to the term 'unders tand ing ' Smithers J . said at 291: " A n unders tand ing must invo lve the meeting of two or more minds. Where the minds of the parties are at one that a proposed transact ion between them proceeds on the basis of a maintenance of a par t icu lar state of a f fa i rs or the adopt ion of a par t icu lar course of conduct , it wou ld seem that there wou ld be an unders tand ing w i th in the meaning of the Act" . See e.g. Interstate C i r c u i t . Inc. v. U n i t e d States 306 U.S. 208 (1939). 157 A provision of a contract, arrangement or understanding, or a convenant shall be deemed to have had, or to have, a particular purpose if -(i) the provision was or is included in the contract, arrangement or understanding, or the covenant was or is required to be given for that purpose, or purposes that included or include that purpose: and (ii) that purpose was or is a substantial purpose. (Emphasis added.) In turn, the word "substantial" is defined in section 2(1) to mean "real or of substance". Although the definitions are somewhat circuitous, it is reasonably clear that the "purpose" test in section 27 will only be satisfied where a particular practice has the real or substantial purpose, of substantially lessening competition in a market. A mere coincidental or, for that matter, incidental purpose will not suffice. The test is objective.48 In regard to the phrase "has or is likely to have the effect", the Act does not appear to be addressing intention or any other mental state, but appears to be looking purely at the consequences of a particular practice. Such consequences must however be the "likely" consequences of a particular activity. Recent case law in New Zealand in a similar respect has held that the word "likely" should be 48 Fisher and Pavkel Ltd.. Decision No. 225, 4 April 1989 at 22, adopting the approach preferred by Smithers J . in Dandy Power, supra note 37. equated wi th the word "probable". It is reasonably clear, once aga in , that a theoret ical or remote possibi l i ty of a reduct ion in compet i t ion is not enough. T u r n i n g next to the phrase "substantial ly lessening compet i t ion" , the key word here is "competit ion". T h e concept of compet i t ion is centra l to the A c t as wel l as to compet i t ion po l icy and economics general ly . T h e prob lem is that it lacks a d e f i n i t i o n agreeable to most antitrust scholars and economists. A s one commentator has noted, "there is probably no concept in al l of economics that is at once more f u n d a m e n t a l and pervasive, yet less sat is factor i ly deve loped than the concept of ' compet i t ion ' " . 5 0 Sect ion 3(1) of the A c t adopts a h y b r i d concept of 'workable and e f fec t ive compet i t ion ' as the d e f i n i t i o n of "competit ion", undoubted ly a recogni t ion by Par l iament f i rs t , that perfect c o m p e t i t i o n 5 1 is neither possible nor a desirable goal fo r rea l - l i fe po l icy m a k i n g (especially in l ight of N e w Zea land 's concentrated and See A i r N e w Z e a l a n d L t d . v. T h e Commerce C o m m i s s i o n [1985] 2 N . Z . L . R . 338. R. A h d a r , "The M e a n i n g of 'Compet i t ion ' and the C o m m e r c e A c t 1986", (1988) 6 Otago L . R e v . 319.. Per fect compet i t ion in an industry arises where there are a large number of compet ing f i rms each sel l ing a homogenous product and whose i n d i v i d u a l market shares are so smal l that none of them are able to in f luence the market pr ice of the product by i n d i v i d u a l l y v a r y i n g the quant i ty sold. Per fect compet i t ion is to be contrasted wi th monopoly , o l igopol ist ic and monopol is t ic compet i t ion where there is only one or a smal l number of f i rms in the industry and each has the abi l i ty to i n f l u e n c e pr ice by v a r y i n g the quant i ty sold. See F . M . Scherer , Industr ia l Marke t Structure and  E c o n o m i c Per fo rmance 2nd ed. (Boston, H o u g h t o n M i f f l i n C o . , 1980) at 9-12. 159 f a i r l y smal l economy) , and second, that compet i t ion is d y n a m i c in n a t u r e 5 2 and should not therefore be v iewed as a static structural not ion. D o n a l d and H e y d o n , in their leading text on the A u s t r a l i a n A c t , p rov ide the f o l l o w i n g usefu l d e f i n i t i o n of 'workable c o m p e t i t i o n ' : 5 3 We suggest that workable compet i t ion means a market f r a m e w o r k in w h i c h the presence of other par t ic ipants (or the existence of potent ial new entrants) is su f f i c i en t to ensure that each par t ic ipant is constra ined to act e f f i c i e n t l y and in its p l a n n i n g to take account of those other par t ic ipants or l i ke ly entrants as u n k n o w n quanti t ies. T o that end there must be an oppor tuni ty fo r each par t ic ipant or new entrant to achieve an equal foot ing wi th the e f f i c ien t par t ic ipants in the market by hav ing equivalent access to the means of entry, sources of supply outlets for product , i n f o r m a t i o n , expertise and f inance . ... Workable compet i t ion exists when there is an  oppor tun i ty fo r su f f i c ien t in f luences to exist in any market ,  w h i c h must be taken into account by each par t ic ipant and  w h i c h constra in its behaviour . (Emphasis added) T h e meaning of 'e f fect ive compet i t ion ' w h i c h term was used in the objects clause of the 1975 A c t , was examined by the Commiss ion in V i s i o n h i r e H o l d i n g s  L t d . / S a n v o Renta ls L t d . 5 4 . T h e Commiss ion in that dec is ion d i d not f i n d it necessary to examine the term in deta i l , but s a i d : 5 5 52 53 54 55 F isher and Payke l L t d . . supra note 48 at 25: "The C o m m i s s i o n accepts that it should not take a 'snapshot' v iew of compet i t ion , that it is a d y n a m i c process, a n d , in par t icu lar , that [a practice] should be seen in this context and that the Commiss ion should consider present market facts c a r e f u l l y in such light". D o n a l d & H e y d o n , supra note 4 at 91. (1984) 4 N . Z . A . R . 288 Id. at 290. 160 [BJroadly it envisages a market structure in w h i c h there is an absence of power in any relevant market to raise a n d / o r decrease prices to exclude entry by others to such a market . While the V i s i o n h i r e decis ion has been re fer red to and a f f i r m e d on numerous occasions s i n c e 5 6 , the classic statement on 'e f fec t ive compet i t ion ' remains that of the U.S. A t to rney Genera l 's N a t i o n a l Commit tee to Study Ant i t rus t L a w s where it was s a i d : 5 7 T h e basic character ist ic of e f fec t ive compet i t ion in the economic sense is that no one seller, and no group of sellers act ing in concert , has the power to choose its level o f prof i ts by g i v i n g less and charg ing more. Where there is workable compet i t ion , r i va l sellers, whether exist ing competi tors or new or potent ial entrants into the f i e l d , wou ld keep this power in check by o f f e r i n g or threatening to o f f e r e f fec t ive inducements , so long as the prof i ts to be ant ic ipated in the indust ry are s u f f i c i e n t l y attract ive in compar ison wi th those in other employment , when al l r isks and other deterrents are taken into account. What can be taken f r o m these de f in i t ions is that fo r workable and e f fec t ive compet i t ion to exist there must be act ive r i va l ry between market part ic ipants. R i v a l r y is not c o n f i n e d to just pr ice but also involves service, technology, i n f o r m a t i o n , qua l i ty , consistency of product and so on. A s was said in R e  Queens land Co-operat ive M i l l i n g Assoc ia t ion L t d . ( " Q C M A " ) : 5 8 See eg. News L t d / I N L Dec is ion N o . 164, 9 M a y 1986; Wattie  I n d u s t r i e s / T a v l o r Freezer Ho ld ings (1985) 5 N Z A R 218 at 222 and A i r  N Z / M t C o o k G r o u p . Dec is ion N o . 130, 6 June 1985. T h e Repor t of the A t to rney General 's Na t iona l Commit tee to Study A n t i -T rus t L a w s (1955) at 320. (1976) 1 A . T . P . R . 17,223 at 17,246. In our v iew e f fec t ive compet i t ion requires both that prices should be f lex ib le , re f lect ing the forces of demand and supply , and that there should be independent r i v a l r y in al l d imensions of the pr ice-product -serv ice packages o f f e r e d to consumers and customers. Par t ic ipants inc lude not only those in the market but also those who have the capac i ty to enter. In this regard, the cr i t ica l determinant is the condi t ions of entry to the relevant market . T h e term "substantial", as noted above, is d e f i n e d in section 2 to mean "real or of substance". T h e A u s t r a l i a n experience, as also noted above, has f o u n d this term to be "imprecise", "ambiguous" and of " intractably i n d e f i n i t e import". It was said in the W h a k a t u / A d v a n c e d Closure A u t h o r i s a t i o n 5 9 that the word "substantial ly" can be used in either a relat ive or absolute sense. T h e Commiss ion adopted the views expressed in R a d i o 2 U E Sydney Ptv L t d . v. Stereo F . M . Ptv  L t d . 6 0 on the equivalent A u s t r a l i a n prov is ion that the relat ive sense is the correct one, that is: what is the extent to w h i c h compet i t ion is lessened by the pract ice over w h i c h the Commiss ion has ju r isd ic t ion relat ive to actual and potent ia l compet i t ion in the relevant market or m a r k e t s ? 6 1 T h e C o m m i s s i o n went on to say that regard should be had to al l of the sur round ing c i rcumstances in m a k i n g a judgement as to the degree of market power created by the pract ice , the test being object ive rather than subjective. T h e Commiss ion also adopted the views expressed Dec is ion N o . 205, 22 Ju ly 1987. (1982) 62 F . L . R . 437. See also F isher and Pavke l L t d . . supra note 48 at 23-24. in Cool & Sons Ptv. Ltd. v. O'Brien Glass Industries Ltd. . again in relation to the equivalent Australian provision, that "real or of substance" are intended to mean "not insignificant, not ephemeral, not nominal or minimal". It is submitted that this interpretation is correct, given what appears to be a conscious choice by Parliament to adopt a special definition of the term "substantial" repeating the very words "real or of substance" used in the judgement of Keely J. in Cool &  Sons Ptv Ltd. v. O'Brien Glass Industries Ltd.63. Section 3(2) of the Act defines the term "lessening of competition" to include the "hindering or preventing of competition". It is notable that clause 3(2) of the draft Bill defined "lessening of competition" as "the lessening, preventing or hindering of price competition or any other single element of competition". The modification to the clause upon enactment makes it clear that all elements of competition and not just price competition are to be taken into account. That regard must be had to restrictions upon potential entrants in a market is reinforced by section 3(3) which provides that "the effect on competition shall be determined by reference to all factors that affect competition in that market from goods and services supplied by persons not resident or carrying on business in New Zealand.64 It is the ability of newcomers to enter a market (in addition to the ability of existing competitors to expand) that gives rise to potential competition as a discipline upon the actions of an incumbent. In the assessment of market (1981) 3 A.T.P.R. 42,992. See text accompanying note 31 supra. 6 4 On the need to have regard to potential competition from imports, see Fletcher Metals Ltd. v. Commerce Commission. Wellington Registry, M600/85,28 April 1986. 163 constraints on incumbent f i rms , the concern is not so m u c h wi th the ident i ty of potent ia l competi tors but whether or not f i rms can enter or expand in a market . Whether or not there is a substantial lessening of compet i t ion in a market w i l l depend upon the c ircumstances of each case and can only be determined by c a r e f u l economic analysis to ascertain the extent to w h i c h the conduct at issue has a f fec ted al l o f the interre lat ionships between the part ic ipants in the market . H o w e v e r one can general ize that there must be an increase in market power resul t ing f r o m the pract ice in question w h i c h is at least real and of substance. T u r n i n g f i n a l l y to the term "market", economists have f o u n d , l ike wi th the concept of compet i t ion , great d i f f i c u l t y in p r o v i d i n g an author i ta t ive d e f i n i t i o n g iven its mu l t id imens iona l nature. Marke t d e f i n i t i o n is of f u n d a m e n t a l importance in re lat ion to v i r tua l ly a l l compet i t ion issues under the A c t because it is a necessary predicate to the determinat ion of whether or not a restr ict ive trade pract ice exists. T h e del ineat ion of the relevant market is also an important f i rst step in the assessment of whether or not there exists "workable and e f fec t ive compet i t ion". A "market" is d e f i n e d in section 3(1) of the A c t to mean: A market for goods and services w i th in New Z e a l a n d that may be d is t inguished as a matter of fact and commerc ia l common sense. T h e d e f i n i t i o n echoes a statement made by the Commiss ion in E d m o n d s F o o d  Industries L i m i t e d / W . F . T u c k e r & C o . 6 5 where in the C o m m i s s i o n o f f e r e d the 65 D e c i s i o n N o . 84, 21 June 1984. 164 f o l l o w i n g analysis , based on the A u s t r a l i a n decis ion in O C M A 6 6 . o f the factors w h i c h are relevant to market d e f i n i t i o n : 6 7 A market has been d e f i n e d as a f i e l d of actual or potent ia l transactions between buyers and sellers amongst w h o m there can be strong subst i tut ion, at least in the long r u n , i f g iven a su f f i c i en t pr ice incent ive. In de l ineat ing the relevant market in any par t icu lar case there is a value judgment w h i c h must be made w h i c h involves , fo r example, an assessment of pert inent market realit ies such as technology, d istance, cost a n d pr ice incent ives an assessment of the degree of subst i tutabi l i ty of products; an apprec ia t ion of the fact that a market is d y n a m i c and that potent ial compet i t ion is relevant; and an eva luat ion of industry v iewpoints and pub l i c tastes and attitudes. Par t icu la r ly important in this process is indust ry recogni t ion (both by suppl ier and purchaser) and recogni t ion by the consumer. U l t i m a t e l y the judgment as to  the appropr iate market - and its de l ineat ion bv f u n c t i o n ,  product and area - is a question of fact w h i c h must be made  on the basis of commerc ia l common sense in the c i rcumstances  of each case. (Emphasis added). In A u c k l a n d R e g i o n a l A u t h o r i t y v. M u t u a l R e n t a l Cars ( A u c k l a n d A i r p o r t )  L t d . and O r s 6 8 counsel submit ted that the reference to "fact and commerc ia l common sense" in section 3(1) meant that the Cour t should give more weight to the views of businessmen in the market place when d e f i n i n g the relevant boundar ies of the market. M r . Justice Barker r e p l i e d : 6 9 [T]hat submission is s impl ist ic ; the reference in the A c t to commerc ia l common sense (as dist inct f r o m any other k i n d of common sense) as the yardst ick by w h i c h to determine a market is another and more s t ra ight forward way of (1976) 1 A . T . P . R . 17,223 at 17,247. D e c i s i o n N o . 84 at 5. J u l y 31st, 1987, H i g h Cour t of A u c k l a n d , C P 137/86. 6 9 Id. at 51. 165 ar t icu la t ing the A u s t r a l i a n d e f i n i t i o n [which def ines the term 'market ' in section 4 E as "a market in A u s t r a l i a a n d , when used in relat ion to any goods or services, inc ludes a market fo r those goods or services that are substitutable fo r , or otherwise compet i t ive wi th , the f i rst ment ioned goods or services]. T h e matters in the A u s t r a l i a n d e f i n i t i o n must enter into the Court 's assessment of ' fact and common sense'. T h e assessment must be made f r o m a considerat ion of the composi t ion of and the forces in the market. T h e perceptions of the part ic ipants can only be part of the necessary i n f o r m a t i o n a v a i l a b l e . 7 0 It seems clear therefore that whi le the views of businessmen w i l l be re levant , commerc ia l commonsense requires the more t rad i t iona l use of statutory interpretat ion and review of authori t ies as well as economic analysis of the evidence. T h e mul t id imens iona l nature of a market noted in E d m o n d s in terms of Tl 7*) *7Q product , f u n c t i o n and area is consistent wi th the approach taken in other In the result, Barker J . f o u n d that "as a 'matter of fact and commerc ia l common sense', there is a market for rental car services at A u c k l a n d A i r p o r t . C f . T r a d e Pract ices Commiss ion v. Ansett T ranspor t Industries  (Operat ions) Pty L t d . (1978) A . T . P . R . 17,705 where, in de termin ing whether A v i s was dominant in the car rental business, the C o u r t d i d not consider a separate market fo r services at a i rports, but held that the geographic market was nat ionwide . T h a t case however considered a proposed merger or takeover wi th the focus being on whether the merged company wou ld dominate the market. In Budget on the other h a n d , the concern was wi th the A R A ' s lett ing of contracts fo r A u c k l a n d A i r p o r t only . See also A s p e n  H i g h l a n d s S k i i n g C o r p . v. A s p e n Sk i ing C o . 738 F.2d 1509 (10th C i r . 1984) in w h i c h the operator of 3 or 4 ski fac i l i t ies in A s p e n , C o l o r a d o had terminated the use of a convenient joint t icket in con junct ion wi th its smaller r i v a l . With the focus of attention on the conduct at A s p e n , it appears to have been accepted that the A s p e n Sk i Resort was not in compet i t ion wi th other ski resorts in the U n i t e d States. T h e product d imension ident i f ies products w h i c h are substi tutable for each other and is normal ly the most c r i t ica l assessment in de termin ing the outcome of a case. See eg. U n i t e d States v. E.I, du Pont de Nemours and Co . 