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

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V E R T I C A L RESTRAINTS IN T H E DISTRIBUTION PROCESS U N D E R NEW Z E A L A N D COMPETITION LAW By DAVID G U Y M O O R M A N B.Com., University of Auckland, 1985 L L B (Hons.), University of Auckland, 1986 A THESIS SUBMITTED IN P A R T I A L F U L L F I L M E N T OF T H E REQUIREMENTS FOR T H E D E G R E E 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  degree freely  at  the  available  copying  of  department publication  this  of  in  partial  fulfilment  of  the  University  of  British  Columbia,  I  agree  for  this or  thesis  reference  thesis by  this  for  his thesis  and  scholarly  or for  her  of  LAW  The University of British Columbia Vancouver, Canada  Date  DE-6  (2/88)  I further  purposes  gain  shall  that  agree  may  representatives.  financial  permission.  Department  study.  requirements  be  It not  that  the  be  Library  an  advanced  shall  permission for  granted  is  for  by  understood allowed  the that  without  make  it  extensive  head  of  copying my  my or  written  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  Ill  w h y v e r t i c a l r e s t r a i n t s are i m p o s e d a n d t h e i r c o m p e t i t i v e e f f e c t s .  Thereafter,  v a r i o u s l e g a l a n d p o l i c y issues are d i s c u s s e d to assist i n d e c i d i n g u p o n the a p p r o p r i a t e legal t r e a t m e n t o f e a c h type o f r e s t r a i n t . to p r o v i d e an a n a l y t i c a l l y c o h e r e n t f r a m e w o r k  F i n a l l y , a n a t t e m p t is m a d e  w i t h i n w h i c h to j u d g e v e r t i c a l  r e s t r a i n t s i n the c o n t e x t o f present c o m p e t i t i o n p o l i c y . T h e c o n c l u s i o n s r e a c h e d c a l l i n t o q u e s t i o n the present t o t a l p r o h i b i t i o n a g a i n s t resale p r i c e m a i n t e n a c e i n N e w Z e a l a n d a n d a d v o c a t e the n e e d f o r more s p e c i f i c p r o v i s i o n s r e g a r d i n g both p r i c e a n d n o n - p r i c e v e r t i c a l r e s t r a i n t s .  In  p a r t i c u l a r , it is suggested that a r u l e o f per se i l l e g a l i t y s h o u l d o n l y o p e r a t e f o r c o n d u c t w h i c h attempts to f i x , m a i n t a i n or c o n t r o l the p r i c e at w h i c h p r o d u c t s are r e s o l d , w h i l e a s t r u c t u r e d r u l e o f reason s h o u l d operate f o r a l l o t h e r types o f v e r t i c a l restraints based on a m a r k e t p o w e r test a d m i n i s t e r e d i n a c c o r d a n c e w i t h g u i d e l i n e s p r o m u l g a t e d b y the C o m m e r c e C o m m i s s i o n .  T A B L E OF CONTENTS PAGE  ABSTRACT  ii  T A B L E OF CASES  iv  T A B L E OF STATUTES  xi  I  INTRODUCTION A.  OVERVIEW  1  B.  BUSINESS R E L A T I O N S H I P S  4  C.  R E L E V A N C E O F C O M P E T I T I O N LAW T H E C O M M E R C E A C T 1986  5  D.  RULES OF ANALYSIS  7  E.  INTEGRATION OF ECONOMIC T H E O R Y INTO C O M P E T I T I O N LAW  9  PRESENT COMPETITION POLICY  17  F.  II  &  V E R T I C A L PRICE RESTRAINTS A.  GENERAL  B.  C U R R E N T S T A T E OF T H E  20 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)  (2)  D.  III  Economic Issues (a)  Cartels  50  (b)  Free Riding  53  (c)  Discounting  66  (d)  Pricing  74  Legal and Policy Issues (a)  Legislative Policy  (b)  Comparative Treatment of  78  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  CONCLUSION  128  V E R T I C A L NON-PRICE RESTRAINTS A.  GENERAL  B.  C U R R E N T S T A T E OF T H E LAW  135  (1)  United States  140  (2)  Canada  146  (3)  Australia  149  (4)  New Zealand  155  III  V E R T I C A L NON-PRICE RESTRAINTS (CONT'D) C.  E V A L U A T I O N OF T H E LAW (1)  (2)  Economic Issues (a)  Cartels  174  (b)  Barriers to Entry  176  (c)  Price Discrimination  179  (d)  Free Riding  180  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  Administration and Enforcement  207  (e) D. IV  '"  CONCLUSION  CONCLUSIONS  BIBLIOGRAPHY  221 225 234  c  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, 93100  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. 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R . 288 159-60, 216 Wattie I n d u s t r i e s / T a y l o r  F r e e z e r H o l d i n g s (1985) 5 N . Z . A . R . 218 160  W h a k a t u / A d v a n c e d C l o s u r e A u t h o r i s a t i o n , D e c i s i o n N o . 205, 22 J u l y 1987 161, 169-70 W h i t e M o t o r C o . v. U n i t e d States 372 U . S . 253 (1963)  Wellington F e n c i n g Materials Association  140-41, 144, 154  ( R e ) [1961] N . Z . L . R . 1121 156  xi  TABLE OF STATUTES Page  Australia T r a d e P r a c t i c e s A c t 1965 ( C t h ) T r a d e P r a c t i c e s A m e n d m e n t A c t 1971 ( C t h )  78 78, 112  T r a d e P r a c t i c e s A c t 1974 ( C t h ) Section 4  150  4A 4F  153 47  45 45A  87, 190, 214 84, 87, 150,  46 47  173 202 18, 149-53, 167, 173, 18990, 214  48 51 76 88(2)  36, 49 153, 172 123 84  90 93 96 97 98  153 153-54,214 36, 43, 47 36 36, 37, 44,  100  113 36  Canada C o m b i n e s I n v e s t i g a t i o n A c t 1951 Section 34 C o m p e t i t i o n A c t 1986 Section 2 38  47 48 49 51(5) 68 I n v e s t m e n t C a n a d a A c t 1985  31, 112 39 32-36, 39, 103, 113, 123 107 91-93 146-47, 224 202 171 171  xii New Zealand Commerce A c t 1975 Section  21 28 80 Commerce Amendment A c t 1976 Commerce Amendment A c t (No. 2) 1979 Commerce A c t 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, 15567, 172, 19091, 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  xiii Copyright Act  Designs A c t  1953 Sections 7 & 8  201  1953 Sections 11 &  12  F a i r T r a d i n g A c t 1986 Patent A c t  1953 Sections 2, 7 & 30  Trademarks  Act  T r a d e Practices A c t  200 201  1958  S e c t i o n 19 20  37, 38 37  Kingdom  R e s a l e P r i c e s A c t 1964 Section 3 R e s a l e P r i c e s A c t 1976  United  104  1953  Sections 10 & 29  United  201  112 78, 121  States  Clayton Act  Sherman A c t  1914 Section 3 4 1890 Section 1  S o f t D r i n k I n t e r b r a n d C o m p e t i t i o n A c t 1980  151 124 9, 22, 23, 25, 89, 140, 214 223  193,  ACKNOWLEDGEMENT  I a m v e r y g r a t e f u l f o r the s u p p o r t of f a m i l y a n d f r i e n d s t h r o u g h o u t the w r i t i n g of this thesis as w e l l as the v a l u a b l e c o m m e n t s p r o v i d e d b y P r o f e s s o r W.T. S t a n b u r y o n the i n i t i a l d r a f t , p a r t i c u l a r l y i n r e g a r d to e c o n o m i c issues a n d the c u r r e n t state o f the l a w i n C a n a d a . applies.  T h e u s u a l a b s o l u t i o n f o r a n y e r r o r or o m i s s i o n  S p e c i a l t h a n k s go to R o s e m a r i e Page f o r her p a t i e n c e a n d d i l i g e n c e d u r i n g  the t y p i n g o f this l e n g t h y p i e c e o f  work.  PART I  INTRODUCTION  1  A.  OVERVIEW  D e p e n d i n g u p o n a n u m b e r o f e c o n o m i c f a c t o r s s u c h as the b a s i c c h a r a c t e r o f a p r o d u c t , a v a i l a b i l i t y o f m a n a g e m e n t a n d c a p i t a l , r i s k a n d most  importantly  cost, a s u p p l i e r w i l l o f t e n d e c i d e to e m p l o y i n d e p e n d e n t d i s t r i b u t o r s to c a r r y out the v a r i o u s f u n c t i o n s i n the d i s t r i b u t i o n p r o c e s s d i s t r i b u t i o n process itself.  1  r a t h e r t h a n to operate the  entire  In the c o n t r a c t u a l a r r a n g e m e n t s between the p a r t i e s , it  is not u n c o m m o n to f i n d a v a r i e t y o f restraints a i m e d at a c h i e v i n g some measure o f s u p e r v i s i o n a n d c o n t r o l o v e r the m a n n e r i n w h i c h the s u p p l i e r s ' p r o d u c t s are m a r k e t e d a n d d i s t r i b u t e d to the c o n s u m i n g p u b l i c .  A s u p p l i e r has a  legitimate  interest i n so d o i n g because its r e p u t a t i o n f o r q u a l i t y , its e s t a b l i s h e d g o o d w i l l a n d its g e n e r a l c o m p e t i t i v e p o s i t i o n are a l l c l e a r l y d e p e n d e n t u p o n the m e t h o d s u t i l i z e d b y its d i s t r i b u t o r s .  R e s t r a i n t s i m p o s e d u p o n a f i r m o p e r a t i n g at one l e v e l o f the  d i s t r i b u t o n process b y a f i r m o p e r a t i n g at a n o t h e r l e v e l o f the d i s t r i b u t i o n process, s u c h as a s u p p l i e r u p o n a d i s t r i b u t o r ,  are r e f e r r e d to as ' v e r t i c a l r e s t r a i n t s ' a n d  are to be d i s t i n g u i s h e d f r o m ' h o r i z o n t a l r e s t r a i n t s ' w h i c h are r e s t r a i n t s  between  T h e d i s t r i b u t i o n process is essentially the ' c o n d u i t ' t h r o u g h w h i c h p r o d u c t s f l o w f r o m a s u p p l i e r to the u l t i m a t e c o n s u m e r . A s u p p l i e r o b v i o u s l y c o m m e n c e s the process b y p l a c i n g its p r o d u c t s i n the f l o w o f c o m m e r c e . A w h o l e s a l e r u s u a l l y s u p p l i e s w a r e h o u s i n g f a c i l i t i e s as w e l l as a n e t w o r k o f l o c a l a n d r e g i o n a l t r a n s p o r t a t i o n services that d e l i v e r the p r o d u c t s to retailers. T h e r e t a i l e r i n t u r n is r e s p o n s i b l e f o r m a r k e t i n g a n d sale o f the p r o d u c t s . T o s i m p l i f y the d i s c u s s i o n , it w i l l be a s s u m e d that the d i s t r i b u t i o n process o n l y i n v o l v e s two tiers.  2  f i r m s o p e r a t i n g at the same l e v e l of the d i s t r i b u t i o n p r o c e s s .  2  T h e c o n c e r n i n this  thesis is w i t h v e r t i c a l restraints o n l y .  V e r t i c a l restraints c a n be c l a s s i f i e d i n t o two categories.  In  the f i r s t  c a t e g o r y are restraints w h i c h restrict the d i s t r i b u t i o n o f a p r o d u c t a n d i n c l u d e :  (a)  resale p r i c e m a i n t e n a n c e ( r e s t r i c t i o n s on the p r i c e at w h i c h  p r o d u c t s m a y be resold);  (b)  t e r r i t o r i a l r e s t r i c t i o n s ( r e s t r i c t i o n s on the t e r r i t o r i e s  within  w h i c h p r o d u c t s m a y be resold); a n d  (c)  c u s t o m e r r e s t r i c t i o n s ( r e s t r i c t i o n s on the c u s t o m e r s to w h o m  p r o d u c t s m a y be resold).  In the s e c o n d c a t e g o r y are those restraints w h i c h l i m i t a d i s t r i b u t o r ' s f r e e d o m to b u y f r o m f i r m s that c o m p e t e w i t h the s u p p l i e r a n d i n c l u d e :  (a)  t y i n g a r r a n g e m e n t s ( a r r a n g e m e n t s w h e r e b y the p u r c h a s e of  one p r o d u c t is c o n d i t i o n e d u p o n the p u r c h a s e o f a s e c o n d p r o d u c t f r o m the s u p p l i e r or f r o m some t h i r d  party);  In the case o f a d u a l d i s t r i b u t i o n s y s t e m , w h e r e a s u p p l i e r also f u n c t i o n s at the same l e v e l of the d i s t r i b u t i o n process as a d i s t r i b u t o r u p o n w h i c h it has i m p o s e d r e s t r a i n t s , the g e n e r a l v i e w is that the s y s t e m s h o u l d be v i e w e d as v e r t i c a l r a t h e r t h a n h o r i z o n t a l . See A B A A n t i t r u s t S e c t i o n , M o n o g r a p h N o . 2, V e r t i c a l R e s t r i c t i o n s L i m i t i n g I n t r a b r a n d C o m p e t i t i o n (1977) at 2 n.3 ( h e r e i n a f t e r c i t e d 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 C o r p . . 483 F. S u p p . 750,754 ( D . M d . 1980) a n d R e d D i a m o n d S u p p l y Inc. v. L i q u i d C a r b o n i c C o r p . 637 F . 2 d . 1001 (5th C i r . 1981).  3  (b)  exclusive dealing arrangements (arrangements whereby a  d i s t r i b u t o r agrees not to p u r c h a s e the p r o d u c t s o f a c o m p e t i n g s u p p l i e r ) ; and  (c)  r e q u i r e m e n t s c o n t r a c t s (contracts u n d e r w h i c h a d i s t r i b u t o r  agrees to p u r c h a s e a l l or some f i x e d p r o p o r t i o n o f its r e q u i r e m e n t s  from  the s u p p l i e r ) .  W h i l e b o t h categories of restraints are o f t e n c o n s i d e r e d t o g e t h e r , they are conceptually different.  V e r t i c a l restraints i n the f i r s t c a t e g o r y are e s s e n t i a l l y  d e s i g n e d to l i m i t c o m p e t i t i o n between a s u p p l i e r ' s d i s t r i b u t o r s .  V e r t i c a l restraints  i n the s e c o n d c a t e g o r y on the other h a n d are e s s e n t i a l l y d e s i g n e d to f o r e c l o s e or exclude a supplier's rivals.  3  T h i s thesis focuses on r e s t r a i n t s i n the f i r s t c a t e g o r y  only.  W i t h i n the c a t e g o r y u n d e r r e v i e w , a d i s t i n c t i o n is n o r m a l l y d r a w n p r i c e a n d n o n - p r i c e restraints.  between  P r i c e r e s t r a i n t s , w h i c h w i l l be c o n s i d e r e d i n P a r t  II,  are those w h i c h d i r e c t l y or i n d i r e c t l y d i c t a t e the p r i c e or r a n g e o f p r i c e s at w h i c h p r o d u c t s m a y be s o l d or r e s o l d , w h i l e n o n - p r i c e r e s t r a i n t s , w h i c h w i l l be c o n s i d e r e d i n P a r t III,  do not d i r e c t l y or i n d i r e c t l y d i c t a t e p r i c e s .  It is p r o p o s e d i n respect o f e a c h t y p e o f r e s t r a i n t to f i r s t d e s c r i b e the n a t u r e o f the r e s t r a i n t a n d its t y p i c a l business a p p l i c a t i o n a n d j u s t i f i c a t i o n s , then to discuss the l e g a l status of the r e s t r a i n t i n the U n i t e d States, C a n a d a , A u s t r a l i a a n d N e w Z e a l a n d , a n d f i n a l l y to e v a l u a t e the l a w (a) by d i s c u s s i n g the v a r i o u s  E . G e l l h o r n . A n t i t r u s t L a w a n d E c o n o m i c s 3 r d e d . (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  c o n t i n u i n g basis, p r o v i d e s g u i d a n c e a n d d i r e c t i o n o n the p r e c i s e m a n n e r i n w h i c h it wants the f r a n c h i s e e to c a r r y out its o p e r a t i o n s .  T h e f r a n c h i s o r i n this case m a y  d e r i v e its i n c o m e f r o m a c o m b i n a t i o n o f an u p f r o n t p a y m e n t , r o y a l t i e s a n d o n g o i n g m a n a g e m e n t a n d a d m i n i s t r a t i o n fees.  T h e term "distribution arrangement"  w h e r e u s e d t h r o u g h o u t this thesis is i n t e n d e d to c o v e r the w h o l e s p e c t r u m o f business r e l a t i o n s h i p s w h e r e such restraints arise i n c l u d i n g f r a n c h i s e s , l i c e n c e s , commission agency, and wholesale and retail d i s t r i b u t i o n .  T h e term "supplier" w i l l  h e r e a f t e r be used to r e f e r to entities at the f i r s t l e v e l o f the d i s t r i b u t i o n process s u c h as f r a n c h i s o r s , l i c e n s o r s , m a n u f a c t u r e r s a n d s u p p l i e r s , w h i l e the t e r m " d i s t r i b u t o r " w i l l h e r e a f t e r be used to r e f e r to those entities a u t h o r i z e d b y the s u p p l i e r to d i s t r i b u t e its p r o d u c t s a n d o p e r a t i n g at the s e c o n d l e v e l o f the d i s t r i b u t i o n process s u c h as f r a n c h i s e e s , licensees, dealers a n d d i s t r i b u t o r s .  C.  R E L E V A N C E OF COMPETITION LAW AND T H E COMMERCE A C T  1986  T h e i m p o s i t i o n o f a r e s t r a i n t by a s u p p l i e r u p o n a d i s t r i b u t o r w i l l almost a l w a y s h a v e some e f f e c t on c o m p e t i t i o n , w h e t h e r it be i n t r a b r a n d or i n t e r b r a n d .  4  T h e d e t r i m e n t a l e f f e c t s to i n t r a b r a n d c o m p e t i t i o n w h i c h i n v a r i a b l y result f r o m s u c h i m p o s i t i o n w i l l o f t e n o u t w e i g h a n y b e n e f i c i a l e f f e c t s to i n t e r b r a n d c o m p e t i t i o n r e s u l t i n g f r o m the r e s t r a i n t a n d it is f o r this reason that c o m p e t i t i o n l a w is r e l e v a n t .  I n t r a b r a n d competition involves competition between distributors selling d i f f e r e n t b r a n d s o f the same p r o d u c t whereas i n t e r b r a n d c o m p e t i t i o n i n v o l v e s c o m p e t i t i o n between d i s t r i b u t o r s s e l l i n g d i f f e r e n t b r a n d s of the same p r o d u c t .  6 The underlying policy of all competition and antitrust laws is the 5  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) has as its underlying objective the promotion and 6  regulation of competition in markets in New Zealand. To meet this objective, the 7  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  a r r a n g e m e n t s or u n d e r s t a n d i n g s to w h i c h s e c t i o n 27, i n t e r a l i a , a p p l i e s . I m p o r t a n t l y , there is no p o w e r to a u t h o r i z e c o n d u c t i n b r e a c h o f s e c t i o n 3 6 .  8  e f f e c t o f a n a u t h o r i z a t i o n g r a n t e d u n d e r section 58 is that p o t e n t i a l l i a b i l i t y  The for  p e c u n i a r y p e n a l t i e s (section 80), i n j u n c t i o n s (section 81) a n d a c t i o n s f o r damages (section 82) is r e m o v e d .  D.  RULES OF ANALYSIS  In e v a l u a t i n g the l e g a l i t y o f v e r t i c a l r e s t r a i n t s , the c o u r t s , p a r t i c u l a r l y  in  the U n i t e d States, h a v e t r a d i t i o n a l l y a d o p t e d e i t h e r a per se or r u l e o f r e a s o n a n a l y s i s a n d it is i m p o r t a n t to a p p r e c i a t e the e f f e c t a n d m e a n i n g o f e a c h .  U n d e r a per se a n a l y s i s , a r e s t r a i n t is h e l d to be i l l e g a l w i t h o u t a n y c o n s i d e r a t i o n o f the p u r p o s e of the r e s t r a i n t or its e c o n o m i c e f f e c t s o n the g r o u n d that it almost i n v a r i a b l y h a r m s c o m p e t i t i o n t h r o u g h h i g h e r p r i c e s a n d r e d u c e d output without any redeeming pro-competitive benefits. p r o v e the e x i s t e n c e o f the restraint.  A l l that is necessary is to  T h e a p p r o p r i a t e n e s s o f a n d n e e d f o r per se  r u l e s was e x p l a i n e d by M r . J u s t i c e B l a c k i n 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 as f o l l o w s :  9  [TJhere are c e r t a i n agreements or p r a c t i c e s w h i c h because o f t h e i r p e r n i c i o u s e f f e c t on c o m p e t i t i o n a n d l a c k o f a n y r e d e e m i n g v i r t u e are c o n c l u s i v e l y p r e s u m e d to be u n r e a s o n a b l e a n d t h e r e f o r e i l l e g a l w i t h o u t i n q u i r y as to the e l a b o r a t e h a r m they h a v e c a u s e d or the business excuse f o r  T h e o n l y p r o t e c t i o n w h i c h a p e r s o n has f r o m the a p p l i c a t i o n o f section 36 is i f it is p a r t y to a c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g w h i c h has o t h e r w i s e been a u t h o r i z e d p u r s u a n t to P a r t V o f the A c t . H o w e v e r there w o u l d seem to be r e l a t i v e l y f e w cases w h e r e a u t h o r i z a t i o n w i l l be g r a n t e d o n 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 r e s t r a i n t is a p p l i e d ; its c o n d i t i o n b e f o r e a n d a f t e r the r e s t r a i n t was i m p o s e d ; the n a t u r e o f the r e s t r a i n t ; a n d its e f f e c t , a c t u a l or p r o b a b l e T h e h i s t o r y o f the r e s t r a i n t , the e v i l b e l i e v e d to exist,the reason f o r a d o p t i n g the p a r t i c u l a r r e m e d y , the p u r p o s e or e n d sought to be o b t a i n e d are r e l e v a n t f a c t s . T h i s is not because a g o o d i n t e n t i o n w i l l serve a n o t h e r w i s e o b j e c t i o n a b l e r e g u l a t i o n or the r e v e r s e , but because k n o w l e d g e o f i n t e n t m a y h e l p the C o u r t to i n t e r p r e t f a c t s a n d to p r e d i c t c o n s e q u e n c e s .  T h e tests a p p l i e d u n d e r the g e n e r a l r u b r i c o f the r u l e o f r e a s o n h a v e v a r i e d c o n s i d e r a b l y to the extent that the d i s t i n c t i o n between the per se r u l e a n d the r u l e o f r e a s o n has b e c o m e v e r y m u c h b l u r r e d .  1 2  T h e d i s t i n c t i o n is h o w e v e r o f  assistance i n u n d e r s t a n d i n g the U n i t e d States cases on v e r t i c a l r e s t r a i n t s a n d the p r o b l e m s f a c e d i n that c o u n t r y o f h a v i n g to c o n s t r u e v i r t u a l l y e v e r y  restraint,  w h e t h e r it be h o r i z o n t a l or v e r t i c a l , i n terms o f s e c t i o n 1 o f the S h e r m a n A c t .  The  per se r u l e a p p e a r s to h a v e been a c o n v e n i e n t a l t e r n a t i v e f o r those c o u r t s u n w i l l i n g to d e v e l o p a n a n a l y t i c s t r u c t u r e f o r e v a l u a t i n g the e c o n o m i c e f f e c t s o f a p a r t i c u l a r r e s t r a i n t o n c o m p e t i t i o n u n d e r a r u l e of reason a n a l y s i s . T h i s u n w i l l i n g n e s s , a n d e v e n d i s t r u s t o f e c o n o m i c t h e o r y , as a basis o f legal r u l e m a k i n g has been n o w h e r e m o r e e v i d e n t t h a n i n cases d e a l i n g w i t h v e r t i c a l r e s t r a i n t s , p a r t i c u l a r l y those d e c i d e d b y the U n i t e d States S u p r e m e C o u r t o v e r the last 25 years.  E.  INTEGRATION OF ECONOMIC T H E O R Y INTO COMPETITION LAW  J u d i c i a l r e l u c t a n c e to a p p l y e c o n o m i c t h e o r y , at least u n t i l recent times, was p r o b a b l y j u s t i f i e d i n v i e w o f the l a c k o f consensus amongst e c o n o m i s t s as to the e c o n o m i c e f f e c t s o f most v e r t i c a l restraints.  It is f a i r to say that e c o n o m i s t s are no  closer to a g r e e m e n t t o d a y ; i n d e e d they are p r o b a b l y more d i v i d e d i n t h e i r  views  See B. H a w k , " E u r o p e a n E c o n o m i c C o m m u n i t y a n d U n i t e d States A n t i t r u s t L a w : C o n s t r a i n t s a n d C o n v e r g e n c e s " , (1988) 16 A . B . L . R . 282 at 303-06.  t h a n they were t w e n t y years ago.  What is n o t a b l e h o w e v e r is the i n c r e a s e d  s o p h i s t i c a t i o n i n s c h o l a r s h i p o v e r this p e r i o d as economists h a v e sought to e c o n o m i c t h e o r y i n t o the area o f c o m p e t i t i o n  law.  integrate  1 3  T h e i n c r e a s e d e m p h a s i s on e c o n o m i c s i n a n t i t r u s t a n a l y s i s has been l e d b y m e m b e r s o f the s o - c a l l e d ' C h i c a g o S c h o o l ' , i n p a r t i c u l a r P r o f e s s o r s (now Judges) Bork  1 4  and Posner . 1 5  T h e C h i c a g o School, using price theory analysis, emphasize  e c o n o m i c e f f i c i e n c y (both a l l o c a t i v e a n d p r o d u c t i v e ) .  1 6  C o n d u c t is c l a s s i f i e d  a c c o r d i n g to w h e t h e r it is (1) e f f i c i e n t ; (2) i n e f f i c i e n t ; or (3) n e u t r a l .  It is a r g u e d  that the law s h o u l d r e f r a i n f r o m i n t e r v e n i n g not o n l y w h e n c o n d u c t is e f f i c i e n t or n e u t r a l , but also w h e n the e f f e c t s of s u c h c o n d u c t c a n not be p r e d i c t e d sufficiently. on output.  1 7  If  T h e test used f o r d e t e r m i n i n g e f f i c i e n c y is the e f f e c t o f a r e s t r a i n t o u t p u t increases as the result o f a r e s t r a i n t , the r e s t r a i n t is a s s u m e d  to h a v e m a d e the p r o d u c t more a t t r a c t i v e to c o n s u m e r s a n d t h e r e f o r e p r o d u c e d a  F o r a r e v i e w o f the b a s i c p r i n c i p l e s o f e c o n o m i c t h e o r y w h i c h bear on c o m p e t i t i o n p o l i c y , see G e l l h o r n , s u p r a note 3 at 45-90.  See R. B o r k , T h e A n t i t r u s t P a r a d o x , ( N e w  See e.g., R. P o s n e r , A n t i t r u s t L a w :  directly  Y o r k , B a s i c B o o k s , 1978).  A n E c o n o m i c Perspective. (Chicago,  U n i v e r s i t y o f C h i c a g o Press, 1976).  " A l l o c a t i v e e f f i c i e n c y r e f e r s to the p l a c e m e n t o f resources i n the e c o n o m y , the q u e s t i o n o f w h e t h e r resources are e m p l o y e d i n tasks w h e r e c o n s u m e r s v a l u e t h e i r o u t p u t most. P r o d u c t i v e e f f i c i e n c y r e f e r s to the e f f e c t i v e use of resources b y p a r t i c u l a r f i r m s " . R. B o r k , s u p r a note 14 at 91. See also E . F o x , " T h e M o d e r n i z a t i o n o f A n t i t r u s t : A N e w 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.  B o r k , s u p r a note 14 at 117. F o r a c r i t i q u e o f this c l a s s i f i c a t i o n a n d the n o r m a t i v e w e i g h t g i v e n to e f f i c i e n c y , see J . F l y n n a n d J . P o n s o l d t , " L e g a l R e a s o n i n g a n d the J u r i s p r u d e n c e o f V e r t i c a l R e s t r a i n t s : T h e L i m i t a t i o n s o f N e o c l a s s i c a l E c o n o m i c A n a l y s i s i n the R e s o l u t i o n o f A n t i t r u s t D i s p u t e s " , 62 N . Y . U . L . R e v . 1125 (1987).  11  p o s i t i v e i n f l u e n c e on c o m p e t i t i o n a n d c o n s u m e r w e l f a r e .  1 8  W i t h the  maximization  o f c o n s u m e r w e l f a r e as the b a s i c g o a l o f a n t i t r u s t , this is best a c h i e v e d , it is a r g u e d , i f the m a r k e t p l a c e is f r e e f r o m g o v e r n m e n t a l a n d m o n o p o l i s t i c o u t p u t restrictions.  A m o n o p o l i s t i c m a r k e t is seen as p a r t i c u l a r l y d e t r i m e n t a l to c o n s u m e r  w e l f a r e because o f the a b i l i t y o f the m o n o p o l i s t to i n c r e a s e p r i c e s a n d restrict output.  Previously accepted social and political values, like protection of small  t r a d e r s a n d d e c o n c e n t r a t i o n o f m a r k e t s , w h i c h c h a r a c t e r i z e d the late 1950's a n d 1 9 6 0 ' s , are rejected. 19  T h u s , t h e i r p r i m a r y c o n c e r n is h o r i z o n t a l c o l l u s i o n w h i c h is seen as the p r i n c i p a l means b y w h i c h the o u t p u t o f goods a n d s e r v i c e s c a n be r e s t r i c t e d a n d prices raised.  B o r k f o r i n s t a n c e argues that a n t i t r u s t e n f o r c e m e n t s h o u l d be  l i m i t e d to h o r i z o n t a l p r i c e f i x i n g a n d m a r k e t d i v i s i o n , h o r i z o n t a l mergers r e s u l t i n g i n the a c q u i s i t i o n o f s u b s t a n t i a l m a r k e t shares, a n d d e l i b e r a t e p r e d a t i o n e n g a g e d i n  T h e t e r m " c o n s u m e r w e l f a r e " i n this c o n t e x t s h o u l d not be c o n f u s e d w i t h the c o n c e p t o f "social w e l f a r e " , a l t h o u g h the two are o f t e n e q u a t e d by the C h i c a g o S c h o o l . H e r e c o n s u m e r w e l f a r e is d e f i n e d i n terms o f e f f i c i e n c y , e i t h e r static or d y n a m i c d e p e n d i n g u p o n the time f r a m e . (Static a n a l y s i s looks to o p t i m a l p r i c e / o u t p u t c o n f i g u r a t i o n s (Pareto o p t i m a l i t y ) i n d e t e r m i n i n g w h e t h e r a l l o c a t i v e e f f i c i e n c y exists i n the short r u n . D y n a m i c a n a l y s i s takes i n t o a c c o u n t new t e c h n o l o g y , k n o w l e d g e a n d tastes i n d e t e r m i n i n g e f f i c i e n c y o v e r the l o n g run). S o c i a l w e l f a r e o n the other h a n d is c o n c e r n e d not o n l y w i t h e f f i c i e n c y , but the d i s t r i b u t i o n o f i n c o m e . T h e m a x i m i z a t i o n o f c o n s u m e r w e l f a r e w i l l t h e r e f o r e not n e c e s s a r i l y l e a d to a m a x i m i z a t i o n o f s o c i a l w e l f a r e . O n e must a c c o r d i n g l y d i s t i n g u i s h e c o n o m i c welfare f r o m social welfare.  E c o n o m i c t h e o r y d u r i n g this time c o i n c i d e d w i t h p o l i t i c a l a n d s o c i a l a t t i t u d e s that f a v o u r e d d i f f u s i o n o f m a r k e t p o w e r , f r e e d o m o f o p p o r t u n i t y f o r i n d i v i d u a l traders and f r e e d o m of consumer choice. N o t i o n s of a l l o c a t i v e a n d p r o d u c t i v e e f f i c i e n c y were n o t a b l e b y t h e i r a b s e n c e . See H a w k , s u p r a note 12 at 287-88.  12  to e l i m i n a t e r i v a l s f r o m a m a r k e t or at least d e l a y t h e i r e n t r y .  V e r t i c a l restraints  on the o t h e r h a n d are seen as almost a l w a y s b e n e f i c i a l to the c o n s u m e r , a n d t h e r e f o r e a d h e r e n t s o f the C h i c a g o S c h o o l a r g u e that s u c h r e s t r a i n t s s h o u l d be completely lawful.  