351 U.S. 377 (1956) and U n i t e d States v. Cont inen ta l C a n C o . et. al . 378 U.S. 441 (1964). jur isd ic t ions. In the most recent New Z e a l a n d decis ion in this area, the H i g h C o u r t and C o u r t of A p p e a l rejected a c l a i m that a market existed in respect of a single a l b u m , f i n d i n g instead that the relevant product and geographic market was the New Z e a l a n d a l b u m m a r k e t . 7 6 Emphas is was placed on demand and supply subst i tutabi l i ty in regard to product market d e f i n i t i o n , but l i tt le was said in regard to geographic market d e f i n i t i o n . T h e d e f i n i t i o n of a "market" in section 3(1) is dec ided ly u n h e l p f u l , requ i r ing the Courts and the C o m m i s s i o n to largely determine in their own minds what factors should be taken into account. What is notable T h e f u n c t i o n a l d imension ident i f ies the level in the product ion and d is t r ibu t ion cha in under considerat ion. T h e area d imens ion ident i f ies the geographic area or areas w i t h i n w h i c h sellers of goods and services operate or to w h i c h buyers can turn f o r the supply of such goods and services. Several factors i n f l u e n c e the determinat ion of a geographic market such as the pattern of d e m a n d , cost of t ransportat ion, mobi l i ty of buyers and convenience but, as a lways, the matter largely depends on the facts of each case. In the U n i t e d States, for example, the method for de te rmin ing these markets bas ica l ly fo l lows the approach set fo r th in the Depar tment of Justice's Merger G u i d e l i n e s issued in 1982 and 1984 where in customer and suppl ier responses to hypothet ica l increases in price are examined. T h e r e is a vast amount of l i terature in this area w h i c h is wel l beyond the scope of this thesis to review. See however W. C a n n , Jr . , "The N e w Merger G u i d e l i n e s - Is the Depar tment of Justice E n f o r c i n g the Law?" 21 A m e r . Bus. L . J . 1 (1983) and G . Werden, "Market De l inea t ion and the Justice Department 's Merger Guide l ines" , (1983) D u k e L . J . 514. In A u s t r a l i a , the approach taken is well set out in In R e T o o t h & Co . L t d . . In R e Toohev 's L t d . (1979) A . T . P . R . 18,174. T r u T o n e L t d et. al . v. Fest iva l Records Reta i l M a r k e t i n g L t d F e b r u a r y 7th 1988 C . L . 31/87 and September 19th, 1988, C A 85/88. See also M a r k L y o n s Ptv L t d v. Burs i l l Sportsaear Ptv L t d (1987) A . T . P . R . 48,789 where the C o u r t rejected the appl icant 's c l a i m that the relevant product market was the Saloman b rand of skiboots. T h e C o u r t also rejected the defendants submission that it was fo r sportsgear or a l ternat ive ly skigear but f o u n d instead that the relevant market was the A u s t r a l i a n skiboot market. 167 however is that neither the Courts nor the Commiss ion have adopted the concept of 'submarkets ' as has been the case in the U n i t e d States a n d A u s t r a l i a . 7 7 T h e submarket concept appears to have been used by the courts in these jur isd ic t ions to a v o i d choosing among possible larger markets in w h i c h the extent of compet i t ion wou ld norma l ly be assessed. T h e r isk is that submarkets may be overnar rowly d e f i n e d and therefore a clear case of l i ab i l i ty w i l l not be establ ished. A number of decisions in the U n i t e d States have been subject to c r i t i c ism for this very 78 reason. (ii) Exempt ions While the A u s t r a l i a n A c t contains f o u r exemptions to the p r o h i b i t i o n against exclusive dea l ing in section 47, the N e w Z e a l a n d A c t l imits the number of exemptions to just three. T h e most important of these is the power g iven to the C o m m i s s i o n under section 58(1) to author ize the enter ing into and per fo rmance of contracts, arrangements or understandings to w h i c h , inter a l ia , section 27 applies. While such author iza t ion remains in force , conduct proh ib i ted by section 27 is deemed l a w f u l i f it is in accordance wi th the terms of the author iza t ion . T h e c r i t i ca l statutory prov is ion govern ing appl icat ions fo r author iza t ion is section 61(6) w h i c h provides: See M . Brun t , "Market D e f i n i t i o n Issues in A u s t r a l i a and N e w Z e a l a n d " (Paper presented at a Commerce A c t Workshop M a y 1988, Well ington). A submarket refers to an area of compet i t ion that is narrower than a market . 78 See B. H a w k , "European E c o n o m i c C o m m u n i t y and U n i t e d States Ant i t rus t L a w : Constra ints and Convergences", (1988) 16 A . B . L . R . 282 at 298. 168 T h e C o m m i s s i o n shal l not make a determinat ion grant ing an author iza t ion under section 58(l)(a) t o ( d ) of this A c t unless it is sat is f ied that-(a) T h e enter ing in to .o f the contract or arrangement or the a r r i v i n g at the understanding; or (b) T h e g iv ing e f fect to the p rov is ion of the contract , arrangement or understanding; or (c) T h e g iv ing or the requ i r ing of the g i v i n g of the covenant; or (d) T h e ca r ry ing out or e n f o r c i n g of the terms of the convenant -as the case may be, to w h i c h the app l ica t ion relates, w i l l in a l l the c ircumstances result, or be l ike ly to result, in a benef i t to  the pub l ic w h i c h would outweigh the lessening in compet i t ion  that wou ld result, or wou ld be l ike ly to result or is deemed to result therefrom. (Emphasis added) B y v i r tue of section 63(1), the Commiss ion may , in cer ta in l im i ted c i rcumstances, grant a prov is iona l author izat ion . T h e ju r isd ic t ion arises where the C o m m i s s i o n is not sat is f ied that the enter ing into of a contract or arrangement , or the a r r i v i n g at an understanding wi l l result or be l ike ly to result in a benef i t to the pub l i c w h i c h wou ld outweigh the lessening of compet i t ion. T h e C o m m i s s i o n is also prepared to give its v iew on the legal i ty of contemplated pract ices w h i c h are in breach of Part II o f the A c t by way of "letters of comfort" . T h e r e is however no securi ty in obta in ing such a letter in that it does not constitute an au thor i za t ion , nor is the C o m m i s s i o n bound by its observat ions. A c t i o n can therefore st i l l be taken against the conduct in question and there is the added risk that a request fo r a letter of comfor t may serve s imply to attract the attent ion of the C o m m i s s i o n w h i c h wou ld not have been concerned wi thout the approach . 169 Despite the enumerat ion of a large number of factors in section 21 of the 1975 A c t to assist the C o m m i s s i o n in de termin ing whether a trade pract ice was contrary to the pub l ic interest, the term "publ ic benefit" is not d e f i n e d in the present A c t . T h e Commiss ion however took the oppor tuni ty in the Whakatu dec is ion to make cer ta in observations concern ing the 'pub l ic benef i t ' concept and the ba lanc ing of pub l ic benef i t against compet i t ive effects. In par t icu lar , the f o l l o w i n g points were made: (a) T h e ba lanc ing of the publ ic benef i t f l o w i n g f r o m a pract ice against the degree of lessening of compet i t ion caused by that pract ice involves testing the detr iment to the pub l ic ar is ing f r o m the lessening of compet i t ion as against the benef i t f o u n d . Such ba lanc ing of benef i t and detr iment then enables a judgement to be made as to where the pub l ic interest l ies, namely , between the des i rab i l i ty of encourag ing compet i t ion and the foster ing of other pub l ic benefi ts seen to f low f r o m the pract ice; (b) A benef i t is something of value to the pub l ic a n d inc ludes , for example, economies of scale even though the cost savings ar is ing there f rom are not passed on to the consumer in the f o r m of lower prices, at least in the short term. T h e weight ing of var ious benefi ts does however d i f f e r accord ing to their nature, impact and c i rcumstances; 79 D e c i s i o n N o . 205 at para. 25. F o r a detai led review of this dec is ion , see R. A d h a r , "Author isa t ion and P u b l i c Benef i t under the C o m m e r c e A c t 1986: Some E m e r g i n g Pr inciples" , (1988) 15 A . B . L . R . 288. 170 (c) T h e term "public" refers to the N e w Z e a l a n d pub l i c and extends beyond s imply consumers to var ious trade interests such as manufac ture rs , wholesalers a n d retailers as wel l as to users, investors and so on; (d) T h e ef fect of the pract ice must be s u f f i c i e n t l y widespread or ind iscr im ina te such that it is l i ke ly to prov ide a benef i t to a whole range of persons rather than just a number of i n d i v i d u a l s . In other words, the benef i t must be t ruly pub l ic rather than pr ivate in nature; (e) T h e c la imed benef i t or detr iment must f low f r o m the pract ice; (f) T h e l ike ly benef i t f r o m a pract ice need not be more probable than not, just that there be a tendency or real possibi l i ty of a par t icu lar benef i t ; and (g) T h e onus of proof to show that the pub l ic benef i t outweighs the lessening of compet i t ion lies on the appl icant . T h e above points made by the Commiss ion are obv ious ly extremely general but the very breadth in word ing of the A c t makes it clear that there is v i r tua l ly no l imi ta t ion on the nature of any pub l ic benef i t w h i c h may be c la imed , nor the compet i t ive detr iment to the publ ic w h i c h may result f r o m any lessening of compet i t ion. A n y t h i n g of benef i t to the country w h i c h results in a more compet i t ive t rad ing envi ronment is l ike ly to be seen as relevant. A s was noted by the A u s t r a l i a n T r a d e Pract ices T r i b u n a l in O C M A . pub l ic benef i t is l i ke ly to be (1976) 25 F . L . R . 169 at 182-83. ... any th ing of value to the communi ty general ly , any cont r ibut ion to the aims pursued by society i n c l u d i n g as one of its p r i n c i p a l elements (in the context of trade pract ices legislat ion) the achievement of the economic goals of e f f i c i e n c y and progress. T h e extent to w h i c h non-economic factors may be taken into account under the A c t is d i f f i c u l t to say. U n l i k e under the 1975 A c t , where section 80 d i rected the C o m m i s s i o n to take into account non-economic factors such as employment creat ion and regional development , it is arguable that because the A c t is exc lus ive ly d i rected towards the achievement of economic e f f i c i e n c y , that non-economic social goals should not be given any weight. Support fo r this v iew can be der ived f r o m the L o n g T i t l e to the A c t and section 26, w h i c h section requires the C o m m i s s i o n to have regard to the economic pol icies of the government as communica ted f r o m time to time. If non-economic factors are to be given any weight, then there is reason to believe that economic factors are more l ike ly to be f a v o u r e d . 8 1 Despite al l this, it is d i f f i c u l t to conceive of too many author izat ions being granted fo r terr i tor ia l and customer restr ict ions unless it can be shown that s ign i f i can t e f f i c ienc ies and cost savings result f r o m the par t icu lar restr ict ion w h i c h wi l l be passed on to the publ ic in the f o r m of lower prices. O n e may contrast the p r imacy given to economic factors such as e f f i c i e n c y and progress when assessing publ ic benef i t under the A c t w i th the more po l i t ica l concerns such as employment , investment and export trade when grant ing consent under the Overseas Investment Regula t ions 1985. T h e same si tuat ion is faced in C a n a d a wi th the d i f f e ren t cr i ter ia under the C o m p e t i t i o n A c t (for example, the e f f i c i e n c y defence under the present section 68) and the Investment C a n a d a A c t (for example , C a n a d i a n par t ic ipa t ion , compat ib i l i ty w i th federa l and p r o v i n c i a l indust r ia l po l icy a n d compat ib i l i t y wi th cu l tura l pol icy) . M a n y of the factors under both are the same but the cr i ter ia under the Regula t ions and the Investment C a n a d a A c t are more l ike ly to vary over t ime because of the f l u c t u a t i n g concerns and pr ior i t ies of successive governments. 172 T h e other but less important exemptions are f o u n d in section 44(l)(b) w h i c h renders inapp l icab le section 27 where the enter ing into of a contract or arrangement or a r r i v i n g at an understanding is between in terconnected bodies corporate (as d e f i n e d in section 2(7)) and in section 45(1) w h i c h renders inapp l icab le section 27 where the o f f e n d i n g prov is ion in the relevant contract , arrangement or understanding relates to the "use, l icence, or assignment of rights under or exist ing by v i r tue of any copyr ight , patent, protected plant var ie ty , registered design, or trade mark ... ". Section 45(2) (a) provides that a prov is ion in a contract , arrangement or understanding meets this latter test i f , inter a l ia: ...it controls the nature, extent, terr i tory or per iod of the exercise of those rights or the type, qua l i ty or quant i ty of goods or services to w h i c h those rights relate. (Emphasis added). Sect ion 45 c lear ly exempts terr i tor ia l restrict ions f r o m section 27 whi le it appears that customer restrict ions are also exempt as being a contro l on the "nature" or "extent" of the var ious rights a forement ioned. It is unclear why customer restr ict ions are not spec i f i ca l ly nent ioned, but at the same time there is little else to w h i c h the words could relate. T h e r e is no decis ion in regard to the equivalent A u s t r a l i a n prov is ion to assist in this regard. Sect ion 45 is however c lear ly wider than its A u s t r a l i a n equivalent w h i c h only protects a l icensor in regard to the "kinds, qual i t ies or standards" of goods subject to the indust r ia l inte l lectual property rights ment ioned in section 51(3). (iii) Commission 's A p p r o a c h T h e r e is also unfor tunate ly not yet any decis ion in N e w Z e a l a n d w h i c h has considered terr i tor ia l and customer restr ict ions, either under the 1975 or the present A c t . T h e only ind ica t ion of the l ike ly approach to be taken by the C o m m i s s i o n is f o u n d in its Repor t on Motor V e h i c l e F ranch ise Agreements where in the C o m m i s s i o n was cal led upon to consider complaints f r o m var ious dealers that al lot ted terri tories were total ly at the manufac turers ' d iscre t ion , they were i l l - d e f i n e d and cou ld be amended by manufacturers upon notice. T h e C o m m i s s i o n f o u n d that such restrict ions gave dealers a posit ive incent ive to invest, h a v i n g regard to their perce ived geographical advantage, and that, "if a n y t h i n g , this type of restr ict ion is l i ke ly to promote the Competi t ion w h i c h the dealer p r o v i d e s . " 8 3 In regard to locat ion clauses, the C o m m i s s i o n recognized that manufac turers have a legit imate interest in regard to where their dealers carry on business and ensur ing that they have an appropr iate network of outlets w h i c h meet requisite standards. While the Commiss ion acknowledged that locat ion clauses may sometimes have an ant icompet i t ive e f fect , beyond that necessary to protect a manufac turer 's legit imate interests, there was no evidence that manufac turers had acted capr ic ious ly in the case of any change of locat ion by any dealer , nor had they unreasonably refused consent to any proposed change of locat ion by any dealer. Most impor tant ly , there was no evidence that such clauses had an adverse e f fect on prices and compet i t ion as c la imed by the dealers. T h e C o m m i s s i o n therefore d i d not f i n d it necessary to render any op in ion on the matter. One can assume that the Courts and the Commiss ion wi l l adopt an approach s imi lar to that used in decisions of their A u s t r a l i a n counterparts regard ing practices f a l l i n g w i th in the more general provis ions of section 45 rather than the more spec i f ic provis ions of section 47. L i t t le regard is l i ke ly to be had to the early Repor t of the Commerce Commiss ion f o l l o w i n g an Inqui ry into the Terms  of Motor V e h i c l e F ranch ise Agreements (1986). Id. at 22. 174 A u s t r a l i a n decisions on terr i tor ia l and customer restr ict ions but more to the deve lop ing trend in the U n i t e d States since Sv lvan ia . A s such , c a r e f u l considerat ion w i l l be g iven to economic and business just i f icat ions wi th a ba lanc ing of in t rabrand and in terbrand compet i t ion under a f u l l rule of reason analysis. It is theoret ical ly possible that such an analysis may also take place under section 36 where a suppl ier imposing terr i tor ia l or customer restr ict ions is in a dominant posi t ion in a market , but it wou ld seem h igh ly u n l i k e l y that a suppl ier wou ld ever be f o u n d to have abused a posi t ion of dominance because such restr ict ions are so rarely imposed for any of the proscr ibed purposes ment ioned in that section. T o the writer 's knowledge, there has never been a case in any of the other three jur isdict ions where a monopoly prov is ion has been app l ied to str ike down a terr i tor ia l or customer restr ict ion. C . E v a l u a t i o n of the L a w (1) E c o n o m i c Issues (a) Carte ls T h e t rad i t iona l cartel theories advanced to exp la in the ant icompet i t ive ef fects of R P M are also used to exp la in terr i tor ia l and customer restr ict ions. F o r m u c h the same reasons however that the cartel theories do not prov ide a plausible explanat ion fo r R P M , so also are the theories largely inadequate wi th respect to terr i tor ia l and customer restrict ions. T h u s , such restrict ions are said to be ind ica t ive of a suppl ier cartel whereby suppl iers in the same market col lude to d i v i d e the market up between themselves in order to protect their monopoly posit ion. By so d o i n g , suppl iers in each area or customer class have the capaci ty to set a r t i f i c i a l l y h igh prices without fear of compet i t ive market forces. A s is the case wi th R P M , the condi t ions necessary fo r such a cartel to exist, namely markets wi th only a smal l number of suppl iers , h igh barr iers to entry and re lat ively homogeneous products wi th no close substitutes, are in most cases d i f f i c u l t y to satisfy. These condi t ions are c lear ly not met where a suppl ier sel l ing a d i f f e ren t ia ted product uni la tera l ly imposes such res t r i c t ions . 