B o r k f o r i n s t a n c e argues that a n t i t r u s t l a w s s h o u l d not c o n c e r n  themselves w i t h v e r t i c a l p r i c e m a i n t e n a n c e a n d m a r k e t d i v i s i o n , t y i n g arrangements, exclusive dealing and requirements c o n t r a c t s .  2 1  Posner, in a similar  v e i n , proposes that p u r e l y v e r t i c a l restraints i n v o l v i n g no d e a l e r c o l l u s i o n s h o u l d be per se l e g a l w h e t h e r they be p r i c e or n o n - p r i c e i n n a t u r e .  2 2  N e w e r m e m b e r s o f the C h i c a g o S c h o o l c o n t i n u e to espouse s i m i l a r v i e w s . T h e l e a d i n g p r o p o n e n t i n more recent times has been P r o f e s s o r (now also J u d g e ) E a s t e r b r o o k w h o i n seeing the goal of a n t i t r u s t law as the f a c i l i t a t i o n o f  efficient  resource a l l o c a t i o n argues that the f r e e m a r k e t d i s c i p l i n e s i n e f f i c i e n t f i r m s a n d c o r r e c t s m o n o p o l y f a s t e r a n d better t h a n j u d i c i a l i n t e r v e n t i o n , a n d that the costs o f e r r o n e o u s l y b a n n i n g e f f i c i e n t t r a n s a c t i o n s are greater t h a n the costs o f erroneously blessing anticompetitive t r a n s a c t i o n s .  23  A s a result, E a s t e r b r o o k  a r g u e s , the t r a d i t i o n a l t e c h n i q u e s o f a n t i t r u s t a n a l y s i s s h o u l d be r e p l a c e d w i t h a  B o r k , s u p r a note 14 at 405-06. See also R. P o s n e r , " T h e C h i c a g o S c h o o l of A n t i t r u s t A n a l y s i s " , 127 U . P a . L . R e v . 925 (1979) at 925-33.  B o r k , s u p r a note 14 at 406.  R . P o s n e r , " T h e N e x t Step i n the A n t i t r u s t T r e a t m e n t o f R e s t r i c t e d D i s t r i b u t i o n : Per Se L e g a l i t y " , 48 U . C h . L . R e v . 6 (1981). B o r k a n d P o s n e r do h o w e v e r d i f f e r as to the a b a n d o n m e n t o f a n t i t r u s t c o n c e r n i n the areas o f p r i c e d i s c r i m i n a t i o n a n d p r e d a t o r y p r i c i n g . See B o r k , s u p r a note 14 at 406 a n d P o s n e r , s u p r a note 20 at 934 a n d 939-44.  F . E a s t e r b r o o k , " T h e L i m i t s of A n t i t r u s t " , 63 T e x a s L . R e v . 12 (1984) at 15. F o r an e x c e l l e n t r e v i e w o f E a s t e r b r o o k ' s thesis, see E . F o x , " T h e P o l i t i c s o f L a w a n d E c o n o m i c s i n J u d i c i a l D e c i s i o n M a k i n g : A n t i t r u s t as a W i n d o w " , 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.  24  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. G T E Svlvania . In that case, decided in 1977, the 27  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. . decided ten years earlier. Justice Powell, who 28  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:  29  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 restraints and in 1984 it issued Vertical Restraint Guidelines 31  32  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 members reflect the influence of the developments in the United 37  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.  38  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, C A 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).  18  f i r m s goes b e y o n d w h a t is c o m p e t i t i v e so as to be u n a c c e p t a b l e i n the interests o f s o c i e t y i n terms o f e f f i c i e n c y a n d e c o n o m i c g r o w t h .  In this r e g a r d , the f o c u s  s h o u l d be o n k e e p i n g b a r r i e r s to e n t r y low so as to p r o v i d e greater o p p o r t u n i t y e n t r y a n d success o f n e w f i r m s i n the m a r k e t .  for  C o m p e t i t i o n does not r e q u i r e that  there be a large n u m b e r o f s u p p l y i n g f i r m s or e q u i v a l e n t l y l o w rates o f  market  c o n c e n t r a t i o n so l o n g as there is a c t u a l a n d e f f e c t i v e p o t e n t i a l c o m p e t i t i o n .  T h e C o m m i s s i o n has r e c o g n i z e d that a r e s t r i c t i o n i n r i v a l r y b e t w e e n  two  c o m p e t i t o r s or u p o n a n i n d i v i d u a l c o m p e t i t o r does not n e c e s s a r i l y result i n a restriction in r i v a l r y .  4 0  I n d e e d , it is f a l l a c y to suggest that the c o m p e t i t i o n test i n  the A c t is c o n c e r n e d w i t h the f a t e o f i n d i v i d u a l c o m p e t i t o r s as o p p o s e d to the level of rivalrous behaviour in a market.  F o r , as F i t z g e r a l d J . s a i d i n O u t b o a r d  M a r i n e A u s t r a l i a v. H e c a r Investments ( N o . 6) P t v L t d . . a case c o n c e r n i n g a r e f u s a l b y O u t b o a r d M a r i n e to s u p p l y H e c a r w i t h o u t b o a r d motors a n d thus a l l e g e d to c o n s t i t u t e e x c l u s i v e d e a l i n g u n d e r s e c t i o n 47 of the A u s t r a l i a n T r a d e P r a c t i c e s A c t 1974  (Cth),:  4 1  It w o u l d , I t h i n k , be an u n u s u a l a n d e x c e p t i o n a l case i n w h i c h it c o u l d be s h o w n that c o m p e t i t i o n i n a g e n e r a l l y c o m p e t i t i v e m a r k e t was or was l i k e l y to be s u b s t a n t i a l l y lessened b y a r e f u s a l to s u p p l y one o f a n u m b e r o f c o m p e t i t i v e r e t a i l e r s i n the m a r k e t w i t h a p r o d u c t o t h e r w i s e f r e e l y a v a i l a b l e a n d c o m p e t i t v e l y m a r k e t e d . F u r t h e r , w h e r e there is a m a r k e t w h i c h is g e n e r a l l y c o m p e t i t i v e , it p l a i n l y does not f o l l o w that c o n d u c t w h i c h a f f e c t s the b a l a n c e o f c o m p e t i t i o n b y a d v a n t a g i n g or d i s a d v a n t a g i n g a p a r t i c u l a r d e a l e r or dealers or a p a r t i c u l a r p r o d u c t n e c e s s a r i l y lessens the c o m p e t i t i o n i n a market.  R. A h d a r , " T h e M e a n i n g o f ' C o m p e t i t i o n ' a n d the C o m m e r c e A c t 1986", (1986) 6 O t a g o L . R . 319.  (1982) A . T . P . R . 43,980 at 43,990.  19  O n e must thus d i s t i n g u i s h between the i m p a c t o f c o n d u c t u p o n the c o m p e t i t i v e p o s i t i o n o f a n i n d i v i d u a l a n d the e f f e c t u p o n c o m p e t i t i o n i n a m a r k e t . It is the m a r k e t c o n t e x t r a t h e r t h a n the a f f a i r s o f i n d i v i d u a l p a r t i c i p a n t s  which  must n e c e s a r i l y be t a k e n i n t o a c c o u n t .  It is w e l l b e y o n d the scope o f this i n t r o d u c t i o n or i n d e e d this thesis to discuss the c o n c e p t o f c o m p e t i t i o n i n a n y d e t a i l a n d its role i n s e r v i n g e c o n o m i c , s o c i a l a n d p o l i t i c a l goals.  W h i l e e c o n o m i c e f f i c i e n c y is w i t h o u t d o u b t one o f the  m o r e i m p o r t a n t o f the A c t ' s u n d e r l y i n g o b j e c t i v e s , it is h o p e d that it does not r e a c h the n o r m a t i v e w e i g h t a s c r i b e d to it b y the C h i c a g o S c h o o l i n competition policy.  future  B o t h e f f i c i e n c y a n d e c o n o m i c s g e n e r a l l y h a v e a role to p l a y i n  a n y c o m p e t i t i o n l a w a n a l y s i s but t h e i r l i m i t a t i o n s must be r e c o g n i z e d . s h o u l d be one o f a n u m b e r  o f goals p u r s u e d i n o r d e r to serve c o n s u m e r interests  a n d m a k e the best use of society's r e s o u r c e s .  F o x , s u p r a note 16 at  Efficiency  1158.  42  PART II  V E R T I C A L PRICE  RESTRAINTS  20  A.  GENERAL  T h e most t y p i c a l v e r t i c a l p r i c e r e s t r a i n t is resale p r i c e m a i n t e n a n c e ("RPM") o t h e r w i s e k n o w n as v e r t i c a l p r i c e f i x i n g .  R P M basically involves a stipulation by  a s u p p l i e r o f the p r i c e at w h i c h a d i s t r i b u t o r m a y resell its p r o d u c t s .  The  s t i p u l a t i o n m a y be ' d i r e c t ' i n the sense that the s t i p u l a t i o n relates to the p r i c e at w h i c h the i m m e d i a t e d i s t r i b u t o r m a y resell its p r o d u c t s , or it m a y be i n d i r e c t  in  the sense that the s t i p u l a t i o n relates to the p r i c e w h i c h a t h i r d p e r s o n m a y resell its p r o d u c t s .  In its most u s u a l f o r m , a s u p p l i e r w i l l s t i p u l a t e as a c o n d i t i o n of the  s u p p l y o f its p r o d u c t s that the d i s t r i b u t o r not sell b e l o w some m i n i m u m p r i c e . H o w e v e r the s t i p u l a t i o n m a y e q u a l l y be that the p r o d u c t s not be sold a b o v e some m a x i m u m p r i c e or that p r i c e be d e t e r m i n e d b y r e f e r e n c e to some f o r m u l a .  T h e p r a c t i c e has a t t r a c t i o n s f o r both s u p p l i e r s a n d d i s t r i b u t o r s , a l t h o u g h d i f f e r e n t interests are o f t e n at p l a y .  F o r the s u p p l i e r , the p r i m a r y m o t i v a t i o n is  n o r m a l l y to ensure resale p r i c e s t a b i l i t y i n r e l a t i o n to its p r o d u c t s , p a r t i c u l a r l y a dual-distribution situation.  in  T h u s the s u p p l i e r m a y w i s h to ensure that its  p r o d u c t s are not p r i c e d b y the d i s t r i b u t o r a b o v e the r a n g e f o r w h i c h they were i n t e n d e d , t h e r e b y i n c r e a s i n g the d i s t r i b u t o r ' s m a r g i n a n d d e c r e a s i n g its sales. C o n v e r s e l y , the s u p p l i e r m a y w i s h to p r e v e n t its p r o d u c t s b e i n g s p e c i a l l e d or sold as loss-leaders since this w i l l d i s r u p t o r d e r l y p r i c i n g a n d m i g h t e v e n l e a d to a loss of r e p u t a t i o n t h e r e b y d e t r i m e n t a l l y  a f f e c t i n g g o o d w i l l a n d f u t u r e sales.  A  s u p p l i e r m a y e v e n h a v e an interest i n p r i c e s t a b i l i t y on the g r o u n d s that it. p r o m o t e s g o o d w i l l amongst its d i s t r i b u t o r s .  If  one d i s t r i b u t o r is r e g u l a r l y s e l l i n g at  p r i c e s b e l o w those s t i p u l a t e d a n d c o n s e q u e n t l y t a k i n g business a w a y f r o m those d i s t r i b u t o r s w h o do not, it is l i k e l y that pressure w i l l be b r o u g h t to bear b y these other d i s t r i b u t o r s to b r i n g the r e c a l c i t r a n t d i s t r i b u t o r i n t o l i n e .  If  the s u p p l i e r  21  does n o t take a p p r o p r i a t e a c t i o n s u c h as r e f u s i n g to s u p p l y the r e c a l c i t r a n t d i s t r i b u t o r o n t e r m i n a t i n g its d i s t r i b u t o r s h i p , t h e n it  m a y w e l l be that the  r e m a i n i n g d i s t r i b u t o r s cease to p r o m o t e the s u p p l i e r ' s p r o d u c t s as v i g o r o u s l y as b e f o r e ar e v e n cease to p u r c h a s e at a l l . ( O t h e r , more subtle means i n c l u d e f a i l i n g to renew a d i s t r i b u t o r s h i p w i t h o u t g i v i n g a n y reasons t h e r e f o r , g r a n t i n g d i s c o u n t s to those d i s t r i b u t o r s w h o do a d h e r e to s t i p u l a t e d prices a n d i n d u c i n g t h i r d to b o y c o t t those w h o d o not a d h e r e ) .  parties  S t i l l f u r t h e r , the s u p p l i e r m a y w i s h to a d o p t  a p r i c i n g p o l i c y w h i c h p r o v i d e s a n i n c e n t i v e f o r its d i s t r i b u t o r s to engage i n i n c r e a s e d p r o m o t i o n a n d p o i n t o f sale s e r v i c i n g .  It w i l l seek to d o this b y  e s t a b l i s h i n g a n a d e q u a t e m a r g i n between the w h o l e s a l e a n d the r e t a i l p r i c e , s u c h that its d i s t r i b u t o r s c a n engage i n a c e r t a i n l e v e l o f n o n - p r i c e c o m p e t i t i o n . the p o i n t o f v i e w o f d i s t r i b u t o r s , it protects t h e m f r o m p r i c e c o m p e t i t i o n p r o v i d e s a m o r e stable m a r k e t .  From a n d thus  1  T h e s t a b i l i t y p r o v i d e d b y R P M has h o w e v e r g e n e r a l l y been seen to h a v e a d v e r s e e f f e c t s o n the c o n s u m e r t h r o u g h the e l i m i n a t i o n o f p r i c e c o m p e t i t i o n , the l i m i t a t i o n o n m o r e e f f i c i e n t methods o f d i s t r i b u t i o n  a n d g e n e r a l l y h i g h e r prices.  It is f o r this reason that most j u r i s d i c t i o n s h a v e p r o h i b i t e d the p r a c t i c e o f R P M as w i l l b e c o m e c l e a r i n the next s e c t i o n .  2  See B. D o n a l d a n d J . H e y d o n , T r a d e P r a c t i c e s L a w ( A u s t r a l i a , L a w B o o k C o . , 1978) at 359. a n d J . C o l l i n g e , T h e L a w R e l a t i n g to R e s t r i c t i v e T r a d e Practices a n d Monopolies. Mergers & Takeovers in N e w Z e a l a n d 2nd ed. ( W e l l i n g t o n , B u t t e r w o r t h s , 1982) at 203-04.  R e s a l e p r i c e restraints were c o m p a r a t i v e l y u n c o m m o n u n t i l t h e latter p a r t o f the 19th c e n t u r y a n d the c o m m o n l a w b a c k g r o u n d o f R P M is t h e r e f o r e s o m e w h a t o b s c u r e . T h e r e appears to be n o r e p o r t e d E n g l i s h case o n the subject p r i o r to 1901. In that y e a r , i n E l l i m a n v. C a r r i n g t o n [1901] 2 C h . 275, a n a g r e e m e n t w h e r e b y a d e a l e r b o u n d i t s e l f not to sell goods f o r less t h a n s p e c i f i e d prices was u p h e l d , w h i l e i n 1915, i n D u n l o p P n e u m a t i c T y r e C o . L t d . v. S e l f r i d g e [1915] A C 798, a n a g r e e m e n t w h e r e the s u p p l i e r c o u l d , at its d i s c r e t i o n , v a r y the m i n i m u m p r i c e was u p h e l d . See g e n e r a l l y , D o n a l d & H e y d o n , s u p r a note 1 at 359-61.  22  B.  C U R R E N T STATE OF T H E LAW  (1)  U n i t e d States  R P M was f i r s t h e l d to be i l l e g a l per se i n the U n i t e d States i n 1911.  In that  y e a r , the S u p r e m e C o u r t i n D r . M i l e s M e d i c a l C o . v. J o h n D . P a r k & Sons C o .  3  held  that an a g r e e m e n t b e t w e e n a m a n u f a c t u r e r o f patent m e d i c i n e s a n d its d e a l e r s to m a i n t a i n a m i n i m u m resale p r i c e v i o l a t e d s e c t i o n 1 o f the S h e r m a n A c t .  4  That  s e c t i o n i n m a t e r i a l part d e c l a r e s e v e r y c o n t r a c t , c o m b i n a t i o n or c o n s p i r a c y i n r e s t r a i n t o f t r a d e to be i l l e g a l .  In r e g a r d to s e c t i o n 1, the C o u r t r u l e d that a  m a n u f a c t u r e r is not e n t i t l e d to restrict the resale o f its p r o d u c t s t h r o u g h interference with a purchaser's p r i c i n g decisions.  T h e C o u r t e q u a t e d the e f f e c t s of  R P M w i t h h o r i z o n t a l p r i c e f i x i n g between dealers a n d r e j e c t e d D r . M i l e s ' a r g u m e n t that m i n i m u m resale p r i c e s were necessary to protect it f r o m p r i c e c u t t i n g w h i c h w o u l d e r o d e its d e a l e r o r g a n i z a t i o n .  T h e C o u r t d i d not h o w e v e r p r o v i d e a n y r e a l  e x p l a n a t i o n w h y e l i m i n a t i n g p r i c e c o m p e t i t i o n between a m a n u f a c t u r e r ' s d e a l e r s almost a l w a y s c o n s t i t u t e d an u n r e a s o n a b l e r e s t r a i n t o f t r a d e a n d thus must be c o n d e m n e d as per se i l l e g a l , other t h a n that "agreements or c o m b i n a t i o n s b e t w e e n d e a l e r s , h a v i n g f o r t h e i r sole p u r p o s e the d e s t r u c t i o n o f c o m p e t i t i o n a n d the f i x i n g o f p r i c e s are i n j u r i o u s to the p u b l i c interest a n d v o i d " .  5  220 U . S . 373 (1911).  W h i l e most resale p r i c e a r r a n g e m e n t s i n the U n i t e d States h a v e been h e l d i l l e g a l u n d e r s e c t i o n 1 of the S h e r m a n A c t , s e c t i o n 2 o f t h a f A c t a n d s e c t i o n 5 o f the F e d e r a l T r a d e C o m m i s s i o n A c t h a v e been u s e d to s i m i l a r e f f e c t . See e.g. F T C v. B e e c h N u t P a c k a g i n g C o . 257 U . S . 441 (1922).  220 U . S . at 408.  In U n i t e d States v. C o l g a t e & C o . . d e c i d e d eight years a f t e r D r . M i l e s , the 6  S u p r e m e C o u r t f a c e d the issue o f w h e t h e r C o l g a t e h a d e x e r c i s e d a l a w f u l u n i l a t e r a l r i g h t to r e f u s e to d e a l w i t h p r i c e - c u t t e r s .  U n l i k e i n D r . M i l e s , there was  no a g r e e m e n t b e t w e e n C o l g a t e a n d its d i s t r i b u t o r s o b l i g i n g the latter to sell a b o v e a m i n i m u m price.  T h e S u p r e m e C o u r t h e l d that there was no v i o l a t i o n o f s e c t i o n 1  o f the S h e r m a n A c t a n d , i n the process, stated that the S h e r m a n A c t "does not r e s t r i c t the l o n g - r e c o g n i z e d r i g h t o f [a] t r a d e r or m a n u f a c t u r e r  engaged i n an  e n t i r e l y p r i v a t e business f r e e l y to exercise [its] o w n i n d e p e n d e n t d i s c r e t i o n as to the parties w i t h w h o m [it] w i l l d e a l " .  7  A c c o r d i n g to the C o u r t , u n i l a t e r a l R P M by  m a n u f a c t u r e r s was p e r m i s s i b l e a n d t h e r e f o r e a m a n u f a c t u r e r  was e n t i t l e d to  a n n o u n c e its resale prices i n a d v a n c e a n d secure a d h e r e n c e by r e f u s i n g to d e a l w i t h those w h o f a i l e d to c o m p l y .  W h i l e the r e a s o n i n g of the C o u r t was c o n s i s t e n t  w i t h the b a s i c r e q u i r e m e n t s o f section 1 that there be a " c o n t r a c t , c o m b i n a t i o n or c o n s p i r a c y " i n r e s t r a i n t o f t r a d e , the t r e a t m e n t o f R P M i n v o l v i n g an a g r e e m e n t the one h a n d a n d u n i l a t e r a l r p m on the other was o b v i o u s l y at o d d s .  on  8  T h e n a r r o w n e s s o f the C o l g a t e d e c i s i o n , was d e m o n s t r a t e d some years later i n U n i t e d States v. P a r k e . D a v i s & C o . w h e r e it was f o u n d that the a c t i o n s o f P a r k e , 9  D a v i s w e n t w e l l b e y o n d w h a t was p e r m i t t e d manufacturer  to m a i n t a i n resale p r i c e s t h r o u g h u n i l a t e r a l r e f u s a l s to d e a l w i t h  6  250 U . S . 300 (1919).  7  Id. at  8  R. P o s n e r , A n t i t r u s t L a w :  .  307.  C h i c a g o Press, 1976) at  9  by C o l g a t e , n a m e l y to a l l o w a  A n E c o n o m i c Perspective (Chicago. U n i v e r s i t y  155.  362 U . S . 29 (1960). See also S i m p s o n v. U n i o n O i l C o . 377 U . S . 13 (1964).  of  non-complying distributors.  P a r k e , D a v i s was f o u n d to h a v e s o l i c i t e d r e t a i l e r s '  assistance i n r e p o r t i n g d i s c o u n t s b y other r e t a i l d r u g g i s t s , a s s u r e d r e t a i l e r s that t h e i r c o m p e t i t o r s w o u l d m a i n t a i n p r i c e s i f they w o u l d d o l i k e w i s e , i n d u c e d w h o l e s a l e r s to r e f u s e to d e a l w i t h r e t a i l d r u g g i s t s at d i s c o u n t s a n d  permitted  d r u g g i s t s w h o h a d been c u t o f f f o r d i s c o u n t i n g to r e p u r c h a s e its p r o d u c t s a f t e r e x a c t i n g assurances that d i s c o u n t i n g w o u l d not take p l a c e i n the f u t u r e . Court stated:  1 0  The  1 1  W h e n the m a n u f a c t u r e r ' s a c t i o n s , as h e r e , go b e y o n d m e r e a n n o u n c e m e n t o f his p o l i c y a n d the s i m p l e r e f u s a l to d e a l , a n d he e m p l o y s other means w h i c h e f f e c t a d h e r e n c e to his resale p r i c e s ... he has put together a c o m b i n a t i o n i n v i o l a t i o n o f the S h e r m a n A c t .  In 1968, the S u p r e m e C o u r t i n A l b r e c h t v. H e r a l d C o .  1 2  e x t e n d e d the per se  r u l e a g a i n s t R P M to e n c o m p a s s v e r t i c a l agreements a i m e d at e s t a b l i s h i n g m a x i m u m resale p r i c e s .  In this case the d e f e n d a n t n e w s p a p e r was h e l d to h a v e v i o l a t e d  s e c t i o n 1 b y r e f u s i n g to sell to the p l a i n t i f f  d i s t r i b u t o r a f t e r the latter h a d r e s o l d  papers to c u s t o m e r s at more t h a n the suggested r e t a i l p r i c e .  T h e Court recognized  that m a x i m u m a n d m i n i m u m p r i c e f i x i n g m a y h a v e d i f f e r e n t  consequences in  m a n y s i t u a t i o n s but stressed that "schemes to f i x m a x i m u m p r i c e s , b y s u b s t i t u t i n g the p e r h a p s e r r o n e o u s j u d g e m e n t o f a seller f o r the f o r c e s o f the c o m p e t i t i v e  A B A Antitrust Section, M o n o g r a p h No.2, V e r t i c a l Restraints L i m i t i n g I n t r a b r a n d C o m p e t i t i o n (1977) at 73 ( h e r e i n a f t e r c i t e d 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  m a r k e t , m a y s e v e r e l y i n t r u d e u p o n the a b i l i t y o f b u y e r s to c o m p e t e a n d s u r v i v e i n that  market."  1 3  M o v e m e n t s to p e r m i t e x e m p t i o n s to the per se r u l e r e s u l t e d i n the passage o f the M i l l e r - T y d i n g s A c t i n 1937 a n d the M c G u i r e A c t i n 1952 w h i c h a l l o w e d States to enact s o - c a l l e d " f a i r trade" laws a u t h o r i z i n g s u p p l i e r s to e s t a b l i s h m i n i m u m or s t i p u l a t e d resale p r i c e s f o r b r a n d e d p r o d u c t s i f the p r o d u c t s were "in f r e e a n d o p e n c o m p e t i t i o n w i t h other p r o d u c t s o f the same g e n e r a l class".  M o s t States  passed f a i r t r a d e laws a n d , as a result, a large n u m b e r o f s u p p l i e r s p r a c t i s e d R P M as f a i r t r a d e .  1 4  In the 1970's, a n u m b e r o f States r e p e a l e d t h e i r f a i r t r a d e  laws  a n d , a f t e r a debate w h i c h h a d lasted f o r q u i t e a n u m b e r o f y e a r s , the C o n s u m e r G o o d s P r i c i n g A c t o f 1975 was e n a c t e d r e p e a l i n g the M i l l e r - T y d i n g s a n d M c G u i r e A c t s , e f f e c t i v e M a r c h 11, 1976, a n d t h e r e b y r e - e s t a b l i s h i n g the status o f R P M as a per se v i o l a t i o n o f s e c t i o n 1.  T h e r e - e s t a b l i s h m e n t o f the per se t r e a t m e n t o f R P M a n d the s u b s e q u e n t h o l d i n g o f the S u p r e m e C o u r t i n C o n t i n e n t a l T . V . Inc. v. G T E S y l v a n i a Inc. that r e s t r i c t i o n s o n the t e r r i t o r i e s w i t h i n w h i c h a d i s t r i b u t o r m a y sell or the c u s t o m e r s w i t h w h i c h it m a y d e a l were to be j u d g e d a c c o r d i n g to a r u l e o f r e a s o n s t a n d a r d r e s u l t e d i n a n i n c o n s i s t e n c y i n U n i t e d States law o n v e r t i c a l restraints. majority  The  i n S y l v a n i a s p e c i f i c a l l y r e f u s e d to r e c o n s i d e r the t r e a t m e n t o f R P M ,  r e a s o n i n g that the i l l e g a l i t y of p r i c e r e s t r i c t i o n s h a d been e s t a b l i s h e d f i r m l y  Ig\ at  for  152.  T h e M i l l e r - T y d i n g s A c t o n l y a p p l i e d to s u p p l i e r s a n d d i s t r i b u t o r s w h o were p a r t i e s to a c t u a l agreements a n d t h e r e f o r e a s u p p l i e r c o u l d not b i n d a d i s t r i b u t o r w h o h a d not s i g n e d a " f a i r trade" a g r e e m e n t . D . M a r k s a n d J . J a c o b s o n , " P r i c e F i x i n g : A n O v e r v i e w " , 30 A n t i t r u s t B u l l . 199 (1985) at 23031.  m a n y years a n d i n v o l v e d s i g n i f i c a n t l y d i f f e r e n t questions of analysis a n d policy. T h e m o r e p e r m i s s i v e t r e a t m e n t of n o n - p r i c e v e r t i c a l restraints l e d a n u m b e r o f c o m m e n t a t o r s to suggest that the e c o n o m i c basis f o r a per se t r e a t m e n t of justified a reconsideration. Department  1 6  T h e A n t i t r u s t D i v i s i o n o f the U n i t e d  RPM  States  o f J u s t i c e u n d e r the d i r e c t i o n o f W i l l i a m B a x t e r a d d e d s u p p o r t to t h e i r  cause by f i l i n g a n u m b e r o f a m i c u s c u r i a e b r i e f s i n 1981-83 u r g i n g the c o u r t s to reassess the per se r u l i n g on R P M .  T h e most s i g n i f i c a n t o f these b r i e f s was that i n  s u p p o r t o f M o n s a n t o ' s p e t i t i o n f o r c e r t i o r a r i f r o m the d e c i s i o n o f the S e v e n t h C i r c u i t i n S p r a y - R i t e S e r v i c e C o r p . v. M o n s a n t o C o . .  1 7  T h e b r i e f u r g e d the  S u p r e m e C o u r t to r e c o n s i d e r a n d u l t i m a t e l y o v e r t u r n the per se r u l e i n D r . M i l e s T h e C o u r t chose not to do so but i n s t e a d to c l a r i f y the a p p l i c a t i o n o f the r u l e that c a s e .  1 8  in  1 9  433 U . S . at 51 n.18. In a c o n c u r r i n g o p i n i o n h o w e v e r , M r . J u s t i c e W h i t e suggested that "the e f f e c t , i f not the i n t e n t i o n o f the S u p r e m e C o u r t ' s o p i n i o n is n e c e s s a r i l y to c a l l i n t o q u e s t i o n the f i r m l y e s t a b l i s h e d per se r u l e a g a i n s t p r i c e restraints." 433 U . S . at 70.  See e.g. F . E a s t e r b r o o k , " V e r t i c a l A r r a n g e m e n t s a n d the R u l e o f R e a s o n " , 53 A n t i t r u s t L . J . 135 (1984).  684 F.2d 1226 (7th C i r . 1982).  B r i e f o f the U.S. D e p a r t m e n t o f J u s t i c e . M o n s a n t o C o . v. S p r a y - R i t e S e r v i c e C o r p . N o . 82-914, 1983. T h e B r i e f stated, i n t e r alia.,:"There is no s o u n d basis f o r a s s u m i n g ... that resale p r i c e m a i n t e n a n c e is so i n v a r i a b l y a n t i c o m p e t i t i v e as to j u s t i f y per se c o n d e m n a t i o n .... T h e l o g i c of S v l v a n i a c o m p e l s the c o n c l u s i o n that resale p r i c e m a i n t e n a n c e - l i k e other v e r t i c a l r e s t r i c t i o n s - is u n s u i t a b l e f o r per se treatment." Id. at 6 a n d 19.  M o n s a n t o v. S p r a v - R i t e S e r v i c e C o r p . 104 S.Ct. 1464 (1984). F o r a d e t a i l e d d i s c u s s i o n of this case, see R. Steuer, " M o n s a n t o a n d the M o t h b a l l E f f e c t of A n t i t r u s t " , 30 A n t i t r u s t , B u l l . 1 (1985) a n d J . M c G i b b o n , " P r o o f o f V e r t i c a l C o n s p i r a c y U n d e r M o n s a n t o " , 30 A n t i t r u s t B u l l . 11 (1985).  27 T h e f a c t s o f M o n s a n t o were that M o n s a n t o h a d s o l d its h e r b i c i d e s u n d e r a d i s t r i b u t i o n p r o g r a m w h e r e d i s t r i b u t o r s were a p p o i n t e d f o r o n e - y e a r terms r e n e w a b l e a c c o r d i n g to s p e c i f i e d c r i t e r i a , i n c l u d i n g f u l l e x p l o i t a t i o n o f the d i s t r i b u t o r ' s a r e a o f p r i m a r y r e s p o n s i b i l i t y a n d a d e q u a t e t e c h n i c a l t r a i n i n g f o r its sales r e p r e s e n t a t i v e s .  M o n s a n t o suggested resale p r i c e s to its d i s t r i b u t o r s a n d took  steps to assure that its suggestions were b e i n g f o l l o w e d .  Spray-Rite, a known price-  c u t t e r , b e c a m e the subject o f n u m e r o u s c o m p l a i n t s l o d g e d w i t h M o n s a n t o b y its other d i s t r i b u t o r s .  W h e n the time c a m e f o r M o n s a n t o to r e n e w S p r a y - R i t e ' s  d i s t r i b u t o r s h i p , M o n s a n t o r e f u s e d to do so. S p r a y - R i t e b r o u g h t suit a l l e g i n g that M o n s a n t o h a d s t o p p e d s e l l i n g to it because it was c u t t i n g p r i c e s a n d that M o n s a n t o was c o n s p i r i n g w i t h other d i s t r i b u t o r s to f i x the resale p r i c e s o f its h e r b i c i d e s . M o n s a n t o d e n i e d the c h a r g e s , a l l e g i n g that the d i s t r i b u t o r s h i p h a d been t e r m i n a t e d f o r n o n - p r i c e reasons, s p e c i f i c a l l y S p r a y - R i t e ' s f a i l u r e to use t r a i n e d salesmen a n d a d e q u a t e l y p r o m o t e sales to d i s t r i b u t o r s .  T h e C o u r t h e l d that a c o n s p i r a c y m a y not be i n f e r r e d m e r e l y f r o m the t e r m i n a t i o n o f a d i s t r i b u t o r i n response to c o m p l a i n t s o f p r i c e c u t t i n g competing distributors.  