8 4 So also are they said to be ind ica t ive of a d is t r ibutor cartel w i th a suppl ier act ing as cartel manager of a market d i v i d e d up by the member d istr ibutors. In this way , each d is t r ibutor becomes a monopol ist in a par t icu lar area or customer class wi th the capaci ty to charge monopoly prices. A g a i n , necessary condi t ions for such a cartel to exist are d i f f i c u l t to satisfy. In par t icu lar , barr iers to entry in d is t r ibu t ion are norma l ly not h igh and the usual ly large number of d ist r ibutors in a market mil i tates against their hav ing any real power to prevent entry. F u r t h e r , the usual ly large number of d istr ibutors and their disparate interests make any d is t r ibutor cartel d i f f i c u l t to organize, administer and pol ice. Such a cartel therefore of ten has to go pub l ic w h i c h makes it easy to detect and at greater r isk to s c r u t i n y . 8 5 F i n a l l y , the prevalence of substitute products norma l l y erodes any attempt by distr ibutors to set up a cartel because other d istr ibutors may enter and undercut . A suppl ier in fact has no interest in e n f o r c i n g and po l i c ing such an arrangement because any u p w a r d movement in the cartel pr ice det r imenta l ly B. D u n l o p , D. M c Q u e e n and M . T r e b i l c o c k , C a n a d i a n Compet i t ion Po l icy : A  L e g a l and E c o n o m i c A n a l y s i s (Toronto, C a n a d a L a w Book Inc., 1987) at 258 (hereinafter ci ted as "Dunlop"). R. B o r k , supra note 15 at 292-93. 176 af fects its sales a n d prof i ts . It is only where a suppl ier is f a c e d wi th a group of d istr ibutors wi th monopsony power that it w i l l be f o r c e d to c o o p e r a t e . 8 6 (b) Barr iers to E n t r y B e y o n d the t rad i t iona l cartel theories, it is also of ten argued that barr iers to entry can be created and strengthened by terr i tor ia l and customer restr ict ions. A s such , a suppl ier can impose d isproport ionate ly h igh costs on its competi tors and make entry into e f fec t ive compet i t ion at the d is t r ibut ion level d i f f i c u l t . 8 7 T h i s may happen in a number of ways. F i rs t , a suppl ier may achieve e f fec t ive forec losure of its competitors and potential competitors by ty ing up exist ing distr ibutors wi th restraints, thereby f o r c i n g its competitors to o f f e r s u f f i c i e n t pr ice incent ives to induce new entry into the d is t r ibut ion market , rather than s imply lu r ing away exist ing d is t r ibu to rs . 8 8 Second, where there is e f fec t ive forec losure , a new entrant, suppl ier of a new product or expand ing suppl ier faces increased capi ta l costs, both in absolute and relat ive terms, because it must enter or expand at both the product ion and d is t r ibut ion l e v e l s . 8 9 T h i r d , intensive adver t is ing can lead to product d i f f e r e n t i a t i o n 9 0 r equ i r ing any new entrant to bear increased 8 6 D u n l o p , supra note 84 at 258. 8 7 See eg. K . Strasser, "Ver t ica l T e r r i t o r i a l Restraints A f t e r Sv lvan ia : A Po l icy A n a l y s i s and Proposed N e w Rule" , (1977) D u k e L . J . 775 at 815. 8 8 Id, at 817. 8 9 1^31818 -20 . 9 0 "Products are d i f f e ren t ia ted when, owing to d i f fe rences in phys ica l attr ibutes, anc i l l a ry service, geographic locat ion, i n f o r m a t i o n , a n d / o r subject ive image, one f i rm 's products are c lear ly pre fer red by at least some buyers over r i va l products at a g iven price." Scherer , supra note 51 at 11. promot iona l costs to combat exist ing consumer sovereignty as wel l as to create some of its own. With respect to the f i rst case, it may be argued that forec losure can not be ach ieved by terr i tor ia l and customer restrict ions alone because a potent ia l new entrant can i tself o f f e r these restrict ions as an inducement to the opening of new dist r ibutorships to handle its p r o d u c t s . 9 2 But i f a l l suppl iers in the market are using either or both of these restr ict ions, then it may be d i f f i c u l t fo r potent ia l new entrants and those wish ing to expand to secure capable d istr ibutors fo r their networks because there may not be made avai lable a n d / o r it may be over ly expensive to b id them away. F u r t h e r , foreclosure is l i ke ly where there is substant ial market power at the suppl ier or d is t r ibutor level and restr ict ions are used in con junct ion wi th other non-pr ice ver t ica l restraints such as exclusive d e a l i n g . 9 3 Forec losure as a strategy is therefore theoret ical ly achievable and prof i tab le in the way that it deters entry by imposing greater costs on competitors. With respect to the second case, there is no doubt that a new entrant enter ing at two levels must raise more capi ta l than would be necessary fo r entry at one level only . T h e greater capi ta l requ i red w i l l be more d i f f i c u l t to obta in fo r a new entrant than an exist ing suppl ier , and in turn is l i ke ly to be more expensive Strasser, supra note 87 at 820-21. R. Bork and W. B o w m a n , "The Cr is is in Ant i t rust" , 65 C o l u m . L . R e v . 363 (1965) at 366-73. Strasser, supra note 87 at 818. 178 because of the greater r isk invo lved T o this extent, new entry and indeed expansion may be d i s c o u r a g e d . 9 4 F i n a l l y , w i th respect to th i rd case, product d i f f e r en t i a t ion may give rise to low consumer subst i tutabi l i ty promoted by those d i f f e r e n t i a t i n g their products and enhanced market power g iv ing the d i f fe ren t ia tor f reedom to raise the pr ice of its products above that of compet ing brands whi le sti l l re ta in ing a substant ia l por t ion of its bus iness . 9 5 T h i s is true however only when the d i f f e r e n t i a t i o n created by adver t is ing is designed to result in a d is t inct ive image; even then, adver t is ing may enhance compet i t ion by p r o v i d i n g i n f o r m a t i o n of value to consumers such as product ava i l ab i l i t y , pr ice and q u a l i t y . 9 6 Where the d i f f e r en t i a t ion exists because the product is func t iona l l y d i f f e ren t , has certa in phys ica l character ist ics or per forms in a certa in manner , the d i f f e ren t ia t ion wi l l general ly be pro-compet i t ive because it enhances product qua l i ty and var iety and promotes suppl ier r i v a l r y . 9 7 T o the extent that terr i tor ia l and customer restr ict ions do create and strengthen barr iers to entry, they are a source of market power. H o w e v e r this is on ly one of many factors in the overa l l assessment because in te rbrand compet i t ion may be e f fec t ive to counter their ant icompet i t ive effects. I± at 820. W. C o m a n o r , "Ver t ica l T e r r i t o r i a l and Customer Restr ic t ions: White Motor and Its A f te rmath" , 81 H a r v . L. R e v . 1419 (1968) at 1423 and 1426-27. See S v l v a n i a . 433 U.S. at 55. Strasser, supra note 87 at 821. 179 (c) Pr ice D i s c r i m i n a t i o n A number of commentators argue that terr i tor ia l and customer restr ict ions can fac i l i ta te pr ice d i s c r i m i n a t i o n . 9 8 Mathewson and Winter for example iden t i f y three situations in w h i c h price d isc r im ina t ion may exist, namely pr ice d i s c r i m i n a t i o n by terr i tory, w i th in a terr i tory and across customer c lasses . 9 9 Three condi t ions must however be met fo r pr ice d isc r im ina t ion to exist: f i rs t , a d iscr imina tor must have some degree of market power wi th respect to the product it produces as otherwise in terbrand compet i t ion w i l l q u i c k l y undermine any attempt to pr ice d iscr iminate ; secondly, the d iscr iminator must be able to segregate its customers into groups with d i f f e ren t pr ice elasticit ies of d e m a n d 1 0 0 so that it can charge d i f f e ren t prices to h igh intensity and low intensity demanders; and th i rd ly , there must be some constraints on the ab i l i ty of low pr ice customers to resell to h igh-pr ice c u s t o m e r s . 1 0 1 T o the extent that terr i tor ia l and customer Pr ice d isc r im ina t ion involves the sale of a product to d i f f e ren t groups of consumers at d i f f e ren t margins. T h e d i f f e r e n t i a l margins w i l l of ten depend upon the quant i ty sold and the cost of serv ic ing , as wel l as the nature of the product . F. Mathewson and R. Winter, "The Economics of Selected V e r t i c a l Restr ict ions" (Un ivers i ty of Toron to , L a w and Economics Workshop Series, 1984) at 42-43. E las t ic i ty of demand measures the responsiveness of consumers in terms of quant i ty purchased to a change in the pr ice of a product . Cross-elast ic i ty of demand measures the responsiveness of consumers to that product when there is a change in the pr ice of other products. Scherer , supra note 51 at 315. 180 restr ict ions increase market power and decrease in t rabrand compet i t ion , then such restr ict ions help sat isfy these c o n d i t i o n s . 1 0 2 Pr ice d isc r im ina t ion is usual ly condemned because it redistr ibutes income away f r o m consumers to those d isc r im ina t ing , thus reduc ing social wel fare . T h e income d is t r ibut ion effects of pr ice d isc r im ina t ion are however very m u c h a matter fo r value judgements over w h i c h there is wide disagreement in m u c h the same manner as the argument whether resources are a l located more or less e f f i c i e n t l y in situations where d isc r im ina t ion is p r a c t i s e d . 1 0 3 T h e fact that pr ice d isc r im ina t ion can only be pract ised p ro f i t ab ly i f the d iscr imina tor possesses market power lends itself to the analysis to be proposed short ly in terms of its effects on market structure and compet i t ion general ly. B e y o n d this, it is not possible to say whether the fac i l i ta t ion of pr ice d isc r im ina t ion is good or bad f r o m an economic s t a n d p o i n t . 1 0 4 (d) Free R i d i n g A s wi th the t rad i t iona l cartel theories, the special services theory is also advanced as an explanat ion for both R P M and terr i tor ia l and customer restr ict ions. Strasser, supra note 87 at 828-29. Scherer , supra note 51 at 319-20. Pr ice d isc r im ina t ion may be bene f ic ia l for example i f it faci l i tates an expansion of output permi t t ing the rea l izat ion of substant ial scale economies w h i c h are then passed on to consumers in less elastic markets in the f o r m of lower prices. Id, at 320 n . l l . Scherer notes that systematic pr ice d isc r im ina t ion tends to preserve and strengthen non-compet i t ive market structures, whi le unsystematic pr ice-d isc r im ina t ion tends to break up these structures and thus can have a pro-compet i t ive ef fect . Id, at 323-25. 181 to represent them f u l l y and adequately and to undertake promot iona l act iv i t ies such as adver t is ing and post-sales s e r v i c e s . 1 0 5 T o prov ide distr ibutors wi th the necessary incent ive to engage in such act iv i t ies, the theory suggests that a suppl ier must assign a d ist r ibutor a s u f f i c i e n t l y large terr i tory or customer class ( in m u c h the same manner that a suppl ier assures a d ist r ibutor of a s u f f i c i e n t l y h igh marg in under a R P M scheme) so as to cover the distr ibutor 's in i t i a l set up costs as wel l as ongoing expenses of p r o v i d i n g point -of -sale i n f o r m a t i o n , serv ic ing and adver t is ing. In the absence of a guaranteed market (whether it be a terr i tory or customer class), the theory predicts that distr ibutors w i l l be reluctant to engage in product promot ion and serv ic ing for fear of ' f r ee - r id ing ' and ' c r e a m - s k i m m i n g ' by other distr ibutors. A s noted above in regard to R P M , the risk fo r a d is t r ibutor is that i f it makes a large investment in promot ion and a product gains consumer acceptance, then compet ing distr ibutors who have not made the in i t ia l promot iona l investment or i n c u r r e d the same risk as the f i rst d is t r ibutor w i l l compete the retai l pr ice to a level that w i l l prevent the f i rst d istr ibutor f r o m recouping its investment wi th a re turn commensurate wi th the risk b o r n e . 1 0 6 T h e theory was spec i f i ca l l y recognized in S y l v a n i a 1 0 7 and is endorsed by the C h i c a g o School in h o l d i n g to the view that a suppl ier does not impose a terr i tor ia l or customer restr ict ion wi th the intent ion of restr ict ing output but of creat ing 105 106 See eg. R. B o r k , "The R u l e of Reason and the Per Se Concept : Pr ice F i x i n g and Marke t D i v i s i o n (II)", 75 Y a l e L . J . 373 (1966) at 430-52 and R. Posner, "Ant i - t rust Po l icy in the Supreme Court : A n A n a l y s i s of the Rest r ic ted D i s t r i b u t i o n , H o r i z o n t a l Merger and Potent ia l Compet i t ion Decis ions", 75 C o l u m . L . R e v . 282 (1975) at 283-85. R. Posner, Ant i t rus t L a w - A n E c o n o m i c Perspective (Ch icago, U n i v e r s i t y of C h i c a g o Press, 1976) at 160. 433 U.S. at 55. 182 d is t r ibut ive e f f i c i e n c y and being more c o m p e t i t i v e . 1 0 8 It is argued that i f output expands, the restr ict ion must have made the suppl ier 's product more attract ive to consumers; their increased purchases are also a sign that consumer wel fare is e n h a n c e d . 1 0 9 T h e r e is no doubt that in spec i f ic market si tuat ions, terr i tor ia l and customer restr ict ions do induce distr ibutor investment and thereby enhance compet i t ion . A s is the case wi th R P M however , it must be quest ioned whether the impos i t ion of these restr ict ions is in fact the most e f f i c i e n t means of accompl ish ing the service a n d promot ion or ientated goals of a suppl ier . T h e assignment of exclusive terr i tories or customer classes would only appear e f f i c ien t where the products in quest ion are re lat ive ly expensive and the required investment in promot ion and serv ic ing is re la t ive ly h igh. With more expensive items, consumers are norma l ly more w i l l i ng to shop a r o u n d , necessitating only a smal l number of d istr ibutors whi le fewer distr ibutors al lows fo r economies of scale in promot ion and serv ic ing. With less expensive items, consumers are normal ly less w i l l i ng to travel any distance to compare prices and services and therefore a greater number of d istr ibutors is requ i red , whi le less promot ion and serv ic ing is also norma l ly necessary. In the latter case, it is unfeasib le to have a whole host of exclusive terri tories in a c o n f i n e d area. Less restr ict ive alternatives such as locat ion clauses and areas of p r i m a r y responsibi l i ty , as wel l as R P M , are more e f f i c ien t because of T h e most obvious e f f i c i e n c y is said to be the purchase of increased sales and service ef for ts . See Bork , supra note 15 at 290 and 430-34. It is on this basis that both Bork and Posner advocate that such restr ict ions be completely l a w f u l . See Bork , supra note 15 at 289-90 and R. Posner, "The Next Step in the Ant i t rust Treatment of Restr ic ted D is t r ibu t ion : Per Se Legal i ty" , 48 U . C h i . L. Rev . 6 (1981) at 21-23. 183 their greater f l ex ib i l i t y . T o this extent, R P M and terr i tor ia l and customer restr ict ions are very much substitutes for each other under the special services theory. A fu r ther problem wi th the theory is that assumes distr ibutors w i l l engage in precisely the r ight k i n d and level of promot iona l act iv i ty and serv ic ing. It is unreal is t ic to expect this to happen in most market situations unless the suppl ier has some means of en fo rc ing the distr ibutor 's express or i m p l i e d commitment to prov ide the appropr iate k i n d and level of promot ion and serv ic ing. P i to fsky argues that this can be ach ieved through cooperat ive adver t is ing arrangements in w h i c h both the suppl ier and distr ibutor in ef fect contract to pay a por t ion of expenses fo r a spec i f i ed f o r m of adver t is ing whi le post-sale serv ic ing and repairs can be hand led d i rect ly by the suppl ier (or i f this is not feasible , can be pr iced separately wi th suppl iers pay ing distr ibutors fo r a l l or part of the service p e r f o r m e d ) . 1 1 1 While the free r ider theory is general ly inapp l icab le when a product and the associated services can be sold separately (par t icu lar ly services p r o v i d e d subsequent to sale), P i to fsky 's argument fa i ls to recognize that some promot ion and services are d i f f i c u l t to isolate and separately q u a n t i f y to the suppl ier 's product ( for example, general locat ion adver t is ing , showroom maintenance and salespersons' salaries). F o r an example of the combined use of R P M and exclusive terr i tories, see A d o o h Coors C o . v. F . T . C . 497 F. 2d 1178 (10th C i r . , 1974). F o r a deta i led discussion of this case, see B. K l e i n and K . M u r p h y , "Ver t ica l Restra ints as Cont rac t E n f o r c e m e n t Mechanisms", 31 J . L a w . & E c o n . 265 (1988) at 280 et seq. R. P i t o f s k y , "The S y l v a n i a Case: Ant i t rus t A n a l y s i s of N o n - P r i c e V e r t i c a l Restr ict ions", 78 C o l u m . L . R e v . 1 (1978) at 21. 184 St i l l fu r ther , the theory assumes that d is t r ibut ion markets are close to per fect ly compet i t ive so that distr ibutors w i l l engage in promot ion and serv ic ing up to a level that reduces their expected monopoly prof i ts f r o m the restr ict ions to z e r o . 1 1 2 If compet i t ion is less than perfect , w h i c h is more of ten than not l ike ly to be the case, they can pocket al l or at least part o f these prof i ts . O n this point , C o m a n o r argues that non-pr ice ver t ica l restraints may in fact have more detr imenta l impl ica t ions for economic e f f i c i e n c y than ver t ica l pr ice r e s t r a i n t s . 1 1 3 H e points to the fact that expl ic i t pr ice restraints lead compet i t ion to shi f t to other f ronts , namely non-pr ice compet i t ion in the f o r m of d isplays, services a n d so on. E x p l i c i t non-pr ice restraints on the other hand c o n f i n e r i va l d istr ibutors to separate market areas and thereby l imit compet i t ion of al l k inds among r iva ls . With non-pr ice compet i t ion , al l of the higher revenues resul t ing f r o m the restraints go to support add i t iona l d is t r ibut ion services, whereas wi th l im i ted pr ice as well as service compet i t ion , some dist r ibutor prof i ts may well remain because there is less assurance that a l l of the increased prof i ts w i l l be used to pay for the add i t iona l d is t r ibut ion s e r v i c e s . 1 1 4 C o m a n o r goes on to argue that a suppl ier w ish ing to attain a spec i f ic level o f services through non-pr ice restraints must therefore general ly create market condi t ions in w h i c h retai l prices are higher and quant i t ies of output are lower than when the same result is attained through the impos i t ion of pr ice Posner, supra note 105 at 160-61 states: "Compet i t ion among potent ial dealers to obtain an exclusive f ranchise w i l l lead them to o f f e r successively more extensive presale services unt i l , at the marg in , the cost o f these services wi l l equal the pr ice increment that the dealer can c o m m a n d fo r the manufacturer 's product by vir tue of being free f r o m the compet i t ion of other dealers." W. C o m a n o r , "Ver t ica l Pr ice F i x i n g , V e r t i c a l Marke t Rest r ic t ions , and the N e w Ant i t rus t Pol icy" , 98 H a r v . L . R e v . 983 (1985) at 984 n.6. Id. at 994 n. 61. See also W. C o m a n o r , "Ver t ica l Ar rangements and Ant i t rus t Ana lys is" , 62 N . Y . U . L . R e v . 1153 (1987) at 1160. restraints. F r o m this it fo l lows that non-pr ice restraints are, i f a n y t h i n g , more l i ke ly to impose greater costs on consumers than pr ice restraints a n d therefore anti trust prohib i t ions are more warranted. T h e conc lus ion reached by this economic analysis is somewhat at odds wi th exist ing compet i t ion law pol icies w h i c h place greater legal proh ib i t ions on pr ice than non-pr ice restraints. C o m a n o r does however seek to d i f fe ren t ia te between establ ished a n d new products. H i s analysis suggests that ver t ica l restraints that concern establ ished products are more l ike ly to reduce consumer wel fare because large numbers of consumers are a lready f a m i l i a r wi th such products and are therefore un l i ke ly to place m u c h value on a c q u i r i n g fur ther i n f o r m a t i o n about them. A s such , C o m a n o r advocates the app l ica t ion of a strict anti trust s tandard in the f o r m of a direct per se proh ib i t ion or a m o d i f i e d rule of reason under w h i c h a de fendant wou ld be requi red to demonstrate that the restraints have benef i t ted consumers g e n e r a l l y . 1 1 6 In the case of new products , or products of new entrants into the market , his analysis suggests that vert ical restraints are less l ike ly to lessen consumer wel fare because their novel ty should create greater demand fo r i n f o r m a t i o n . In these c i rcumstances, C o m a n o r advocates that such restraints should be permit ted or at least treated more lenient ly under a rule of reason a n a l y s i s . 1 1 7 T h e r e is no doubt that a new entrant or a new product has a greater need for p romot ion and pre -and post-sales services and less ab i l i ty to prov ide them 1 1 5 IcL 1 1 6 Id, at 1001-02. 1 1 7 Id. at 1002. 186 wi thout ver t ica l restraints. With a new entrant or new product (par t icu lar ly where the product is technica l ly complex a n d / o r requires a great deal of pre-sel l ing act iv i ty ) , d is t r ibutor e f fo r t in the f o r m of promot ion and pre-sales services is essential to gain consumer acceptance. L i k e w i s e , post-sales services are important to assure the consuming pub l ic of the integri ty of an entrant a n d value of a product . T h e novel ty of a new product i n v a r i a b l y makes it d i f f i c u l t to f i n d distr ibutors w i l l i n g to undertake the appropr iate investment in t ime and money. V e r t i c a l restraints help prov ide this inducement and are also a less expensive way fo r a new entrant to f inance its entry into the market. T h e enhanced compet i t ion p r o v i d e d by a new product and entrant jus t i f i ab ly requires a more permissive treatment under compet i t ion l a w s . 1 1 8 C o m a n o r has also quest ioned the assumed co inc idence of suppl ier and consumer interests u n d e r l y i n g the C h i c a g o School v iew to jus t i fy the legal i ty of terr i tor ia l and customer restrictions on the basis that it fa i ls to acknowledge the importance of d i f fe rences among consumers regard ing their preferences fo r d is t r ibutor p r o v i d e d services. Where such d i f fe rences exists, C o m a n o r argues, suppl iers ' and consumers' interests do not necessari ly c o i n c i d e . 1 1 9 T h e basis of Comanor 's c r i t i c ism is that because d ist r ibutor p r o v i d e d services change the nature of a product in m u c h the same manner as do changes in qua l i ty , the p ro f i t ab i l i t y of increasing the level of d is t r ibut ion services through ver t ica l restraints s imi la r ly depends ent i re ly on the preferences of marg ina l See general ly Strasser, supra note 87 at 800. C o m a n o r , supra note 112 at 989-90. 118 119 187 c o n s u m e r s . 1 2 0 T h e C h i c a g o view is that the value w h i c h marg ina l consumers place on extra services is the same as that of i n f r a - m a r g i n a l consumers and therefore suppl iers w i l l f i n d it prof i tab le to impose restraints that increase the vo lume of these services regardless of the preferences of i n f r a - m a r g i n a l consumers. C o m a n o r s ta tes : 1 2 1 Y e t societal gains or losses f r o m changes in the product depend on the preferences of a i l consumers, not merely those at the marg in . T o the extent that such alterat ions f a i l to ref lect the preferences of i n f r a - m a r g i n a l consumers, the interests of consumers in general may not be served. G i v e n this point , one can no longer rely on the automat ic l ink between the interests of producers and consumers. If marg ina l consumers value dea le r -prov ided services less than i n f r a - m a r g i n a l consumers do, the level of such services w i l l be too low. By contrast, i f marg ina l consumers value these services more h igh ly , the level of d is t r ibut ion services w i l l be excessive and the imposi t ion of ver t ica l restraints to promote such services would be i n e f f i c i e n t . 1 2 2 120 12  M a r g i n a l consumers are those whose va luat ion of a product approximates its pr ice and who are therefore re lat ively sensitive to any product improvement that may disrupt the e q u i l i b r i u m between subjective va lua t ion a n d market pr ice. In f ramarg ina l consumers on the other hand place a value on a product substant ia l ly higher than its pr ice. Such consumers are therefore re lat ively insensit ive to any price increase needed to f u n d a change in product qual i ty . Id, at 991. 1 2 1 Id. at 991. Comanor 's views on this point are very m u c h the same as those of Scherer who, as noted above, argues that under cer ta in condi t ions , the compet i t ion generated by a number of suppliers adopt ing a h igh marg in po l icy through the use of R P M to induce the prov is ion of services by its d istr ibutors can lead to too m u c h var iety being o f f e r e d and too m u c h money being spent on services. See text accompany ing Part II, note 100, supra. Comanor 's analysis has i tself been cr i t i c i zed fo r concentrat ing solely on the possibi l i ty that consumer surplus may decl ine and thus ignor ing the potent ia l increase in producer surplus. K l e i n and M u r p h y s ta te : 1 2 3 When the manufacturer 's marg in is large, and hence one is l i ke ly to observe the use of ver t ica l restraints as part of an arrangement to insure the supply of promot iona l services, it is also l ike ly that such arrangements w i l l be e f f i c i e n c y enhanc ing because the increase in sales to the marg ina l consumers impl ies a large increase in producer surplus. Moreover , there may be a substant ial increase in consumer surplus to the now i n f r a m a r g i n a l - prev iously marg ina l -consumers who learned about the product and are now rece iv ing substant ial benefi ts. A lack of in te rbrand compet i t ion may well result in consumers being sold more services than they wish and pay ing a higher pr ice , as C o m a n o r suggests. Where there is e f fec t ive in terbrand compet i t ion however , the market should theoret ical ly operate to b id out the prov is ion of any services w h i c h consumers do not demand wi th a consequent reduct ion in price. A n y d is t r ibutor c o n t i n u i n g to charge the h igher pr ice w i l l f i n d itself losing sales and market share. T h e level of in t rabrand and in terbrand compet i t ion in a market and the degree to w h i c h both in t rabrand and in terbrand compet i t ion is a f f e c t e d by terr i tor ia l and customer restr ict ions is in fact at the heart o f a l l the issues raised in this section and the root cause of the debate amongst economists as to how these restr ict ions should be treated. It is general ly accepted that terr iot i ra l and customer restr ict ions, assuming they are e f fec t ive , do reduce in t rabrand compet i t ion by prevent ing distr ibutors who sell the same brand f r o m compet ing wi th one another fo r the same customers, but may promote in te rbrand compet i t ion by encourag ing K l e i n & M u r p h y , supra note 109 at 291. 189 non-price competition and creating more competitive market structures. The more exclusive the nature of the restrictions, the more likely intrabrand competition will be eliminated. Exclusive territories for instance allow only one distributor to sell a supplier's product in the designated area of sale and in that area only, while areas of primary responsibility allow distributors to compete anywhere after they satisfy their responsibility to service a local area and profit passover clauses allow competition anywhere after payment of an appropriate fee to the local distributor to compensate for promotional work. But even if restrictions are exclusive so that a distributor has a monopoly on its supplier's brand in a particular territory or to a particular customer class, the presence of interbrand rivals will provide a check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different brand of the same product. If interbrand competition is substantial, the competitive consequences of a territorial or customer restriction should be minor and hence there is an incentive to cut prices. From an economic standpoint, the real question then is the extent to which interbrand competition exists and may be affected when determining if any intrabrand restriction should be permitted. Factors relevant to this determination have been touched upon in this section and will be discussed in more detail in the formulation of an appropriate test in Part IIIC (2)(e). (2) Legal and Policy Issues (a) Legislative Policy As mentioned in the introduction, the New Zealand Act is largely modelled on its Australian counterpart. What is particularly notable in this section of the thesis however is that New Zealand did not adopt section 47 of the Australian Act dealing with those practices termed "exclusive dealing", including requirements 190 contracts, exclusive dea l ing , ty ing arrangements a n d , impor tant ly fo r present purposes, terr i tor ia l and customer restrict ions. N o clear statement appears to have been made regard ing the omission (although a deta i led study of select committee hearings may wel l reveal the reasons therefor) . It is arguable that the absence of a spec i f i c p rov is ion in the N e w Z e a l a n d A c t s imi lar to section 47 can be construed as i n d i c a t i n g that the A c t does not, nor was it in tended to, cover these practices. It is also arguable that because the A u s t r a l i a n A c t contains a separate and dist inct p rov is ion dea l ing wi th contracts, arrangements and understandings w h i c h substant ia l ly lessen compet i t ion , namely section 45 (the equiva lent of section 27), exclusive dea l ing practices are outside the ambit of the more general p r o v i s i o n . 1 2 4 O n the other h a n d , it is arguable that there is noth ing in the A c t i tself to suggest why d is t r ibut ion practices such as those ment ioned should not be caught by the more general provis ions of the A c t . T h e reason fo r the absence of a spec i f i c p rov is ion dea l ing wi th d is t r ibut ion practices on this argument wou ld be that Par l iament was concerned not to prohib i t such practices per se, but to create a s i tuat ion in w h i c h such practices wou ld be at r isk only i f they substant ia l ly lessened c o m p e t i t i o n . 1 2 5 Fur ther , it is arguable that Par l iament wanted to avo id a prov is ion as complex as that of section 47, replete as it is w i th double negatives and numerous al ternat ives, when the same result cou ld be ach ieved by a more s t ra igh t fo rward prov is ion l ike section 27. F o r a discussion of the interre lat ionship between sections 45 and 47 of the A u s t r a l i a n A c t , see F. C a l l a w a y , Section 45 or 47?", (1980) 54 A . L . J . 200. See D. Wi l l iams, G . R icket ts and F. Q u i n , "The C o m m e r c e Ac t" , (Paper presented at a N e w Z e a l a n d L a w Society Seminar A p r i l / M a y 1986) at 32-33. 191 It is submit ted that the latter v iew is the more persuasive a n d that terr i tor ia l and customer restrict ions w i l l , i f at a l l , be caught by section 27 a n d , to a lesser extent, by section 36 of the A c t . T h i s assumption was made in d iscussing the current law in N e w Z e a l a n d and w i l l be so made throughout the rest of this Part . (b) D is t ingu ish ing Pr ice f r o m N o n - p r i c e V e r t i c a l  Restra ints It has been noted in earl ier sections that there is a f u n c t i o n a l s imi la r i ty between pr ice and non-pr ice ver t ica l restraints whi le the economic consequences of the two are also s i m i l a r . 1 2 6 Inevi tably , therefore, many non-pr ice ver t ica l restraints have some ef fect on prices whatever may have been the purpose in imposing the restraints. Ye t , as has also been noted, there is a m a r k e d d i f f e r e n c e in treatment between the two types of restraints in al l f o u r jur isd ic t ions. T h e need to d is t inguish pr ice f r o m non-pr ice restraints is therefore of c r i t i ca l importance. T h i s is par t icu la r ly the case at the hor izonta l level where section 30 of the A c t on ly requires that a contract arrangement or understanding "have or be l ike ly to have the ef fect ... of f i x i n g , contro l l ing or ma in ta in ing" the pr ice fo r goods of services. R e a d l i tera l ly , even an act iv i ty that has an indi rect e f fect on pr ice w i l l be deemed to have the ef fect of substant ia l ly lessening compet i t ion under the section a n d wi l l therefore be per se i l legal (subject to the very l im i ted r ight of author iza t ion ment ioned a b o v e ) . 1 2 7 So also at the ver t ica l leve l , a w i t h h o l d i n g of O b v i o u s l y there is debate between the var ious schools as to these consequences, the tradit ional ists a rgu ing that they fac i l i ta te co l lus ion , barr iers to entry and pr ice and product d i s c r i m i n a t i o n , whi le the C h i c a g o School argues that they are a imed at cont ro l l ing f ree - r id ing by prevent ing or l im i t ing pr ice cutt ing. T h i s interpretat ion is par t icu lar ly relevant i f the a l ternat ive of subsuming section 37 w i th in section 30 were to be adopted. 192 supplies fo r one of the reasons spec i f ied in sections 37(3)(d) a n d (e) (as supplemented by section 40) w i l l be deemed to constitute R P M , and w i l l therefore be per se i l legal . H o w then does one make this d is t inct ion? A n attempt to d is t inguish price f r o m non-pr ice ver t ica l restraints was made by the U.S. Depar tment of Justice in the V e r t i c a l Restra int G u i d e l i n e s ("the G u i d e l i n e s " ) 1 2 8 issued in 1985. T h e Gu ide l ines state that before charac ter i z ing a pract ice as a pr ice restraint, "there must be an agreement between a suppl ier a n d its d ist r ibutors as to resale prices". T h e G u i d e l i n e s then c o n t i n u e : 1 2 9 [I]f a suppl ier adopts a bona f i d e d is t r ibut ion program embody ing non-pr ice restraints, these G u i d e l i n e s wi l l app ly unless there is direct or c i rcumstant ia l ev idence (other than ef fects on price) establ ishing an expl ic i t agreement as to the spec i f i c prices at w h i c h goods would be resold. F u r t h e r , i f a suppl ier adopts a bona f i d e d is t r ibut ion program e m b o d y i n g both pr ice and non-pr ice restraints, the non-pr ice restraints are p laus ib ly designed to create e f f i c ienc ies and the price restraint is merely anc i l l a ry to the non-pr ice restraints, then the Depar tment w i l l analyze the entire program under the rule of reason. If however , there is evidence of an agreement between a suppl ier and its d istr ibutors to set resale pr ices, then this w i l l be v iewed as R P M and therefore per se i l l e g a l . 