from  R a t h e r , there must be d i r e c t or c i r c u m s t a n t i a l e v i d e n c e  that "tends to e x c l u d e the p o s s i b i l i t y that the m a n u f a c t u r e r a n d 2ft d i s t r i b u t o r s were a c t i n g i n d e p e n d e n t l y "  non-terminated  * a n d that the s u p p l i e r a n d the  c o m p l a i n i n g d i s t r i b u t o r share "a c o n s c i o u s c o m m i t m e n t to a c o m m o n scheme d e s i g n e d to a c h i e v e an u n l a w f u l o b j e c t i v e " .  20  2 1  Id. at  1471.  Id. at  1473.  21  In this r e g a r d , the C o u r t s p e c i f i c a l l y  28  i n d i c a t e d that it w i s h e d to f o r t i f y the d o c t r i n e s e n u n c i a t e d i n C o l g a t e a n d Svlvania.  T h e Court stated:  22  It is o f c o n s i d e r a b l e i m p o r t a n c e that i n d e p e n d e n t a c t i o n b y the m a n u f a c t u r e r a n d c o n c e r t e d a c t i o n on n o n - p r i c e r e s t r i c t i o n s be d i s t i n g u i s h e d f r o m p r i c e - f i x i n g agreements. If a n i n f e r e n c e o f s u c h a n a g r e e m e n t m a y be d r a w n f r o m h i g h l y a m b i g u o u s e v i d e n c e , there is a c o n s i d e r a b l e d a n g e r that d o c t r i n e s e n u n c i a t e d i n S v l v a n i a a n d C o l g a t e w i l l be s e r i o u s l y eroded.  T h e C o u r t also h e l d that w h e r e there is p r o o f of a v e r t i c a l  agreement  b e t w e e n a s u p p l i e r a n d one or more o f its d i s t r i b u t o r s , a n d p r o o f that the termination  o f a d i s t r i b u t o r was "part o f or p u r s u a n t to" the v e r t i c a l  the t e r m i n a t i o n  w i l l be i l l e g a l i f the v e r t i c a l a g r e e m e n t is i l l e g a l '  2 3  agreement, T o prove a  v e r t i c a l c o n s p i r a c y , the C o u r t stated that there must be m o r e t h a n just "a s h o w i n g that the d i s t r i b u t o r c o n f o r m e d " to the s u p p l i e r ' s s u g g e s t i o n s .  24  T h e r e must be p r o o f  that the s u p p l i e r sought " a c q u i e s c e n c e or agreement" f r o m the d i s t r i b u t o r ,  and  p r o o f that the d i s t r i b u t o r " c o m m u n i c a t e d " its " a c q u i e s c e n c e or agreement" to the supplier.  B a s e d o n the f a c t s , the C o u r t f o u n d p r o o f o f a v e r t i c a l c o n s p i r a c y a n d  2 5  e v i d e n c e that S p r a y - R i t e ' s t e r m i n a t i o n conspiracy.  "  l±  at  1470.  2 3  I d , at  1472.  2 4  Id  2 5  Id.  at 1471  n.9.  was "part o f or p u r s u a n t to" that  vertical  29 F o l l o w i n g M o n s a n t o , it was c l e a r that a s u p p l i e r , a c t i n g u n i l a t e r a l l y , c o u l d r e f u s e to take o n n e w d i s t r i b u t o r s w h i c h it a n t i c i p a t e d w o u l d not a d h e r e to its suggested resale p r i c e s ; it c o u l d also a n n o u n c e to its e x i s t i n g d i s t r i b u t o r s that it i n t e n d e d to t e r m i n a t e a n y d i s t r i b u t o r w h i c h d i d not f o l l o w those p r i c e s ; a n d it c o u l d a c t u a l l y t e r m i n a t e d i s t r i b u t o r s i f t h e i r p r i c e s d i d not c o n f o r m .  In these  cases, there w o u l d be no "meeting o f the m i n d s " or " c o m m o n scheme".  O n the other  h a n d , it was per se u n l a w f u l f o r a s u p p l i e r to c o e r c e a d h e r e n c e to resale p r i c e s , or to c o n s p i r e w i t h one o f its d i s t r i b u t o r s to t e r m i n a t e  a n o t h e r f o r f a i l u r e to  maintain  •„„„ 26  prices.  A d i s t r i b u t o r , f o r its part, c o u l d "acquiesce" to a s u p p l i e r ' s d e m a n d a n d " c o n f o r m " to the suggested p r i c e w i t h o u t c r e a t i n g an a g r e e m e n t . it c o u l d not " c o m m u n i c a t e " its a c q u i e s c e n c e to the s u p p l i e r .  O n the other  T h i s is w h e r e  hand  the  C o u r t d r e w a l i n e b e t w e e n u n i l a t e r a l a c t i o n a n d a m e e t i n g o f the m i n d s .  T h e a p p l i c a t i o n of the per se p r o h i b i t i o n against R P M was f u r t h e r  clarified  b y the S u p r e m e C o u r t i n its 1988 j u d g e m e n t i n B u s i n e s s E l e c t r o n i c s C o r p . v. S h a r p Electronics C o r p . .  2 8  B u i l d i n g on its r e a s o n i n g i n M o n s a n t o , the C o u r t h e l d that the  t e r m i n a t i o n o f a l o w p r i c e d i s t r i b u t o r b y a s u p p l i e r f a l l s w i t h i n the per se p r o h i b i t i o n o n l y i n c i r c u m s t a n c e s w h e r e there is a n e x p l i c i t or i m p l i e d  agreement  b e t w e e n the s u p p l i e r a n d other n o n - t e r m i n a t e d d i s t r i b u t o r s to set resale p r i c e s at some l e v e l .  2 6  2 7  28  T h e C o u r t rejected the c o n t e n t i o n that the e x i s t e n c e of a n  Steuer. s u p r a note 19 at  Id.  108 S.Ct. 1515 (1988).  7.  agreement  30 c o u l d be i n f e r r e d m e r e l y o n the basis o f the t e r m i n a t i o n o f n o n - c o m p l y i n g distributors and s a i d :  2 9  O u r a p p r o a c h to the q u e s t i o n presented i n the present case is g u i d e d b y the premises o f G T E S v l v a n i a a n d M o n s a n t o : that there is a p r e s u m p t i o n i n f a v o u r o f a r u l e - o f - r e a s o n s t a n d a r d , that d e p a r t u r e f r o m that s t a n d a r d must be j u s t i f i e d b y d e m o n s t r a b l e e c o n o m i c e f f e c t , s u c h as f a c i l i t a t i o n o f c a r t e l i z i n g , r a t h e r t h a n f o r m a l i s t i c d i s t i n c t i o n s ; that i n t e r b r a n d c o m p e t i t i o n is the p r i m a r y c o n c e r n o f the a n t i t r u s t l a w s ; a n d that rules i n this a r e a s h o u l d be f o r m u l a t e d w i t h a v i e w t o w a r d s p r o t e c t i n g the d o c t r i n e o f G T E S v l v a n i a .  W h i l e R P M r e m a i n s i l l e g a l per se i n the U n i t e d States, it is n o t a b l e that the stance t a k e n b y the D e p a r t m e n t o f J u s t i c e since the e a r l y 1980's, a n d the s u b s e q u e n t n a r r o w i n g o f the per se r u l e , h a v e g e n e r a t e d e x t e n s i v e c o n c e r n i n Congress.  B e s i d e s its a c t i o n i n p r e v e n t i n g the D e p a r t m e n t  f r o m p r e s e n t i n g its  a r g u m e n t i n M o n s a n t o , l e g i s l a t i o n was i n t r o d u c e d i n 1987 to c o d i f y the per se 3 0  p r o h i b i t i o n o f R P M a n d a v e r s i o n o f the B i l l was passed by the H o u s e o f Representatives in early 1988. passed b y Senate.  31  It is u n d e r s t o o d that the B i l l has not yet been  T h e Senate C o m m i t t e e R e p o r t a c c o m p a n y i n g the l e g i s l a t i o n was  h o w e v e r e x t r e m e l y c r i t i c a l o f the A d m i n i s t r a t i o n f o r f a i l i n g to f i l e a n y R P M cases i n recent years a n d f o r i n t e r v e n i n g o n b e h a l f o f d e f e n d a n t s i n s e v e r a l p r i v a t e l y initiated  cases.  32  29  Id,  30  See 45 A n t i t r u s t & T r a d e R e g . R e p . ( B N A ) 670 ( O c t . 27, 1983).  31  T h e R e t a i l C o m p e t i t i o n E n f o r c e m e n t A c t , 100th C o n g . , 1st Sess. (1987).  32  at  1519.  I. N i e l s o n - J o n e s et a l . , " P r o d u c t D i s t r i b u t i o n a n d the C o m p e t i t i o n A c t : T h e Treatment of R e v i e w a b l e Matters a n d Price Maintenance" Paper presented at a C o n t i n u i n g L e g a l E d u c a t i o n S o c i e t y o f B r i t i s h C o l u m b i a s e m i n a r , ( O c t o b e r 1988) at 3.1.50-51.  31  (2)  Canada  C a n a d a was the f i r s t c o u n t r y to u n c o n d i t i o n a l l y p r o h i b i t R P M . S e c t i o n 34 of the C o m b i n e s I n v e s t i g a t i o n  A c t 1951 p r o v i d e d that n o d e a l e r c o u l d d i r e c t l y or  i n d i r e c t l y , b y a n y m e a n s , r e q u i r e or i n d u c e or a t t e m p t to r e q u i r e a n y p e r s o n to sell goods at a m i n i m u m p r i c e or m a r k - u p or p r i c e s p e c i f i e d b y the seller.  A m e n d m e n t s m a d e i n 1975, e f f e c t i v e p r o h i b i t i o n i n a n u m b e r o f respects.  1 J a n u a r y 1976, b r o a d e n e d the  F i r s t , the p r o h i b i t i o n was e x t e n d e d b e y o n d  the m e r e s p e c i f i c a t i o n o f prices to a n y attempt to i n f l u e n c e a p r i c e u p w a r d s or d i s c o u r a g e the r e d u c t i o n o f prices.  S e c o n d , the p r o h i b i t i o n was e x t e n d e d b e y o n d  mere s i t u a t i o n s o f resale to a n y s i t u a t i o n w h e r e a p r o d u c t is s o l d , so also c a t c h i n g l e a s i n g a n d h i r i n g . T h i r d , the w o r d " p r o d u c t " r e p l a c e d the w o r d "goods", so c a t c h i n g s e r v i c e s . F o u r t h , the w o r d "dealer" was r e p l a c e d b y the w o r d "person" g i v i n g rise to the p o s s i b i l i t y that the s e c t i o n c o u l d a p p l y to b o t h h o r i z o n t a l a n d vertical relationships.  3 3  F i n a l l y , a n e w o f f e n c e was c r e a t e d e x t e n d i n g to t h i r d  parties the p r o h i b i t i o n against a r e f u s a l to s u p p l y w h i c h is r e l a t e d to a n a t t e m p t to enforce price maintenance.  A n o t a b l e n a r r o w i n g o f the p r o h i b i t i o n r e s u l t e d  from  the s u b s t i t u t i o n o f the w o r d s "or a n y l i k e means" f o r the w o r d s "or a n y other means".  N o reason a p p e a r s to h a v e been g i v e n f o r the c h a n g e , a l t h o u g h the  m a j o r i t y i n R. v. P h i l i p s E l e c t r o n i c s L t d . f e l t that this was a c l e a r i n d i c a t i o n o f  T h i s p o s s i b i l i t y b e c a m e e v i d e n t i n J L v. Peter C a m p b e l l (1981) 51 C . P . R . 284 w h e r e the m a n a g e r o f a r e n t a l c a r c o m p a n y was f o u n d g u i l t y o f p r i c e m a i n t e n a n c e b y i n d u c i n g t w o o f his c o m p e t i t o r s to raise t h e i r r e n t a l rates. See also R , v. S c h e l e w et a l . (1982) 63 C . P . R . (2d) 140.  P a r l i a m e n t ' s i n t e n t i o n to s u b s t a n t i a l l y restrict the t y p e o f attempts w h i c h c o n s t i t u t e a n o f f e n c e u n d e r the s e c t i o n .  3 4  T h e s e a m e n d m e n t s were l a r g e l y r e p e a t e d i n s e c t i o n 38 o f the C o m p e t i t i o n A c t 1986 (to be r e n u m b e r e d s e c t i o n 61 u n d e r the 1985 R e v i s e d Statutes).  Section  38(l)(a) o f the 1986 A c t n o w t h e r e f o r e p r o v i d e s that no p e r s o n w h o is e n g a g e d i n the business o f m a k i n g or s e l l i n g a p r o d u c t s h a l l , d i r e c t l y or i n d i r e c t l y :  b y a g r e e m e n t , threat, p r o m i s e or a n y l i k e m e a n s , a t t e m p t to i n f l u e n c e u p w a r d , or to d i s c o u r a g e the r e d u c t i o n o f , the p r i c e at w h i c h a n y other p e r s o n e n g a g e d i n a business i n C a n a d a s u p p l i e s or o f f e r s to s u p p l y or a d v e r t i s e s a p r o d u c t w i t h i n Canada.  T h i s p r o h i b i t i o n also a p p l i e s to persons w h o e x t e n d c r e d i t b y w a y o f c r e d i t c a r d s or are o t h e r w i s e e n g a g e d i n a business that relates to c r e d i t c a r d s or w h o h a v e the e x c l u s i v e r i g h t s a n d p r i v i l e g e s c o n f e r r e d b y a p a t e n t , t r a d e m a r k , c o p y r i g h t or registered industrial design.  In o r d e r to e s t a b l i s h a n o f f e n c e u n d e r this p r o v i s i o n , p r o o f is not r e q u i r e d that a s u p p l i e r a c t u a l l y s u c c e e d e d i n i n f l u e n c i n g u p w a r d or d i s c o u r a g i n g the r e d u c t i o n o f a n o t h e r person's prices. way can suffice.  In R v. M o f f a t s  3 5  A mere attempt to i n f l u e n c e p r i c e s i n this  it was h e l d that a c q u i e s c e n c e b y a p e r s o n  w h o m the a c c u s e d h a d a t t e m p t e d to i n f l u e n c e was not necessary to s u p p o r t a conviction.  116 D . L . R . (3d) 298 at 305. In this case, c o n d u c t w h i c h p r e s u m a b l y w o u l d h a v e been c a u g h t u n d e r the p r e v i o u s w o r d i n g was h e l d to be o u t s i d e the section.  (1957), 118 C . C . C . 4.  33  T h e courts h a v e g e n e r a l l y g i v e n a b r o a d i n t e r p r e t a t i o n o f a n "agreement, t h r e a t , p r o m i s e or l i k e means".  to the  requirement  A n a t t e m p t to i n f l u e n c e  upward  or d i s c o u r a g e the r e d u c t i o n o f p r i c e s i n this m a n n e r has been f o u n d f o r i n s t a n c e w h e r e a rebate was p r o v i d e d o n sales m a d e at a m a n u f a c t u r e r s ' suggested list prices;  3 6  s p e c i a l a l l o w a n c e s were t h r e a t e n e d to be r e m o v e d i f the r e t a i l e r  d o w n w a r d price changes;  initiated  a n d i n d u c e m e n t s were o f f e r e d to c o m p l y w i t h suggested  p r i c e s i n c l u d i n g a n o f f e r to s u p p l y a n a d d i t i o n a l , h i g h l y d e s i r e d p r o d u c t a n d a n o f f e r to f o r c e other r e t a i l e r s to a d h e r e to suggested p r i c e s .  3 8  S e c t i o n 38(l)(b) o f the C o m p e t i t i o n A c t makes it a separate o f f e n c e f o r a n y p e r s o n to, d i r e c t l y or i n d i r e c t l y :  r e f u s e to s u p p l y a p r o d u c t to or o t h e r w i s e d i s c r i m i n a t e a g a i n s t a n y other p e r s o n e n g a g e d i n business i n C a n a d a because of the l o w p r i c i n g p o l i c y o f that other p e r s o n .  T h e e f f e c t o f this p r o v i s i o n is to m a k e it a n o f f e n c e to r e f u s e to s u p p l y on the basis o f p r i c e d i s c o u n t i n g .  In a d d i t i o n to the o f f e n c e i n section 38(1), s e c t i o n 38(6)  o f the C o m p e t i t i o n  A c t p r o v i d e s that:  N o p e r s o n s h a l l , b y t h r e a t , p r o m i s e or a n y l i k e m e a n s , a t t e m p t to i n d u c e a s u p p l i e r , as a c o n d i t i o n of his d o i n g business w i t h the s u p p l i e r , to r e f u s e to s u p p l y a p r o d u c t to a p a r t i c u l a r  3 6  R. v. C a m p b e l l (1964) 3 C . C . C .  112.  3 7  R , v. S u n o c o Inc. (1986), 11 C . P . R . (3d)  3 8  R , v. H . D . L e e o f C a n a d a L t d . (1980), 57 C . P . R . (2d)  557.  186.  p e r s o n or class o f persons because o f the low p r i c i n g p o l i c y of that p e r s o n or class o f persons.  T h i s p r o v i s i o n is d i r e c t e d at c o n t r o l l i n g possible attempts b y d i s t r i b u t o r s to i n i t i a t e r e f u s a l s b y t h e i r s u p p l i e r s to s u p p l y to c o m p e t i n g , l o w e r p r i c e d i s t r i b u t o r s . V i o l a t i o n o f s e c t i o n 38(1)  or s e c t i o n 38(6)  is a n i n d i c t a b l e o f f e n c e a n d is  p u n i s h a b l e b y a f i n e i n the d i s c r e t i o n of the c o u r t or i m p r i s o n m e n t f o r 5 years or both.  3 9  In r e g a r d to the issue of mens r e a . it has been h e l d i n a n u m b e r o f cases that it is not necessary f o r the C r o w n to p r o v e that an a c c u s e d p e r s o n i n t e n d e d to h a v e the e f f e c t o f m a i n t a i n i n g h i g h e r - t h a n - c o m p e t i t i v e  p r i c e levels.  R a t h e r , it is  s u f f i c i e n t to s u p p o r t a c o n v i c t i o n u n d e r s e c t i o n 38 i f the C r o w n shows that the a c c u s e d k n o w i n g l y c a r r i e d out the acts w h i c h c o n s t i t u t e d the o f f e n c e .  4 0  T h e r e are s e v e r a l e x c e p t i o n s to the p r i c e m a i n t e n a n c e p r o v i s i o n s that are o f i m p o r t a n c e i n the present context.  S e c t i o n 38(2)  p r o v i d e s that s e c t i o n 38(1)  does  not a p p l y i n s i t u a t i o n s i n v o l v i n g a f f i l i a t e d c o m p a n i e s or d i r e c t o r s , agents, o f f i c e r s or e m p l o y e e s o f (a) the same c o m p a n y , p a r t n e r s h i p or sole p r o p r i e t o r s h i p , or (b) c o m p a n i e s , p a r t n e r s h i p s or sole p r o p r i e t o r s h i p s that are a f f i l i a t e d . s e c t i o n 38(2)  p r o v i d e s that section 38(1)  In  addition,  does not a p p l y i n s i t u a t i o n s w h e r e the  p e r s o n a t t e m p t i n g to i n f l u e n c e the c o n d u c t o f a n o t h e r p e r s o n a n d that other p e r s o n are p r i n c i p a l a n d agent.  S e c t i o n 38(8).  R . v. M o f f a t s . s u p r a note 35.  35  S e c t i o n s 38(3), (4) a n d (5) c l a r i f y the t r e a t m e n t o f suggested resale p r i c e s u n d e r the p r i c e m a i n t e n a n c e  provisions.  S e c t i o n 38(3)  provides, in effect,  that  p r o d u c e r s or s u p p l i e r s w h o m a k e suggestions r e g a r d i n g the resale p r i c e s o f t h e i r p r o d u c t s m u s t , i n o r d e r to a v o i d l i a b i l i t y u n d e r the p r i c e m a i n t e n a n c e  provisions,  also m a k e c l e a r to the p e r s o n to w h o m the suggestion is o f f e r e d that he is u n d e r no o b l i g a t i o n to a c c e p t the suggestion.  In the absence o f p r o o f to this e f f e c t ,  the  m a k i n g o f suggestions r e s p e c t i n g resale p r i c e s is d e e m e d to be p r o o f o f a n a t t e m p t to i n f l u e n c e the person i n a c c o r d a n c e w i t h the suggestion o f f e r e d . c l a r i f i e s f u r t h e r that a d v e r t i s e m e n t s  Section  38(4)  p u b l i s h e d by a s u p p l i e r o f a p r o d u c t , other  t h a n a r e t a i l e r , that m e n t i o n a resale p r i c e f o r the p r o d u c t , must m a k e c l e a r that the p r o d u c t m a y be s o l d at a l o w e r p r i c e . s u c h an a d v e r t i s e m e n t  U n l e s s this is d o n e , the p u b l i c a t i o n  is d e e m e d to constitute an a t t e m p t to i n f l u e n c e u p w a r d  s e l l i n g p r i c e o f a n y p e r s o n i n t o whose h a n d s the p r o d u c t comes f o r resale. t h e r e f o r e u n c o m m o n to f i n d the w o r d s "or less" used i n a d v e r t i s e m e n t s suggested p r i c e .  T h e courts h a v e h e l d ' t h a t sections 38(3)  o f f e n c e s i n themselves.  of  constitute  R a t h e r , they are e x a m p l e s o f attempts to i n f l u e n c e  p r o v i d e s that the p r i c e m a i n t e n a n c e  41  Section  p r o v i s i o n s do not a p p l y w h e r e the  It is not  including a  a n d (4) d o not  that m a y f a l l w i t h i n the c o n d u c t p r o s c r i b e d i n s e c t i o n 3 8 ( l ) ( a ) .  the  prices 38(5)  words  "suggested p r i c e " or "suggested r e t a i l p r i c e " are i n some w a y a t t a c h e d to a p r o d u c t or its p a c k a g e or c o n t a i n e r a l o n g w i t h the p r i c e .  ( T h e use o f suggested r e t a i l  p r i c e s w i l l be c o n s i d e r e d i n m o r e d e t a i l later i n this Part.)  F i n a l l y s e c t i o n 38(9)  i n e f f e c t p r o v i d e s a d e f e n c e to a person c h a r g e d w i t h  r e f u s a l to s u p p l y u n d e r s e c t i o n 38(l)(b) w h e r e he believes that the p e r s o n he has r e f u s e d to s u p p l y has m a d e a p r a c t i c e of: (a) u s i n g p r o d u c t s s u p p l i e d by the person  See e.g. R , v. P h i l i p s E l e c t r o n i c s L t d . (1981), 2 S . C . R . 264.  c h a r g e d as loss-leaders;  (b) u s i n g s u c h p r o d u c t s not f o r the p u r p o s e o f s e l l i n g  t h e m at a p r o f i t but f o r the p u r p o s e o f a t t r a c t i n g customers to his store; (c) e n g a g i n g i n m i s l e a d i n g a d v e r t i s i n g i n respect o f s u c h p r o d u c t s ; or (d) f a i l i n g to p r o v i d e the l e v e l o f s e r v i c e that m i g h t r e a s o n a b l y be e x p e c t e d b y p u r c h a s e r s o f such products.  A s w i l l be seen s h o r t l y , these e x c e p t i o n s to some extent  a c c o m m o d a t e the p o s i t i v e r a t i o n a l e s f o r p r i c e m a i n t e n a n c e a c t i v i t i e s w h i c h h a v e b e e n a d v a n c e d b y m o d e r n a n t i t r u s t s c h o l a r s . It is n o t a b l e , h o w e v e r , that the e x c e p t i o n s i n s e c t i o n 38(9)  do not a p p l y to the b a s i c o f f e n c e o f p r i c e  maintenance  u n d e r s e c t i o n 38(l)(a), n o r do they a p p l y to the o f f e n c e o f i n d u c e m e n t to engage i n r e f u s a l to s u p p l y u n d e r s e c t i o n 38(6).  ( T h e loss-leader d e f e n c e w i l l also be  c o n s i d e r e d i n m o r e d e t a i l later i n this Part.)  (3)  Australia  T h e R P M p r o v i s i o n s i n the N e w Z e a l a n d A c t are v i r t u a l l y e q u i v a l e n t R P M p r o v i s i o n s i n the T r a d e P r a c t i c e s A c t 1974 (Cth) r e f e r r e d to as "the A u s t r a l i a n A c t " )  4 3  and therefore  c o n s i d e r e d together (as is d o n e i n the next section).  a mirror of  the  (hereafter  b o t h c a n c o n v e n i e n t l y be The only  significant  d i f f e r e n c e is the i n c l u s i o n o f a d e f e n c e a l o n g the lines o f s e c t i o n 38(9)  of  the  C a n a d i a n C o m p e t i t i o n A c t to a s u p p l i e r w h o w i t h h o l d s s u p p l i e s o f goods to a p e r s o n w h o , w i t h i n the p r e c e d i n g t w e l v e m o n t h s , has s o l d goods o b t a i n e d f r o m s u p p l i e r at less t h a n their cost f o r the purposes o f p r o m o t i n g business or  the  attracting  T h e loss-leader d e f e n c e was c o n s i d e r e d i n R^ v. H . D . L e e of C a n a d a L t d . , s u p r a note 38. T h e Q u e b e c S u p r e m e C o u r t d e f i n e d l o s s - l e a d e r s e l l i n g as sale at a p r i c e below i n v o i c e cost a n d r e - a f f i r m e d an i n t e r p r e t a t i o n g i v e n e a r l i e r i n the P h i l i p s case.  Sections 48,96,97,98 a n d 100. F o r a d e t a i l e d d i s c u s s i o n o f these p r o v i s i o n s , see R. M i l l e r , A n n o t a t e d T r a d e P r a c t i c e s A c t 8th e d . ( A u s t r a l i a , L a w B o o k C o . , 1987).  to h i s p l a c e o f business persons l i k e l y to p u r c h a s e other goods.  The  exemption  does not h o w e v e r a p p l y to g e n u i n e seasonal c l e a r a n c e sales o f goods not a c q u i r e d f o r the p u r p o s e o f b e i n g s o l d at the p a r t i c u l a r sale n o r does it a p p l y i n s i t u a t i o n s i  w h e r e the sale took p l a c e w i t h the consent o f the s u p p l i e r .  (4)  New  4 5  Zealand  (i)  History  R P M a r r a n g e m e n t s were f i r s t b r o u g h t u n d e r the t r a d e p r a c t i c e r e g i m e New Zealand in 1958,  46  but were not s p e c i f i c a l l y dealt w i t h u n t i l 1975.  in  S e c t i o n 28  o f the C o m m e r c e A c t 1 9 7 5  4 7  p r o v i d e d that no p e r s o n s h a l l be a p a r t y to a n y  a g r e e m e n t or a r r a n g e m e n t  f o r the sale or s u p p l y o f goods "between a w h o l e s a l e r  a n d a r e t a i l e r " or "between two or more wholesalers" p u r s u a n t to w h i c h there is a d i r e c t or i n d i r e c t i n d i c a t i o n o f the p r i c e o f goods s o l d a n d / o r the i m p o s i t i o n of c o n d i t i o n s o f sale a f f e c t i n g the resale p r i c e of goods s o l d .  However  e x c e p t i o n s were p r o v i d e d , n a m e l y (a) w h e r e the p a r t i c u l a r a g r e e m e n t arrangement  three or  h a d been a p p r o v e d i n a d v a n c e by the C o m m e r c e C o m m i s s i o n a n d a n y  c o n d i t i o n s i m p o s e d b y ' t h e C o m m i s s i o n c o m p l i e d w i t h ; (b) w h e r e the t r a d e p r a c t i c e was e x p r e s s l y a u t h o r i z e d by a n y other A c t ; a n d (c) the a g r e e m e n t or  arrangement  S e c t i o n 98(2). See e.g. T r a d e P r a c t i c e s C o m m i s s i o n v. O r l a n e A u s t r a l i a P t v . L t d . (1984) 51 A . L . R . 767 a n d C o o l a n d Sons P t v L t d . v. O ' B r i e n G l a s s I n d u s t r i e s L t d . (1981) 35 A . L . R . 445.  S e c t i o n 98(3).  T r a d e P r a c t i c e s A c t 1958, sections 19 & 20.  A s a m e n d e d by the C o m m e r c e A m e n d m e n t A c t 1976 ( N o . 67) a n d . s u b s e q u e n t l y by the C o m m e r c e A m e n d m e n t A c t ( N o . 2) 1979 ( N o . 140).  was one u n d e r w h i c h the resale p r i c e or c o n d i t i o n r e l a t i n g thereto was i n d i c a t e d to be a suggested p r i c e o n l y .  4 8  T h e 1986 A c t d i d not repeat s e c t i o n 28 o f its predecessor b u t , as p r e v i o u s l y n o t e d , a d o p t e d the e q u i v a l e n t p r o v i s i o n s o f the A u s t r a l i a n A c t .  (ii)  S e c t i o n 37(1)  O v e r v i e w of C u r r e n t Provisions  o f the 1986 A c t makes it u n l a w f u l f o r a p e r s o n "to engage i n  the p r a c t i c e o f resale p r i c e m a i n t e n a n c e " . set out i n s e c t i o n 37(3)  (a)  49  T h e v a r i o u s acts c o n s t i t u t i n g R P M are  and include:  M a k i n g it k n o w n to a p e r s o n that goods w i l l not be s u p p l i e d unless that p e r s o n agrees not to sell those goods at a p r i c e less t h a n s p e c i f i e d ;  (b)  I n d u c i n g or a t t e m p t i n g to i n d u c e a p e r s o n not to sell goods at a p r i c e less than specified;  (c)  E n t e r i n g or o f f e r i n g to enter i n t o a n a g r e e m e n t f o r the s u p p l y o f goods w h e r e one o f the terms t h e r e o f is or w o u l d be that a p e r s o n not sell the goods at a p r i c e less t h a n s p e c i f i e d or p r i c e that w o u l d be s p e c i f i e d ;  F o r a d i s c u s s i o n o f the R P M p r o v i s i o n s o f the 1975 A c t , see C o l l i n g e , s u p r a note 1 at 198-208.  S e c t i o n 37 deals w i t h ' d i r e c t ' a n d ' i n d i r e c t ' R P M , w h i l e s e c t i o n 38 deals w i t h R P M e n f o r c e d b y t h i r d parties f o r w h i c h there is no e q u i v a l e n t p r o v i s i o n i n the A u s t r a l i a n A c t . A s s e c t i o n 38 v i r t u a l l y m i r r o r s s e c t i o n 37, o n l y the latter s e c t i o n w i l l be d i s c u s s e d f o r present p u r p o s e s .  39  (d)  W i t h h o l d i n g the s u p p l y o f goods f o r the reason that a p e r s o n has not a g r e e d not to sell the goods at a p r i c e less t h a n s p e c i f i e d or that the p e r s o n has sold or is l i k e l y to sell the goods at a p r i c e less t h a n s p e c i f i e d ; a n d  (e)  W i t h h o l d i n g the s u p p l y o f goods f o r the reason that a t h i r d p e r s o n has not a g r e e d not to sell those goods at a p r i c e less t h a n s p e c i f i e d or has s o l d or is l i k e l y to sell those goods at a p r i c e less t h a n s p e c i f i e d .  S e c t i o n s 37(4)(a)-(d) d e a l w i t h the q u e s t i o n as to w h e n a s u p p l i e r w i l l be t a k e n to h a v e s p e c i f i e d or p r i c e ,  5 0  w h i l e s e c t i o n 37(4)(e) deals w i t h the issue o f  a g e n c y a n d deems a n y t h i n g d o n e o n b e h a l f o f or b y a r r a n g e m e n t to h a v e been d o n e b y that s u p p l i e r .  w i t h the s u p p l i e r  F i n a l l y , section 37(5) d e f i n e s the t e r m "sale" to  i n c l u d e a d v e r t i s i n g , d i s p l a y i n g or o f f e r i n g f o r sale, w i t h the terms "sell", "selling" a n d "sold" h a v i n g c o r r e s p o n d i n g m e a n i n g s  It is n o t a b l e that section 37 o n l y a p p l i e s to goods a n d not s e r v i c e s , p r e s u m a b l y o n the basis that services c a n not g e n e r a l l y be r e s o l d . obviously important in any particular  5 1  It is t h e r e f o r e  case to c h a r a c t e r i z e w h e t h e r a resale m o r e  p r o p e r l y i n v o l v e s a c o n t r a c t f o r the sale o f goods or a c o n t r a c t f o r services. characterization  will determine  w h e t h e r or not s e c t i o n 37 is to a p p l y .  5 2  This  It is also  A s to the i n t e r p r e t a t i o n o f a " s p e c i f i e d p r i c e " , see M i l l e r , s u p r a note 43 at 311.  C f . C a n a d i a n C o m p e t i t i o n A c t , section 38 w h i c h r e f e r s to the p r o d u c i n g or s u p p l y i n g o f a "product", d e f i n e d i n s e c t i o n 2 as i n c l u d i n g "an a r t i c l e a n d service".  (Emphasis  added)  A s to the d e f i n i t i o n o f "goods" a n d " s u p p l y o f goods", see sections 4(b) a n d (c). See also T h e H e a t i n g C e n t r e P t v L t d . v. T r a d e P r a c t i c e s C o m m i s s i o n (1986) A . T . P . R . 