1 3 0 1 2 8 An t i t rus t & T r a d e Reg . R e p ( B N A ) N o . 1199 (Spec. Supp. Jan . 24, 1985). 1 2 9 Id, at 10. (Emphasis in or iginal ) . F o r var ious views on the G u i d e l i n e s , see "Ver t ica l Restra ints Gu ide l ines Panel D iscussion" , 54 An t i t rus t L . J . 319 (1985). 1 3 0 Statement of Char les F. R u l e , A c t i n g Assistant A t to rney G e n e r a l (Ant i t rust D i v i s i o n ) before the Commit tee on the J u d i c i a r y U n i t e d States Senate concern ing the G u i d e l i n e s (July 16, 1985) at 9-10. One can have no real qu ibb le wi th the approach taken in the G u i d e l i n e s regard ing non-pr ice restraints such that a rule of reason analysis should apply where non-pr ice restraints are central to a d is t r ibut ion program and pr ice related restraints are being used to enhance any e f f ic ienc ies f l o w i n g f r o m the former . T h e prob lem lies wi th the requirement that there be an expl ic i t agreement as to spec i f i c prices. T h i s requirement is al legedly based on the Supreme Cour t 's ho ld ing in Monsanto that there must be evidence of an agreement between a suppl ier and its d istr ibutors as to resale prices before a pract ice w i l l be character ized as a resale-pr ice r e s t r a i n t . 1 3 1 But few, i f any , R P M schemes are inst i tuted f o r m a l l y between suppl iers and distr ibutors, p r i n c i p a l l y because of the harsh treatment accorded such schemes. (The extremely harsh treatment accorded to hor izonta l pr ice f i x i n g , par t icu la r ly under section 1 of the Sherman A c t where no f o r m a l agreement is necessary to constitute an u n l a w f u l conspi racy but where a conspi racy may be f o u n d merely in a course of deal ings or an exchange of words, has a l ready been noted above). T o exclude f r o m the realm of any R P M law any agreement not exp l ic i t ly made would e f fec t ive ly result in a l l R P M schemes being subject to the rule of reason. C e r t a i n l y there is the risk that i f the only test is whether or not there is an ef fect on pr ice , w h i c h is the case wi th v i r tua l ly every non-pr ice ver t ica l restraint , then, in e f fect , every th ing becomes R P M . T h e Commiss ion and the Cour ts can be 104 S.Ct. 1464 (1984) at 1470-71. It is notable however that the C o u r t never ind ica ted that such an agreement must be expl ic i t or that prices must be spec i f ic . C f . Business E lect ron ics C o r p . v. Sharp E lec t ron ics C o r p . 108 S. Ct . 1515 (1988) where in the Supreme Cour t held that per se condemnat ion is to be nar rowly app l ied and that ver t ica l agreements between a manufac ture r and its distr ibutors are subject to a rule of reason analysis unless the agreement sets a par t icu lar pr ice or pr ice level . (Id. at 1525) See E . G e l l h o r n and K . F e n t o n , "Ver t ica l Restra ints D u r i n g the Reagan E r a : A Program in Search of a Pol icy" , 33 Ant i t rus t B u l l . 543 (1988) at 556-60. 194 presumed however to have the abi l i ty to establish the u n d e r l y i n g purpose of a so-ca l led non-pr ice restraint and to see whether it is in tended to ma in ta in resale prices. T w o al ternat ive approaches have been suggested to make the necessary d is t inc t ion . T h e f i rst is to l imi t the category of pr ice restraints to those arrangements w h i c h 'on their face ' attempt to set spec i f i c resale p r i c e s . 1 3 2 But as one commentator has pointed o u t : 1 3 3 A n y attempt to d is t inguish price f r o m non-pr ice arrangements by ask ing whether they f a c i a l l y set spec i f ic prices or ranges of prices... is obv iously formal is t ic . T h e f a c i a l approach also fa i ls to c l a r i f y whether agreements or other actions designed only to a f fec t prices can be used as evidence of an agreement to f i x spec i f ic prices or ranges. T h e second al ternat ive is to adopt an approach s imi lar to that taken in recent U.S. hor izonta l pr ice f i x i n g cases wh ich look to output reduc t ion , compet i t ion restr ict ion and e f f i c i e n c y creat ion as the most important factors in the character iza t ion p r o c e s s . 1 3 4 If there is the potent ial for e f f i c i e n c y creat ion , then an arrangement is judged under the rule of reason even i f it has an output 132 133 T h i s is the approach taken in the Depar tment of Justice's A m i c u s C u r i a e B r i e f in Monsanto in arguing that Monsanto's market ing program d i d not 'on its face ' perta in to pr ice. (Br ie f of the U.S. Depar tment of Just ice, Monsanto C o . v. S p r a v - R i t e Service C o r p . N o . 82-914, 1983 at 15). See W. L iebe le r , "1983 E c o n o m i c R e v i e w of Ant i t rus t Developments: T h e D i s t i n c t i o n Between Pr ice and N o n p r i c e D is t r ibu t ion Restr ic t ions", 31 U . C . L . A . L. R e v 384 (1983). L iebe le r , k L at 392 and 392 n.48. 134 See eg. Broadcast M u s i c Inc. v. C o l u m b i a Broadcast ing System 441 U.S. 1(1979) and N a t i o n a l Col legiate A th le t i c Assoc ia t ion v. B o a r d of Regents of U n i v e r s i t y of O k l a h o m a 468 U.S. 85 (1984). 195 restr ict ing ef fect . It is only where there is no potent ial for e f f i c i e n c y creat ion that the per se rule comes into p lay , and then only i f the arrangement a lways, or almost a lways, tends to decrease output and restrict c o m p e t i t i o n . 1 3 5 Despite the obvious C h i c a g o School underp inn ings to this approach , an e f f i c i e n c y - b a s e d character iza t ion does have some appeal in terms of its admin is t ra t ive e f f i c i e n c y . Problems arise however in requ i r ing a Cour t or the C o m m i s s i o n to make a decis ion at f i rst glance whether or not an arrangement has e f f i c i e n c y enhanc ing potent ia l . T h i s assessment is by no means easy to make. T h e r e is then the obvious c r i t i c ism that an arrangement w i l l only be struck down i f it "always or almost always" det r imenta l ly a f fects output and compet i t ion. N o ba lanc ing of p ro -and ant i -compet i t ive ef fects appears necessary nor does the degree of output reduct ion and compet i t ion restr ict ion appear relevant w i th this approach. If pr ice and non-pr ice ver t ica l restraints are to be treated d i f f e r e n t l y , there inev i tab ly must be some formal is t ic l ine d raw ing to separate the two. T h i s can obv ious ly be avo ided i f both types of restraint are subjected to the rule of reason. A s noted in the conc lus ion to the previous section however , this solut ion appears u n l i k e l y to be palatable. In the meant ime, one can only rely on the ab i l i ty of the Cour ts and the C o m m i s s i o n to carry out the appropr iate task. (c) Less Restr ic t ive A l ternat ives A number of commentators argue that a restr ict ion w h i c h cou ld be ach ieved by a less restr ict ive al ternat ive, w h i c h is i tself not ant icompet i t ive a n d has al leged See L iebe le r , supra note 132 at 395-96 and F. Sp ine l la , Jr. , "Categor izat ion and Presumptions in H o r i z o n t a l Ant i t rus t Cases", 22 N . E . L . R e v . 295 (1987) at 296-98. procompet i t ive ef fects , should be declared i l legal . T h e thrust of their argument is that legit imate business purposes can be ach ieved by more moderate ver t ica l restraints that invo lve no restr ict ion on in t rabrand compet i t ion. In regard to the use of exclusive terri tories fo r example, w h i c h total ly e l iminate i n t r a b r a n d compet i t ion , this wou ld mean consider ing whether a suppl ier c o u l d have imposed either a locat ion clause, area of p r imary responsibi l i ty or p ro f i t pass-over agreement instead to achieve its desired business goals whi le at the same time ensur ing the existence of some in t rabrand compet i t ion among its distr ibutors. More spec i f i ca l l y , it has been suggested that locat ion clauses can better prevent ' c ream-sk imming ' on smal l items than exclusive terri tories because consumers are hab i tua l ly u n w i l l i n g to shop a round for such items and therefore seek out outlets in close p r o x i m i t y . 1 3 7 S im i l a r l y , it has been suggested that areas of p r i m a r y responsibi l i ty and pro f i t pass-over agreements can prevent 'c ream-s k i m m i n g ' on large items as wel l as induce pre- and post-sale s e r v i c e s . 1 3 8 However , exclusive terr i tories are rarely used in the f i rst s i tuat ion for the reasons noted e a r l i e r , 1 3 9 whi le there is some doubt as to the ef fect iveness and e f f i c i e n c y of the suggested restr ict ions in the second si tuat ion. In par t icu lar , the f reedom w h i c h an area of p r imary responsibi l i ty gives a d ist r ibutor to sell outside a designated terr i tory means that a d istr ibutor w i l l of ten concentrate its e f for ts only in the 1 3 6 See eg. P i t o f s k y , supra note 111 at 14, 22-23 and 36-37 and D. T u r n e r , "The D e f i n i t i o n of Agreement U n d e r the Sherman A c t : Consc ious Para l le l ism and Refusa ls to Deal" , 75 H a r v . L. R e v . 655 (1962) at 699. 1 3 7 Strausser, supra note 87 at 803-04. 1 3 8 Id , at 804 a n d 810-11. See text a c c o m p a n y i n g note 110 supra 197 most prof i tab le local i t ies in that area and then wi l l target other pro f i tab le local i t ies where other distr ibutors may also be operat ing. T h i s result w i l l i n v a r i a b l y d iverge f r o m what a suppl ier sees as the o p t i m u m level of sales e f for t fo r an a r e a . 1 4 0 F u r t h e r , it is of ten very d i f f i c u l t to accurate ly calculate the per sale cost o f pre- and post-sale services when a pro f i t pass-over agreement is in use, let alone to enforce the agreement on every sale. A d d i t i o n a l costs are therefore inevi table in under tak ing such calculat ions and e n f o r c e m e n t . 1 4 1 T h e o v e r r i d i n g disadvantage of the less restr ict ive al ternat ive test is the r isk and uncer ta inty f aced by a suppl ier in implement ing a d is t r ibut ion arrangement. T h e suppl ier must have the foresight to judge what type of restr ict ion a Cour t or the Commiss ion wi l l later determine to be the al ternat ive w h i c h meets its needs wi th the least restraint. A n incorrect judgment w i l l render the restr ict ion i l legal and put the d is t r ibut ion arrangement in jeopardy. A s was pointed out in A m e r i c a n Motor Inns v. H o l i d a y Inns Inc . : 1 4 2 A p p l i c a t i o n of the r ig id "no less restr ict ive al ternat ive" test wou ld place an undue burden on the o r d i n a r y conduct of business. Ent repreneurs ... wou ld then be made guarantors that the imaginat ions of lawyers cou ld not conjure up come method of ach iev ing the business purpose in quest ion w h i c h wou ld result in a somewhat lesser restr ict ion of trade. A n d courts wou ld be placed in the posit ion of second-guessing business judgements as to what arrangements wou ld or wou ld 140 141 142 Bork , supra note 105 at 467-69. Strasser, supra note 105 at 811. See also J . Meehan , Jr . and R. L a r n e r , " A Proposed R u l e of Reason for V e r t i c a l Restra ints on Compet i t ion" , 26 Ant i t rus t B u l l . 195 (1981) at 210-11. 521 F.2d 1230 (3rd C i r . 1975) at 1249-50. See also M . H a n d l e r , T w e n t y F i v e  Years of Ant i t rus t (1973) at 707: "[T]here wi l l almost a lways be a less restr ict ive a l ternat ive, and indeed fur ther al ternatives to each al ternat ive ad i n f i n i t u m . "(Quoted in A B A M o n o g r a p h N o . 2 supra note 1 at 60). 198 not provide 'adequate' protection for legitimate commercial interests. A similar view was taken in Svlvania at the Court of Appeals level where it was said that a least restrictive alternative test "would place an unreasonable and impractical burden on a manufacturer desiring to impose some vertical restraint in order to promote its position vis a vis its competitors".143 Despite this expressed hostility to the application of the test for vertical restraints, it is notable that the same is not the case for horizontal restraints where the Courts, particularly in the United States, have frequently applied the less restrictive alternative test and the associated 'reasonably necessary' test.144 The most common example is where the sale of a business is involved. In this situation, the Courts have traditionally held that a restraint, as well as having to support a protectable interest and being reasonable in the public interest, must be reasonable as between the parties. Any restraint therefore that proscribes the activities of the party restrained any more than necessary, covers a wider geographical area than necessary or extends in time longer than necessary will be struck down. 1 4 5 Relatively few problems have been experienced in applying the test to this 143 144 145 694 F.2d 1132 (9th Cir. 1982) at 1138 n. 11. Spinella, supra note 135 at 309. The less restrictive alternative analysis had its genesis in the United States in the 1898 decision of United States v. Addvston Pipe & Steel Co. 85 F. 271 (6th Cir. 1898) where it was held that an ancillary restraint should be struck down if it "exceeds the necessity presented by the main purpose of the contract". (Ick at 282) See S. Mehigan and D. Griffiths, Restraint of Trade and Business Secrets:  Law and Practice (London, Longman Group U K Ltd., 1986) at 115-19. For a brief history of the common law of restraint of trade, see Dunlop. supra note 84 at 24-41. si tuat ion and indeed it seems no more d i f f i c u l t an analysis to under take than ba lanc ing pro- and ant i -compet i t ive ef fects under the rule of reason. F u r t h e r , uncer ta in ty fo r a suppl ier as to the legal i ty of a restr ict ion w o u l d appear to be no greater under the less restr ict ive al ternat ive test and it may wel l be quest ioned whether the adopt ion of such a test is l ike ly to prove more of a d iscouragement to suppl ier investment than the standard rule of reason test (al though admi t ted ly a less restr ict ive al ternat ive test w i l l more of ten than not result in a stricter treatment of restrictions). O n balance, doubts as to the ef fect iveness of some types of restr ict ions to achieve the d is t r ibut iona l e f f i c ienc ies w h i c h a suppl ier i n v a r i a b l y seeks when impos ing terr i tor ia l and customer restrict ions and the h igher costs of admin is t ra t ion and enforcement rule out a less restr ict ive a l ternat ive test as itself a v iab le a l t e r n a t i v e . 1 4 6 Ce r ta in ly there seems no jus t i f i ca t ion in dec la r ing an exclusive terr i tor ia l restr ict ion i l legal whi le permi t t ing less restr ict ive al ternat ives unless it can be c lear ly demonstrated that the former has a greater ant icompet i t ive than procompet i t ive e f fect whi le the reverse is the case wi th the latter. It is acknowledged that the existence of less restr ict ive al ternat ives may however be a matter for considerat ion in author iza t ion proceedings that is, an author iza t ion may be refused i f the app l ica t ion fa i ls to establish that the c la imed benef i ts cou ld not have been ach ieved otherwise than by means of the ant icompet i t ive conduct . T h i s v iew is supported by statements made in F isher and Pavbe l L t d , supra note 48, that since the purpose of the A c t is to promote compet i t ion , i f the same benefi ts can be produced by a less restr ict ive a l ternat ive, then the C o m m i s s i o n wi l l be loath to grant the pr iv i lege of author iza t ion to a restr ict ive trade pract ice otherwise proscr ibed by the A c t . (Id. at 28). 200 (d) D is t r ibu t ion Arrangements Invo lv ing Industr ia l and Intel lectual Property R ights A great many d is t r ibut ion arrangements incorpora t ing a ter r i tor ia l or customer restr ict ion invo lve the grant of some indust r ia l and inte l lectual property r ight (hereafter fo r convenience termed "intel lectual property right") in the f o r m of a patent, t rademark , copyr ight or registered design. T h e d is t r ibu t ion arrangement may, fo r example, invo lve the l icensing of some patented process under w h i c h the patentee grants a l icensee the r ight to manufac tu re and sell a par t icu lar product to certa in customers (with the patentee reserv ing cer ta in customers to itself) or the l icensing of a t rademark under w h i c h a f r a n c h i s o r grants a f ranchisee the r ight to use a par t icu lar mark in connect ion wi th a f ranch ised business in a certain area. T h e l icence granted may be exclusive or non-exc lus ive as with any other terr i tor ia l and customer restr ict ion not subject to an inte l lectual property r ight. T h e grant of an intel lectual property r ight in a d is t r ibu t ion arrangement raises a basic ph i losophica l question about the re lat ionship between indust r ia l and inte l lectual property law (hereafter fo r convenience termed "intel lectual property law") and compet i t ion law. Intel lectual property law is p r i m a r i l y designed to protect the holder of an intel lectual property r ight f r o m the use by others of such rights fo r d e f i n e d periods. A patent fo r example prohib i ts anyone other than the patentee f r o m put t ing into use any invent ion for a term of 16 y e a r s , 1 4 7 whi le copyr ight confers upon the author of any or ig ina l l i terary , d ramat ic , mus ica l , or 147 Patent A c t 1953, sections 2, 7 and 30. 