40-674.  40 n o t a b l e that s e c t i o n 37(3)  c o v e r s o n l y m i n i m u m a n d not m a x i m u m p r i c e s i n s t a t i n g  that the resale p r i c e must be "not less than" the p r i c e s p e c i f i e d b y the s u p p l i e r .  It is c l e a r f r o m the v a r i o u s types o f c o n d u c t l i s t e d that the a m b i t o f section 37(3)  is e x t r e m e l y w i d e .  Whereas the c o n d u c t i n (a) r e q u i r e s a p e r s o n to be m a d e  a w a r e o f a s u p p l i e r ' s i n t e n t i o n , the c o n d u c t i n (b) r e q u i r e s some p o s i t i v e act b y w h i c h the s u p p l i e r i n t e n d s to p e r s u a d e a p e r s o n to c o m p l y , a l t h o u g h the s u p p l i e r ' s e f f o r t s n e e d not be s u c c e s s f u l .  M o s t l i k e l y to f a l l i n t o this c a t e g o r y are threats o f  t e r m i n a t i o n f o r n o n - c o m p l i a n c e a n d other f o r m s o f c o e r c i o n . C o n d u c t u n d e r (c) w o u l d a p p e a r to r e q u i r e that a l e g a l l y b i n d i n g c o n t r a c t be e n t e r e d i n t o or at least that a n o f f e r be m a d e to this e f f e c t .  It is n o t a b l e i n this r e g a r d that there is no  r e f e r e n c e to a n "arrangement" or " u n d e r s t a n d i n g " as a p p e a r s i n sections 27 a n d 28 o f the A c t a n d t h e r e f o r e more t h a n a m u t u a l i n t e n t i o n or e x p e c t a t i o n is r e q u i r e d . F i n a l l y i n r e g a r d to (d) a n d (e), a n y w i t h h o l d i n g o f s u p p l y as a means o f e n f o r c i n g c o m p l i a n c e by a reseller w h o refuses to a d h e r e to a m i n i m u m resale p r i c e s is caught.  5 3  A n i m p o r t a n t e x c e p t i o n i n r e g a r d to a n y a l l e g a t i o n o f i n d u c i n g or a t t e m p t i n g to i n d u c e a p e r s o n not to sell goods at a p r i c e less t h a n s p e c i f i e d a n d f a l l i n g w i t h (b) a b o v e , is that a s u p p l i e r m a y , p u r s u a n t to s e c t i o n 39 o f the A c t , r e c o m m e n d p r i c e s to its resellers so l o n g as there is no o b l i g a t i o n to c o m p l y w i t h such recommendation.  53  F o r a d e t a i l e d a n a l y s i s o f the v a r i o u s types of c o n d u c t c o n s t i t u t i n g R P M a n d f a l l i n g w i t h i n the e q u i v a l e n t A u s t r a l i a n p r o v i s i o n , see D o n a l d & H e y d o n , s u p r a note 1 at 368-86.  41  (iii)  Specification of Prices  A s c a n be n o t e d f r o m s e c t i o n 37(3), a m a j o r element o f e a c h type o f c o n d u c t l i s t e d is w h e t h e r  the s u p p l i e r has " s p e c i f i e d " a p r i c e .  T h e extent to w h i c h a  r e c o m m e n d e d p r i c e m a y be a s p e c i f i e d p r i c e is o b v i o u s l y s i g n i f i c a n t f o r a s u p p l i e r i f this results i n the b e n e f i t of the e x e m p t i o n i n s e c t i o n 39 b e i n g lost. was i n f a c t c o n s i d e r e d i n M i k a s a (NSW) P t v . L t d . v. F e s t i v a l S t o r e s  5 4  T h e matter  w h e r e the  H i g h C o u r t o f A u s t r a l i a h e l d , i n the context o f a p r o h i b i t i o n a g a i n s t  the  w i t h h o l d i n g o f s u p p l i e s , that it was not possible to m a i n t a i n a d i s t i n c t i o n m i n i m u m a n d mandatory prices.  Walsh J . s a i d :  between  5 5  It w o u l d d e p r i v e the p r o v i s i o n o f a n y sensible o p e r a t i o n i f it were to be c o n s t r u e d so as to m a k e l a w f u l a w i t h h o l d i n g o f s u p p l i e s f o r the reason that the p o t e n t i a l c u s t o m e r was l i k e l y to sell at a p r i c e b e l o w the p r i c e w h i c h the s u p p l i e r wishes to be m a i n t a i n e d as the s e l l i n g p r i c e , p r o v i d e d that his d e s i r e d s e l l i n g p r i c e was stated to be a r e c o m m e n d e d or a sensible price.  T h e C o u r t i n T r a d e P r a c t i c e s C o m m i s s i o n v. B a t a Shoe C o m p a n y o f A u s t r a l i a Ptv. L t d .  5 6  c a m e to a s i m i l a r c o n c l u s i o n i n h o l d i n g that the f a c t that the  s p e c i f i c a t i o n o f a p r i c e is c o u c h e d i n terms o f a r e c o m m e n d a t i o n does not n e c e s s a r i l y p r e v e n t it f r o m b e i n g a s p e c i f i e d p r i c e f o r the purposes o f  the  A u s t r a l i a n e q u i v a l e n t o f s e c t i o n 37.  (1972) 127 C . L . R . 671. O n the f a c t s , S p i c e r C . J . a n d S m i t h e r s J . , o f the C o m m o n w e a l t h I n d u s t r i a l C o u r t , the c o u r t o f f i r s t i n s t a n c e , f o u n d that the s u p p l i e r s h a d gone b e y o n d a mere r e c o m m e n d a t i o n a n d h a d m a d e it c l e a r that the r e c o m m e n d e d p r i c e list was i n f a c t the m i n i m u m p r i c e list.  Id. at 647.  56  See also B a r w i c k C . J . at 635.  (1980) 44 F . L . R . 145.  42  T h e r e is no reason to b e l i e v e that a s i m i l a r i n t e r p r e t a t i o n  w o u l d not be  g i v e n to the e q u i v a l e n t N e w Z e a l a n d p r o v i s i o n s . S e c t i o n 39 is e x p r e s s l y l i m i t e d its o p e r a t i o n to the terms o f section 37(3)(b). A c c o r d i n g l y , the f a c t that the  in  making  o f a r e c o m m e n d a t i o n as to resale prices m a y f u l l y a c c o r d w i t h s e c t i o n 39, it m a y yet be a s u f f i c i e n t s p e c i f i c a t i o n to s a t i s f y the r e q u i r e m e n t s o f s e c t i o n 37(3)(d).  It  is i m p o r t a n t to r e m e m b e r that a p r i c e m a y be a s p e c i f i e d p r i c e , b u t n e v e r t h e l e s s not "a p r i c e s p e c i f i e d b y the [supplier] as the p r i c e b e l o w w h i c h the goods are not be s o l d " .  5 7  It w o u l d t h e r e f o r e seem s a f e f o r a s u p p l i e r to l e g i t i m a t e l y  s p e c i f y that  a c e r t a i n p r i c e is r e c o m m e n d e d so l o n g as there is no request that this p r i c e be a d h e r e d to n o r a n y threat o f a c t i o n i f it is not.  It is c l e a r h o w e v e r that a p r i c e c a n be the s p e c i f i e d p r i c e b e l o w goods are not to be s o l d w i t h o u t b e i n g s p e c i f i e d i n precise terms. P r a c t i c e s C o m m i s s i o n v. P v e Industries Sales P t v . L t d .  5 8  In  which  Trade  f o r i n s t a n c e , it was h e l d  that w h a t was c a l l e d a "go p r i c e " a n d w h i c h c o u l d v a r y b e t w e e n $10-15 up or d o w n was s u c h a p r i c e , w h i l e i n the B a t a d e c i s i o n it was h e l d that it was s u f f i c i e n t that a p r i c e be s p e c i f i e d as not less t h a n that c h a r g e d b y other e s t a b l i s h e d retailers.  It is also c l e a r f r o m s e c t i o n 37(4)(d) that w h e r e a s u p p l i e r makes a statement to a n o t h e r p e r s o n o f a p r i c e that is l i k e l y to be u n d e r s t o o d b y that p e r s o n as the  See Peter W i l l i a m s o n P t v . L t d . v. C a p i t o l M o t o r s L t d . 1982) 61 F . L . R . 257 at 261 w h e r e F r a n k i J . d i d not accept a s u b m i s s i o n that a r e f u s a l to s u p p l y w o u l d c o n v e r t a r e c o m m e n d e d p r i c e i n t o a s p e c i f i e d p r i c e below w h i c h goods were not to be sold. W h e t h e r or not the r e c o m m e n d a t i o n o f a p r i c e f o l l o w e d b y a r e f u s a l to d e a l w h e r e the b u y e r has s o l d b e l o w the r e c o m m e n d e d p r i c e c a n c o n v e r t the r e c o m m e n d e d p r i c e i n t o a s p e c i f i e d p r i c e b e l o w w h i c h goods are not to be s o l d d e p e n d e d , i n F r a n k i J.'s v i e w , on a l l o f the c i r c u m s t a n c e s .  (1978) A . T . P . R . 40-088.  U p h e l d on a p p e a l (1979) A . T . P . R . 40-124.  43 p r i c e b e l o w w h i c h goods are not to be s o l d , that p r i c e is d e e m e d to h a v e been s p e c i f i e d b y the s u p p l i e r as the p r i c e b e l o w w h i c h the goods a r e not to be s o l d .  5 9  It m a y be that a statement o f p r i c e , e v e n i f r e c o m m e n d e d , m a y w e l l be l i k e l y i n p a r t i c u l a r cases to be u n d e r s t o o d by d i s t r i b u t o r s as the m i n i m u m p r i c e o f the goods.  In s u c h cases, the e x c e p t i o n i n section 39 w o u l d not seem to be a v a i l a b l e .  (iv)  6 0  Withholding of Supply  T h e most p e r v a s i v e o f the acts l i s t e d i n s e c t i o n 37(3) to d i s t r i b u t i o n i n g e n e r a l are those set out i n p a r a g r a p h s (d) a n d (e), n a m e l y the w i t h h o l d i n g o f s u p p l y f o r f a i l u r e to m a i n t a i n resale prices. to c o n s t i t u t e the w i t h h o l d i n g o f s u p p l y .  B y s e c t i o n 40, c e r t a i n acts a r e d e e m e d  T h a t section p r o v i d e s as f o l l o w s :  F o r the purposes o f s e c t i o n 37(3)(d) a n d (e) o f this A c t , the s u p p l i e r s h a l l be d e e m e d to w i t h h o l d the s u p p l y o f goods to another person i f -  (a)  T h e s u p p l i e r refuses or f a i l s to s u p p l y those goods to, or as requested b y , the other p e r s o n ; or  (b)  T h e s u p p l i e r refuses to s u p p l y those goods except o n terms that are d i s a d v a n t a g e o u s to the other p e r s o n ; or  (c)  In s u p p l y i n g those goods to the other p e r s o n , the s u p p l i e r treats that p e r s o n less f a v o u r a b l y , w h e t h e r i n respect o f t i m e , m e t h o d , o r place o f d e l i v e r y , o r o t h e r w i s e , t h a n the s u p p l i e r treats other persons to w h o m the s u p p l i e r s u p p l i e s the same or s i m i l a r goods; or  See B . P . A u s t r a l i a L t d . v. T r a d e P r a c t i c e s C o m m i s s i o n (1986) A . T . P . R . 701 i n r e g a r d to the e q u i v a l e n t A u s t r a l i a n p r o v i s i o n (section 96(3)(f)). objective.  D o n a l d & H e y d o n , s u p r a note 1 at 385.  T h e test is  44 (d)  T h e s u p p l i e r causes or p r o c u r e s a p e r s o n to act i n r e l a t i o n to the s u p p l y o f goods i n the m a n n e r s p e c i f i e d i n p a r a g r a p h s (a), (b), or (c), as the case m a y b e , o f this section. 1  T h e e f f e c t o f s e c t i o n 40, w h e n r e a d w i t h sections 37(3)(d) a n d (e), is to r e m o v e a n y a r g u m e n t that l i a b i l i t y c a n be a v o i d e d s i m p l y by s p e c i f y i n g a resale p r i c e a n d l e a v i n g it to a d i s t r i b u t o r to v o l u n t a r i l y a c c e p t that s t i p u l a t i o n or not. T h u s , w h a t m a y be l a w f u l c o n d u c t i n the U n i t e d States u n d e r C o l g a t e , is c l e a r l y not so i n N e w Z e a l a n d .  F u r t h e r g u i d a n c e i n the i n t e r p r e t a t i o n  o f p a r a g r a p h s (d) a n d (e) o f s e c t i o n  37 is g i v e n b y s e c t i o n 42 w h i c h p r o v i d e s as f o l l o w s :  (1) W h e r e , i n p r o c e e d i n g s u n d e r this A c t a g a i n s t a s u p p l i e r f o r a c o n t r a v e n t i o n o f s e c t i o n 37(3)(d) o r section 37(3)(e) o f this A c t it is p r o v e d that -  (a)  T h e s u p p l i e r has a c t e d i n a m a n n e r r e f e r r e d to i n s e c t i o n 40 o f this A c t ; a n d  (b)  D u r i n g a p e r i o d e n d i n g i m m e d i a t e l y b e f o r e the s u p p l i e r so a c t e d , the s u p p l i e r h a d been s u p p l y i n g goods o f the k i n d w i t h h e l d e i t h e r to -  (i) T h e p e r s o n i n respect o f w h o m the c o n t r a v e n t i o n is a l l e g e d ; or  (ii) A p e r s o n c a r r y i n g o n a s i m i l a r business to that person; a n d  (c)  D u r i n g a period of 6 months immediately  b e f o r e the  s u p p l i e r so a c t e d , the s u p p l i e r b e c a m e a w a r e o f a  U n l i k e u n d e r sections 98(2) a n d (3) o f the A u s t r a l i a n A c t , n o d e f e n c e is p r o v i d e d i n the N e w Z e a l a n d A c t to a w i t h h o l d i n g o f s u p p l y o n a c c o u n t o f the sale o f goods at less t h a n t h e i r cost (i.e l o s s - l e a d e r i n g ) .  45  matter or c i r c u m s t a n c e c a p a b l e o f c o n s t i t u t i n g a reason r e f e r r e d to i n section 37(3)(d) or (e) o f this A c t —  it s h a l l be p r e s u m e d , i n the absence o f e v i d e n c e to the c o n t r a r y , that the s u p p l i e r so a c t e d o n a c c o u n t o f that m a t t e r .  (2) N o t h i n g i n s u b s e c t i o n (1) o f this section a p p l i e s i n respect o f terms i m p o s e d by a s u p p l i e r that a r e d i s a d v a n t a g e o u s or t r e a t m e n t that is less f a v o u r a b l e t h a n the s u p p l i e r a c c o r d s other persons i f the terms or t r e a t m e n t consists o n l y o f a r e q u i r e m e n t b y the s u p p l i e r as to the t i m e at w h i c h , or the f o r m i n w h i c h , p a y m e n t as to be m a d e or as to the g i v i n g o f s e c u r i t y to secure p a y m e n t . 6 2  T h e w o r d s "in the absence o f e v i d e n c e to the c o n t r a r y " i n s e c t i o n 42 m a k e it c l e a r that e v e n w h e n p a r a g r a p h s (a), (b) a n d (c) o f that s e c t i o n a r e p r o v e d , the p r e s u m p t i o n that the s u p p l i e r was a c t u a t e d by a desire to m a i n t a i n resale p r i c e s does not arise i f " e v i d e n c e to the c o n t r a r y " is p r o d u c e d .  What "the c o n t r a r y " o f  w i t h h o l d i n g f o r the "reason[s]" m e n t i o n e d i n sections 37(3) (d) a n d (e) means seems to d e p e n d o n p r e c i s e l y w h a t w i t h h o l d i n g f o r those reasons means.  A number of interpretations 37(3)(d) a n d (e), n a m e l y w h e t h e r  m a y be g i v e n to the w o r d reason i n sections  the reason must be the m a i n , o n l y or just a reason  f o r w i t h h o l d i n g s u p p l y so as to b r i n g the sections i n t o p l a y .  T h i s m a t t e r was also  c o n s i d e r e d i n the A u s t r a l i a n case o f M i k a s a ( N S W ) P t v L t d . v. F e s t i v a l S t o r e s . where M i k a s a , an importer a n d wholesaler of dinnerware  w h i c h it m a r k e t e d  the names ' M i k a s a ' a n d ' P r e m i e r e ' , r e f u s e d to s u p p l y F e s t i v a l , a c o m p a n y a n u m b e r o f d i s c o u n t houses, w i t h its M i k a s a b r a n d .  63  under  operating  F e s t i v a l a l l e g e d that M i k a s a ' s  6 2  See h o w e v e r U n i t e d States v. P a r k e D a v i s 362 U . S . 29 (1960) w h e r e i f the threat o f n o n - s u p p l y is used to cajole c o m p l i a n c e i n a n y w a y , this r e q u i r e m e n t m a y w e l l be s a t i s f i e d .  6 3  (1927) 127 C . L . R . 617.  reason f o r r e f u s i n g to s u p p l y it w i t h this b r a n d was because F e s t i v a l d e c l i n e d to a b i d e by the resale p r i c e s s p e c i f i e d by M i k a s a i n its c a t a l o g u e .  M i k a s a , o n the  other h a n d a r g u e d that f o r F e s t i v a l to s u c c e e d , it h a d to s h o w that the o n l y reason a c t u a t i n g M i k a s a was its b e l i e f that F e s t i v a l w o u l d sell at p r i c e s b e l o w those specified by M i k a s a .  M i k a s a asserted that i n p o i n t o f f a c t , the o n l y reason by  w h i c h it was a c t u a t e d was q u i t e d i f f e r e n t ,  n a m e l y its b e l i e f that the ' i m a g e ' o f its  p r o d u c t w o u l d s u f f e r i f it were m a r k e t e d by F e s t i v a l .  In r e g a r d to this issue,  C h i e f J u s t i c e B a r w i c k i n the H i g h C o u r t o f A u s t r a l i a s a i d :  6 4  In m y o p i n i o n it is not c o r r e c t to so e m p h a s i z e the p a r t i c i p l e i n the phrase f o r the reason that as r e q u i r i n g the w i t h h o l d i n g o f the s u p p l y to be f o r one reason o n l y . In m y o p i n i o n , i f the l i k e l i h o o d that the w o u l d - b e p u r c h a s e r w o u l d sell at less t h a n the s p e c i f i e d p r i c e is an o p e r a t i v e reason f o r w i t h h o l d i n g that s u p p l y , the s u p p l i e r engages i n the p r a c t i c e o f R P M , h o w e v e r m a n y reasons the s u p p l i e r m a y i n e f f e c t h a v e f o r not s u p p l y i n g the goods to the w o u l d - b e p u r c h a s e r . T h e l i k e l i h o o d o f p r i c e - c u t t i n g is not r e q u i r e d , i n m y o p i n i o n to be the p r e d o m i n a n t r e a s o n ; it is e n o u g h f o r this to be an o p e r a t i v e r e a s o n , that is to s a y , a s u b s t a n t i a l reason i n the t o t a l i t y of reasons f o r the w i t h h o l d i n g of the s u p p l y .  W a l s h J . also spoke o f a "substantial a n d o p e r a t i v e reason"  , while Menzies  J . ( w i t h w h o m G i b b s J . agreed) stated that "if the goods w o u l d not h a v e been w i t h h e l d h a d it not been f o r the l i k e l i h o o d o f p r i c e c u t t i n g " , t h e n the w h i c h o c c u r r e d was i l l e g a l despite the existence o f other r e a s o n s .  I d , at 634-35.  I d , at  646.  Id. at  642.  6 6  withholding  47  T h e tests p r o p o u n d e d b y B a r w i c k C . J . a n d W a l s h J . i n this case h a v e to a large extent been a d o p t e d i n s e c t i o n 2 ( 5 ) ( b )  67  o f the A c t w h i c h p r o v i d e s that a  p e r s o n s h a l l be d e e m e d to h a v e e n g a g e d i n c o n d u c t f o r a p a r t i c u l a r r e a s o n i f (a) that p e r s o n e n g a g e d i n that c o n d u c t f o r a reason that i n c l u d e d that reason a n d (b) that reason was a s u b s t a n t i a l reason.  T h e e f f e c t o f s e c t i o n 2(5)(b) i n the present  c o n t e x t is that a v i o l a t i o n o f s e c t i o n 37 w i l l be f o u n d to h a v e o c c u r r e d w h e r e the p r e d o m i n a n t reason f o r the w i t h h o l d i n g o f s u p p l y , a l t h o u g h s e c o n d a r y , was nevertheless present a n d s u b s t a n t i a l .  6 8  It is c l e a r at least that the p a r t i c u l a r r e a s o n ,  n e e d not be the sole reason.  T h e result o f the i n t e r p r e t a t i o n  p l a c e d b y the H i g h C o u r t i n M i k a s a o n the  e x p r e s s i o n " f o r that reason that" a n d the o p e r a t i o n o f s e c t i o n 2(5)(b) w o u l d  appear  to be that a s u p p l i e r w i l l be h e l d to h a v e e n g a g e d i n the p r a c t i c e o f R P M w h e r e (a) i n r e g a r d to say s e c t i o n 37(3)(d)(ii) it c a n be i n f e r r e d f r o m a s u p p l i e r ' s c o n d u c t that a " s u b s t a n t i a l " reason a c t u a t i n g the s u p p l i e r i n w i t h h o l d i n g goods f r o m a n o t h e r p e r s o n was that p e r s o n h a d sold or was l i k e l y to sell those goods at less t h a n the p r i c e s p e c i f i e d b y the s u p p l i e r or (b) the three f a c t u a l elements i n s e c t i o n 42 a r e p r o v e d , a n d the s u p p l i e r does not r e b u t the p r e s u m p t i o n by p r o v i d i n g e v i d e n c e to the c o n t r a r y .  T h e A u s t r a l i a n e q u i v a l e n t is section 4 F . In r e g a r d to sections 4 F a n d 100(1) (the e q u i v a l e n t o f s e c t i o n 42(1)) o f the A u s t r a l i a n A c t , see Peter W i l l i a m s o n P t y . L t d . v. C a p i t o l M o t o r s L t d . (1982) 61 F . L . R . 257 at 263 w h e r e it was s a i d that the ' r e a s o n ' f o r w i t h h o l d i n g s u p p l y n e e d not be the sole r e a s o n , b u t it must be one o f r e a l s i g n i f i c a n c e .  68  A s to the a p p l i c a t i o n o f s e c t i o n 4 F ( b ) o f the A u s t r a l i a n A c t to the e q u i v a l e n t o f s e c t i o n 37(3) ( n a m e l y s e c t i o n 96(3)), see T h e H e a t i n g C e n t r e P t v . L t d . v. T r a d e P r a c t i c e s C o m m i s s i o n (1986) A . T . P . R . 40-674 at 47-436-38.  48  In r e g a r d to the w i t h h o l d i n g o f s u p p l y , it is c l e a r that a r e f u s a l to d e a l per se does not b r e a c h sections 37(3)(d) a n d (e) . o f the e n u m e r a t e d reasons  It is o n l y w h e r e the r e f u s a l is f o r one  that a b r e a c h m a y o c c u r . In r e g a r d to the e q u i v a l e n t  A u s t r a l i a n p r o v i s i o n , S m i t h e r s J . i n T r a d e P r a c t i c e s C o m m i s s i o n v. S t i h l C h a i n Saws (Aust.) P t v . L t d . s a i d :  6 9  T h a t a r e f u s a l to s u p p l y goods to a n o t h e r w h o requests t h e m o n terms w h i c h the s u p p l i e r is u n w i l l i n g to t r a d e w i t h that other s h o u l d be a w i t h h o l d i n g o f s u p p l i e s w i t h i n the m e a n i n g o f s.98(l)(a) [the e q u i v a l e n t o f s e c t i o n 40(l)(a)] does not i n i t s e l f i m p l y that the s u p p l i e r b y w i t h h o l d i n g the goods is i n some w a y a c t i n g i n c o n t r a v e n t i o n o f the A c t . S e c t i o n 98(1) is c o n c e r n e d not to create or d e f i n e o b l i g a t i o n s but to state c i r c u m s t a n c e s i n w h i c h i f other f a c t o r s are o p e r a t i v e i n the t r a n s a c t i o n , the total c o n d u c t i n v o l v e d m a y w e l l c o n s t i t u t e a c o n t r a v e n t i o n o f s.48. T h i s m a y a r i s e , i n t e r a l i a , b y r e a s o n o f the p r o v i s i o n s o f s.96(3)(d) or (e). In o t h e r w o r d s , unless the c o n d u c t d e f i n e d i n s.98(l), w h i c h f o r the purposes o f s.96(3)(d) or (e) is d e e m e d to c o n s t i t u t e w i t h h o l d i n g o f s u p p l i e s , is c o m m i t t e d f o r a reason s p e c i f i e d i n s.96(3)(d) or (e) no c o n t r a v e n t i o n of the A c t is i n v o l v e d . (v)  T e r m i n a t i o n f o r F a i l u r e to A d h e r e to  Specified Prices  T h e extent to w h i c h a s u p p l i e r m a y t e r m i n a t e a d i s t r i b u t o r s h i p w h e r e one o f the reasons f o r so d o i n g is the d i s c o u n t i n g a c t i v i t i e s o f a d i s t r i b u t o r was c o n s i d e r e d i n R o n H o d g s o n ( H o l d i n g s ) P t v . L t d . v. Westco M o t o r s ( D i s t r i b u t o r s ) Ltd..  7 0  Ptv.  It was h e l d i n that case that e v e n t h o u g h a f r a n c h i s o r h a d v a l i d reasons f o r  t e r m i n a t i o n o f a f r a n c h i s e , the R P M p r o v i s i o n s o f the A u s t r a l i a n A c t w e r e i n f r i n g e d because a s u b s t a n t i a l a n d o p e r a t i v e r e a s o n f o r t e r m i n a t i o n was that the f r a n c h i s e e h a d s o l d or a d v e r t i s e d or was l i k e l y to sell or a d v e r t i s e the f r a n c h i s o r s p r o d u c t s at a p r i c e less t h a n s p e c i f i e d .  (1978) A . T . P . R . 40-091 at 17,894.  (1980) 29 F . L . R . 307.  T h e F e d e r a l C o u r t o f A u s t r a l i a was c a l l e d u p o n to c o n s i d e r a s i m i l a r set o f f a c t s two years later i n Peter W i l l i a m s o n Ptv. L t d . v. C a p i t o l M o t o r s L t d .  w h e r e it  7 1  was a l l e g e d that the r e s p o n d e n t t h r e a t e n e d to w i t h h o l d the s u p p l y o f B M W v e h i c l e s i n c o n t r a v e n t i o n o f s e c t i o n 48 o f the A u s t r a l i a n A c t . e q u i v a l e n t A u s t r a l i a n p r o v i s i o n s o f sections 37(2)  In terms o f  a n d 37(3)(d)(ii), the  motor the  applicant  c l a i m e d that the r e s p o n d e n t was w i t h h o l d i n g the s u p p l y o f v e h i c l e s o f the reason that it h a d s o l d s e v e r a l v e h i c l e s at a p r i c e less t h a n a p r i c e s p e c i f i e d by the r e s p o n d e n t as the p r i c e below w h i c h the goods were not to be s o l d .  The  applicant  a d m i t t e d s e l l i n g s e v e r a l new B M W m o t o r v e h i c l e s at less t h a n the r e s p o n d e n t ' s suggested or r e c o m m e n d e d r e t a i l p r i c e s but c l a i m e d that the r e s p o n d e n t h a d b e c o m e a w a r e o f this at least six m o n t h s b e f o r e the date o f t e r m i n a t i o n . r e s p o n d e n t o n the other h a n d p l e a d e d that the a p p l i c a n t h a d not f u l f i l l e d o b l i g a t i o n s u n d e r the r e l e v a n t agreement a n d that t e r m i n a t i o n  The its  was j u s t i f i e d by a  number of commercial considerations.  H a v i n g r e g a r d to the A u s t r a l i a n e q u i v a l e n t o f s e c t i o n 2(5)(b), F r a n k i J . h e l d that a l t h o u g h p r i c e was a f a c t o r i n the t e r m i n a t i o n , the p r i c e at w h i c h a d e a l e r s o l d cars was not a c o n c e r n o f the r e s p o n d e n t ; r a t h e r the i m p o r t a n t whether  the dealer's business was a " v i a b l e p r o p o s i t i o n " .  not c i t e d , the tests i n b o t h cases a p p e a r v i r t u a l l y the m e a n i n g o f the t e r m  factor  was  A l t h o u g h H o d g s o n was  the same, a n d also a c c o r d w i t h  "substantial" r e f e r r e d to a b o v e .  (1982) 61 F . L . R . 257.  See also T r a d e P r a c t i c e s C o m m i s s i o n v. S t i h l C h a i n  Saws ( A u s t ) P t v . L t d . (1978) A . T . P . R . 40-091.  F i n a l l y , i n D i r e c t H o l d i n g s L t d . v. F e l t e x F u r n i s h i n g s o f N e w Z e a l a n d L t d . and Smith & Brown L t d .  7 2  . the o n l y N e w Z e a l a n d d e c i s i o n so f a r to c o n s i d e r  s e c t i o n 37 o f the A c t , the H i g h C o u r t g r a n t e d a n i n j u n c t i o n r e q u i r i n g b o t h d e f e n d a n t s to r e s u m e s u p p l y o n terms no less f a v o u r a b l e t h a n those i m p o s e d o n other f u r n i t u r e  r e t a i l e r s a n d to p r e v e n t a c t i o n b e i n g t a k e n i n r e l a t i o n to the  p l a i n t i f f ' s other s u p p l i e r s a n d trade c o m p e t i t o r s .  T h e e v i d e n c e d i s c l o s e d that the  f i r s t d e f e n d a n t h a d i n c r e a s e d the w h o l e s a l e p r i c e o f its p r o d u c t s to the  plaintiff  a f t e r c o m i n g u n d e r some pressure f r o m the s e c o n d d e f e n d a n t to r e c t i f y  the  p l a i n t i f f ' s d i s c o u n t i n g a c t i v i t i e s or f a c e w i t h d r a w a l o f the s e c o n d d e f e n d a n t ' s custom.  T h e n a t u r e o f the p r o c e e d i n g s u n f o r t u n a t e l y  m e a n t that there was l i t t l e  a n a l y s i s o f s e c t i o n 37.  C.  EVALUATION OF THE LAW  (1)  E c o n o m i c Issues  (a)  Cartels  The traditional economic arguments  7 3  j u s t i f y i n g the a p p l i c a t i o n o f a per se  r u l e a g a i n s t R P M are that it i n v o l v e s the m a n i f e s t a t i o n o f e i t h e r a s u p p l i e r or distributor cartel.  Where this c a n be p r o v e d , there is w i d e a g r e e m e n t that R P M is  a n t i c o m p e t i t i v e a n d t h e r e f o r e s h o u l d be p r o h i b i t e d .  (1986) 6 N . Z . A . R . 245.  F o r a c o m p r e h e n s i v e r e v i e w o f these a n d the n u m e r o u s other e x p l a n a t i o n s f o r a d o p t i n g R P M , see T . O v e r s t r e e t , R e s a l e P r i c e M a i n t e n a n c e E c o n o m i c Theories and E m p i r i c a l Evidence (Federal Trade Commission Staff Report, 1984).  51  In respect o f the s u p p l i e r c a r t e l t h e o r y , the g e n e r a l h y p o t h e s i s is that c o l l u d i n g s u p p l i e r s , b y i m p o s i n g R P M , w i l l a t t e m p t to m a k e the p r i c i n g s y s t e m m o r e t r a n s p a r e n t a n d t h e r e b y m a k e it easier to detect ' c h i s e l l i n g ' .  R P M will  thereby preclude shaded wholesale prices f r o m a f f e c t i n g retail prices a n d t r a n s l a t i n g i n t o a d d i t i o n a l sales, thus a i d i n g s u p p l i e r s i n p r o t e c t i n g t h e i r  monopoly.  W h i l e most a n a l y s t s a c c e p t this h y p o t h e s i s as p o s s i b l e , the c o n d i t i o n s that a n e f f e c t i v e c a r t e l has to meet ( f o r e x a m p l e , f e w s u p p l i e r s to e n a b l e easier c o o r d i n a t i o n , h o m o g e n o u s p r o d u c t s , no g o o d substitutes a n d b a r r i e r s to e n t r y ) are relatively  onerous.  T h e h y p o t h e s i s n e c e s s a r i l y r e q u i r e s a l l s u p p l i e r s i n the m a r k e t  7 5  to m a i n t a i n the c a r t e l p r i c e f o r t h e i r p r o d u c t s at the r e t a i l l e v e l . with a differentiated f i t the h y p o t h e s i s .  