201 art ist ic work the sole r ight to pub l ish , p e r f o r m or reproduce the same and to restrain others f r o m so do ing fo r terms of up to 75 y e a r s . 1 4 8 T h e r e are two basic pol icy reasons fo r the grant of these rights under statute. F i rs t , it provides an inventor , creator, author, or designer wi th an incent ive to invest the t ime, money and energy necessary to d iscover , create and develop an inven t ion , mark , work or design. Secondly , it encourages their disclosure in situations where they might otherwise remain u n k n o w n to the publ ic . T h u s , these statutory rights reward an inventor , creator, author or designer by protect ing their investment in inherent ly h igh r isk invent ions and easi ly p i rated subject matter, whi le their ava i lab i l i ty for use and enjoyment is obv ious ly of benef i t to the publ ic . T h e u n d e r l y i n g pol icy of compet i t ion law on the other h a n d is to restrain monopol ies and promote compet i t ion by remov ing unnecessary restr ict ions imposed or agreed to by cer ta in p a r t i e s . 1 4 9 A s such , there may be seen to be a potential con f l i c t in the way that one grants rights of monopoly whi le the other prohibi ts monopol is t ic a c t i v i t i e s . 1 5 0 Attempts made to resolve this conf l i c t have suggested the use of a cost /benef i t C o p y r i g h t A c t 1962, sections 7 and 8. See also T r a d e M a r k s A c t 1953 sections 10 and 29 and Designs A c t 1953, sections 11 and 12. F o r a percept ive analysis of these and other po l icy goals, see J .T . M c C a r t h y , "Intellectual Property and T r a d e Pract ices Pol icy: Coexistence or C o n f l i c t ? T h e A m e r i c a n Exper ience" , (1985) 13 A . B . L . R . 198. A t the same t ime, there may be seen to be some consistency in the way that inte l lectual property law also promotes compet i t ion by s t imulat ing product and process development and i n d u c i n g compet i t ion amongst f i rms to handle these new products and processes. 202 economic analysis. One such analysis as it relates to terr i tor ia l restr ict ions in patent l icences requires an assessment as to whether the total benefi ts of terr i tor ia l restr ict ions (being the incent ives to potent ial innovators) exceed the total costs (being the detr iment to the economy) ar is ing f r o m their imposi t ion . If the rat io of benef i ts to costs is greater than one, then the restr ict ion should be a l lowed. If not, it should be d i s a l l o w e d . 1 5 2 It was noted above that section 45 of the New Z e a l a n d A c t , l ike its A u s t r a l i a n and C a n a d i a n equivalents, spec i f i ca l l y exempts f r o m the p r o h i b i t i o n in section 27, but not sections 36, 37 and 38, any contract , arrangement or unders tand ing relat ing to the "use, l icence, or assignment of rights under or exist ing by v i r tue of any copyr ight , patent, protected plant var ie ty , registered design or t r a d e m a r k " . 1 5 3 T h e ef fect of this prov is ion is to make it per se legal fo r any party to enter into a contract incorpora t ing a terr i tor ia l or customer restr ict ion and re lat ing to one of these intel lectual property rights notwi thstanding the ant icompet i t ive ef fects of the restr ict ion. G i v e n the po l icy con f l i c t between See eg. L. K a p l o w , "The Patent -Ant i t rust Intersection: A Reappra isa l" 97 H a r v . L . R e v . 1815 (1984) and J . O r d o v e r , "Economic Foundat ions and Considera t ions in Protect ing Industr ia l and Intel lectual Proper ty , 53 Ant i t rus t L . J . 503 (1984). K a p l o w , supra note 151 at 1821-42. F o r a d iscussion of this analysis see B. C h e f f i n s , "Exc lus ive Te r r i to r i a l R ights in Patent L icences and A r t i c l e 85 of the E E C Treaty : A n E v a l u a t i o n of Recent Developments in the Law" , 10 B.C. Int'l & C o m p . L. R e v . 53 (1987) at 63-64. Sect ion 45 (l)(a). Section 36 has its own exempt ing subsect ion w h i c h provides that a person does not use a dominant posi t ion in a market fo r an improper purpose "by reason only that that person enforces or seeks to enforce any right under or exist ing by v i r tue of any copyr ight , patent, protected plant var ie ty , registered design or trade mark". (Section 36(2)). See also C a n a d i a n Compet i t ion A c t , section 51(5) (to be renumbered section 79(5)). C f . Section 46 of the A u s t r a l i a n A c t w h i c h contains no such exempt ion. 203 intellectual property law and competition law, one may argue that Parliament has made a clear choice to favour the former in the belief that this will stimulate innovation, promote the diffusion of new technology and enhance intrabrand competition all to the benefit of consumers and the country as a whole. It is also arguable that this attitude reflects a decreased concern about the anticompetitive , effects of territorial and customer restrictions where intellectual property rights are involved. If protection is not granted, this may be damaging to the dissemination of new technology and works and prejudice competition between new and existing products.154 One may question why the holder of an intellectual property right deserves this special protection when the very grant of the right gives the holder a monopoly, whether it be absolute or limited, and thus an advantage over its competitors. Further, one may question whether the special protection granted in fact stimulates innovation or licensing activity to any material degree. Even with the protection provided by the exemption, the holder of an intellectual property right will rarely have a sufficient degree of market power to be of antitrust concern. It is only where, for example, a patent involves particularly novel technology that few, if any, close substitutes are likely to exist and barriers to entry are likely to be high that any significant degree of market power may be obtained. A territorial or customer restriction imposed in this situation is unlikely to be imposed for the purpose of foreclosing competitors or having other anticompetitive effects but of diffusing risk, defraying development costs, increasing a supplier's reward from licence fees and royalty payments not other wise attainable, exploiting territories in which and customers to whom a supplier See Chef fins, supra note 152 at 65-70. 204 may not otherwise have been able to operate and sell and general ly e f f ec t ing a more e f f i c ien t and prof i tab le d is t r ibut ion of its p r o d u c t s . 1 5 5 These advantages should be s u f f i c i e n t incent ive fo r inventors and authors to cont inue to innovate and create. F r o m this it fo l lows that d is t r ibut ion arrangements i n v o l v i n g an inte l lectual property r ight should also be subject to treatment under the more general provis ions of the A c t as is the case in the U n i t e d States where exclusive rights and terr i tor ia l restr ict ions are most f requent ly ana lyzed under the rule of reason by d iscern ing whether their overa l l e f fect is procompet i t ive or a n t i c o m p e t i t i v e . 1 5 6 In this way , factors such as the height of barr iers to entry, the a v a i l a b i l i t y of close substitutes and the degree of market power in general can be taken into account in any case. Where is it desirable that a monopoly be main ta ined because new technology is invo lved and the s ign i f icant costs and risks i n c u r r e d in development just i fy appropr ia te compensat ion, then this is a matter w h i c h can always be considered under the pub l ic benef i t provis ions of the A c t . Part ies wi th any concern about i n f r i n g i n g the A c t can always app ly for au thor i za t ion of their own accord . One would expect that in situations i n v o l v i n g new technology w h i c h Id, at 76-77 A s imi lar v iew was expressed in C a n a d a in 1977 as part of proposals to amend section 29 of the Combines Investigat ion A c t . T h e proposals were based on the E c o n o m i c C o u n c i l of C a n a d a Repor t on Intel lectual and  Industr ia l Property (Ot tawa. In format ion C a n a d a , 1971) w h i c h suggested that where the existence of un just i f iab le ant icompet i t ive pract ices is proven , compet i t ion po l icy legislat ion should overr ide that of inte l lectual and indust r ia l property legislat ion by p r o v i d i n g fo r remedies w h i c h lead to the d iscont inuance of uncompet i t ive practices related to the ownership of inte l lectual property rights. T h e dra f t B i l l , w h i c h empowered the C o m p e t i t i o n B o a r d to issue a remedia l order where it f o u n d anyone exerc is ing an intel lectual property r ight or interest in a manner not expressly author ized by the pert inent statutes and w h i c h was l ike ly to a f fec t compet i t ion adversely in a market , never however became law. 205 prov ide s ign i f i can t consumer benef i ts , f avourab le considerable wou ld be a f f o r d e d by the C o m m i s s i o n as being the sort o f cases w h i c h are the proper subject matter of author iza t ion . Solut ions such as l im i t ing the exempt ion to those parties who do not possess a s ign i f i can t degree of market power a n d / o r requ i r ing cer ta in parties to apply for an i n d i v i d u a l exempt ion are unfeasib le as the E u r o p e a n C o m m i s s i o n f o u n d in prepar ing the B lock E x e m p t i o n for Patent L i c e n c e s . 1 5 7 T h e C o m m i s s i o n wanted to l imi t most automat ic terr i tor ia l exemptions to small and m e d i u m sized companies (on the basis that only these companies needed the incent ive to develop technology p r o v i d e d by exclusive r ights and terr i tor ia l restrictions) but f o u n d m a x i m u m turnover and market share detr iments d i f f i c u l t to app ly and i m p r e c i s e . 1 5 8 Subject ing treatment of d is t r ibut ion arrangements i n v o l v i n g inte l lectual property r ights to the more general provisions of the A c t is also admin is t ra t ive ly more e f f i c i e n t than a system under w h i c h an exempt ion is l imi ted in one of the manners suggested a n d / o r an i n d i v i d u a l exempt ion must be appl ied for . G i v i n g parties the d iscret ion as to whether they seek author iza t ion f r o m the C o m m i s s i o n is fu r ther no worse than the present system of e f fec t ive per se legal i ty. A n acknowledged disadvantage of the suggested approach over the present system is that to determine the legal i ty of restrict ions on a case by case basis creates uncer ta in ty and may make some parties th ink twice before enter ing into Regu la t ion 2349/84. F o r a br ie f discussion of the history and app l ica t ion of the B lock E x e m p t i o n , see C h e f f i n s , supra note 152 at 53-54 and 59-61. 158 C h e f f i n s , i d , at 79-80 and 82. 206 distribution arrangements.159 Whatever the arguments surrounding the present system, it is certainly more predictable. The conflict between intellectual property law and competition law is not an easy one to solve and it is far beyond the scope of this thesis to even attempt this difficult task. As one commentator has stated:160 [T]here is no 'objective truth' to be found in the tension and conflict between intellectual property and antitrust. While many legal scholars have sought to find a 'unified field theory' which will serve as a legal tool to resolve all such conflicts, no one has yet succeeded. It is probably delusive to even search for such a thing. The huge body of legal precedent in the United States on the proper and improper use of intellectual property rights creates a delusive mirage that there is some rule of immutable logic at work, if only we could discover what it is. But I think that all that is at work is the personal preference as to societal and economic values of the judges who decide the cases. Both laws can however operate in harmony so long as neither is applied too aggressively. To do otherwise means that the fundamental policies of both are defeated. In examining any distribution arrangement (whether or not it involves intellectual property rights), one is faced with the same questions regarding the competitive effects of the restrictions incorporated therein. Parliament has obviously made a clear policy choice to exempt arrangements involving intellectual property rights from the purview of section 27, but it would seem arguable that a more consistent approach to all distribution arrangements should be adopted. 1 5 9 This is said by some commentators to be one of the major disadvantages of the U.S. approach. See Chef fins, supra note 152 at 83 n. 146. 1 6 0 McCarthy, supra note 149 at 199. 207 (e) A d m i n i s t r a t i o n and E n f o r c e m e n t In the corresponding section in Part II, var ious rules of analysis were discussed in regard to R P M in terms of their admin is t ra t ive e f f i c i e n c y and appropriateness. T h e advantages and disadvantages fo r each ho ld equal va l id i t y in regard to terr i tor ia l and customer restr ict ions. One need however only real ly consider a rule of reason analysis in this section g iven the weight of scholar ly support in its f a v o u r 1 6 1 and because such restr ict ions are neither so typ ica l l y ant icompet i t ive nor procompet i t ive as to just i fy app l ica t ion of one of the per se rules. Ra ther , they may be ant i -compet i t ive or pro-compet i t ive depend ing upon a whole range of factors to be discussed short ly. It w i l l be recal led that the p r imary advantage of the rule of reason is the ab i l i ty of the relevant ad jud ica t ive body to weigh the pro- and ant i -compet i t ive ef fects of a restraint in any par t icu lar case, whi le its p r i m a r y disadvantages are the need to undertake an extensive economic analysis in each case and the ab i l i ty of judges to in fact undertake this task. O n this latter point , one commentator has noted in regard to the A u s t r a l i a n A c t : 1 6 2 T h e d i f f i c u l t y wi th the rule of reason is the int imate b lend of economic and legal reasoning that is requi red - the b lend ing of economic and legal concepts - in the app l ica t ion of the statute by way of economic analysis and legal argument to the facts of the case. Since however the scene of act ion is a court of law, the c o n u m d r u m is how to get economics into the court . See Strasser, supra note 87 at 830 n.255. M . Brun t , "Lawyers and Compet i t ion Pol icy" in A . D . H a m b l y and J . L . G o l d r i n g , A u s t r a l i a n L a w y e r s and Social Change (1976) at 290. 208 For the Commission, the conumdrum is not serious given the skills and experience it can count on from amongst its members and the lack of any procedural impedients in receiving economic evidence.163 The Courts themselves have shown an increasing willingness to admit evidence and hear arguments of an economic nature, 1 6 4 while being able to call upon experts as lay members to assist the Court in its proceedings.165 In advocating a rule of reason as that which is most appropriate, one is faced with a very open-ended provision in the form of section 27. A set of guidelines to assist the Commission in its administration and enforcement of territorial and customer restrictions under the Act as well as to provide parties to a distribution arrangement with some means of judging the legality of their conduct would seem to be of some benefit in this situation. In this regard, it is appropriate to consider two of the approaches suggested by high ranking bodies in the United States. The first is that adopted in the Vertical Restraints Guidelines issued by the Department of Justice in 1985. The Guidelines were designed to express the Department's enforcement policy in regard to vertical non-price restraints as well as to clarify the existing law in this area. 1 6 6 It is beyond the scope of this thesis to discuss the content of the Guidelines in any detail suffice to say that they embrace 1 6 3 Sections 9(4) and 98-99. 1 6 4 See eg. Tru-Tone. Part II, note 200 supra. 1 6 5 Section 77. 1 6 6 See Panel Discussion, supra note 129 at 321-22 (per Charles F. Rule). 209 the consumer wel fare approach to ver t ica l non-pr ice restraints by assuming that there is a lways a procompet i t ive explanat ion fo r their imposi t ion a n d that suppl iers who impose non-pr ice ver t ica l restraints w i l l general ly be act ing in the best interests of consumers. In so do ing , any restraints w h i c h are not "airtight" are deemed per se legal notwi thstanding that there may be no procompet i t ive ef fects and a substant ial e l iminat ion of in t rabrand c o m p e t i t i o n . 1 6 7 What is re levant fo r present purposes is the two-step approach used fo r eva luat ing those restraints w h i c h are subject to the Gu ide l ines . U n d e r the f i rst step, the Department uses a "market structure screen" to e l iminate f r o m fur ther considerat ion any restraint w h i c h is deemed u n l i k e l y to have ant icompet i t ive e f f e c t s . 1 6 8 F o r this p u r p o s e , 1 6 9 the Depar tment calculates the market share of each f i r m that is party to a d is t r ibuton arrangement conta in ing the non-pr ice ver t ica l restraint and then sums the values fo r a l l f i rms at the same level of d is t r ibut ion . T h i s ca lcu la t ion produces what is termed the "Ver t ica l Restra ints Index" ("VRI"). T h e Department also calculates the propor t ion of each market i n v o l v e d in the restraint w h i c h it terms "the coverage ratio". T h e use of a restraint w i l l not be chal lenged i f (1) a f i r m employ ing a restraint has a market share of 10% or less; (2) the V R I and the coverage rat io are below 1200 and 60% respect ively in the relevant market; (3) the V R I is below 1200 in the suppl ier and F o r a discussion of the content of the G u i d e l i n e s , see Panel D iscuss ion , supra note 129. V e r t i c a l Restra ints Gu ide l ines , supra note 128 at 23-25. T h e f o l l o w i n g is based on Statement of Char les F. R u l e , A c t i n g Assistant A t t o r n e y Genera l Ant i t rus t D i v i s i o n , before the Commit tee on the J u d i c i a r y , U n i t e d States Senate concern ing the Justice Department 's V e r t i c a l Restra ints G u i d e l i n e s (July 16th, 1985) at 12-17. 