7 6  A single supplier  p r o d u c t p r a c t i s i n g R P M at the r e t a i l l e v e l o b v i o u s l y does not E v e n g e n e r a l l y , it seems q u e s t i o n a b l e w h e t h e r  R P M will  b e n e f i t a s u p p l i e r since the e f f e c t o f setting a m i n i m u m p r i c e a b o v e the c o m p e t i t i v e l e v e l w i l l be to place a f l o o r on resale p r i c e s , w h i l e setting the r e t a i l p r i c e b e l o w the c o m p e t i t i v e l e v e l w i l l r e n d e r R P M s u p e r f l u o u s .  T h e impact of  R P M w i l l s e e m i n g l y be to r e d u c e a s u p p l i e r ' s sales a n d c o r r e s p o n d i n g l y its p r o f i t s , f o r w i t h o u t R P M , d i s t r i b u t o r s w i l l sell m o r e at a l o w e r r e t a i l p r i c e , but p a y  the  same w h o l e s a l e p r i c e .  F . M . S c h e r e r , " T h e E c o n o m i c s of V e r t i c a l R e s t r a i n t s " 52 A n t i t r u s t L . J . 687 (1983) at 691-92.  See F . M a t h e w s o n a n d R. W i n t e r , " T h e E c o n o m i c s o f S e l e c t e d V e r t i c a l R e s t r i c t i o n s " ( U n i v e r s i t y o f T o r o n t o , L a w a n d E c o n o m i c s W o r k s h o p Series, 1984) at 27-29.  76  B. D u n l o p , D . M c Q u e e n a n d 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 P o l i c y - A L e g a l a n d E c o n o m i c A n a l y s i s ( T o r o n t o , C a n a d a L a w B o o k , 1987) at 250 ( h e r e a f t e r c i t e d as " D u n l o p " ) .  52 In respect o f the d i s t r i b u t o r c a r t e l t h e o r y , the g e n e r a l h y p o t h e s i s is that a s u p p l i e r w i l l be i n d u c e d to m a i n t a i n prices at a l e v e l w h i c h m a x i m i z e s d i s t r i b u t o r s ' m a r g i n s (at the expense of c o n s u m e r s w h o f a c e h i g h e r p r i c e s a n d the s u p p l i e r w h o loses p r o f i t s f r o m r e d u c e d sales).  T h e supplier will effectively police and enforce  the c a r t e l , thus a v o i d i n g the p r o b l e m s o f c o - o r d i n a t i o n that large n u m b e r s o f d i s t r i b u t o r s h a n d l i n g the same p r o d u c t o f t e n f a c e .  7 7  Such a hypothesis supports  the r a t i o n a l e o r i g i n a l l y o f f e r e d b y the U n i t e d States S u p r e m e C o u r t i n D r . M i l e s f o r a per se r u l e , n a m e l y that R P M was e f f e c t i v e l y e q u i v a l e n t to h o r i z o n t a l p r i c e fixing.  In that case the C o u r t s a i d :  7 8  [T]he c o m p l a i n a n t c a n f a r e no better w i t h its p l a n o f i d e n t i c a l c o n t r a c t s t h a n c o u l d the dealers themselves i f they f o r m e d a c o m b i n a t i o n a n d e n d e a v o u r e d to e s t a b l i s h the same r e s t r i c t i o n s a n d , thus to a c h i e v e the same r e s u l t , b y a g r e e m e n t w i t h e a c h other. If the i m m e d i a t e a d v a n t a g e they w o u l d thus o b t a i n w o u l d not be s u f f i c i e n t to s u s t a i n a d i r e c t a g r e e m e n t , the asserted u l t e r i o r b e n e f i t to the c o m p l a i n a n t c a n n o t be r e g a r d e d as necessary to s u p p o r t the system.  A s u n d e r the s u p p l i e r c a r t e l t h e o r y , the c o n d i t i o n s n e c e s s a r y to a c h i e v e a n e f f e c t i v e d i s t r i b u t o r c a r t e l ( f o r e x a m p l e , f e w d i s t r i b u t o r s to e n a b l e easier i n d u c e m e n t , h o m o g e n o u s p r o d u c t s , no close substitutes a n d b a r r i e r s to e n t r y ) are also o n e r o u s .  77  7 9  M o s t a n a l y s t s agree that c o - o r d i n a t i o n i n the t y p i c a l l y  fragmented  W. B o w m a n , " T h e P r e r e q u i s i t e s a n d E f f e c t s o f R e s a l e P r i c e M a i n t e n a n c e " , 22 U . C h i . L . R e v . 825 (1955).  7 8  79  220 U . S . at 408. T h e r e was h o w e v e r no e v i d e n c e o f a d i s t r i b u t o r c a r t e l i n this case. B a x t e r , f o r one, has n o t e d that there was i n f a c t a m a j o r h o r i z o n t a l a n t i t r u s t case b r o u g h t i n 1908 or 1909 a g a i n s t a n u m b e r o f d r u g m a n u f a c t u r e r s , i n c l u d i n g D r . M i l e s , a n d that a consent d e c r e e was issued i n 1910 e n j o i n i n g a n u m b e r o f p r a c t i c e s , i n c l u d i n g R P M , i n w h i c h this h o r i z o n t a l c a r t e l h a d e n g a g e d . See W. B a x t e r , " V e r t i c a l P r a c t i c e s - H a l f S l a v e , H a l f F r e e " , 52 A n t i t r u s t L J 743 (1983).  M a t h e w s o n a n d W i n t e r , s u p r a note 75 at 19-27.  53  r e t a i l i n d u s t r y is d i f f i c u l t to a c h i e v e a n d that b a r r i e r s to e n t r y are n o r m a l l y  low.  8 0  T h e o n l y r e a l s i t u a t i o n i n w h i c h d i s t r i b u t o r s as a g r o u p h a v e the means to o r g a n i z e t h e m s e l v e s a n d the a b i l i t y to d i s c i p l i n e e a c h other is i f t h e i r p a r t i c u l a r i n d u s t r y is subject to some legal r e s t r i c t i o n s u c h as l i c e n s i n g . E v e n then a m o r e p r a c t i c a l m o v e b y a g r o u p o f d i s t r i b u t o r s w i t h m o n o p s o n y p o w e r w o u l d seem to be to e x t r a c t a l o w e r w h o l e s a l e p r i c e f r o m the s u p p l i e r t h a n to seek a f i x e d r e t a i l p r i c e . T h e m o r e o n e r o u s c o n d i t i o n s to be met b y d i s t r i b u t o r cartels suggests that t h e i r e x i s t e n c e w i l l be e v e n r a r e r t h a n that o f s u p p l i e r cartels.  T h i s i n d e e d is s u p p o r t e d  b y a d e t a i l e d r e v i e w c o n d u c t e d b y one c o m m e n t a t o r i n t o the i n c i d e n c e o f allegations in Department  o f J u s t i c e cases f o r the p e r i o d 1890-1980 a n d F e d e r a l  T r a d e C o m m i s s i o n cases f o r the p e r i o d 1942-1979 i n the U n i t e d S t a t e s .  (b)  RPM  81  Free R i d i n g  T h e m a j o r c o n t e m p o r a r y e c o n o m i c e x p l a n a t i o n f o r a d o p t i n g R P M has been that it gives a d i s t r i b u t o r at the r e t a i l l e v e l a w i d e r s p r e a d b e t w e e n its costs a n d p r i c e t h e r e b y i n d u c i n g the d i s t r i b u t o r to compete o n a n o n - p r i c e basis b y e n g a g i n g i n a d d i t i o n a l p r e - a n d post-sales a c t i v i t y s u c h as d i s p l a y s , d e m o n s t r a t i o n s , a d v e r t i s i n g a n d a f t e r - s a l e s services. F r o m an e c o n o m i c s t a n d p o i n t , the s u p p l i e r w i l l raise the p r i c i n g p o w e r o f the d i s t r i b u t o r w i t h the e x p e c t a t i o n that this w i l l l e a d to m o r e s e l l i n g a c t i v i t y on the d i s t r i b u t o r ' s p a r t w h i c h i n t u r n w i l l l e a d to an  D u n l o p , s u p r a note 76 at 250-51.  S. O r n s t e i n , "Resale P r i c e M a i n t e n a n c e a n d C a r t e l s " , 30 A n t i t r u s t B u l l . 401 (1985) at 415-21. See also O v e r s t r e e t , s u p r a note 73 at 161-62. O v e r s t r e e t f o u n d that w h i l e d i s t r i b u t o r c a r t e l b e h a v i o u r is sometimes e v i d e n t , a s u p p l i e r c a r t e l e x p l a n a t i o n f o r R P M is more o f t e n a p p l i c a b l e . E v e n so, he c o n c l u d e d that "the e v i d e n c e ... o u t s i d e the d r u g a n d l i q u o r trades suggests n e i t h e r s u p p l i e r n o r d e a l e r c o l l u s i o n e x p l a n a t i o n s are l i k e l y to a p p l y to a l l or e v e n most instances o f p r i c e m a i n t e n a n c e " .  54 i n c r e a s e i n c o n s u m e r d e m a n d a n d a c o n s e q u e n t i n c r e a s e i n the s u p p l i e r ' s sales a n d profits.  8 2  If  a s u p p l i e r does not set a m i n i m u m resale p r i c e , d i s t r i b u t o r s w i l l l a c k  a n y i n c e n t i v e to engage i n s u c h a d d i t i o n a l sales a c t i v i t y because c o n s u m e r s c a n take a d v a n t a g e o f pre-sale a c t i v i t i e s e n g a g e d i n b y the h i g h e r p r i c e d i s t r i b u t o r s a n d t h e n p u r c h a s e f r o m the d i s t r i b u t o r s not so e n g a g e d w h o a c c o r d i n g l y c h a r g e a lower price.  In other w o r d s , low p r i c e d i s t r i b u t o r s w i l l ' f r e e - r i d e ' o n the sales  a c t i v i t y o f the m o r e costly a n d h e n c e h i g h e r p r i c e d i s t r i b u t o r s t h e r e b y g a i n i n g the b e n e f i t o f e x t r a sales w i t h o u t the c o n c o m i t a n t expense o f p r o v i d i n g a l l these e x t r a services itself.  T h e f r e e r i d e r p r i n c i p l e h a d its genesis i n an a r t i c l e w r i t t e n by P r o f e s s o r Lester Telser in 1962.  83  T e l s e r n o t e d that i n m a n y i n s t a n c e s , d e m a n d f o r a  p a r t i c u l a r s u p p l i e r ' s p r o d u c t was a f u n c t i o n o f the d e m a n d f o r the p h y s i c a l p r o d u c t a n d the a c c o m p a n y i n g p r e - or post-sales services ( w h i c h he t e r m e d " s p e c i a l services") o f f e r e d to p r o s p e c t i v e customers by a s u p p l i e r ' s d i s t r i b u t o r s .  T o take an  e x a m p l e , the a v e r a g e c o n s u m e r w h o goes i n t o a store to b u y a s o p h i s t i c a t e d p e r s o n a l c o m p u t e r has v e r y l i t t l e i d e a o f w h a t he or she r e a l l y needs i n terms o f m e m o r y c a p a c i t y , speed o f the c e n t r a l p r o c e s s i n g u n i t , b r a n d o f s o f t w a r e , type o f p r i n t e r a n d so o n .  Whether or not this c o n s u m e r w i l l b u y a c o m p u t e r w i l l v e r y  m u c h d e p e n d u p o n the s k i l l s a n d expertise o f the salespersons a v a i l a b l e to e x p l a i n its o p e r a t i o n s .  C l e a r l y this s e r v i c e is not costless .  T h u s , T e l s e r p o i n t e d out, i f one  d i s t r i b u t o r p r o v i d e d this presale s e r v i c e to c o n s u m e r s but c o u l d not or d i d not s e p a r a t e l y c h a r g e f o r it, a p r o s p e c t i v e c u s t o m e r w o u l d go to that d i s t r i b u t o r ,  F . H a n k s a n d P. W i l l i a m s , " T h e T r e a t m e n t  find  o f V e r t i c a l R e s t r a i n t s a n d the  A u s t r a l i a n T r a d e P r a c t i c e s A c t " , (1987) 15 A . B . L . R .  147.  L . T e l s e r , "Why S h o u l d M a n u f a c t u r e r s Want F a i r T r a d e ? " , 23 J . L . & E c o n . 86 (1960).  55  out a l l he or she w a n t e d to k n o w a b o u t the a t t r i b u t e s o f the p r o d u c t a n d t h e n go d o w n the r o a d to a s e c o n d d i s t r i b u t o r w h i c h s o l d the same p r o d u c t (but sales assistance) at a l o w e r p r i c e .  without  U n d e r these c i r c u m s t a n c e s , the s e c o n d d i s t r i b u t o r  w o u l d h a v e t a k e n a ' f r e e r i d e ' on the services p r o v i d e d b y the f i r s t  distributor,  s i n c e w i t h o u t these s e r v i c e s , the c u s t o m e r m i g h t not h a v e b o u g h t the p r o d u c t at a l l .  A s s u m i n g that a s u b s t a n t i a l n u m b e r o f c o n s u m e r s p l a c e d a v a l u e o n h a v i n g the p r o d u c t e x p l a i n e d to t h e m b e f o r e p u r c h a s i n g it, it was seen to be i n the c o n s u m e r s ' interests that d i s t r i b u t o r s p r o v i d e the s e r v i c e .  H o w e v e r , w i t h o u t some  i n h i b i t i o n u p o n the f r e e r i d e r , d i s t r i b u t o r s w o u l d be u n w i l l i n g to p r o v i d e a n optimal amount of such service.  T o state the m a t t e r i n terms o f the e x a m p l e  a b o v e , o v e r t i m e the f i r s t d i s t r i b u t o r w o u l d e i t h e r cease to p r o v i d e sales assistance or w o u l d d i s c o n t i n u e c a r r y i n g the s u p p l i e r ' s p r o d u c t at a l l . d i s t r i b u t i o n a l e f f i c i e n c y w o u l d be a d v e r s e l y a f f e c t e d .  In e i t h e r  event,  8 4  T h e s p e c i a l s e r v i c e s t h e o r y a n d f r e e r i d e r p r i n c i p l e h a v e been l a r g e l y e n d o r s e d b y the C h i c a g o S c h o o l .  8 5  P o s n e r , f o r e x a m p l e , argues that m i n i m u m  resale p r i c e s enables new m a n u f a c t u r e r s a n d m a n u f a c t u r e r s e n t e r i n g n e w  markets  to a t t r a c t c o m p e t e n t a n d aggressive d i s t r i b u t o r s a n d to i n d u c e t h e m to m a k e the k i n d o f i n v e s t m e n t o f c a p i t a l a n d l a b o u r that is o f t e n r e q u i r e d i n the s u c c e s s f u l d i s t r i b u t i o n o f p r o d u c t s u n k n o w n to the c o n s u m e r . T h e m a n u f a c t u r e r is t h e n able  T h e f o r e g o i n g is based on L . P o p o f s k y a n d S. B o m s e , " S y l v a n i a to M o n s a n t o : N o L o n g e r a F r e e R i d e " , 30 A n t i t r u s t B u l l . 67 (1985) at 88-89.  See R. B o r k , " T h e R u l e o f R e a s o n a n d the Per Se C o n c e p t : P r i c e F i x i n g a n d M a r k e t D i v i s i o n Pt. II", 75 Y a l e L . J . 373 (1966) a n d R. P o s n e r , " A n t i t r u s t P o l i c y a n d the S u p r e m e C o u r t : A n A n a l y s i s o f the R e s t r i c t e d D i s t r i b u t i o n , H o r i z o n t a l M e r g e r a n d P o t e n t i a l C o m p e t i t i o n D e c i s i o n s " , 75 C o l u m . L . R e v . 282 (1975).  to c o m p e t e m o r e e f f e c t i v e l y w i t h e s t a b l i s h e d c o m p a n i e s .  8 6  Posner f u r t h e r  argues  that the i m p o s i t i o n o f a m i n i m u m resale p r i c e i n d u c e s dealers to engage i n p r o m o t i o n a l a c t i v i t i e s a n d to p r o v i d e s e r v i c e a n d r e p a i r f a c i l i t i e s n e c e s s a r y to the e f f i c i e n t m a r k e t i n g o f a m a n u f a c t u r e r ' s p r o d u c t , w i t h the c o n c o m i t a n t o f the s o - c a l l e d ' f r e e r i d e r ' p r o b l e m .  In Posner's w o r d s :  elimination  8 7  T h e m a n u f a c t u r e r c a n choose a n y l e v e l o f presale s e r v i c e s that he desires h i s dealers to p r o v i d e a n d t h e n , b y s e t t i n g the m i n i m u m resale p r i c e a p p r o p r i a t e l y , assure that p r e c i s e l y that l e v e l o f services is p r o v i d e d .  G i v e n these p r o - c o m p e t i t i v e b e n e f i t s w h i c h are seen to f l o w f r o m  minimum  resale p r i c e s i n , almost a l l c i r c u m s t a n c e s , P o s n e r , a n d others, a d v o c a t e the a p p l i c a t i o n o f a r u l e o f per se l e g a l i t y .  8 8  P e r se l e g a l i t y is s a i d to be j u s t i f i e d b y  the a l l e g e d absence o f either t h e o r e t i c a l or e m p i r i c a l g r o u n d s f o r c o n d e m n i n g p u r e l y v e r t i c a l r e s t r a i n t s as a n t i c o m p e t i t i v e .  8 9  86  P o s n e r , i±  87  R. Posner, A n t i t r u s t L a w : A n E c o n o m i c Perspective ( C h i c a g o , U n i v e r s i t y of C h i c a g o Press, 1976) at 161.  88  R . P o s n e r , " T h e N e x t Step i n the A n t i t r u s t T r e a t m e n t o f R e s t r i c t e d D i s t r i b u t i o n : P e r Se L e g a l i t y " , 48 U . C h i . L . R e v . 6 (1981) at 23. See also R. B o r k , T h e A n t i t r u s t P a r a d o x ( N e w Y o r k , B a s i c B o o k s , 1978) at 288.  at 283-85.  J . T . H a l v e r s o n , " A n O v e r v i e w o f L e g a l a n d E c o n o m i c Issues a n d the R e l e v a n c e o f the V e r t i c a l M e r g e r G u i d e l i n e s " , 52 A n t i t r u s t L . J . 49 (1983) at 62.  57  T h e f r e e - r i d e r p r i n c i p l e has also been s p e c i f i c a l l y r e c o g n i z e d b y the States S u p r e m e C o u r t .  United  In a passage s e e m i n g l y u n n e c e s s a r y to the p r e c i s e issue  b e f o r e it, the C o u r t i n M o n s a n t o s a i d :  9 0  A m a n u f a c t u r e r a n d its d i s t r i b u t o r s h a v e l e g i t i m a t e reasons to e x c h a n g e i n f o r m a t i o n a b o u t p r i c e s a n d the r e c e p t i o n o f t h e i r p r o d u c t s i n the m a r k e t . M o r e o v e r , it is p r e c i s e l y i n cases i n w h i c h the m a n u f a c t u r e r attempts to f u r t h e r a p a r t i c u l a r m a r k e t i n g strategy b y means o f agreements on o f t e n costly n o n p r i c e r e s t r i c t i o n s that it w i l l h a v e the most interest i n the d i s t r i b u t o r s ' resale p r i c e s . T h e m a n u f a c t u r e r o f t e n w i l l w a n t to ensure that its d i s t r i b u t o r s e a r n s u f f i c i e n t p r o f i t to p a y f o r p r o g r a m s s u c h as h i r i n g a n d t r a i n i n g a d d i t i o n a l s a l e s m e n or d e m o n s t r a t i n g the t e c h n i c a l f e a t u r e s o f the p r o d u c t , a n d w i l l w a n t to see that " f r e e - r i d e r s " do not i n t e r f e r e . (Citations omitted.)  T e l s e r ' s s p e c i a l services t h e o r y took some years to be a c c e p t e d , one of the m a i n reasons b e i n g that it was l i m i t e d to a n a r r o w range o f p r o d u c t s a n d distribution practices.  T h e t h e o r y d i d not a p p l y f o r i n s t a n c e to s t a n d a r d p r o d u c t s  l i k e f o o d , d r i n k a n d c l o t h i n g w h e r e c o n s u m e r s were u n l i k e l y to p l a c e too m u c h v a l u e o n p r e - s a l e services i n the f o r m o f e x p l a n a t i o n s or d e m o n s t r a t i o n s .  9 1  H o w e v e r i n the e a r l y 1980's, a n u m b e r o f c o m m e n t a t o r s b e g a n to r e c o n s i d e r T e l s e r ' s w o r k a n d d e m o n s t r a t e d that the range o f services w h i c h were  'free-ridable'  104 S.Ct. 1464, 1470 (1984).  A n e x a m p l e is p r o v i d e d b y the H . D . L e e case, s u p r a note 38, w h e r e the a c c u s e d a r g u e d that its jeans s h o u l d h a v e a s p e c i a l l o c a t i o n i n e a c h store, s p e c i a l d i s p l a y s w i t h m a n n e q u i n s , i n d i v i d u a l h a n g e r s a n d so o n . A r m y a n d N a v y , one o f the stores r e f u s e d s u p p l y because o f , a m o n g other t h i n g s , its f a i l u r e to p r o v i d e a n a d e q u a t e l e v e l o f s e r v i c i n g , was s a i d to s i m p l y stack u p the jeans on a c o u n t e r w h e r e the c u s t o m e r h a d to select his size a n d take it to the c a s h i e r ! B e a u c h e m i n J . s u c c i n c t l y r e p l i e d to this a r g u m e n t as f o l l o w s : " H o w e v e r d e s i r a b l e f r o m the s u p p l i e r ' s s t a n d p o i n t is the a m o u n t o f s e r v i c i n g a n d p r o m o t i o n a r e t a i l e r w i l l g i v e his p r o d u c t , the test o f [section 38(5)] is not the l e v e l of s e r v i c i n g w h i c h the s u p p l i e r or m a n u f a c t u r e r m i g h t expect but r a t h e r the l e v e l o f s e r v i c i n g w h i c h the p u r c h a s e r o f a p r o d u c t m i g h t expect" (IdL at 198).  58  was m u c h b r o a d e r t h a n T e l s e r h a d suggested. M o r e i m p o r t a n t t h a n s u c h o b v i o u s items as sales assistance or l i b e r a l w a r r a n t y a n d r e t u r n s p o l i c i e s were s e r v i c e s b r o a d l y d e n o m i n a t e d as i n f o r m a t i o n a l , p r o m o t i o n a l a n d r e p u t a t i o n a l .  9 2  M a r v e l a n d M c C a f f e r t y f o r e x a m p l e h a v e a r g u e d that R P M is d e s i g n e d to ensure that s u p p l i e r s o b t a i n c e r t i f i c a t i o n o f the q u a l i t y a n d s t y l i s h n e s s o f products f r o m reputable d i s t r i b u t o r s .  9 3  their  In t h e i r v i e w , c u s t o m e r s m a y not c a r e  w h e r e t h e y o b t a i n t h e i r s u p p l i e s o f a p r o d u c t but m a y care that the p r o d u c t is s o l d at l e a d i n g r e t a i l e r s s i m p l y because the d e c i s i o n o f those r e t a i l e r s to h a n d l e the p r o d u c t i n d i c a t e s that is it consistent w i t h t h e i r r e p u t a t i o n s ,  i n this w a y R P M m a y  be used to g u a r a n t e e m a r g i n s i n o r d e r to m a k e h i g h q u a l i t y p r o d u c t s a t t r a c t i v e such retailers.  for  T o the extent that the f r e e - r i d i n g o f other r e t a i l e r s exists, the use  o f R P M is, i n t h e i r v i e w , o f b e n e f i t to the p u b l i c .  T h e t h e o r y that R P M m a y be a p r i n c i p a l m e t h o d o f d i s t r i b u t o r s l e n d i n g t h e i r r e p u t a t i o n to s u p p l i e r s was e x t e n s i v e l y c o n s i d e r e d i n a 1984 s t u d y b y f i v e a c a d e m i c c o n s u l t a n t s o f the U.S. F e d e r a l T r a d e C o m m i s s i o n i n t o past R P M enforcement action  B y w a y o f o v e r v i e w the s t u d y o b s e r v e d :  9 4  P o p o f s k y a n d B o m s e , s u p r a note 84 at 91.  See H . P . M a r v e l a n d P. M c C a f f e r t y , "Resale P r i c e M a i n t e n a n c e a n d 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 a n d S. M c C a f f e r t y , " T h e W e l f a r e E f f e c t s o f R e s a l e P r i c e M a i n t e n a n c e " , 28 J. L a w a n d E c o n . 363 (1985) a n d F . M a t h e w s o n a n d R. W i n t e r " A n E c o n o m i c T h e o r y o f V e r t i c a l R e s t r a i n t s " , 15 R a n d J. E c o n . 27 ( 1 9 8 4 ) . M a r y e l a n d M c C a f f e r t y , s u p r a 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 E v a l u a t i o n s 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 R e s t r a i n t s Cases ( F e d e r a l T r a d e C o m m i s s i o n S t a f f R e p o r t , 1984) at 34.  59  In e a c h o f the R P M studies the c o n s u l t a n t s f o u n d that v e r t i c a l r e s t r a i n t s were b e i n g used to protect the s i g n a l o f h i g h q u a l i t y c r e a t e d b y the r e t a i l e r s ' g e n e r a l m e t h o d o f d o i n g business. B y c a r r y i n g the m a n u f a c t u r e r s ' p r o d u c t s , r e t a i l stores w i t h h i g h q u a l i t y r e p u t a t i o n s s i g n a l that the p r o d u c t s are o f h i g h q u a l i t y , t h e r e b y h e l p i n g the m a n u f a c t u r e r s e s t a b l i s h or m a i n t a i n their products' reputations. T h i s signal of high q u a l i t y is f r e e - r i d a b l e ; other r e t a i l e r s c o u l d r e f r a i n f r o m the expense o f c r e a t i n g a q u a l i t y r e p u t a t i o n , yet h a v e t h e i r sales o f the m a n u f a c t u r e r s ' p r o d u c t s b e n e f i t f r o m the c e r t i f i c a t i o n e f f o r t s o f q u a l i t y - s i g n a l i n g dealers. A c c o r d i n g to o u r c o n s u l t a n t s , the m a n u f a c t u r e r s ' desire to p r e v e n t the d e t e r i o r a t i o n o f this q u a l i t y c e r t i f i c a t i o n t h r o u g h f r e e - r i d i n g e x p l a i n e d , i n part or i n w h o l e , the use o f R P M i n e a c h o f the three R P M cases s t u d i e d .  T h e s p e c i a l services t h e o r y has c e r t a i n l y not been w i t h o u t its c r i t i c s , p a r t i c u l a r l y those w h o d o not espouse the C h i c a g o S c h o o l a p p r o a c h to v e r t i c a l p r i c e restraints.  O n e o f the most v o c i f e r o u s has been P r o f e s s o r W i l l i a m C o m a n o r w h o  has a r g u e d that it is o n l y i n s p e c i a l c i r c u m s t a n c e s that the use o f R P M to o v e r c o m e f r e e r i d i n g y i e l d s a net b e n e f i t to o f f s e t against the l e s s e n i n g o f c o m p e t i t i o n r e s u l t i n g f r o m its i m p o s i t i o n .  In the absence o f R P M , he a r g u e s , c e r t a i n c u s t o m e r s  w o u l d h a v e p u r c h a s e d the p r o d u c t i n a n y case; w i t h the a d v e n t o f R P M , s u c h c u s t o m e r s are f o r c e d to p a y a h i g h e r p r i c e .  9 5  If there is i n f a c t n o f r e e - r i d e r  p r o b l e m he a r g u e s , there is no need f o r R P M to ensure the s u p p l y o f s e r v i c e s , since v a r i o u s d i s t r i b u t o r s w i l l i n e v i t a b l y p r o v i d e the p a r t i c u l a r s e r v i c e s d e m a n d e d b y consumers.  " I n d e e d , w i t h no f r e e - r i d e r p r o b l e m , there w o u l d be m o r e v a r i e t y i n  the d i s t r i b u t i o n s e r v i c e s o f f e r e d i n the absence o f [ R P M ] a n d the f u l l r a n g e o f c o n s u m e r p r e f e r e n c e s w o u l d be more l i k e l y to be s e r v e d " .  9 6  W. C o m a n o r , " V e r t i c a l T e r r i t o r i a l a n d C u s t o m e r R e s t r i c t i o n s : a n d Its A f t e r m a t h " , 81 H a r v . L . R e v . 1419 (1968)  White M o t o r  W. C o m a n o r , " V e r t i c a l A r r a n g e m e n t s a n d A n t i t r u s t A n a l y s i s " , 62 N . Y . U . L . R e v . 1153 (1987) at 1157. See also C o m a n o r at 1158 i n r e g a r d to the f r e e r i d e r e x p l a n a t i o n b e i n g s u f f i c i e n t to e x p l a i n the t r a n s f e r a b i l i t y o f c o n s u m e r p e r c e p t i o n s f r o m store to b r a n d u n d e r the c e r t i f i c a t i o n t h e o r y .  60 A n o t h e r v o c i f e r o u s c r i t i c has been P r o f e s s o r R o b e r t P i t o f s k y w h o has s e r i o u s l y c h a l l e n g e d the c o m p e t i t i v e b e n e f i t s a l l e g e d to f l o w f r o m R P M .  9 7  In  p a r t i c u l a r he has a t t a c k e d the a r g u m e n t s that R P M m a y be n e c e s s a r y to r e c r u i t d i s t r i b u t o r s a n d that m i n i m u m resale prices i n d u c e d i s t r i b u t o r s e r v i c e s . In respect o f d i s t r i b u t o r r e c r u i t m e n t , P i t o f s k y argues that h i g h e r r e t a i l p r i c e s m e a n most c o n s u m e r s do not w a n t or need the a d d i t i o n a l d i s t r i b u t o r s w h i c h are a t t r a c t e d b y h i g h e r m a r g i n s , a n d e v e n i f they d o , a s u p p l i e r c a n a c h i e v e the same e n d by l o w e r i n g its o w n p r i c e , w i d e n i n g the m a r g i n f o r c o m p e t i n g d i s t r i b u t o r s ,  attracting  m o r e outlets a n d t h e r e b y b e n e f i t i n g c o n s u m e r s t h r o u g h l o w e r p r i c e s f r o m e n h a n c e d competition.  9 8  In respect o f i n d u c i n g d i s t r i b u t o r s e r v i c e s , P i t o f s k y argues that not  m a n y s u p p l i e r s e s t a b l i s h m i n i m u m resale prices f o r this p u r p o s e , a n d e v e n i f  they  d o , there is no g u a r a n t e e that a d i s t r i b u t o r , o n c e its resale p r i c e is r a i s e d , w i l l engage i n the d e s i r e d l e v e l o f services unless it is c o n t r a c t u a l l y b o u n d .  Further, a  d i s t r i b u t o r c a n be a s s u m e d to k n o w better t h a n its s u p p l i e r the d e s i r e d l e v e l o f s e r v i c e s n e c e s s a r y to sell a p r o d u c t a n d w i l l p r o v i d e s u c h services or go out o f business.  99  Quite naturally, Pitofsky, like C o m a n o r , very much favours  retention  o f the e x i s t i n g r u l e o f per se i l l e g a l i t y , a l t h o u g h he does a c c e p t the need f o r n a r r o w , c a r e f u l l y d e f i n e d e x c e p t i o n s to the per se r u l e i n the case o f new a n d new products.  entrants  A n y s u c h e x c e p t i o n s w o u l d o n l y seem j u s t i f i a b l e o n this v i e w  i f a v a i l a b l e f o r a r e a s o n a b l y short p e r i o d o f , say, three y e a r s .  E v e n products  r e g a r d e d as t e c h n i c a l l y c o m p l e x a n d t h e r e f o r e r e q u i r i n g a great d e a l o f e x p l a n a t i o n t e n d to b e c o m e c o m p r e h e n s i b l e to most c o n s u m e r s w i t h i n a r e a s o n a b l y  9 7  See e.g. R. P i t o f s k y , "In D e f e n c e o f D i s c o u n t e r s : T h e N o F r i l l s C a s e f o r a P e r Se R u l e A g a i n s t V e r t i c a l P r i c e F i x i n g " , 71 G e o r g e t o w n L . J . 1487 (1983).  9 8  Id. at  1494.  Id. at 1492-93.  61  short p e r i o d at w h i c h time there is less need f o r R P M to s u p p o r t post-sale services. T h e p e r s o n a l c o m p u t e r is the o b v i o u s e x a m p l e i n this case.  M o r e t e m p e r a t e i n his c r i t i c i s m is P r o f e s s o r S c h e r e r , w h o has a r g u e d that, u n d e r c e r t a i n c o n d i t i o n s , the c o m p e t i t i o n g e n e r a t e d by a n u m b e r o f s u p p l i e r s a d o p t i n g a h i g h m a r g i n p o l i c y to i n d u c e the p r o v i s i o n o f s e r v i c e s b y its d i s t r i b u t o r s c a n l e a d to too m u c h v a r i e t y b e i n g o f f e r e d a n d too m u c h m o n e y b e i n g spent o n s e r v i c e s .  