210 distr ibutor markets; or (4) the coverage rat io is below 60% in both markets. T h e rat ionale in (1) is that a f i r m wi th a smal l market share is u n l i k e l y to possess market power of its own accord nor is it l ike ly to be major par t ic ipant in any cartel . T h e rat ionale in (2), (3) and (4) is that "neither co l lus ion nor ant i -compet i t ive exc lus ion is plausible" in these situat ions, "because either the p r imary a n d / o r secondary markets do not meet the m i n i m u m structura l condi t ions fo r a restraint to have ant icompet i t ive e f f e c t s " . 1 7 0 U n d e r the second step, a restraint w h i c h does not pass the screen is considered under a structured rule of reason. Factors relevant to the compet i t ive e f fect of a restraint inc lude the ease or d i f f i c u l t y of entry into a market , market concent ra t ion , the conduciveness of the market to co l lus ion , the exc lus ionary nature of the restraint , evidence of co l lus ion or exc lus ion , the type of f i rms using the restraint and procompet i t ive e f f ic ienc ies . O n l y i f these factors suggest that a restraint is ant icompet i t ive w i l l it be c h a l l e n g e d . 1 7 1 While this structura l analysis is obv iously a imed at s i m p l i f y i n g the rule of reason approach , the inevi table c r i t i c ism is that the tests are very static in nature. A p a r t f r o m the somewhat arb i t rary choice of f igures fo r the market screen no account can be taken of market share changes over time nor of any changes in the market itself. F u r t h e r , the factors requ i r ing considerat ion under the second step concentrate on structura l matters and thus largely ignore behav ioura l concerns. St i l l fu r ther , h igh values under the V R I w i l l result i f most of the suppleirs in an industry are using the same restraint, the very si tuat ion in w h i c h one would expect 1 7 0 Id. at 14. 1 7 1 V e r t i c a l Restra ints G u i d e l i n e s , supra note 128 at 31-32. 211 this to be the case i f the restraint is e f f i c i e n c y - e n h a n c i n g . These are only some of the many reasons that the Gu ide l ines have been the subject of heavy c r i t i c i s m . 1 7 3 T h e G u i d e l i n e s have also proved to be of l itt le re levance g iven the Department 's a l ready permissive enforcement po l icy towards ver t ica l non-pr ice restraints. T h e second approach is that adopted in the V e r t i c a l Restra ints G u i d e l i n e s issued by the N a t i o n a l Assoc ia t ion of At torneys Genera l ( " N A A G " ) 1 7 4 i n response to the Depar tment of Justice's V e r t i c a l Restra ints Gu ide l ines . A g a i n it is beyond the scope of this thesis to discuss the N A A G G u i d e l i n e s in any deta i l , s u f f i c e to say that the G u i d e l i n e s , whi le acknowledg ing that ver t ica l non-pr ice restraints have the potent ial fo r increasing e f f i c i e n c y , require the existence or l i ke l ihood of pro-compet i t ive benef i ts to be d e m o n s t r a t e d . 1 7 5 A s such, the N A A G advocate that any i n q u i r y regard ing the legal i ty of a non-pr ice ver t ica l restraint depends upon a whole range of market factors. T h e N A A G G u i d e l i n e s require a considerat ion of such factors as market concentra t ion , coverage, scale economies, barr iers to entry, See Panel D iscuss ion , supra note 129 at 355-57 and G e l l h o r n & F e n t o n , supra note 131 at 568-69. C r i t i c i s m of the Gu ide l ines was in fact expressed by the U.S. House of Representat ives Commit tee on the J u d i c i a r y who, in recommending that House Reso lu t ion 303 be passed, stated that the G u i d e l i n e s "do not have the force of law, do not accurate ly state current anti trust law, a n d shal l not be considered by the courts of the U n i t e d States as b i n d i n g or persuasive ..." (Report of the House J u d i c i a r y Commit tee , 99th Congress, 1st Session, N o . 99-399). T h e N a t i o n a l Assoc ia t ion of At torneys G e n e r a l , V e r t i c a l Restra ints G u i d e l i n e s (December 4th, 1985) 49 Ant i t rus t & T r a d e R e g u l a t i o n Repor t 996 (12-5-85). 175 Id. at para . 3.2. 212 co l lus ion , output restr ict ion and the r ig id i ty and longevi ty of the restraint. Cons idera t ion is also to be given to the role that dealer pressure may have p layed in the dec is ion to institute the restraints, the extent to w h i c h add i t iona l services are in fact p r o v i d e d once the restraint has been imposed, the e f fect of the restraint on 'consumer choice ' in the area of pr ice and qual i ty options and the intent of the parties impos ing the r e s t r a i n t . 1 7 7 T h e N A A G approach , whi le less simple and e f f i c ien t to administer and enforce , c lear ly provides a m u c h fa i re r and more comprehensive approach to the assessment of i n d i v i d u a l ver t ica l non-pr ice restraints w i th in a market setting. Its virtues arise f r o m the fact that restraints are v iewed in l ight of their actual intent, consumer impact , and the par t icu lar facts presented in each case. T h e C o m m i s s i o n has itself recently attempted to formula te its own ver t ica l restraints g u i d e l i n e s . 1 7 8 L i k e the Department of Justice's V e r t i c a l Restra ints G u i d e l i n e s , the Commiss ion 's G u i d e l i n e s start o f f wi th the general proposi t ion that "vert ical restraints may promote compet i t ion by a l lowing a manufac tu re r to achieve e f f i c ienc ies in the d is t r ibut ion of its products and by permi t t ing f i r m s to Id. at paras 4.6-4.13. Id. at paras 4.4, 4.5 4.14 and 4.15. See F isher and Pavke l L t d . supra note 48 at 15-22. T h e G u i d e l i n e s were an attempt to de f ine the pr inc ip les w h i c h should appply to the pract ice of exclusive dea l ing and to more accurate ly ref lect the Depar tment of Justice's V e r t i c a l Restraints G u i d e l i n e s as appropr iate to New Z e a l a n d . (Id, at 14) T h e decis ion itself i n v o l v e d an appl ica t ion for author iza t ion by F isher and Payke l L t d fo r an exclusive deal ing clause in its f ranch ise agreements. T h e C o m m i s s i o n had no d i f f i c u l t y in d e c i d i n g that the lessening of compet i t ion was substant ial (based on the condi t ions set out in the Gu ide l ines ) and that the l ike ly detr iments there f rom clear ly outweighed the benef i ts f o u n d . T h e C o m m i s s i o n therefore dec l ined the app l ica t ion . T h e f ranch ise agreements d i d not conta in any terr i tor ia l or customer restr ict ions w h i c h might otherwise have been the subject of discussion. 213 compete through d i f f e ren t methods of d i s t r i b u t i o n . " 1 7 9 Therea f te r , the G u i d e l i n e s concern themselves almost solely wi th exclusive dea l ing , a l though they do note in passing, again as in the Department of Justice's V e r t i c a l Restra ints G u i d e l i n e s , that ver t ica l restraints "may fac i l i ta te col lus ion among competitors or may be used to exc lude or have the ef fect of exc lud ing r i v a l s . " 1 8 0 T h e Commiss ion 's G u i d e l i n e s recognize a suppl ier must have s ign i f i can t market power (as judged by the cr i ter ia ment ioned therein) i f that suppl ier is to s i g n i f i c a n t l y lessen compet i t ion through its use of a ver t ica l restraint. In this regard however , the C o m m i s s i o n sensibly d i d not feel i tself bound to establish quant i ta t ive cr i ter ia as to market shares and concentrat ion ratios, not ing that there is in fact debate as to whether the U.S. cr i ter ia are appropr ia te for that count ry , let alone fo r N e w Z e a l a n d . T h e Commiss ion stated that it has resisted quant i ta t ive cr i ter ia to date in assessing compet i t ive impacts in the bel ief that it does not have s u f f i c i e n t exper ience or data to prov ide such cr i ter ia fo r N e w Z e a l a n d at this t i m e . 1 8 1 T h e Commiss ion 's G u i d e l i n e s are the poorer fo r not dea l ing wi th al l ver t ica l non-pr ice restraints and it is therefore hoped that broader-based guidel ines wi l l be promulgated , pre ferab ly outside the constraints of any dec is ion , w h i c h prov ide a f r a m e w o r k to describe the condi t ions w h i c h must exist before ver t ica l non-pr ice restraints have ant icompet i t ive effects and the factors w h i c h assist in the analysis 179 Id. at 15. 180 Id. 181 Id. at 19-20. 214 thereof. Such guidel ines should not however replace the statutory tests and the judgements w h i c h must be made pursuant to section 27 ( in assessing whether there is a "substantial lessening of competit ion"). In this regard , one may consider whether the statutory provis ions in the other three jur isd ic t ions prov ide any more an e f fec t ive means of admin is t ra t ion and enforcement of ver t ica l non-pr ice restraints than the present provis ions. It is clear at least that section 1 of the Sherman A c t provides no real a l ternat ive , being as open-ended as section 27 and result ing in the f l u i d i t y of in terpretat ion noted earl ier in the section on the current state of the law in the U n i t e d States. T h e C a n a d i a n a l ternat ive just i f ies m u c h closer considerat ion because it spec i f i ca l l y addresses the pract ice of terr i tor ia l and customer retr ict ions. T h i s a l ternat ive appeals because it also adopts a "substantial ly lessening of compet i t ion test", recognizes that the imposi t ion of a "market restr ict ion" is on ly ever l i ke ly to be ant icompet i t ive when engaged in by a suppl ier wi th a s ign i f i can t degree of market power, and o f fe rs a general ly accepted defence fo r those suppl iers new to the market or i n t r o d u c i n g new products. F i n a l l y in regard to section 47 of the A u s t r a l i a n A c t , the convu lu ted d r a f t i n g style of the relevant provis ions in this sect ion, the con f l i c t between sections 45 and 47, and the problems wi th the interpretat ion of key phrases noted earl ier d iscount the A u s t r a l i a n approach as a v iable al ternat ive. T h e no t i f i ca t ion procedure in section 93 of the A u s t r a l i a n A c t also appears to be of l itt le ef fect iveness and only increases fu r ther the admin is t ra t ive burden on the T r a d e Pract ices Commiss ion . Whichever a l ternat ive is chosen, it is essential that there exists an adequate f r a m e w o r k w i t h i n w h i c h to judge any ver t ica l non-pr ice restraint. It is submit ted 215 that the S t r u c t u r e / C o n d u c t / P e r f o r m a n c e P a r a d i g m advocated by many economists in the f i e l d of indust r ia l organizat ion and employed by the T r a d e Pract ices C o m m i s s i o n ("TPC") and T r a d e Pract ices T r i b u n a l ("TPT") in A u s t r a l i a provides such a f ramework . T h e theoret ical f o u n d a t i o n of the P a r a d i g m is that the structure of a g iven market strongly in f luences the k i n d of conduct that entities w i th in the market are l ike ly to pursue and that conduct in turn strongly in f luences per formance . A s such, there is a causal l ink between structure and conduct and conduct and per formance. T h e usual approach in the indust r ia l organizat ion in l i terature is to emphasize market power. Marke t power is essential ly the ab i l i ty of a f i r m to contro l its p roduct ion and sel l ing pol icies independent ly of market constraints and thus to earn excess p r o f i t s . 1 8 3 Most f i rms have some degree of market power because their products are not per fect ly substitutable wi th the products of others a n d because there may be barr iers to entry of new f i rms such as cost advantages through access to superior p roduct ion methods and essential inputs , scale economies of p r o d u c t i o n , d is t r ibu t ion , purchasing and capi ta l , and product d i f f e r e n t i a t i o n and b r a n d loyal ty . Marke t power is d iscret ionary to the extent that a f i r m has the f reedom whether or not to exercise this power, and so not to max imize prof i ts . In the absence of e f fec t ive compet i t ion, the antithesis of undue market power, controls on costs sometimes become lax and so f i rms of ten tolerate and ma in ta in what is termed " X - i n e f f i c i e n c y " . Fur ther , the lure of excess prof i ts of ten induces T h e P a r a d i g m was f i rst conceived by E d w a r d S. M a s o n at H a r v a r d d u r i n g the 1930's and has been extended by numerous scholars since. See eg. Scherer , supra note 51 at 4-7. 183 T h e usual fo rmula t ions of 'monopoly power' in the U.S. are either "the power to reduce output and increase price" or "the power to raise prices and exclude entry". 216 f i r m s to i n c u r wastefu l expenditures so as to ma in ta in a n d strengthen monopoly p o s i t i o n s . 1 8 4 In assessing market power, this essential ly involves a cons idera t ion of market structure through an analysis of market shares, market concentra t ion a n d market entry c o n d i t i o n s . 1 8 5 T h e condi t ions of entry to a market is wi thout doubt the most important element of market structure fo r it is the ease wi th w h i c h f i rms may enter and stay in a market w h i c h establishes the possibi l i ty of market concentra t ion over time and it is the threat of new f i r m s and new capac i ty to a market w h i c h operates as the ult imate regulator of compet i t ive c o n d u c t . 1 8 6 T h e greater the d i f f i c u l t y in ach iev ing successful entry into a market , the fewer the constraints upon incumbent f i rms and the more l ike ly the market w i l l exhib i t signs of ant icompet i t ive conduct . Assessing the condi t ions of entry helps determine the l ike ly level of potent ia l compet i t ion w h i c h is essential i f the f i n a l p icture of the Scherer , supra note 51 at 464-71. Factors relevant for determin ing whether a compet i t ive market structure exists or not were set out in O C M A and i n c l u d e d the number a n d size d is t r ibut ion of independent sellers, the ease or d i f f i c u l t y of enter ing a market , product d i f f e r e n t i a t i o n , ver t ica l integrat ion a n d the nature of any arrangements between f i rms restr ict ing their ab i l i ty to f u n c t i o n as independent entities (1976) A . T . P . R . at 17,246. These factors were ci ted wi th approva l in the V i s i o n h i r e and A i r N e w Z e a l a n d decisions. O C M A . id . at 17,246. A cond i t ion of entry is basica l ly any requirement w h i c h must be met by a f i r m to gain entry to a market . Some condi t ions of entry represent more of a demand on new entrants than others and hence are l ike ly to e f fec t a longer delay in new entry. T i m e lags de lay ing entry to the market can help an incumbent f i r m ma in ta in and enhance its market power. C o n d i t i o n s of entry w h i c h are more d e m a n d i n g of new entrants than those exper ienced by an incumbent w i l l normal ly give rise to a re lat ive ly greater time fo r the incumbent to ma in ta in and enhance its posi t ion in the market . T h i s then results in a longer t ime lag before new entry or expansion actual ly occurs and greater market power fo r the incumbent wi th consequent ia l detr imental ef fects on compet i t ion in the market . F isher and Pavke l L t d . supra note 48 at 30-31. 217 structure of a market is to take due account of d y n a m i c forces as wel l as static c o n d i t i o n s . 1 8 7 In one f o r m or another, market share and concentrat ion f igures are used as threshold tests in al l major systems of compet i t ion law. In regard to market share, the usual measure employed is the percentage share of sales made by a f i r m in the market , but care is needed in interpretat ion for it may overstate a f i rm 's market power where there are no or low barr iers to entry and the threat of potent ial compet i t ion is great. In regard to market concentra t ion , the usual measure employed is a concentrat ion rat io based on the percentage share of output , capac i ty , sales or assets accounted for by the leading f i rms operat ing in the market . But this must be supplemented by i n f o r m a t i o n on the c i rcumstances of concentra t ion such as size d is t r ibu t ion , disparateness or mobi l i ty of market s h a r e s . 1 8 8 Marke t share or concentrat ion f igures alone are however not s u f f i c i e n t in themselves to determine the ant icompet i t ive effects of a restraint. T h e y are merely usefu l as a p re l im inary screen in any analysis to d iscard those restraints posing no threat to compet i t ion. T h e presence of potent ial entrants to a market has been accepted by writers on the subject of indust r ia l organizat ion for many years. It has however become more popular in recent years wi th the development of the 'contestable markets' hypothesis w h i c h sets out to demonstrate that in the absence of both entry and exit barr iers , either the actual i ty or the threat of new entry w i l l cause economic per formance in an indust ry to come very close to that predicted by the model of perfect compet i t ion. See W. B a u m o l , C . Panzar and D. Wi l l ig , Contestable Markets and the T h e o r y of Industry  Structure (New Y o r k , Harcour t , Brace , J o h a n o v i c h , 1982). T r a d e Pract ices C o m m i s s i o n , Second A n n u a l Repor t (year ended 30 June 1976) at 61-62. F o r a discussion of the al ternat ive means of measur ing market concentrat ion (eg H e r f i n d a h l - H i r s c h m a n Index) and market power general ly (eg Le rner Index), see Scherer, supra note 51 at 56-74. 218 Cons idera t ion of any of these elements of market structure requires as an essential f i rst step a clear d e f i n i t i o n of the relevant market. One can only analyze market share and concentrat ion i f one knows w h i c h f i r m s to inc lude in the ca lcu la t ion . L i k e w i s e , one can only analyze condi t ions of entry i f one knows what is being e n t e r e d . 1 8 9 In d e f i n i n g the market , it is important to f i rst i den t i f y those f i r m s whose act iv i t ies c lear ly constrain the act iv i ty of the f i r m in quest ion - and secondly , how potent ial entrants, whether ident i f i ab le or not, constra in the strategy of that f i r m . 1 9 0 In other words, one should consider al l those factors w h i c h a f i r m takes into account in determin ing its business pol icies and practices. T h e d e f i n i t i o n must take into account the dimensions of product , f u n c t i o n , area and time. In par t icu lar , the product d imension should invo lve i d e n t i f i c a t i o n of those products w h i c h are reasonably interchangeable wi th the product in question (demand subst i tutabi l i ty) as wel l as the capaci ty of other f i rms to produce the product (supply subst i tutabi l i ty) . T h e area d imension should determine the geographical area w i th in wh ich consumers can pract ica l ly turn f r o m one source of supply to another and suppliers can pract ica l ly switch f r o m one product ion p lan to another. In this regard, both cross-elasticity of demand and supply are relevant. F i n a l l y , in dea l ing wi th the time d imens ion , special care should be taken in adopt ing either a static or d y n a m i c view. T h e longer the per iod a l lowed for l ike ly consumer and suppl ier adjustment, the wider w i l l be the market d e f i n i t i o n . A T h e iden t i f i ca t ion of the relevant market when assessing the state of compet i t ion and the l ike ly compet i t ive ef fects of a restraint is also appropr iate when consider ing publ ic benef i t and detr iment fo r the purposes of an author izat ion . T h i s is so even though there is no reference to "market" in section 61(6). See In re T o o t h & Co . L t d . . In re Toohevs L t d . (1979) A . T . P . R . 18,174 at 18,194. N. N o r m a n and P. Wi l l iams, "The Ana lys is of Marke t and C o m p e t i t i o n under the T r a d e Pract ices A c t - T o w a r d s the Reso lu t ion of Some H i ther to . U n r e s o l v e d Issues", (1983) 11 A . B . L . R . 396 at 409. 219 d y n a m i c view is however preferable because it recognizes that the market is a f i e l d of actual or potent ial r i va l ry between f i r m s . 1 9 1 A n a l y s i s of the conduct and per formance aspects of a market are c r u c i a l l y important in add i t ion to any inferences of market power gleaned f r o m market share, market concentra t ion , condi t ions of entry and other st ructura l considerat ions. A s the T P C stated in its Second A n n u a l R e p o r t : 1 9 2 T h e C o m m i s s i o n takes the view that in reach ing a dec is ion on a par t icu lar app l ica t ion , it must have regard to al l three elements of the market - structure, conduct and per fo rmance -- i f it is to assess the effects on compet i t ion correct ly . A s has been shown in this chapter, there can be no quest ion of basing decisions on structural considerat ions only to the exclusion of behav ioura l considerat ions, or visa versa. C o n d u c t or per formance evidence has meaning only i f it is considered in the context of the structural character ist ics of the market . Structure must therefore be the start, but not the f i n i s h , of any assessment of the ef fects on compet i t ion. C o n d u c t and per formance eva luat ion usual ly requires deta i led i n f o r m a t i o n about the compet i t ive behav iour of f i rmrs in the market over a re la t ive ly long per iod of t ime a n d is natura l ly more d i f f i c u l t to obta in . Matters fo r considerat ion should inc lude however the extent to w h i c h a f i r m is constra ined by the conduct of competi tors and potential competi tors; the capaci ty of the f i r m in question to determine prices i n , or to exclude entry to, the relevant market wi thout i n h i b i t i o n ; the capaci ty of consumers to in f luence the market , the capaci ty or wi l l ingness of d istr ibutors to meet the present or fu ture requirements of consumers or to respond See In R e T o o t h & C o L t d : In re Toohevs L t d . (1979) A . T . P . R . 18,174 at 18,194. 192 T r a d e Pract ices C o m m i s s i o n , Second A n n u a l Repor t (year ended 30 June 1976) at 71. See also News L t d / I N L . Dec is ion N o . 164, 9 M a y 1986 at 6. 220 to variations in those requirements, cost structures, profitability and efficiency as well as prices, terms, standards and service.1 9 3 All these factors then should be considered when analyzing the effect of any vertical non-price restraint on competition. The framework suggested provides a useful guide to those adjudicating as well as those party to any restraint. In particular, it focuses the adjudicating body on the areas of concern which should be central in determining the competitive effect of any restraint. In confining the focus to reasonably precise and manageable issues, unnecessary economic evidence can be ignored, thus making for shorter trials and hearings, a more manageable record for review, easier enforcement overall and a greater certainty in the law. Greater certainty results because the parties involved and their advisors are aware of factors seen as important in analyzing any restraint. Theoretically, this makes it easier for them to evaluate restraints independently and accordingly makes it less likely that restraints will be used in.situations in which they will not be upheld. 1 9 4 Obviously such an analytical structure should not be fixed in stone but developed as knowledge of particular industries increases and economic theory and research shows that particular factors should be given more or less weight in the determination of pro- and anti-competitive effects of each restraint.195 See Outboard Marine Australia Ptv Ltd. v. Hecar Investments No. 6 Ltd. (1982) A.T.P.R. 43, 980 at 43, 988-89 and News Ltd/INL. supra note 192 at 7. Strasser, supra note 87 at 839-40. Id. at 840. 2 2 1 A s fa r as enforcement itself is concerned , l itt le more than was said in Part I I 1 9 6 can be added to here. T h e penalties are an adequate deterrent so long as the C o m m i s s i o n prosecutes wi th due d i l igence, whi le pr ivate actions should c lear ly remain ava i lab le for d istr ibutors aggr ieved wi th the force a n d degree to w h i c h restr ict ions are imposed and pol iced. D. C O N C L U S I O N U n l i k e R P M , the schools of thought regard ing the economic impl ica t ions and suggested treatment of terr i tor ia l and customer restr ict ions are fa r less divergent . T h e d i f fe rences in op in ion lie in whether "airtight" or "exclusive" restr ict ions are so ant icompet i t ive that they should be accorded per se i l legal treatment or a rule of reason analysis, whi le for less restr ict ive al ternat ives it is whether their procompet i t ive potential just i f ies per se legal treatment or a rule of reason analysis. N a t u r a l l y those tak ing the more t rad i t iona l v iewpoin t , such as C o m a n o r and P i t o f s k y , opt fo r the strict treatment in each case whi le those adher ing to the consumer wel fare model , advocate the more l ibera l treatment in each case. Those in the midd le seek a rule of reason analysis fo r a l l restr ict ions whatever their nature so as to enable an appropr iate ba lanc ing of pro- and ant i -compet i t ive ef fects on compet i t ion. It is this writer 's content ion that the middle course is the correct approach to take. A per se rule of i l legal i ty is c lear ly only appropr iate when the restraints in quest ion are almost always ant icompet i t ive that there is no jus t i f i ca t ion fo r their use. But , as has been seen, suppl iers who impose terr i tor ia l and customer restr ict ions as part of their d is t r ibut ion arrangements i n v a r i a b l y do have legit imate 196 See text a c c o m p a n y i n g Part II, notes 242-46 supra 2 2 2 motives a n d just i f icat ions for so do ing a n d therefore the restr ict ions can be procompet i t ive by enhanc ing e f f i c i e n c y , p r o v i d i n g e f fec t ive compet i t ion amongst r i v a l suppl iers and distr ibutors and general ly i m p r o v i n g the compet i t ive structure of the market . In par t icu lar , the restr ict ions can attract competent and aggressive d ist r ibutors , encourage promot iona l act iv i ty and the prov is ion of pre- and post-sale services, st imulate d istr ibutor investments, reduce suppl ier r isk, de f ray suppl ier development and expansion costs, increase market coverage, max imize market penetrat ion and improve distr ibutor loyal ty . A t the same t ime, the restr ict ions can st i l l be ant icompet i t ive in the way that they may fac i l i ta te co l lus ion amongst suppl ier and distr ibutors (al though rare), create and strengthen barr iers to entry and fac i l i ta te pr ice d iscr imina t ion . Whether these pro- and ant i -compet i t ive e f fects are present in any par t icu lar case can only be determined by appropr ia te analysis under a rule of reason. T o ascribe legal status to par t icu lar types of restr ict ions on the basis that they are a lways e f f i c i e n c y - e n h a n c i n g or to do l ikewise where cer ta in d e f i n e d thresholds are not met is shortsighted and imprecise. In advocat ing a rule of reason analysis, this analysis must be under taken w i t h i n a f ramework that provides for e f fec t ive and e f f i c ien t admin is i t ra t ion and enforcement as wel l as c o n f o r m i t y to the given po l icy of exist ing legislat ion. T h e S t r u c t u r e / C o n d u c t / P e r f o r m a n c e P a r a d i g m provides such a f r a m e w o r k w i th in w h i c h to examine the ef fect of a restraint on compet i t ion and the state of compet i t ion in the relevant market. T h e start ing point is to examine the structure of the relevant market through an analysis of market share, market concentrat ion and condi t ions of entry. These f i rst two elements play an important role, but of greater impor tance is the ease or d i f f i c u l t y of new entry to the market and the ava i l ab i l i t y of substitutes. If barr iers to entry are h igh and there are no close 223 substitutes, a restr ict ion can be used to e l iminate in t rabrand compet i t ion between distr ibutors. If the restr ict ion is exclusive, the suppl ier and its d istr ibutors w i l l each have s ign i f icant market power because there is no e f fec t ive compet i t ion. If however barr iers to entry are low and there are close substitutes, the restr ict ion w i l l not confer market power on the suppl ier and its d ist r ibutors , regardless of the degree of exc lus iv i ty , because they wi l l face compet i t ion f r o m other suppl iers and distr ibutors. It is in the f i rst of these situations that anti trust concern is obv ious ly the greatest. B e y o n d these structural factors, it is important to consider behav ioura l factors such as the p ro f i t ab i l i t y and e f f i c i e n c y of the indust ry , the potent ia l fo r innova t ion and product development , the combined use of other restraints (par t icu lar ly exclusive deal ing) , the character ist ics of the product and the demands of consumers. If a new product is i n v o l v e d , par t icu lar ly i f it incorporates novel technology, or a suppl ier is new to a market , the use of restr ict ions to fac i l i ta te entry but w h i c h have substantial ant i -compet i t ive effects should be g iven f a v o u r a b l e considerat ion and an author izat ion granted. (This assumes that the restrict ions are of benef i t to the publ ic and less restr ict ive alternatives cou ld not employed to achieve the same result.) In cases where it can be shown that the net e f fect of the restraint in question is to promote compet i t ion , there can be no "substantial lessening of compet i t ion" in terms of section 27 and it should not therefore be necessary to proceed to an examinat ion of pub l ic b e n e f i t . 1 9 7 A s imi lar approach is adopted in the Soft D r i n k Interbrand Compet i t ion A c t of 1980, 15 U .S .C . 3501-3503 (1982), w h i c h relies on the s tandard of "substantial and e f fec t ive compet i t ion" to d is t inguish compet i t ive h a r m f u l and benign uses of exclusive territories and w h i c h has proved e f fec t ive in 224 B y u t i l i z ing the f ramework suggested and focus ing on the factors ment ioned, it is then easier to assess the pro- and ant i -compet i t ive ef fects of a restr ict ion and so evaluate whether, on balance, there is a reduct ion in compet i t ion a n d , i f there is, whether such a reduct ion is substantial . G u i d e l i n e s along the lines of those issued by the N A A G would be a h e l p f u l supplement to the C o m m i s s i o n in its admin is t ra t ion and enforcement of the A c t , whi le g i v i n g a f f e c t e d parties something against w h i c h to judge their conduct . A spec i f i c p rov is ion dea l ing wi th "market restr ict ion" along the lines of section 49 of the C a n a d i a n C o m p e t i t i o n A c t wou ld also be h e l p f u l in d e f i n i n g wi th greater c lar i ty the type of ver t ica l non-pr ice restraints w h i c h are the proper subject matter of the A c t . In this regard , considerat ion might also be g iven to nar rowing the except ion f o r d is t r ibu t ion arrangements i n v o l v i n g intel lectual property rights. resolv ing l i t igat ion. See E . G e l l h o r n and K . F e n t o n , "Ver t ica l Restra ints d u r i n g the Reagan A d m i n i s t r a t i o n : A Program in Search of a Pol icy" , 33 Ant i t rus t B u l l . 543 (1988) at 565 n.72. PART IV CONCLUSIONS 225 T h e legal treatment of ver t ica l restraints restr ict ing d is t r ibut ion has proved to be one of the most contentious areas of modern compet i t ion law. T h e con f l i c t has centered a round the importance of economic e f f i c i e n c y as against a concern fo r the protect ion of smal l businesses and the f reedom of sellers to choose their own methods of d is t r ibut ion . T h e law, par t icu la r ly in the U n i t e d States, has been character ized by an increasing appl icat ion of theoret ical micro -economic analysis brought about by an extensive body of economic l i terature quest ioning the presumed ant icompet i t ive effects attr ibutable to ver t ica l restraints and suggesting that such restraints should be accorded per se legal status where their predominant e f fect is to enhance economic e f f i c i e n c y . Those advocat ing this v iew, general ly k n o w n as the C h i c a g o School , argue that e f f ic ienc ies (which result f r o m the imposi t ion of ver t ica l restraints) can benef i t the consumer either by lead ing to lower costs (and thereby lower prices) or by increasing the overa l l value of the product to the consumer . 1 T h e interests of the suppl ier and the consumer are therefore seen to be in total correspondence. 2 V e r t i c a l anti trust enforcement in the U n i t e d States is increasingly re f lect ing the values inherent in the e f f i c i e n c y approach by largely restr ict ing its concerns to economies of scale, e f f i c i e n c y enhancement , f ree-r iders and in terbrand compet i t ion . 3 Suppl ier and consumer interests do not however necessari ly correspond and suppl iers do not always act ra t ional ly in their imposi t ion of ver t ica l restraints. In 1 R. B o r k , T h e Ant i t rust Paradox (New Y o r k , Basic Books, 1978) at 7. 2 W. C o m a n o r , "Ver t ica l Pr ice F i x i n g , V e r t i c a l Marke t Restr ic t ions and the N e w Ant i t rus t Pol icy" , 98 H a r v . L. R e v . 983 (1985) at 983. 3 W. C a n n Jr. , "Ver t ica l Restraints and the ' E f f i c i e n c y ' In f luence - Does A n y R o o m R e m a i n for more T r a d i t i o n a l Ant i t rus t Va lues and More Innovat ive Ant i t rus t Pol icies?", 24 A m . Bus. L . J . 484 (1987). 226 its assumption that suppl iers are rat ional p ro f i t maximizers and that business decisions merely ref lect e f f i c i e n c y pursuits, the C h i c a g o School approach fa i ls to recognize that decisions are often based on "ego gra t i f i ca t ion , power enhancement , the need fo r compromise, and the presence of m i s i n f o r m a t i o n . " 4 F e w suppl iers spec i f i ca l l y calculate a pro f i t m a x i m i z i n g pr ice and rely instead on judgement. Re levant i n f o r m a t i o n costs money, is not a lways ava i lab le a n d , even i f it is, may be mis interpreted. When decisions must be reached, uncer ta in ty inev i tab ly remains. F u r t h e r , many suppl iers are content so long as prof i ts are reasonably adequate and market share stable. 5 A s two commentators have noted: 6 [R]eal wor ld markets and methods of business dec is ionmak ing of ten cannot be f u l l y exp la ined by economic theory ... par t icu la r ly as extrapolated and expanded by subsequent economic analysis. What goes on in the marketplace is a process of t r ia l and error: businesses often stumble upon, rather than, p lan , successful d is t r ibut ion and market ing techniques, and as these for tunate businesses prosper, they encourage others to fo l low (in an almost D a r w i n i a n fashion) . Businesses are guided in this process by inst inct , not econometr ics. T h e y also f requent ly employ a mix of d is t r ibut iona l practices (often in combinat ion) that cannot be c o n f i n e d w i th in neatly label led boxes. In this m i l i e u , successful practices are of ten in i t ia ted for the 'wrong reason, ' but those who nonetheless recognize their value are l i ke ly to be the compet i t ive victors. E c o n o m i c theory does help to exp la in the mot iva t ion and jus t i f i ca t ion fo r suppl ier actions under var ious market models, but compe