1 0 0  T h e fragmentation  o f a m a r k e t t h r o u g h the e x p a n s i o n o f  m a r g i n s a n d s e r v i c e s , a n d p e r h a p s also t h r o u g h the e n t r y o f a d d i t i o n a l  distributors  to take a d v a n t a g e o f the h i g h m a r g i n s m a y result, he a r g u e s , i n loss o f e c o n o m i e s o f scale or a n i n c r e a s e i n f i x e d costs, b o t h a b s o l u t e l y a n d per u n i t s o l d .  1 0 1  The  l i k e l y loss o f e f f i c i e n c y e n v i s a g e d by S c h e r e r i n this s i t u a t i o n o b v i o u s l y r u n s c o u n t e r to the P o s n e r / B o r k t h e o r y that an i n c r e a s e i n o u t p u t n e c e s s a r i l y e n h a n c e s efficiency.  T h e r e m a y be some i n c r e a s e i n o u t p u t as a result o f the  1 0 2  generally  h i g h e r l e v e l o f s e r v i c e s , but this is l i k e l y to be a d v e r s e l y a f f e c t e d by the h i g h e r level of prices.  A s Scherer n o t e s  1 0 3  :  O n a p r i o r i g r o u n d s , w h e t h e r q u a n t i t y d e m a n d e d is i n c r e a s e d or not d e p e n d s u p o n the e l a s t i c i t y o f d e m a n d w i t h respect to s e r v i c e o n the one h a n d , versus the e l a s t i c i t y o f d e m a n d w i t h respect to p r i c e on the other h a n d . Y o u c a n n o t t e l l i n this r i v a l r o u s s i t u a t i o n w h e t h e r e f f i c i e n c y has i n c r e a s e d or not.  1 0 0  S c h e r e r , s u p r a note 74 at 701-02.  1 0 1  I d , at  1 0 2  R. P o s n e r , " T h e R u l e o f R e a s o n a n d the E c o n o m i c A p p r o a c h :  703.  R e f l e c t i o n s on  the S y l v a n i a D e c i s i o n " , 45 U . C h i . L . R e v . 1 (1977) at 18 a n d B o r k , s u p r a note 88 at 290 a n d 295-96.  103  S c h e r e r , s u p r a note 74 at  703.  62 O n this basis, S c h e r e r argues that R P M s h o u l d be p r e s u m e d l e g a l o n l y f o r r e l a t i v e l y s m a l l u p s t r e a m f i r m s a n d i n s i t u a t i o n s w h e r e its use is not u b i t q u i t o u s . Where these c o n d i t i o n s are not s a t i s f i e d , he w o u l d r e q u i r e those w h o w a n t to use R P M to bear the b u r d e n o f p r o v i n g w h y it s h o u l d be a l l o w e d .  M o s t r e c e n t l y , K l e i n a n d M u r p h y h a v e presented a n a l t e r n a t i v e  theory of  h o w R P M a n d other v e r t i c a l r s t r a i n t s operate to i n d u c e d e s i r e d d i s t r i b u t o r services.  1 0 4  T h e t h r u s t o f t h e i r t h e o r y is that p r i v a t e e n f o r c e m e n t b y w a y  of  a c t i v e s u p p l i e r m o n i t o r i n g a n d the threat o f s u p p l i e r t e r m i n a t i o n assures distributor performance.  T h r o u g h the use o f this m e c h a n i s m , it is a r g u e d that a  s u p p l i e r c a n e m p l o y v e r t i c a l restraints to r e d u c e the short r u n g a i n s to n o n p e r f o r m i n g d i s t r i b u t o r s (by l i m i t i n g t h e i r a b i l i t y to e x p a n d o u t p u t ) a n d to i n c r e a s e the l o n g r u n g a i n s to p e r f o r m i n g d i s t r i b u t o r s (by c r e a t i n g a q u a s i - r e n t stream).  It  is s a i d that the m e c h a n i s m is a p p l i c a b l e to a n y s e r v i c e that a s u p p l i e r wishes a d i s t r i b u t o r to p e r f o r m that is not i n the d i s t r i b u t o r ' s o w n s e l f - i n t e r e s t a n d  where  an e x p l i c i t c o n t r a c t c a n not be w r i t t e n a n d e n f o r c e d .  It is the v e r y i n a b i l i t y to p r e d i c t the e f f i c i e n c y e n h a n c i n g or r e d u c i n g e f f e c t s a l l u d e d to b y S c h e r e r w h i c h is at the heart o f the debate b e t w e e n e c o n o m i c theorists.  the  T h e r e is no d o u b t that u n d e r c e r t a i n v e r y l i m i t e d c o n d i t i o n s  R P M c a n f a c i l i t a t e c a r t e l i z a t i o n at the s u p p l i e r or d i s t r i b u t o r l e v e l .  1 0 5  A s shown  e a r l i e r , the r e q u i r e m e n t s f o r a p l a u s i b l e h y p o t h e s i s o f c o l l u s i o n are o n e r o u s , p a r t i c u l a r l y at the r e t a i l l e v e l .  H o w e v e r , some i n d u s t r i e s u n d o u b t e d l y do d i s p l a y  B. K l e i n a n d K . M u r p h y , " V e r t i c a l R e s t r a i n t s as C o n t r a c t E n f o r c e m e n t M e c h a n i s m s " , 31 J . L . & E c o n . 265 (1988).  See O v e r s t r e e t , s u p r a note 73 at 81-82 a n d O r s t e i n , s u p r a note 81.  63  the c h a r a c t e r i s t i c s necessary to s a t i s f y s u c h r e q u i r e m e n t s  1 0 6  a n d it is f o r this  reason that, at least f r o m a n e c o n o m i c s t a n d p o i n t , there w o u l d seem to be some n e e d f o r p r o s c r i p t i v e rules r e g a r d i n g R P M .  T h e r e is also n o d o u b t that m a n y s u p p l i e r s d o i n s t i t u t e R P M as a means to g i v e t h e i r d i s t r i b u t o r s more p r i c i n g p o w e r , i n c r e a s e t h e i r m a r g i n s a n d t h e r e b y i n d u c e t h e m to p e r f o r m more i n the w a y o f s e r v i c e s , a n d that a n u m b e r o f d i s t r i b u t o r s w i l l a t t e m p t to take a f r e e r i d e i n this s i t u a t i o n .  However, with all  d u e respect to P o s n e r a n d other m e m b e r s o f the C h i c a g o S c h o o l , it is s u b m i t t e d that the ' f r e e r i d e r ' is not as w i d e s p r e a d as they w o u l d h a v e us b e l i e v e ,  1 0 7  n o r is  R P M the most e f f i c i e n t means f o r a c c o m p l i s h i n g the s e r v i c e a n d p r o m o t i o n o r i e n t a t e d goals o f a s u p p l i e r w h o m a y be c o n c e r n e d a b o u t a f r e e r i d e r p r o b l e m . In the w o r d s o f S c h e r e r , it is s o m e w h a t o f a ' b l u n t i n s t r u m e n t ' to ensure a d e q u a t e d i s t r i b u t o r s e r v i c e because it raises the p r i c e o f a p r o d u c t to a u n i f o r m l e v e l f o r a l l d i s t r i b u t o r s , large or s m a l l , s p e c i a l i z e d or g e n e r a l i z e d a n d is not n e c e s s a r i l y profit m a x i m i z i n g .  1 0 8  F o r some d i s t r i b u t o r s , R P M m a y elevate the p r i c e too little.  A n e x a m p l e w o u l d seem to be the A u s t r a l i a n p e t r o l e u m i n d u s t r y , d o m i n a t e d as it is b y 3-4 m a j o r c o m p e t i t o r s s e l l i n g a h e a v i l y a d v e r t i s e d , l a r g e l y h o m o g e n o u s p r o d u c t that is v e r y m u c h essential to c o n s u m e r s . A case a r i s i n g o u t o f the use o f R P M i n this i n d u s t r y is B . P . A u s t r a l i a L t d . v . T r a d e P r a c t i c e s C o m m i s s i o n (1986) A . T . P . R . 701. F o r a d i s c u s s i o n o f this case, see P . H . C l a r k e , "Resale Price M a i n t e n a n c e - C u r r e n t U n c e r t a i n t i e s i n L a w a n d P o l i c y " , (1987) 15 A . B . L . R . 59.  T h i s v i e w is s u p p o r t e d by a 1984 F T C s t u d y w h i c h d e a l t w i t h s p e c i f i c i n s t a n c e s o f R P M a n d c o n c l u d e d that there was l i t t l e e v i d e n c e that R P M was i m p o s e d to p r e v e n t f r e e - r i d i n g o n p r o d u c t s p e c i f i c [ d i s t r i b u t o r ] services". See L a f f e r t y , L a n d e & K i r k w o o d , s u p r a note 94 at 27. See also F . M . Scherer, Industrial M a r k e t Structure a n d E c o n o m i c P e r f o r m a n c e (2ed, 1980) at 593 n.103 w h e r e S c h e r e r states that a l t h o u g h the f r e e - r i d e r p r o b l e m m a y o c c u r , " i t s e m p i r i c a l s i g n i f i c a n c e appears modest".  108  S c h e r e r , s u p r a note 74 at 701.  64  T h i s is no p r o b l e m because s e c t i o n 37 of the A c t , l i k e R P M p r o v i s i o n s i n most j u r i s d i c t i o n s , o n l y relates to m i n i m u m resale p r i c e s . i n c r e a s e the p r i c e f u r t h e r , that is a l l o w e d .  If  a d i s t r i b u t o r w a n t s to  B u t f o r other d i s t r i b u t o r s ,  particularly  those s e l l i n g h i g h v o l u m e p r o d u c t s , R P M p r o b a b l y elevates the p r i c e a b o v e the profit-maximizing  level.  " A n d w h e n that is the case, it is no l o n g e r g e n e r a l l y true  that a n e l e v a t i o n o f p r i c e c a u s e d b y [ R P M ] w h i c h leads t h r o u g h i n c r e a s e d s e r v i c e p r o v i s i o n to a n o u t p u t i n c r e a s e n e c e s s a r i l y increases e f f i c i e n c y . "  1 0 9  A s a l r e a d y s h o w n , the s p e c i a l services t h e o r y a r t i c u l a t e d b y T e l s e r is also too l i m i t e d i n terms o f the types o f p r o d u c t s to w h i c h it a p p l i e s , n a m e l y e x p e n s i v e , t e c h n i c a l l y c o m p l e x a n d r a p i d l y c h a n g i n g r a t h e r t h a n low p r i c e , f r e q u e n t l y p u r c h a s e d items.  F u r t h e r , the need f o r R P M to i n d u c e post-sale services s u c h as  the p r o v i s i o n o f w a r r a n t i e s a n d r e p a i r services a n d the a d o p t i o n o f r e t u r n s p o l i c i e s is not a l w a y s j u s t i f i e d .  It is b e c o m i n g m o r e a n d m o r e c o m m o n f o r s u p p l i e r s to  assume r e s p o n s i b i l i t y f o r these f u n c t i o n s (or e v e n to c o n t r a c t w i t h t h i r d parties to do so) as w e l l as to o f f e r c o n s u m e r s the c h o i c e o f t a k i n g a s u p p l e m e n t a r y at a n a d d i t i o n a l c h a r g e .  warranty  T h u s , i n m a n y cases, post-sale services c a n be s e p a r a t e d  f r o m the sale o f the p r o d u c t itself ( a l t h o u g h t i e d to it), b e n e f i t t i n g c o n s u m e r s t h r o u g h a greater r a n g e o f p r i c e / s e r v i c e o p t i o n s o n o f f e r .  T h e e c o n o m i c e x p l a n a t i o n w h i c h w o u l d seem to most a c c u r a t e l y a c c o u n t f o r the use o f R P M is that a d v a n c e d b y M a r v e l a n d M c C a f f e r t y l i n k i n g c o n c e r n s to the f r e e r i d e r c o n c e p t .  1 0 9  no  1 1 0  quality  F o r those s u p p l i e r s w h o h a v e been able to  Id.  In two o f the case studies dealt w i t h i n the 1984 F T C R e p o r t , the s p e c i a l s e r v i c e s t h e o r y was f o u n d to be either i n a p p r o p r i a t e or a n i n c o m p l e t e e x p l a n a t i o n , a m o r e s a t i s f a c t o r y e x p l a n a t i o n o f R P M i n these cases b e i n g  65  create a b r a n d i m a g e f o r t h e i r p r o d u c t s a n d h a v e o b t a i n e d  a c e r t a i n degree o f  m a r k e t p o w e r w h i c h goes a l o n g w i t h a p r o d u c t ' s a c q u i r e d d i s t i n c t i v e n e s s , R P M c a n t h e n be used as a d i f f e r e n t i a t i n g  d e v i c e to p r o m o t e that b r a n d i m a g e .  However  the use o f R P M i n this s i t u a t i o n o n l y makes e c o n o m i c sense f o r c e r t a i n types o f products and suppliers.  It is s u b m i t t e d that the t h e o r y is i m p l a u s i b l e f o r n o n -  l u x u r y items a n d f o r s m a l l , r e l a t i v e l y u n k n o w n s u p p l i e r s .  What is o f  prime  c o n c e r n to d i s t r i b u t o r s w h e n m a k i n g b u y i n g d e c i s i o n s is the a n t i c i p a t e d c o n s u m e r d e m a n d f o r the p r o d u c t i n q u e s t i o n .  W h i l e that d e m a n d m a y be i n f l u e n c e d b y  c o n s u m e r s ' i m p r e s s i o n s o f the p r o d u c t , it is u n l i k e l y to be a f f e c t e d b y the i m a g e o f a s u p p l i e r , unless that s u p p l i e r is f a i r l y w e l l - k n o w n .  In other w o r d s , it s h o u l d o n l y  be i n r a r e cases that the e x c l u s i v i t y a n d status a s s o c i a t e d w i t h a h i g h p r i c e d p r o d u c t w i l l result i n a r e d u c t i o n i n d e m a n d i f one or more d i s t r i b u t o r s b e g i n to sell b e l o w the n o r m a l l y h i g h p r i c e .  It d e f i e s b a s i c e c o n o m i c t h e o r y to suggest that  s u c h a m a r k e t i n g p h e n o m e n o n a p p l i e s to a l l but the most w e l l - k n o w n products.  luxury  P e r h a p s it is that some s u p p l i e r s a d o p t i n g R P M do so i n the hope o f  e n h a n c i n g t h e i r r e p u t a t i o n a n d that o f t h e i r p r o d u c t s .  Such an argument  was  r a i s e d i n T r a d e P r a c t i c e s C o m m i s s i o n v. L o i s ( A u s t r a l i a ) P t y . L t d . l l l . w h e r e  the  reason g i v e n b y the r e s p o n d e n t f o r e n d e a v o u r i n g to m a i n t a i n the p r i c e o f its p r o d u c t s was to preserve its i m a g e as a s u p p l i e r o f h i g h q u a l i t y  apparel.  (1986) A . T . P . R . 40-645. F o r a d i s c u s s i o n o f this case see P . H . C l a r k e , " R e s a l e P r i c e M a i n t e n a n c e - C u r r e n t U n c e r t a i n t i e s i n L a w a n d P r a c t i c e " , (1987) 15 A . B . L . R . 59 at 63-64. See also F e d e r a l T r a d e C o m m i s s i o n v. L e v i Strauss 433 U . S . 36 (1977).  (c)  Discounting  T h o s e l a b e l l e d ' f r e e r i d e r s ' u n d e r the s p e c i a l s e r v i c e s t h e o r y h a v e n o r m a l l y been d i s c o u n t e r s because o f t h e i r a l l e g e d f a i l u r e to o f f e r the m i x o f p r e - a n d postsales s e r v i c e s that a s u p p l i e r d e c i d e s is the most e f f i c i e n t means o f m a r k e t i n g its products.  A number of c o m m e n t a t o r s  1 1 2  h a v e h o w e v e r come to t h e i r d e f e n c e , b o t h  o n a t h e o r e t i c a l a n d an e m p i r i c a l l e v e l , i n terms o f the c o n t r i b u t i o n s that d i s c o u n t e r s h a v e m a d e to c o n s u m e r w e l f a r e a n d c o m p e t i t i v e m a r k e t s .  These  c o n t r i b u t i o n s , it is a r g u e d , are s u f f i c i e n t to e a r n d i s c o u n t e r s s p e c i a l c o n s i d e r a t i o n  110 in antitrust  law.  (i)  C o n t r i b u t i o n to C o n s u m e r W e l f a r e  T h e most o b v i o u s c o n t r i b u t i o n to c o n s u m e r w e l f a r e is s a i d to be that o f l o w e r p r i c e s , t h e r e b y e n a b l i n g c o n s u m e r s to b u y m o r e p r o d u c t s f o r less m o n e y . E v e n f r o m g e n e r a l o b s e r v a t i o n s this is u n d o u b t e d l y true.  T h e s e l o w e r p r i c e s are  a c h i e v e d b y the a b i l i t y o f d i s c o u n t e r s to b u y p r o d u c t s i n r e l a t i v e l y  large  112  See e.g. P i t o f s k y , s u p r a note 97 a n d R. S t e i n e r , " T h e N a t u r e o f V e r t i c a l R e s t r a i n t s " , 30 A n t i t r u s t B u l l . 143 (1985).  113  See H . G e r l a , " D i s c o u n t e r s a n d the A n t i t r u s t L a w s : M a k e Cases", 12 J . C o r p . L a w 1 (1986).  1 1 4  1 1 4  Faces Sometimes S h o u l d  Irk at 3. I n t e r v i e w s w i t h f i v e s p o k e s m e n f o r the d i s c o u n t i n 1982 i n d i c a t e d that the e s t i m a t e d p r i c e d i f f e r e n t i a l b e t w e e n d i s c o u n t e r s a n d n o n d i s c o u n t e r s was i n the range o f 10-15%. A s u r v e y c o n d u c t e d b y the N a t i o n a l M a s s R e t a i l e r s Institute the same y e a r i n d i c a t e d that a p p r o x i m a t e l y 30% o f its m e m b e r s ' sales w o u l d be a f f e c t e d i f R P M was l e g a l i z e d . A p p l y i n g these f i g u r e s to the estimates o f the o v e r a l l size o f the d i s c o u n t i n d u s t r y i n the U . S . at that time suggested that $30-$90 b i l l i o n o f c u r r e n t d i s c o u n t sales m i g h t come u n d e r R P M i f it was l e g a l i z e d , thus i m p l y i n g a n aggregate c o n s u m e r loss o f $6-$ 18 b i l l i o n . See " F o r e w o r d : A n t i t r u s t a n d the D i s c o u n t e r s ' C a s e A g a i n s t R e s a l e P r i c e M a i n t e n a n c e " , 14 A n t i t r u s t L . & E c o n . R e v . 1 (No.3, 1982) at 4.  67  q u a n t i t i e s , t h e r e b y r e c e i v i n g q u a n t i t y d i s c o u n t s , plus t h e i r o w n efficiency.  distribution  It is this s e c o n d element w h i c h is seen as most n o t a b l e i n a c c o u n t i n g  f o r the c o n s u m e r p r i c e gap between d i s c o u n t e r s a n d n o n - d i s c o u n t e r s . C o n s u m e r s e n s i t i v i t y to p r i c e has a l w a y s seen p r i c e b e i n g used b y d i s c o u n t e r s as t h e i r competitive weapon.  major  B u t , o v e r recent y e a r s , e f f i c i e n c i e s a r i s i n g f r o m i n n o v a t i o n s  in management, internalization  of wholesaling functions, innovations in service  c o n c e p t s ( f o r e x a m p l e , r e p l a c e m e n t o f sales p e r s o n n e l by s e l f - s e r v i c e ) a n d scale e c o n o m i e s i n g e n e r a l d u e to h i g h e r sales per store h a v e l e d to r e d u c t i o n s i n o p e r a t i n g costs w h i c h c o u l d be passed o n to c o n s u m e r s .  1 1 5  R P M is seen b y  d i s c o u n t e r s as a b a r r i e r to i n n o v a t i o n , because the i n c e n t i v e to d e v e l o p m o r e e f f i c i e n t means o f g e t t i n g p r o d u c t s f r o m the s u p p l i e r to the c o n s u m e r is lost.  Any  r e d u c t i o n s i n o p e r a t i n g costs a c h i e v e d b y i n n o v a t i o n s c a n not be passed o n to the c o n s u m e r i n the f o r m o f l o w e r p r i c e s n o r c a n d i s c o u n t e r s secure f o r themselves the greater v o l u m e sought w h i c h m i g h t o t h e r w i s e be a v a i l a b l e i f they c o u l d use these l o w e r p r i c e s as p a r t o f t h e i r m a r k e t i n g strategy.  A n a s s u r e d h i g h m a r g i n or a  f i x e d n u m b e r o f u n i t s is seen to be o f no r e a l c o n s o l a t i o n .  A n o t h e r i m p o r t a n t c o n t r i b u t i o n to c o n s u m e r w e l f a r e is s a i d to be the greater c h o i c e o f p r o d u c t m i x a n d a n c i l l i a r y services w h i c h is o f f e r e d , enhancing consumer sovereignty.  1 1 6  thereby  In this r e g a r d t h e . c o n s u m e r has a c h o i c e  b e t w e e n p a y i n g a h i g h e r p r i c e a n d t a k i n g a d v a n t a g e o f a l l the a n c i l l a r y services  S t e i n e r , s u p r a note 112 at 153-55.  G e r l a , s u p r a note 113 at 5. A l l i e d to this is the a b i l i t y o f c o n s u m e r s to assess the cost o f a n c i l l a r y s e r v i c e s , a n d i n d e e d the true cost o f the p r o d u c t . D i s c o u n t e r s are thus also s a i d to serve as a source o f i n f o r m a t i o n o n c o m p a r a t i v e p r i c e a n d v a l u e not o n l y to t h e i r o w n c u s t o m e r s but v i a t h e i r p r i c e a d v e r t i s i n g to other customers as w e l l . See S t e i n e r , s u p r a note 112 at 183-87.  68 w h i c h m a y be o f f e r e d b y a p a r t i c u l a r d i s t r i b u t o r or f o r e g o i n g those s e r v i c e s i n consideration f o r a lower price.  In f a c t there is o f t e n l i t t l e or no d i f f e r e n c e  b e t w e e n the o v e r a l l l e v e l o f services o f f e r e d b y a t r a d i t i o n a l r e t a i l e r a n d a d i s c o u n t e r a l t h o u g h the assortment o f these s e r v i c e s is o f t e n d i f f e r e n t .  Defenders  e v e n c l a i m that d i s c o u n t e r s as a class s i g n i f i c a n t l y o u t p e r f o r m n o n - d i s c o u n t e r s i n terms o f c u s t o m e r s e r v i c e .  1 1 7  Whether or not this is the case, c o n s u m e r s d e m a n d at  least some l e v e l o f s e r v i c e a n d t h e r e f o r e d i s c o u n t e r s are g u a r a n t e e d to lose c u s t o m e r s i f they do a d h e r e to the f r e e r i d e r m o d e l o f ' r e a p i n g w h e r e t h e y h a v e not s o w n ' .  P r o f e s s o r S t e i n e r , one of the strongest s u p p o r t e r s o f the d i s c o u n t e r s  estimates that the f r e e r i d e r s c e n a r i o a c c o u n t s f o r o n l y a b o u t 15% o f cases i n v o l v i n g v e r t i c a l restraints s u c h as R P M .  In his v i e w , the a d o p t i o n o f R P M i n the  b a l a n c e o f cases is d e t e r m i n e d b y the t y p e o f p r o d u c t a n d m a r k e t share o f the distributors i n v o l v e d .  1 1 8  T h e t h r u s t o f Steiner's thesis is that a s u p p l i e r c a n not g e n e r a l l y sell to b o t h d i s c o u n t e r s a n d n o n - d i s c o u n t e r s i n the same m a r k e t a n d that a s u p p l i e r ' s sales a n d p r o f i t s w i l l f a l l i f a s w i t c h is m a d e to d i s c o u n t e r s b e f o r e they h a v e a t t a i n e d a size s u f f i c i e n t to assure the s u p p l i e r o f at least as m u c h sales v o l u m e a n d p r o f i t s as the n o n - d i s c o u n t e r s w i t h w h o m the s u p p l i e r is c u r r e n t l y d e a l i n g .  A t that p o i n t , it p a y s  the s u p p l i e r to s w i t c h because the l o w e r m a r g i n s o f the d i s c o u n t e r s a n d the l o w e r c o n s u m e r p r i c e s w i l l i n c r e a s e the s u p p l i e r ' s o w n sales a n d p r o f i t s at the same wholesale price.  T h i s h o w e v e r poses s o m e w h a t o f a d i l e m m a :  i f the s u p p l i e r c a n  not a f f o r d to sell to d i s c o u n t e r s u n t i l they h a v e a t t a i n e d a s u f f i c i e n t m a r k e t s h a r e ,  Steiner,  s u p r a note 112 at 155 n.19; P i t o f s k y , s u p r a note 112, at 1493  n.24.  R . S t e i n e r , " D i s t r i b u t i o n R e s t r a i n t s a n d the G r o w t h of D i s c o u n t i n g : T h e I m p o r t a n c e o f V e r t i c a l C o m p e t i t i o n " , 15 A n t i t r u s t L . & E c o n . R e v . 73 ( N o . 3, 1984).  h o w d o they i n f a c t r e a c h that c r i t i c a l l e v e l i f n o - o n e is p r e p a r e d to sell to them? S t e i n e r o f f e r s no s o l u t i o n other t h a n that it is i m p o r t a n t f o r p u b l i c p o l i c y that the g r o w t h o f n e w a n d e f f i c i e n t f o r m s o f r e t a i l i n g not be i n h i b i t e d a n d to a c h i e v e this d i s c o u n t e r s s h o u l d not be d e n i e d the t y p e o f p r o d u c t t h e y are most s u i t e d to s e l l , n a m e l y the w e l l - k n o w n , low or m e d i u m p r i c e d p r o d u c t b r a n d that does not r e q u i r e a large amount of e x p l a n a t i o n .  1 1 9  Steiner's v i e w s o n r e l a t e d matters are also i n t e r e s t i n g .  H e sees the f u n c t i o n  o f p r o v i d i n g i n f o r m a t i o n , w h e t h e r it be p r o d u c t s p e c i f i c i n f o r m a t i o n a n d / o r the r e p u t a t i o n o f the p r o d u c t whose t r a d e m a r k the c o n s u m e r is g o i n g to respect, as c o n f e r r i n g m a r k e t p o w e r o n w h o e v e r p e r f o r m s that f u n c t i o n .  When a distributor  c a n p e r f o r m that f u n c t i o n , as i n the case o f a w e a k b r a n d (that is, w h e r e there are a large n u m b e r o f s m a l l s u p p l i e r s whose p r o d u c t s do not h a v e a s t r o n g c o n s u m e r f r a n c h i s e ) , the r e t a i l e r c a n "substitute between d i f f e r e n t [suppliers'] b r a n d s , p l a y one [supplier] o f f a g a i n s t the o t h e r , m a k e the [supplier] sell to h i m at m a r g i n a l cost, a n d c a p t u r e a l l o f the p o t e n t i a l p r o d u c e r - p l u s d i s t r i b u t o r s u r p l u s f o r [itself]."  120  If,  o n the other h a n d , the b r a n d is s t r o n g (that is, w h e r e there are a  s m a l l n u m b e r o f s u p p l i e r s whose p r o d u c t s are w e l l - k n o w n a n d c o m m a n d a large m a r k e t share), t h e n the s u p p l i e r has the a b i l i t y to m a k e its d i s t r i b u t o r s c o m p e t e m o r e a g g r e s s i v e l y to the p o i n t w h e r e the s u p p l i e r c a n get its d i s t r i b u t o r s to sell at close to f a c t o r y cost a n d t h e r e b y c a p t u r e the s u r p l u s f o r i t s e l f .  1 2 1  A s such, Steiner  sees s u p p l i e r s a n d d i s t r i b u t o r s v e r y m u c h as c o m p e t i t o r s f o r that s u r p l u s i n  1 1 9  Id. at 86 a n d 90-91.  1 2 0  Id. at 89.  121  Id.  70  c o n t r a s t to the c u r r e n t w i s d o m that sees s u p p l i e r s a n d d i s t r i b u t o r s i n a c o m p l e m e n t a r y r e l a t i o n s h i p , s u p p o s e d l y r e l y i n g o n e a c h other's e f f i c i e n c y .  T o the  p a r t y t h e n that c o n t r o l s the f u n c t i o n o f p r o v i d i n g p r o d u c t - s p e c i f i c i n f o r m a t i o n a n d the q u a l i t y c e r t i f i c a t i o n w h i c h c o n s u m e r s r e l y o n goes the m a r k e t p o w e r a n d m o n o p o l y p r o f i t s (if a n y ) .  1 2 2  It is o n l y i n s i t u a t i o n s w h e r e a m a n u f a c t u r e r  has  some f o r m o f m a r k e t p o w e r that Steiner b e l i e v e s it is n e c e s s a r y to d e c l a r e R P M illegal.  1 2 3  T h u s he sees it as u n p r o d u c t i v e to b r i n g R P M cases a g a i n s t s u p p l i e r s i n  f r a g m e n t e d i n d u s t r i e s w h e r e s u c h s u p p l i e r s h a v e no m a r k e t p o w e r , w h i l e i n the case o f a s m a l l i n n o v a t i v e f i r m w i t h a n e w p r o d u c t , he v i e w s R P M as unobjectionable and possibly even p r o - c o m p e t i t i v e .  1 2 4  F r o m a n e c o n o m i c s t a n d p o i n t , Steiner's v i e w s seem e m i n e n t l y s e n s i b l e . T h e r e seems l i t t l e p o i n t i n a n e n f o r c e m e n t a g e n c y , l i k e the C o m m i s s i o n , b r i n g i n g a n a c t i o n a g a i n s t a s m a l l s u p p l i e r w h o , because a l i t t l e p r i c e c u t t i n g has d e v e l o p e d i n its l i n e o f p r o d u c t s , has i n v o k e d R P M .  What w o u l d o c c u r i f the p r i c e c u t t i n g  c o n t i n u e d w o u l d be that other d i s t r i b u t o r s w o u l d d r o p this l i n e , get a n o t h e r a n d sell it at the p r e v i o u s m a r g i n or m o r e .  122  1 2 3  124  N o t h i n g w o u l d be a c c o m p l i s h e d e x c e p t to  S t e i n e r , s u p r a note 112 art 159-60. I r r e s p e c t i v e o f w h o gets the m a r k e t p o w e r , Steiner's thesis b r i n g s out a f u r t h e r weakness i n the s p e c i a l services t h e o r y i n a s s u m i n g that it is a l w a y s e f f i c i e n t f o r services to be p r o v i d e d by a d i s t r i b u t o r , e v e n i n the case o f a new p r o d u c t . T h e f u n c t i o n o f p r o v i d i n g p r o d u c t - s p e c i f i c i n f o r m a t i o n a n d i n d e e d r e p u t a t i o n is i n c r e a s i n g l y f a l l i n g o n the s h o u l d e r s o f s u p p l i e r s . T h i s is so it w o u l d seem because the scale e c o n o m i e s o f m a s s - c o m m u n i c a t i o n m a k e it m o r e e f f i c i e n t f o r a s u p p l i e r r a t h e r t h a n a d i s t r i b u t o r to do so. So it is also the case that s u p p l i e r s are i n c r e a s i n g l y p r o v i d i n g the b a c k - u p s e r v i c e that goes a l o n g w i t h a n y warranty.  Id. at 196-97.  Id.  71  restrict one s u p p l i e r ; c o n s u m e r s w o u l d not h a v e g a i n e d i n a n y w a y s i n c e there w o u l d be no c h a n g e i n aggregate o u t p u t or p r i c e s .  T h e r e also seems little p o i n t i n the C o m m i s s i o n b r i n g i n g a c t i o n a g a i n s t a small f i r m w i t h a new a n d i n n o v a t i v e product.  A d i s t r i b u t o r w h i c h has i n v e s t e d a  great d e a l o f t i m e , e f f o r t a n d m o n e y i n t o e s t a b l i s h i n g a p r o d u c t deserves some p r o t e c t i o n f r o m w h a t S t e i n e r terms the " m i s s i o n a r y f r e e - r i d e r " (that i s , d i s t r i b u t o r s w h o b e g i n h a n d l i n g a p r o d u c t k n o w i n g that is m a r k e t a b l e , a n d w h o are a b l e to sell it at a l o w e r p r i c e because they h a v e not h a d to bear the expense o f work).  promotional  A t the same t i m e , the a m o u n t of p r o t e c t i o n need o n l y be f o r a short p e r i o d  o f t i m e s u f f i c i e n t f o r c o n s u m e r s to b e c o m e a w a r e o f the p r o d u c t a n d f o r  the  d i s t r i b u t o r to r e c o u p its costs plus a l i t t l e m o r e as some r e w a r d f o r its e f f o r t s .  ii)  C o n t r i b u t i o n to C o m p e t i t i v e  Markets  T h e c o n t r i b u t i o n to c o m p e t i t i v e m a r k e t s arises t h r o u g h w h a t is t e r m e d "intertype competition", d e f i n e d  b y P r o f e s s o r P a l a m o u n t a i n as "the c o m p e t i t i o n  b e t w e e n d i f f e r e n t types o f 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 b e t w e e n d i s t r i b u t o r s is  s a i d to result not o n l y i n p r i c e c o m p e t i t i o n per se, but the d e v e l o p m e n t o f m o r e i n n o v a t i v e a n d e f f i c i e n t modes o f d i s t r i b u t i o n .  1 2 6  A s a l r e a d y n o t e d , this has the  e f f e c t o f r e d u c i n g o p e r a t i n g costs w h i c h c a n t h e n be passed o n to c o n s u m e r s i n the f o r m of lower prices.  125  J . P a l a m o u n t a i n , T h e P o l i t i c s of D i s t r i b u t i o n (1955) at 38.  126  G e r l a . s u p r a note 113 at 6.  72  P r o f e s s o r G e r l a has i d e n t i f i e d a n u m b e r o f d i f f e r e n t w a y s i n w h i c h d i s c o u n t e r s h a v e been able to p r o m o t e i n t e r b r a n d c o m p e t i t i o n , n a m e l y b y f o r c i n g c o m p e t i n g d i s t r i b u t o r s to press s u p p l i e r s f o r p r i c e c o n c e s s i o n s , b y f o r c i n g r e t a i l outlets to create p r i v a t e b r a n d s a n d b y p r o v i d i n g a n outlet f o r m a n y l o w - p r i c e d , u n b r a n d e d products and products with less-known brand n a m e s .  1 2 7  The many  e x a m p l e s p r o v i d e d b y G e r l a a n d Steiner o f the v a r i e d p r o d u c t categories i n w h i c h i n t e r t y p e c o m p e t i t i o n has p l a y e d a c r u c i a l role i n r e d u c i n g m a r g i n s a n d p r i c e s p r o v i d e u n d e n i a b l e e v i d e n c e that the d i s c o u n t i n d u s t r y has h a d a b e n e f i c i a l  effect  o n i n t e r b r a n d c o m p e t i t i o n i n spite o f the C h i c a g o S c h o o l ' s r e l u c t a n c e to a c c e p t this fact.  1 2 8  T h i s i n c r e a s e d c o m p e t i t i o n f r o m d i s c o u n t e r s is o b v i o u s l y not a l w a y s w e l c o m e d b y c o m p e t i t o r s e s p e c i a l l y w h e r e t h e i r o w n i n e f f i c i e n c y does not a l l o w t h e m to m a t c h the d i s c o u n t e r s ' l o w e r m a r g i n s a n d p r i c e s .  T o c o u n t e r the  potential  loss o f sales a n d d r o p i n p r o f i t s , r e c o u r s e is o f t e n m a d e to a v a r i e t y o f t a c t i c s d e s i g n e d to b r i n g the d i s c o u n t e r s b a c k i n t o l i n e i n terms o f p r i c e or e v e n to h a v e t h e m c o m p l e t e l y cut o f f f r o m the s o u r c e o f s u p p l y .  T h e imposition of  minimum  resale p r i c e s by a s u p p l i e r a n d the w i t h h o l d i n g o f s u p p l y w h e r e i n d u c e d by c o m p e t i t o r s o f the d i s c o u n t e r s not o n l y r i s k s r u n n i n g a f o u l o f c o m p e t i t i o n l a w s , as a l r e a d y n o t e d , but s t i f l e s a n d m a y e v e n r e m o v e c o m p l e t e l y the a b i l i t y  of  d i s c o u n t e r s to engage i n p r i c e c o m p e t i t i o n as w e l l as p r o v i d i n g a d i s i n c e n t i v e to the d e v e l o p m e n t o f n e w , i n n o v a t i v e a n d e f f i c i e n t modes o f d i s t r i b u t i o n .  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. B a x t e r , " V e r t i c a l R e s t r a i n t s a n d R e s a l e P r i c e M a i n t e n a n c e : A R u l e o f R e a s o n A p p r o a c h " , 14 A n t i t r u s t L . & E c o n . R e v . 13 ( N o . 4, 1982) at 21; P o s n e r , s u p r a note 88 at 12 a n d F . E a s t e r b r o o k , " V e r t i c a l A r r a n g e m e n t s a n d the R u l e o f R e a s o n " , 53 A n t i t r u s t L . J . 135 (1984) at 156-57.  73  T h e e f f e c t on p r i c e c o m p e t i t i o n is l i k e l y to be p a r t i c u l a r l y severe w h e r e R P M is i m p o s e d b y a s u p p l i e r w i t h a s i g n i f i c a n t degree o f m a r k e t p o w e r because it is s e l l i n g a h i g h l y d i f f e r e n t i a t e d brand  branded p r o d u c t .  1 2 9  If  a p r o d u c t has a s t r o n g  t h i s , b y i m p l i c a t i o n , means that the degree o f i n t e r b r a n d c o m p e t i t i o n f o r  that p r o d u c t is l i k e l y to be l o w e r t h a n u s u a l . to p r o v i d e n e i t h e r a n a l t e r n a t i v e  T h e e x i s t e n c e o f other b r a n d s is s a i d  source of supply f o r discounters nor an  effective  c h e c k on p r i c e s c h a r g e d b y a s u p p l i e r i n s i t u a t i o n s w h e r e R P M is most l i k e l y to be adopted.  1 3 0  P r o d u c t s w i t h strong a c t u a l or p o t e n t i a l b r a n d i d e n t i t i e s are s a i d to be  e x a c t l y the p r o d u c t s that m o d e r n d i s c o u n t e r s must c a r r y i n o r d e r to t h r i v e p r o v i d e c o m p e t i t i o n at b o t h s u p p l i e r a n d d i s t r i b u t o r l e v e l s .  and  1 3 1  It must be b o r n e i n m i n d w h e n assessing the c l a i m s o f d i s c o u n t e r s a n d t h e i r a d h e r e n t s that the c o n t i n u e d p r o s c r i p t i o n o f R P M is v e r y m u c h i n t h e i r interest.  self-  H o w e v e r , f r o m a n e c o n o m i c s t a n d p o i n t , the c o n t r i b u t i o n s to c o n s u m e r  w e l f a r e a n d c o m p e t i t i v e m a r k e t s b r i e f l y r e v i e w e d a b o v e are u n d e n i a b l e a n d t h e r e f o r e this must be b o r n e i n m i n d i n d e c i d i n g u p o n the a p p r o p r i a t e o f v e r t i c a l p r i c e restraints.  It is i m p o r t a n t that new a n d e f f i c i e n t  treatment  retailing  i n n o v a t i o n s not be d i s c o u r a g e d b y m a k i n g it d i f f i c u l t f o r d i s c o u n t e r s to o b t a i n l e a d i n g b r a n d s a n d r e s e l l i n g t h e m at p r i c e s w h i c h r e f l e c t t h e i r greater  efficiency.  In this r e g a r d , the f o c u s o f the C o m m i s s i o n ' s a t t e n t i o n s h o u l d be on k e e p i n g b a r r i e r s to e n t r y l o w so as to f a c i l i t a t e new d i s t r i b u t i o n t e c h n i q u e s . also to the l e g i t i m a t e  interests o f s u p p l i e r s , e s p e c i a l l y w h e r e they are s m a l l ,  129  P i t o f s k y , s u p r a note 112 at 1492  130  G e r l a , s u p r a note 113 at 18.  Id. at 18-19.  H a v i n g regard  n.22.  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.  133  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  134  ABA Monograph No. 2, supra note 10 at 79 n.327.  135  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.  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.  139  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.  140  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 F T C 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 texts  142  reveals  surprisingly little about the legislative policy behind the treatment of RPM in the 1958 and 1975 New Zealand A c t s  143  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  144  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  Trade Practices Act 1958, section 19(2)(d) and Commerce Act 1975, section 28.  144  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 industries , while in Australia the legislation appears to have been 145  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 1951  147  after a report of the MacQuarrie Committee to  study combines legislation in that country had recommended that RPM prohibited.  148  be  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  See R. Merkin and K. Williams, Competition Law Antitrust Policy in the United Kingdom and the EEC (London, Sweet & Maxwell, 1984) at 228.  146  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 p r i c e s must be v i e w e d as m a n i f e s t a t i o n s o f a r e s t r i c t i v e or m o n o p o l i s t i c p r a c t i c e w h i c h does not p r o m o t e general  welfare.  It is s u b m i t t e d that this same p o l i c y p e r v a d e s the c u r r e n t R P M p r o v i s i o n s i n the A u s t r a l i a n a n d N e w Z e a l a n d A c t s , b o t h A c t s based as they are o n p r o m o t i n g c o m p e t i t i o n t h r o u g h e n h a n c e d e c o n o m i c e f f i c i e n c y f o r the b e n e f i t o f the p u b l i c at large.  T h i s v i e w is b o r n e out b y the c o m m e n t s o f f o r m e r A u s t r a l i a n  Attorney  G e n e r a l N . H . B o w e r w h o gave as reasons f o r b a n n i n g R P M i n A u s t r a l i a "that the p r a c t i c e tends to r e m o v e i n c e n t i v e to sell goods c h e a p l y a n d that, i n g e n e r a l , the p r a c t i c e w o r k s a g a i n s t the o b j e c t i v e s o f e f f i c i e n c y w h i c h are so i m p o r t a n t i f o u r e f f o r t s to resist present i n f l a t i o n a r y  pressures are to s u c c e e d . "  1 5 1  T h e n e e d to c o n t r o l i n f l a t i o n as the basis f o r the b a n n i n g o f R P M i n C a n a d a also r e f l e c t s the o p i n i o n o f two C a n a d i a n c o m m e n t a t o r s .  They  state:  1 5 2  In o u r v i e w it is i n c o r r e c t to a s c r i b e the i n t r o d u c t i o n o f a p r i c e m a i n t e n a n c e i n 1951 to a d e s i r e o f P a r l i a m e n t to use c o m p e t i t i o n p o l i c y to protect the interests o f s m a l l business. T h e p r o x i m a t e cause o f R P M was the h i g h l y r e g a r d e d M a c Q u a r r i e C o m m i t t e e R e p o r t i n 1951 a n d the h i g h rate o f i n f l a t i o n b e i n g e x p e r i e n c e d at the time.  N e w Z e a l a n d also was e x p e r i e n c i n g i n f l a t i o n a r y  pressures at the t i m e o f  e n a c t m e n t o f the 1975 l e g i s l a t i o n , as i n d e e d was the rest o f the w o r l d , but it is d o u b t e d that this was i n f a c t the p r i m e m o t i v a t i n g f a c t o r .  R a t h e r , as is o f t e n  the  Q u o t e d i n C . T a p e r e l l , R. V e r m e e s c h a n d D . H a r l a n d T r a d e P r a c t i c e s a n d C o n s u m e r P r o t e c t i o n ( S y d n e y , B u t t e r w o r t h s , 1974) at 103.  152  P. G o r e c k i a n d W. S t a n b u r y , T h e O b j e c t i v e s o f C a n a d i a n C o m p e t i t i o n P o l i c y 1888-1983 ( M o n t r e a l , T h e Institute f o r R e s e a r c h 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 h a d l a g g e d b e h i n d its C o m m o n w e a l t h c o u n t e r p a r t s i n e n a c t i n g s p e c i f i c p r o v i s i o n s d e a l i n g w i t h R P M a n d it is l i k e l y that it was the d e s i r e f o r c o n s i s t e n t t r e a t m e n t o f R P M as w e l l as the g e n e r a l b e l i e f at that t i m e that R P M h a d the e f f e c t o f s u p p r e s s i n g p r i c e c o m p e t i t i o n i n the m a r k e t to the d e t r i m e n t o f c o n s u m e r s that p r o m p t e d some a c t i o n b y P a r l i a m e n t .  C o n c e r n f o r the e l i m i n a t i o n  o f p r i c e c o m p e t i t i o n s u c h that the c o n s u m e r s m a y lose the o p p o r t u n i t y to b e n e f i t f r o m the i n c r e a s e d e f f i c i e n c y or other c o m p e t i t i v e a d v a n t a g e o f a p a r t i c u l a r d i s t r i b u t o r is consistent w i t h c o m m e n t s m a d e i n the o n l y A u s t r a l i a n case so f a r to 1 ro  c o n s i d e r R P M i n l i g h t o f the o v e r a l l p o l i c y o f the A c t w h e r e it was s a i d :  It is c l e a r l y the i n t e n t i o n o f P a r l i a m e n t to l a y d o w n c o n d i t i o n s f o r the c o n d u c t o f c o r p o r a t e t r a d e a n d c o m m e r c e w h i c h w i l l e n s u r e that t r a d e r s operate i n c o m p e t i t i v e c o n d i t i o n s a n d that the p u b l i c has the b e n e f i t s w h i c h f l o w there f r o m . So f a r as resale p r i c e m a i n t e n a n c e is c o n c e r n e d the object o f the A c t is to create c o n d i t i o n s i n w h i c h the p u b l i c w i l l b e n e f i t f r o m t r a d e r s c o m p e t i n g w i t h e a c h other i n respect o f p r i c e s u n f e t t e r e d b y p r i c e restraints i m p o s e d b y s u p p l i e r s o f goods u p o n retailers.  M o v e s i n the U n i t e d States t o w a r d s a m o r e p e r m i s s i v e t r e a t m e n t o f R P M a p p e a r , s o m e w h a t s u r p r i s i n g l y , to h a v e gone l a r g e l y u n n o t i c e d i n N e w Z e a l a n d or Australia.  A n y p o l i c y c h a n g e i n this d i r e c t i o n b y e i t h e r the N e w Z e a l a n d or  A u s t r a l i a n P a r l i a m e n t s seems u n l i k e l y i n the i m m e d i a t e  future.  In c o n t r a s t , C a n a d a m a y w e l l see a c h a n g e i n its l e g i s l a t i o n i f the r e c o m m e n d a t i o n b y the M a c D o n a l d C o m m i s s i o n i n 1985 to r e v i e w that c o u n t r y ' s  T r a d e P r a c t i c e s C o m m i s s i o n v. S t i h l C h a i n Saws (Aust.) P t v . L t d . (1978) A T P R 40-091 at 17,895.  82  R P M p r o v i s i o n s is t a k e n u p .  1 5 4  S u c h a r e v i e w , it was suggested, m i g h t  determine  that R P M s h o u l d be i l l e g a l o n l y w h e n its d e t r i m e n t a l e f f e c t s o n c o m p e t i t i o n o u t w e i g h its b e n e f i t s , or a l t e r n a t i v e l y  R P M c o u l d be m a d e a m a t t e r f o r r e v i e w  by  a n a d m i n i s t r a t i v e t r i b u n a l s u c h as the R T P C as is n o w the case w i t h e x c l u s i v e dealing, tied selling and market  (b) Restraints  restriction.  1 5 5  Comparative Treatment of Horizontal Price  P o l i c y statements c o n c e r n i n g h o r i z o n t a l p r i c e restraints a r e , at least i n A u s t r a l i a a n d N e w Z e a l a n d , also c o n s p i c u o u s b y t h e i r absence.  T h e r e is l i t t l e  d o u b t i n a n y j u r i s d i c t i o n h o w e v e r that p r i c e f i x i n g b y c o m p e t i t o r s is f a r benign.  from  A s f a r b a c k as 1927, Stone J. i n the l e a d i n g d e c i s i o n o f 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 a n d result o f e v e r y p r i c e - f i x i n g a g r e e m e n t , i f e f f e c t i v e , is the e l i m i n a t i o n o f one f o r m o f c o m p e t i t i o n . T h e p o w e r to f i x p r i c e s , w h e t h e r r e a s o n a b l y e x e r c i s e d or not, i n v o l v e s p o w e r to c o n t r o l the m a r k e t a n d to f i x a r b i t r a r y a n d unreasonable prices. T h e reasonable price f i x e d today may t h r o u g h e c o n o m i c a n d business c h a n g e s b e c o m e the u n r e a s o n a b l e p r i c e o f t o m o r r o w . O n c e e s t a b l i s h e d , it m a y be m a i n t a i n e d u n c h a n g e d because o f the absence o f c o m p e t i t i o n s e c u r e d b y the agreement f o r a p r i c e r e a s o n a b l e w h e n f i x e d .  154  R o y a l C o m m i s s i o n o n the E c o n o m i c U n i o n a n d D e v e l o p m e n t Prospects f o r C a n a d a , R e p o r t ( O t t a w a , Q u e e n s P r i n t e r , 1985) at 224.  155  Id. T h e C o m m i s s i o n ' s r e c o m m e n d a t i o n was based o n a d e t a i l e d s t u d y by M a t h e w s o n a n d W i n t e r w h i c h c o n t e n d e d that there are c i r c u m s t a n c e s i n w h i c h R P M could in fact provide significant economic benefits. T h e study i n f a c t r e c o m m e n d e d that R P M s h o u l d be m a d e l e g a l except w h e r e it f a c i l i t a t e s the e s t a b l i s h m e n t of a s u p p l i e r or d i s t r i b u t o r c a r t e l . See F . M a t h e w s o n a n d R. W i n t e r , C o m p e t i t i o n P o l i c y a n d V e r t i c a l E x c h a n g e ( T o r o n t o , U n i v e r s i t y o f T o r o n t o . Press, 1985) at 37.  156  273 U . S . 392,397 (1927).  83  T h i s v i e w was f o r c e f u l l y e n d o r s e d i n 1940 b y D o u g l a s J . i n 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. w h e r e he s a i d :  1 5 7  A n y c o m b i n a t i o n w h i c h tampers w i t h p r i c e s t r u c t u r e s is e n g a g e d i n a n u n l a w f u l a c t i v i t y . E v e n t h o u g h the m e m b e r s o f the p r i c e - f i x i n g g r o u p were i n no p o s i t i o n to c o n t r o l the m a r k e t , to the extent that they r a i s e d , l o w e r e d or s t a b i l i z e d p r i c e s , they w o u l d be d i r e c t l y i n t e r f e r i n g w i t h the f r e e p l a y of market forces.  W i t h these v i e w s i n m i n d , h o r i z o n t a l p r i c e f i x i n g i n the U n i t e d States has l a r g e l y r e m a i n e d u n c h a l l e n g e d as one o f the restraints w h i c h is the p r o p e r subject o f per se i l l e g a l i t y u n d e r s e c t i o n 1 o f the S h e r m a n A c t .  1 5 8  T h e p r a c t i c e i n N e w Z e a l a n d was f i r s t g e n e r a l l y c a u g h t b y s e c t i o n 19(2)  of  the 1958 A c t a n d i n the 1975 A c t , the p r a c t i c e was s p e c i f i c a l l y d e a l t w i t h i n s e c t i o n 27 w h i c h m a d e it a n o f f e n c e f o r a n y p e r s o n to be a p a r t y to a n a g r e e m e n t or a r r a n g e m e n t r e l a t i n g to the p r i c e s at w h i c h or terms u p o n w h i c h goods s h o u l d be s o l d .  P r o v i s i o n was m a d e i n s e c t i o n 29 f o r an a g r e e m e n t or a r r a n g e m e n t to be  a p p r o v e d , w h i l e there were also a l i m i t e d n u m b e r o f e x c e p t i o n s .  1 5 9  310 U . S . 150, 221 (1940).  It s h o u l d be n o t e d h o w e v e r that a t r e n d has d e v e l o p e d i n a n u m b e r of recent d e c i s i o n s not to a p p l y a per se r u l e to h o r i z o n t a l p r i c e f i x i n g . See e.g. B r o a d c a s t M u s i c . Inc. v. C o l u m b i a B r o a d c a s t i n g S y s t e m Inc. 441 U . S . 1 (1979) a n d N C A A v. B o a r d o f R e g e n t s o f U n i v . o f O k l a h o m a 468 U . S . 85 (1984). F o r a d i s c u s s i o n o f these a n d other recent d e c i s i o n s see F . S p i n n e l l a Jr., " C a t e g o r i s a t i o n s a n d P r e s u m p t i o n s i n H o r i z o n t a l A n t i t r u s t Cases", 22 N . E . L . R . 295 (1987).  159  F o r a d i s c u s s i o n o f these p r o v i s i o n s , see C o l l i n g e , s u p r a note 1 at 187-98.  84 R e l e v a n t p r o v i s i o n s i n the present A c t a g a i n are l a r g e l y m o d e l l e d o n the equivalent Australian p r o v i s i o n s .  1 6 0  S e c t i o n 30(1) o f the 1986 A c t p r o v i d e s :  [A] p r o v i s i o n o f a c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g s h a l l be d e e m e d f o r the purposes o f [section 27] to h a v e the p u r p o s e , or to h a v e or to be l i k e l y to h a v e the e f f e c t , o f s u b s t a n t i a l l y l e s s e n i n g c o m p e t i t i o n i n a m a r k e t i f the p r o v i s i o n has the p u r p o s e , or has or is l i k e l y to h a v e the e f f e c t o f f i x i n g , c o n t r o l l i n g , or m a i n t a i n i n g , or p r o v i d i n g f o r the f i x i n g , c o n t r o l l i n g or m a i n t a i n i n g o f the p r i c e o f goods or s e r v i c e s , or a n y d i s c o u n t , a l l o w a n c e , rebate, or c r e d i t i n r e l a t i o n to goods or s e r v i c e s . ( E m p h a s i s a d d e d . )  T h e p r a c t i c a l e f f e c t o f s e c t i o n 30 is that a l l h o r i z o n t a l p r i c e f i x i n g a r r a n g e m e n t s are i l l e g a l per se unless a u t h o r i z e d u n d e r P a r t V o f the A c t . present A c t also c o n t a i n s a l i m i t e d n u m b e r of e x e m p t i o n s  i n c l u d i n g joint  1 6 1  The  venture  p r i c i n g (section 31), r e c o m m e n d e d p r i c e p r o v i s i o n s w h e r e there are not less t h a n 50 parties to the c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g (section 32) a n d j o i n t b u y i n g a n d p r o m o t i o n a r r a n g e m e n t s (section 3 3 ) .  1 6 2  A d e t a i l e d d i s c u s s i o n o f h o r i z o n t a l p r i c e r e s t r a i n t s is w e l l b e y o n d the scope o f this thesis.  T h e b r i e f r e v i e w o f s e c t i o n 30 a b o v e is i n t e n d e d h o w e v e r to f o c u s  u p o n the c o m p a r a t i v e t r e a t m e n t o f h o r i z o n t a l p r i c e f i x i n g as the basis f o r assessing w h e t h e r the t r e a t m e n t o f h o r i z o n t a l a n d v e r t i c a l p r i c e r e s t r a i n t s is c o n s i s t e n t g i v e n the e m p i r i c a l e v i d e n c e that R P M m a y i n some instances f a c i l i t a t e c o l l u s i o n a n d  Sections 4 5 A ( l ) - ( 4 ) a n d (7)-(8).  F o r a d i s c u s s i o n o f these p r o v i s i o n s , see  M i l l e r , s u p r a note 43 at 65-69.  F o r a d i s c u s s i o n o f the a u t h o r i z a t i o n p r o v i s i o n s , see text a c c o m p a n y i n g P a r t III,  162  notes 79-81  infra.  It s h o u l d be n o t e d that these e x e m p t i o n s o n l y relate to a r r a n g e m e n t s w i t h i n s e c t i o n 30; s u c h a r r a n g e m e n t s are s t i l l subject to s e c t i o n 27.  falling  85  m o r e g e n e r a l l y that there w i l l also almost a l w a y s be a c o n t r a c t , a r r a n g e m e n t u n d e r s t a n d i n g b e t w e e n a s u p p l i e r a n d d i s t r i b u t o r w h e r e R P M is i n v o l v e d .  or  As  M o n s a n t o d e m o n s t r a t e s , there w i l l be f e w cases o f p u r e l y u n i l a t e r a l a c t i o n , s u c h that there is no "meeting of the m i n d s " .  T h i s w i l l arise f o r e x a m p l e w h e r e a  s u p p l i e r listens to a n d acts u p o n a c o m p l a i n t f r o m a d i s t r i b u t o r , w h e r e a s u p p l i e r urges a p r i c e c u t t i n g d i s t r i b u t o r to h o l d the l i n e o n p r i c e , or w h e r e a s u p p l i e r e x p l a i n s its p r i c i n g p r e f e r e n c e i n r e p e a t e d or e n t h u s i a s t i c t e r m s .  1 6 3  O f i m m e d i a t e note is the p r o v i s i o n f o r a u t h o r i z a t i o n o f a p r i c e f i x i n g a g r e e m e n t u n d e r s e c t i o n 30 i n contrast to the a b s o l u t e p r o h i b i t i o n o f R P M u n d e r s e c t i o n 37.  W h y this is so appears l a r g e l y u n e x p l a i n e d , p a r t i c u l a r l y i n l i g h t o f  f a c t that s e c t i o n 88(2)  o f the A u s t r a l i a n A c t s p e c i f i c a l l y d e n i e s a u t h o r i z a t i o n  a r r a n g e m e n t s f i x i n g , c o n t r o l l i n g or m a i n t a i n i n g the p r i c e s o f goods (but  If  the A u s t r a l i a n e x p e r i e n c e is a n y t h i n g to go b y  f e w , i f a n y , a u t h o r i z a t i o n s are l i k e l y to be g r a n t e d .  1 6 4  for  not  s e r v i c e s ) , subject the e q u i v a l e n t e x c e p t i o n s m e n t i o n e d a b o v e i n sections 31-33 the N e w Z e a l a n d A c t .  the  of  however,  A l s o o f note is that s e c t i o n  32, l i k e s e c t i o n 39, a l l o w s f o r the r e c o m m e n d i n g o f p r i c e s , a l t h o u g h n o t h i n g is s a i d a b o u t the o b l i g a t i o n to c o m p l y .  It w o u l d seem that a n u n d e r s t a n d i n g that there be  c o m p l i a n c e w i t h r e c o m m e n d e d p r i c e s w i l l f a l l a f o u l o f s e c t i o n 30 i t s e l f .  B o t h sections 30 a n d 37 are c o m p r e h e n s i v e i n t h e i r a t t e m p t to p r o s c r i b e p r i c e f i x i n g , w h e t h e r it be h o r i z o n t a l or v e r t i c a l .  T o this e n d , one m a y q u e s t i o n  w h y s e c t i o n 37 s h o u l d not also be subject to a c o m p e t i t i o n test, l i k e s e c t i o n 30, a n d  See cases c i t e d i n W. A n d e r s e n , " T h e A n t i t r u s t C o n s e q u e n c e s o f M a n u f a c t u r e r - S u g g e s t e d R e t a i l P r i c e s - T h e Case for P r e s u m p t i v e Illegality", 54 W a s h . L . R e v . 763 (1979) at 777.  See M i l l e r , s u p r a note 43 at 66-69.  i n d e e d the rest o f the t r a d e p r a c t i c e p r o v i s i o n s i n the A c t .  In this r e g a r d , it is  i n s t r u c t i v e to b r i e f l y r e f e r to the l e a d i n g A u s t r a l i a n d e c i s i o n o f R a d i o 2 U E S y d n e y P t v L t d . v. Stereo F . M . P t y . L t d . & A n o r .  1 6 5  c o n c e r n i n g the g e n e r a l  a p p l i c a t i o n o f the A u s t r a l i a n e q u i v a l e n t o f s e c t i o n 30. In that case, L o c k h a r t J . i n 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 c a l l e d u p o n to c o n s i d e r the a c t i o n s o f t w o S y d n e y r a d i o stations w h i c h o f f e r e d e q u a l a d v e r t i s i n g t i m e o n b o t h stations at c o m b i n e d rates.  H i s H o n o u r stressed the i m p o r t a n c e o f d i s t i n g u i s h i n g b e t w e e n  arrangements w h i c h restrain price competition a n d arrangements w h i c h have an i n c i d e n t a l e f f e c t o n p r i c e . In h i s v i e w , not e v e r y a r r a n g e m e n t  between  c o m p e t i t o r s w h i c h has some e f f e c t o n p r i c e is p e r se u n l a w f u l , n o r w e r e the p r i c e f i x i n g p r o v i s i o n s i n t r o d u c e d to m a k e a r r a n g e m e n t s u n l a w f u l w h i c h a f f e c t p r i c e b y improving competition.  S u c h a v i e w he saw as consistent w i t h the a p p r o a c h  a d o p t e d i n the U n i t e d States' cases a n d he c i t e d S o c o n y i n s u p p o r t . said:  1 6 6  H e then  1 6 7  It is f u n d a m e n t a l to [the p r i c e f i x i n g p r o v i s i o n s ] that the r e l e v a n t c o n d u c t , i n p u r p o s e or e f f e c t , s u b s t a n t i a l l y lessens c o m p e t i t i o n e r w o u l d be l i k e l y to d o so. If c o m p e t i t i o n is i m p r o v e d b y a n a r r a n g e m e n t I c a n n o t p e r c e i v e h o w it c o u l d be c h a r a c t e r i z e d as a p r i c e f i x i n g a r r a n g e m e n t w i t h i n the a m b i t o f those p r o v i s i o n s .  W h i l e L o c k h a r t ' s a p p r o a c h , s e e m i n g l y u n w i t t i n g l y , s h o w e d great  similarity  to the t r e n d d e v e l o p i n g i n the U n i t e d States o f d i s t i n g u i s h i n g b e t w e e n p r i c e a n d n o n - p r i c e r e s t r a i n t s o n the basis o f m a t e r i a l i t y  165  166  167  o f e f f e c t o n p r i c e so as to a v o i d  (1982) A . T . P . R . 40-318.  T h e c h a r a c t e r i z a t i o n o f c o n d u c t d e p e n d i n g u p o n its e f f e c t o n p r i c e w i l l be d i s c u s s e d i n m o r e d e t a i l i n P a r t IIIC(2)(b).  I d , at 43,920.  87  a p p l i c a t i o n o f the per se r u l e , the cases u p o n w h i c h he r e l i e d s c a r c e l y g a v e h i m s u p p o r t f o r this a p p r o a c h . subject o f some c r i t i c i s m .  It was no s u r p r i s e t h e r e f o r e that the case was the 1 6 8  W h e n the case c a m e u p on a p p e a l ,  a l l e g i n g that the e v i d e n c e d i s c l o s e d a p r i c e - f i x i n g a r r a n g e m e n t o f s e c t i o n 4 5 A o f the A c t a n d that s u c h a r r a n g e m e n t  1 6 9  the  appellant  w i t h i n the  automatically  meaning  involved a  b r e a c h o f s e c t i o n 45 (the e q u i v a l e n t o f s e c t i o n 27) o f the A c t , the F u l l C o u r t unfortunately o f the case.  f o u n d it u n n e c e s s a r y to c o n s i d e r this s e c o n d a l l e g a t i o n i n d i s p o s i n g T h e F u l l C o u r t d i d say  however:  1 7 0  In o u r v i e w the w o r d ' f i x i n g ' i n s.45A takes c o l o u r f r o m its g e n e r a l c o n t e x t a n d f r o m the w o r d s - " c o n t r o l l i n g or m a i n t a i n i n g " - a n d not e v e r y d e t e r m i n a t i o n o f a p r i c e , f o l l o w i n g d i s c u s s i o n between c o m p e t i t o r s , w i l l a m o u n t to a p r i c e ' f i x i n g ' . T h e r e must, we b e l i e v e , be a n element o f i n t e n t i o n or l i k e l i h o o d to a f f e c t p r i c e f i x i n g b e f o r e p r i c e " f i x i n g " c a n be e s t a b l i s h e d . T h i s w i l l o f t e n be a m a t t e r o f i n f e r e n c e , r e q u i r i n g no d i r e c t e v i d e n c e f o r it to be established.  W i t h respect, e v e n this a p p r o a c h seems at v a r i a n c e w i t h the p o l i c y u n d e r l y i n g the s e c t i o n .  T h e r e is no r e f e r e n c e to " i n t e n t i o n " i n s e c t i o n 30; a  p r o v i s i o n n e e d o n l y h a v e "the e f f e c t " o f p r i c e - f i x i n g to come i n t o p l a y .  N e v e r t h e l e s s , the a p p r o a c h e s t a k e n b o t h by L o c k h a r t J . a n d the F u l l C o u r t m a y i n d i c a t e the f u t u r e a p p r o a c h o f the A u s t r a l i a c o u r t s i n this a r e a a n d , i f so, it c e r t a i n l y c a l l s i n t o q u e s t i o n w h y h o r i z o n t a l p r i c e - f i x i n g , w h i c h has  traditionally  1 6 8  See e.g. J . J a c k s o n , " P r i c e F i x i n g A g r e e m e n t s a n d S e c t i o n 4 5 A ( 1 ) o f T r a d e P r a c t i c e s A c t 1 9 7 4 ( C t h ) \ (1983) 11 A . B . L . R . 310.  1 6 9  (198 3 ) 68 F . L . R . 70.  1 7 0  Id. at 72.  the  been l o o k e d u p o n w i t h more d i s f a v o u r t h a n R P M , s h o u l d be the subject o f  more  permissive treatment.  c)  C o n s i g n m e n t Sales  A f u n d a m e n t a l issue to the v e r y a p p l i c a t i o n o f the R P M p r o v i s i o n s o f A c t is the m e a n i n g o f the t e r m "resale" i n s e c t i o n 37.  the  B y the use o f this w o r d , it is  a r g u a b l e that the s e c t i o n does not come i n t o p l a y i n a s i t u a t i o n w h e r e a n a g e n c y relationship  1 7 1  c a n be s a i d to exist s u c h as w h e r e a s u p p l i e r sells p r o d u c t s o n a  c o n s i g n m e n t basis t h r o u g h d i s t r i b u t o r s .  In l e g a l terms, a sale i n v o l v e s a t r a n s f e r  p r o p e r t y a n d no s u c h t r a n s f e r takes p l a c e w h e r e one p e r s o n is a c t i n g as agent another.  Where a c o n s i g n m e n t system is b e i n g u s e d , the t r a n s f e r o f p r o p e r t y  p l a c e b e t w e e n the s u p p l i e r a n d the u l t i m a t e c o n s u m e r a n d t h e r e f o r e c o n s t i t u t e d as the c o n s i g n e e does not take title at a n y stage.  F r o m this it  takes  follows which  T h e a r g u m e n t is  r e i n f o r c e d by the r e f e r e n c e to "another person" i n s e c t i o n 37(3)  w h i c h i m p l i e s that  that p e r s o n has its o w n legal p e r s o n a l i t y a n d w i l l sell goods o n its o w n r a t h e r t h a n o n the s u p p l i e r ' s b e h a l f .  for  no resale is  that "the s p e c i f i c a t i o n " to a d i s t r i b u t o r w h o is a n agent "of the p r i c e b e l o w goods are not to be sold" w o u l d not a p p e a r to be p r o h i b i t e d .  of  A n agency relationship between  behalf a supplier  a n d "another person" w o u l d seem to d e n y this separate l e g a l p e r s o n a l i t y .  In l e g a l terms, "agency" is used to c o n n o t e an a u t h o r i t y or c a p a c i t y r e s i d i n g i n one p e r s o n to create l e g a l r e l a t i o n s b e t w e e n a n o t h e r p e r s o n i n the p o s i t i o n o f a " p r i n c i p a l " a n d t h i r d parties. In the business w o r l d h o w e v e r , its s i g n i f i c a n c e is by no means thus r e s t r i c t e d . See K e n n e d y v. D e T r a f f o r d [1897] A C 180,188 (per L o r d H e r s h e l l ) . Whether or not a n a g e n c y r e l a t i o n s h i p exists w i l l d e p e n d on the f a c t s i n e a c h case. See e.g. I n t e r n a t i o n a l H a r v e s t e r C o m p a n y o f A u s t r a l i a v. C a r r i g a n s H a z e l d e n e P a s t o r a l C o m p a n y (1958) 100 C . L . R . 644.  See D o n a l d a n d H e y d o n , s u p r a note 1 at  363.  S u c h a l e g a l i s t i c a r g u m e n t w o u l d a p p e a r to d e f e a t the e c o n o m i c p u r p o s e b e h i n d the p r o h i b i t i o n .  It has h o w e v e r been used w i t h this e n d i n m i n d i n a  number of significant distribution arrangements. was i n U n i t e d States v. G e n e r a l E l e c t r i c C o .  1 7 3  T h e most n o t a b l e test o f its use  w h e r e the U n i t e d States S u p r e m e  C o u r t was c a l l e d u p o n to c o n s i d e r a R P M scheme o p e r a t e d by G e n e r a l E l e c t r i c u n d e r w h i c h it r e t a i n e d title to its p r o d u c t s a n d m e r e l y c o n s i g n e d t h e m to agents f o r resale.  In u p h o l d i n g the c o n s i g n m e n t , the C o u r t s a i d that " g e n u i n e contacts of  a g e n c y " d i d not v i o l a t e s e c t i o n 1 o f the S h e r m a n A c t "because the o w n e r o f a n a r t i c l e , p a t e n t e d or otherwise" was not p r o h i b i t e d f r o m " f i x i n g the p r i c e b y his agents t r a n s f e r the title f r o m h i m to s u c h c o n s u m e r " .  1 7 4  which  C r i t i c a l to this case  was the f i n d i n g that there was no c o n s p i r a c y or c o m b i n a t i o n .  A n almost i d e n t i c a l c o n s i g n m e n t s y s t e m c a m e u p f o r c o n s i d e r a t i o n i n S i m p s o n v. U n i o n O i l C o . .  1 7 5  T h i s time h o w e v e r the S u p r e m e C o u r t h e l d that there  h a d been a v i o l a t i o n o f s e c t i o n 1 o f the S h e r m a n A c t a n d sought to d i s t i n g u i s h G e n e r a l E l e c t r i c o n the basis that there was no c o e r c i o n i n that case, u n l i k e M o r e s p e c i f i c a l l y , the C o u r t h e l d that the c o n s i g n m e n t a g r e e m e n t  here.  was a s h a m by  p l a c i n g most o f the i n c i d e n t s o f o w n e r s h i p u p o n the s h o u l d e r s o f the s o - c a l l e d  173  1 7 4  175  272 U . S . 476 (1926).  272 U . S . at  478.  377 U . S . 13 (1964).  consignee  a n d that there was i n substance a sale f o r resale p u r p o s e s .  f o r the m a j o r i t y , M r . J u s t i c e D o u g l a s s a i d :  Speaking  1 7 7  A s we h a v e s a i d , a n o w n e r o f a n a r t i c l e m a y send it to a d e a l e r w h o m a y i n t u r n u n d e r t a k e to sell it o n l y at a p r i c e d e t e r m i n e d b y the o w n e r . T h e r e is n o t h i n g i l l e g a l a b o u t that a r r a n g e m e n t . W h e n , h o w e v e r , a ' c o n s i g n m e n t ' d e v i c e is used to c o v e r a vast g a s o l i n e d i s t r i b u t i o n s y s t e m , f i x i n g p r i c e s t h r o u g h m a n y r e t a i l outlets, the a n t i t r u s t laws p r e v e n t c a l l i n g the ' c o n s i g n m e n t ' a n a g e n c y , f o r t h e n the e n d result o f 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 . ... w o u l d be a v o i d e d m e r e l y by c l e v e r m a n i p u l a t i o n o f w o r d s , not b y d i f f e r e n c e s i n s u b s t a n c e . T h e present, c o e r c i v e ' c o n s i g n m e n t ' d e v i c e , i f s u c c e s s f u l against c h a l l e n g e u n d e r the a n t i t r u s t l a w s , f u r n i s h e s a w o o d e n f o r m u l a f o r a d m i n i s t e r i n g p r i c e s o n a vast scale.  T h e S u p r e m e C o u r t i n U n i t e d States v. A r n o l d . S c h w i n n & C o . .  decided  just three years a f t e r S i m p s o n , u p h e l d a c o n s i g n m e n t p l a n i m p o s i n g t e r r i t o r i a l a n d c u s t o m e r r e s t r i c t i o n s on o t h e r w i s e i n d e p e n d e n t d i s t r i b u t o r s .  N o price f i x i n g  was  i n v o l v e d i n S c h w i n n . but the C o u r t d i d i n d i c a t e that p r i c e m a i n t e n a n c e i n a b o n a f i d e c o n s i g n m e n t s y s t e m m i g h t be u n l a w f u l .  A s w i l l be d i s c u s s e d i n P a r t IIIB, the  d i s t i n c t i o n b e t w e e n sale a n d c o n s i g n m e n t t r a n s a c t i o n s m a d e i n S c h w i n n was  T h e c o n s i g n m e n t a g r e e m e n t s p e c i f i e d that w h i l e title to the c o n s i g n e d g a s o l i n e w o u l d r e m a i n i n the s u p p l i e r a n d the s u p p l i e r w o u l d p a y a l l p r o p e r t y taxes t h e r e o n , S i m p s o n , as d i s t r i b u t o r , "must c a r r y p e r s o n a l l i a b i l i t y a n d p r o p e r t y d a m a g e i n s u r a n c e ... a n d is r e s p o n s i b l e f o r a l l losses o f the ' c o n s i g n e d ' g a s o l i n e i n his possession, save f o r s p e c i f i e d acts of G o d . " Id. at 15.  1 7 7  178  Id. at 21-22.  388 U . S . 365 (1967).  91  strongly criticized in S v l v a n i a  1 7 9  a n d the d e c i s i o n was u l t i m a t e l y o v e r t u r n e d .  Where this leaves the law i n the U n i t e d States is u n c e r t a i n  T h e l a w is c e r t a i n l y c l e a r e r i n C a n a d a .  T h e 1975 a m e n d m e n t s e x t e n d i n g the  p r i c e m a i n t e n a n c e p r o v i s i o n s to s i t u a t i o n s b e y o n d just resale m e a n that c o n s i g n m e n t s e l l i n g is n o w c a u g h t .  C o n s i g n m e n t s e l l i n g was also m a d e a c i v i l l y  r e v i e w a b l e p r a c t i c e as part o f those a m e n d m e n t s f o l l o w i n g a n u m b e r o f reports i n d i c a t i n g that it h a d been used i n the past to a v o i d the p r i c e m a i n t e n a n c e p r i c e d i s c r i m i n a t i o n p r o v i s i o n s o f the C o m b i n e s I n v e s t i g a t i o n  Act.  1 8 1  and  S e c t i o n 48 of  the C a n a d i a n C o m p e t i t i o n A c t o f 1986 n o w e m p o w e r s the C o m p e t i t i o n T r i b u n a l to o r d e r that a s u p p l i e r cease the use o f c o n s i g n m e n t s e l l i n g w h e r e the p r a c t i c e has been i n t r o d u c e d b y a s u p p l i e r o f a p r o d u c t w h o o r d i n a r i l y sells the p r o d u c t f o r resale f o r the p u r p o s e o f either (a) c o n t r o l l i n g the p r i c e at w h i c h a d e a l e r s u p p l i e s the p r o d u c t or (b) d i s c r i m i n a t i n g between consignees a n d other dealers.  W h i l e no  r e m e d i a l o r d e r s h a v e yet been m a d e u n d e r this s e c t i o n , it is c l e a r that a s u p p l i e r ' s m o t i v e w i l l be c r i t i c a l i n a n y case.  If  there is a s o u n d business reason f o r  179  433 U . S . 36 (1977).  180  See h o w e v e r M e s i r o w v. P e p p e r i d g e F a r m Inc. 703 F . 2 d 339 (9th C i r . 1983) w h e r e a c o n s i g n m e n t agreement setting w h o l e s a l e p r i c e s was h e l d not to be illegal.  181  See e.g. R e s t r i c t i v e T r a d e P r a c t i c e s C o m m i s s i o n , R e p o r t o n a n I n q u i r y i n t o the D i s t r i b u t i o n a n d Sale of A u t o m o b i l e O i l . G r e a s e s . A n t i f r e e z e . A d d i t i v e s . T i r e s . B a t t e r i e s . A c c e s s o r i e s a n d R e l a t e d P r o d u c t s (1962) a n d R e s t r i c t i v e T r a d e P r a c t i c e s C o m m i s s i o n , R e p o r t r e l a t i n g to the D i s t r i b u t i o n a n d Sale of G a s o l i n e i n the C i t y o f W i n n i p e g a n d E l s e w h e r e i n the P r o v i n c e o f M a n i t o b a (1966).  92  e n g a g i n g i n the p r a c t i c e r a t h e r t h a n a n a n t i c o m p e t i t i v e p u r p o s e , t h e n the s e c t i o n is u n l i k e l y to h a v e a p p l i c a t i o n .  W i t h no case o n p o i n t i n A u s t r a l a s i a , one is f o r c e d to c o n c l u d e that, o n a strict i n t e r p r e t a t i o n o f s e c t i o n 37, R P M i n a b o n a f i d e c o n s i g n m e n t a r r a n g e m e n t w o u l d a p p e a r to be l a w f u l a l t h o u g h , i f the A m e r i c a n e x p e r i e n c e is to be r e l i e d o n , the per se p r o h i b i t i o n against R P M c a n n o t be a v o i d e d b y c l e v e r d r a f t s m a n s h i p . T h e C o m m i s s i o n a n d the c o u r t s c a n be a s s u m e d to be p r i m a r i l y c o n c e r n e d w i t h substance r a t h e r t h a n f o r m , a n d t h e r e f o r e the mere use o f the terms ' c o n s i g n e e ' or 'agent' w i l l not n e c e s s a r i l y be d e f i n i t i v e .  1 8 3  Where a d i s t r i b u t o r is c l e a r l y  i n d e p e n d e n t s u c h that it acts o n its o w n b e h a l f r a t h e r t h a n o n b e h a l f o f its s u p p l i e r a n d takes title to a n d bears the r i s k o f loss o n i n v e n t o r y , t h e n a b o n a f i d e c o n s i g n m e n t a r r a n g e m e n t w i l l o b v i o u s l y be h e l d not to exist.  Factors pointing  t o w a r d s the e x i s t e n c e o f a b o n a f i d e c o n s i g n m e n t a r r a n g e m e n t o n the o t h e r h a n d w i l l be i f t i t l e a n d r i s k i n goods r e m a i n s w i t h the s u p p l i e r , a d i s t r i b u t o r has a r i g h t to r e t u r n u n s o l d goods or a s u p p l i e r has a r i g h t to d e m a n d t h e i r r e t u r n a n d i f p a y m e n t is o n l y d u e u p o n a c t u a l sale o f the goods r a t h e r t h a n w i t h i n some s p e c i f i e d time.  E v e n w h e n a b o n a f i d e c o n s i g n m e n t a r r a n g e m e n t is i n use, it is  a r g u a b l e that it m a y s t i l l c o n s t i t u t e an i n f r i n g e m e n t i f a d o p t e d as part o f a d e l i b e r a t e p l a n to c o n t r o l the p r i c e at w h i c h goods are r e s o l d , e s p e c i a l l y i f some f o r m o f i n d u c e m e n t is i n v o l v e d .  S e c t i o n 37(3)(b) w o u l d then c o m e i n t o p l a y , a n d it  is u n l i k e l y that s e c t i o n 39 w o u l d be a v a i l a b l e as a d e f e n c e .  182  183  K a i s e r , s u p r a note 32 at 3.1.14.  T P C v. P v e I n d u s t r i e s Sales P t v L t d . (1978) A . T . P . R . 40-088.  93  T h e p o s s i b i l i t y o f a n a g e n c y e x c e p t i o n to the R P M p r o v i s i o n , w h i l e i l l o g i c a l w h e n one c o n s i d e r s the p u r p o s e b e h i n d those p r o v i s i o n s , w o u l d seem u n l i k e l y to c o n s t i t u t e a g r o u n d f o r i n d u c i n g a s u p p l i e r to e s t a b l i s h a s y s t e m o f c o n s i g n m e n t s e l l i n g or to v e r t i c a l l y integrate.  A large n u m b e r o f o t h e r f a c t o r s w i l l i n e v i t a b l y  be t a k e n i n t o a c c o u n t i n c h o o s i n g the a p p r o p r i a t e f o r m o f d i s t r i b u t i o n a r r a n g e m e n t i n c l u d i n g the n a t u r e o f the i n d u s t r y a n d the n a t u r e o f the p r o d u c t . W h i l e A m e r i c a n a n d C a n a d i a n e x p e r i e n c e i n the past has s h o w n there to be g r o u n d s f o r so d o i n g , no e m p i r i c a l e v i d e n c e a p p e a r s a v a i l a b l e to gauge its most r e c e n t use.  T h e f a c t that no r e m e d i a l o r d e r s h a v e been issued b y the C a n a d i a n  C o m p e t i t i o n T r i b u n a l under, section 48 or its predecessor suggests that those p r o v i s i o n s h a v e been e f f e c t i v e .  T h e r e t h e r e f o r e seems great m e r i t i n a m e n d i n g  s e c t i o n 37 a n d / o r i n t r o d u c i n g a s i m p l e p r o v i s i o n i n t o the N e w Z e a l a n d A c t a l o n g the l i n e s o f that i n s e c t i o n 48 to c u r e w h a t a p p e a r s to be a l o n g o v e r l o o k e d a n d illogical loophole.  (d)  M i n i m u m vs. M a x i m u m R e s a l e P r i c e s  A s n o t e d a b o v e , s e c t i o n 37 of the A c t p r o s c r i b e s o n l y m i n i m u m resale p r i c e s a n d not m a x i m u m resale p r i c e s .  W i t h a l l v e r t i c a l p r i c e f i x i n g per se i l l e g a l i n the  U n i t e d States, one m a y q u e s t i o n w h y R P M s h o u l d be t r e a t e d a n y d i f f e r e n t l y  in  N e w Z e a l a n d d e p e n d e n t u p o n w h e t h e r it i n v o l v e s the s p e c i f i c a t i o n o f m i n i m u m or m a x i m u m resale p r i c e s .  T h e m a j o r i t y i n 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 justifications  f o r a d o p t i n g a r u l e o f per se i l l e g a l i t y f o r m a x i m u m p r i c e f i x i n g a n d it is w o r t h w h i l e to c o n s i d e r e a c h i n t u r n .  390 U . S . 145 (1968).  F i r s t , it was s a i d that it l i m i t s the f r e e d o m  o f d i s t r i b u t o r s to sell at the p r i c e they c o n s i d e r most a p p r o p r i a t e .  This  j u s t i f i c a t i o n r e a l l y comes d o w n to a q u e s t i o n o f the extent to w h i c h  competition  laws s h o u l d p r e s e r v e f r e e a n d u n f e t t e r e d c o m p e t i t i o n a n d so p r o h i b i t contractual restriction its o w n d i s c r e t i o n .  any  which inhibits a distributor f r o m acting in accordance with  T h e d e v e l o p m e n t o f the c o n c e p t o f " w o r k a b l e a n d  effective  c o m p e t i t i o n " as the d e f i n i t i o n o f " c o m p e t i t i o n " u n d e r the A c t is r e c o g n i t i o n that c o m p l e t e e c o n o m i c f r e e d o m c a n not a n d n e v e r w i l l exist except i n the most perfectly competitive market. of a c t i o n ,  1 8 6  A l l r e s t r i c t i o n s i n v o l v e some l i m i t a t i o n o n f r e e d o m  h e n c e the r e q u i r e m e n t f o r a n y l e s s e n i n g o f c o m p e t i t i o n u n d e r s e c t i o n  27 o f the A c t to be s u b s t a n t i a l .  ,  T o d e t e r m i n e i f a r e s t r i c t i o n h i n d e r s c o m p e t i t i o n , its e f f e c t s must be m e a s u r e d a g a i n s t the p r i n c i p a l e c o n o m i c c o n c e r n s o f the A c t , n a m e l y  the  p r e v e n t i o n o f r e s t r a i n t s to f r e e c o m p e t i t i o n i n business a n d c o m m e r c i a l t r a n s a c t i o n s w h i c h t e n d to restrict p r o d u c t i o n , raise p r i c e s or o t h e r w i s e c o n t r o l the m a r k e t to the d e t r i m e n t o f c o n s u m e r s .  1 8 7  E s t a b l i s h i n g m a x i m u m resale p r i c e s does  not n e c e s s a r i l y restrict p r o d u c t i o n , raise p r i c e s or o t h e r w i s e c o n t r o l the m a r k e t  to  the d e t r i m e n t o f c o n s u m e r s ; s u c h a p o l i c y w o u l d i n f a c t l i k e l y l o w e r p r i c e s , t h e r e b y l e a d i n g to a n i n c r e a s e i n o u t p u t f r o m the i n c r e a s e i n d e m a n d .  T o this  e x t e n t , the f i r s t j u s t i f i c a t i o n c a n l a r g e l y be d i s p o s e d of.  Id. at 152-153 (per White J.) ["... schemes to f i x m a x i m u m p r i c e s , b y s u b s t i t u t i n g the p e r h a p s e r r o n e o u s j u d g e m e n t o f a seller f o r the f o r c e s of the c o m p e t i t i v e m a r k e t , m a y severely i n t r u d e u p o n the a b i l i t y o f b u y e r s to c o m p e t e a n d s u r v i v e i n that market."].  See P. E l m a n , " P e t r i f i e d O p i n i o n s a n d C o m p e t i t i v e R e a l i t i e s " , 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  S e c o n d , it was s a i d that a m a x i m u m p r i c e m a y be f i x e d too l o w to a l l o w a d i s t r i b u t o r to p r o v i d e the a m o u n t o f services necessary f o r the t y p e o f p r o d u c t b e i n g s o l d or w h i c h a c o n s u m e r desires a n d is w i l l i n g to p a y .  1 8 8  This justification  assumes, c o n t r a r y to Posner's c o n c e p t i o n o f the s p e c i a l services t h e o r y ,  that a  1 8 9  s u p p l i e r is u n a b l e to d e t e r m i n e the p r i c e at w h i c h its d i s t r i b u t o r s w i l l engage i n a n a p p r o p r i a t e a m o u n t o f n o n - p r i c e c o m p e t i t i o n a n d at w h i c h the s u p p l i e r w i l l m a x i m i z e its o w n sales; that is, i f the m a x i m u m p r i c e is set too l o w ,  inadequate  services w i l l be p r o v i d e d a n d the s u p p l i e r ' s sales w i l l not be m a x i m i z e d .  What is b e i n g s a i d i n essence is that a d i s t r i b u t o r s h o u l d be e n t i t l e d d e t e r m i n e this o p t i m a l p r i c e itself.  to  But a profit maximizing price for a distributor  w i l l not n e c e s s a r i l y be the same p r o f i t m a x i m i z i n g p r i c e f o r a s u p p l i e r .  If  d i s t r i b u t o r has m a r k e t p o w e r , it m a y , because o f p r o d u c t d i f f e r e n t i a t i o n ,  a location  or other e c o n o m i c f a c t o r s , be able to c o m m a n d s u p r a c o m p e t i t i v e p r o f i t s at the expense o f a s u p p l i e r .  A n e x a m p l e m i g h t be a f r a n c h i s e d r e s t a u r a n t c h a i n w h e r e ,  because o f the p a r t i c u l a r l o c a t i o n o f one r e s t a u r a n t , the r e l e v a n t f r a n c h i s e e is able to c h a r g e m u c h h i g h e r p r i c e s f o r meals t h a n f r a n c h i s e e s i n other l o c a t i o n s .  The  h i g h e r sales c h a r g e d d i s r u p t u n i f o r m i t y across the c h a i n a n d t h e r e f o r e m a y  affect  sales a n d p r o f i t s o v e r a l l .  In this s i t u a t i o n , a m a x i m u m p r i c e w i l l not o n l y  benefit  the s u p p l i e r but c o n s u m e r s a n d other d i s t r i b u t o r s as w e l l .  T h i r d , it was s a i d that m a x i m u m p r i c e f i x i n g m a y c h a n n e l d i s t r i b u t i o n t h r o u g h a f e w large or s p e c i f i c a l l y a d v a n t a g e d d i s t r i b u t o r s w h o o t h e r w i s e  A l b r e c h t v. H e r a l d C o . 390 U . S . at 152-53.  See P o s n e r , s u p r a note 85 at 291-92.  would  96 be subject to s i g n i f i c a n t n o n - p r i c e c o m p e t i t i o n .  H o w e v e r this is a q u e s t i o n o f  f a c t d e p e n d i n g as m u c h o n other f a c t o r s s u c h as a s u p p l i e r ' s c h o i c e o f d i s t r i b u t o r s , d i s t r i b u t o r e f f i c i e n c y , p r o v i s i o n o f d i s c o u n t s a n d so o n .  1 9 1  A f o u r t h a n d f i n a l j u s t i f i c a t i o n o f f e r e d was that the a c t u a l p r i c e c h a r g e d u n d e r a m a x i m u m resale p r i c e scheme o f t e n operates as a de f a c t o f i x e d p r i c e .  1 9 2  A s s u c h , the scheme has a l l the a t t r i b u t e s o f a m i n i m u m resale p r i c e f i x i n g scheme If  this is the i n t e n d e d e f f e c t , then i n N e w Z e a l a n d b o t h s e c t i o n 27 a n d s e c t i o n 37  would apply.  O b v i o u s l y i f m a x i m u m resale p r i c e s are a b o v e the c o m p e t i t i v e l e v e l ,  d i s t r i b u t o r s are f r e e to sell b e l o w s u c h p r i c e s a n d c o m p e t i t i o n c a n not but be enhanced.  T h e o b j e c t i o n to R P M is q u i t e the o p p o s i t e , n a m e l y that it keeps p r i c e s  a b o v e the c o m p e t i t i v e l e v e l a n d t h e r e b y p r e c l u d e s c o m p e t i t i o n .  1 9 3  T h e S u p r e m e C o u r t i n A l b r e c h t v. H e r a l d C o . r e l i e d o n K i e f e r S t e w a r t v. Joseph E . Seagram & S o n .  1 9 4  w h i c h i n v o l v e d h o r i z o n t a l m a x i m u m p r i c e f i x i n g , to  j u s t i f y a p p l i c a t i o n o f a r u l e o f per se i l l e g a l i t y to v e r t i c a l m a x i m u m p r i c e f i x i n g . It w i l l be r e c a l l e d that one o f the t r a d i t i o n a l j u s t i f i c a t i o n s f o r p r o s c r i b i n g  1 9 0  A l b r e c h t v. H e r a l d C o . 390 U . S . at 152-53.  1 9 1  A B A M o n o g r a p h N o . 2, s u p r a note 10 at 93.  1 9 2  A l b r e c h t v. H e r a l d C o . 390 U . S . at 152-53.  193  194  F o r a d i s c u s s i o n o f two f u r t h e r j u s t i f i c a t i o n s see D . M a r k s a n d J . J a c o b s o n , " P r i c e F i x i n g : A n O v e r v i e w " , 30 A n t i t r u s t B u l l . 199 (1985) at 252 n. 183.  340 U . S . 211 (1951). In this case, the r e s p o n d e n t a g r e e d to sell its p r o d u c t s o n l y to those w h o l e s a l e r s w h o w o u l d resell b e l o w s t i p u l a t e d p r i c e c e i l i n g s . T h e C o u r t h e l d that the s t i p u l a t e d m a x i m u m resale p r i c e s i n h i b i t e d the w h o l e s a l e r s ' r i g h t s to select a f a i r p r i c e f o r t h e i r p r o d u c t s just as e f f e c t i v e l y as m i n i m u m resale p r i c e s . I r l at 213.  m i n i m u m resale p r i c e s is that it i n v o l v e s the m a n i f e s t a t i o n o f a d i s t r i b u t o r  cartel  w h e r e b y a s u p p l i e r acts as a n i n s t r u m e n t o f the d i s t r i b u t o r s i n p o l i c i n g a n d e n f o r c i n g the c a r t e l p r i c e .  In the case o f a s u p p l i e r a d o p t i n g a m a x i m u m resale  p r i c e p o l i c y o n the o t h e r h a n d , there is no l o g i c a l r e a s o n w h y d i s t r i b u t o r s w o u l d be m o t i v a t e d to c o l l e c t i v e l y seek a m a x i m u m p r i c e .  T h e y are u n l i k e l y to be  c o n c e r n e d a b o u t a c o m p e t i t o r r a i s i n g its p r i c e , but o n l y that t h e i r o w n p r i c e s are h i g h e n o u g h to g i v e t h e m a n a d e q u a t e r e t u r n o n c a p i t a l .  The benefit of a  m a x i m u m resale p r i c e p o l i c y w o u l d seem to lie p r i m a r i l y w i t h a s u p p l i e r w h o w i l l set a p r i c e w h i c h m a x i m i z e s its o w n p r i c e s .  A s H a r l a n J . n o t e d i n his d i s s e n t i n  A l b r e c h t . there is no s i n g l e h o r i z o n t a l r e s t r a i n t on o t h e r w i s e  competitive  d i s t r i b u t o r s but m e r e l y a series of d i s t i n c t v e r t i c a l r e s t r a i n t s b e t w e e n a s u p p l i e r a n d its d i s t r i b u t o r s , w i t h no one d i s t r i b u t o r e c o n o m i c a l l y i n t e r e s t e d i n the m a i n t e n a n c e o f a v e r t i c a l r e s t r a i n t w i t h a n y other  distributor.  1 9 5  It is not s u r p r i s i n g that the d e c i s i o n i n A l b r e c h t has been the subject o f extensive c r i t i c i s m  1 9 6  to the p o i n t w h e r e there is n o w v i r t u a l u n a n i m i t y that a r u l e  o f per se i l l e g a l i t y a g a i n s t m a x i m u m sale p r i c e s m a k e s no c o m m e n t a t o r has gone so f a r as to s a y :  e c o n o m i c sense.  One  1 9 7  I k n o w o f no e c o n o m i s t , respectable or o t h e r w i s e , w h o has come u p w i t h a r a t i o n a l e f o r p r o s c r i b i n g m a x i m u m p r i c e f i x i n g i n recent years.  390 U . S . at 159-60 n.4.  See e.g. 32 P. A r e e d a a n d D . T u r n e r , A n t i t r u s t L a w (1978) at 255 n.13, P i t o f s k y , s u p r a note 97 at 1490 n.17; a n d S c h e r e r , s u p r a note 74 at 705-06.  " P a n e l D i s c u s s i o n o n the E c o n o m i c s o f V e r t i c a l R e s t r a i n t s " , 52 A n t i t r u s t L . J . 731 (1983) at 732 (per M . L . P o p o f s k y ) .  98  A n u m b e r o f l o w e r c o u r t s h a v e sought to c i r c u m v e n t the a p p l i c a t i o n o f Albrecht Sylvania.  1 9 8  a n d it is at least a r g u a b l e that its basis has been u n d e r m i n e d  by  T h i s arises f r o m the f a c t that A l b r e c h t . w h i c h i n v o l v e d the a s s i g n m e n t  of exclusive territories  to d i s t r i b u t o r s , was based i n p a r t u p o n the p r o h i b i t i o n  of  e x c l u s i v e t e r r i t o r i e s i n S c h w i n n . w h i c h p r o h i b i t i o n was i t s e l f e x p r e s s l y o v e r r u l e d in S y l v a n i a .  1 9 9  T h e c u r r e n t e n f o r c e m e n t p o l i c y o f the D e p a r t m e n t  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 i n the U n i t e d States also means that f e w , i f a n y , cases w i l l be b r o u g h t c h a l l e n g i n g m a x i m u m resale p r i c e schemes.  In l i g h t o f the f o r e g o i n g , the present t r e a t m e n t o f m a x i m u m resale prices u n d e r the m o r e g e n e r a l p r o v i s i o n s o f the A c t t h e r e f o r e seems j u s t i f i e d .  Vertical  p r i c e c e i l i n g s s h o u l d g e n e r a l l y be p r o - c o m p e t i t i v e as a s u p p l i e r w h o uses t h e m  will  n o r m a l l y be t r y i n g to l o w e r p r i c e s to c o n s u m e r s a n d , w h e n that is the case, the e f f e c t s h o u l d be to i n c r e a s e p r i c e c o m p e t i t i o n at the r e t a i l l e v e l .  T h i s was  g e n e r a l l y r e c o g n i z e d i n the l e a d i n g N e w Z e a l a n d d e c i s i o n on this p o i n t , T r u T o n e L t d . et a l . v. F e s t i v a l R e c o r d s R e t a i l M a r k e t i n g L t d .  2 0 0  T h e r e s p o n d e n t i n this case  See e.g. J a c k Walters & Sons C o r p . v. M o r t o n B l d g s . . Inc. 1984-2 T r a d e C a s . ( C C H ) 66,080 (7th C i r . 1984). In this case, J u d g e P o s n e r a r g u e d that a s u p p l i e r - i m p o s e d p r i c e c e i l i n g is i n t e n d e d to l i m i t the p o w e r that an e x c l u s i v e t e r r i t o r y gives a d i s t r i b u t o r a n d s h o u l d be l a w f u l i f the e x c l u s i v e t e r r i t o r y a r r a n g e m e n t i t s e l f meets a r u l e o f reason test.  Id. See also P o s n e r , s u p r a note 102 at 12 ["The l o g i c o f S y l v a n i a is that r e s t r i c t i o n s i m p o s e d o n dealers by m a n u f a c t u r e r s p r o m o t e i n t e r b r a n d c o m p e t i t i o n a n d are t h e r e f o r e not per se i l l e g a l , save p e r h a p s i f the m a n u f a c t u r e r has a m o n o p o l y . T h a t l o g i c d e m o l i s h e s A l b r e c h t . " ] It s h o u l d be n o t e d h o w e v e r that A l b r e c h t was c i t e d as a u t h o r i t y i n 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 S o c i e t y (457 U . S . 332 (1982)) so as to c o n d e m n as a g r e e m e n t between a g r o u p o f d o c t o r s e s t a b l i s h i n g m a x i m u m fee s c h e d u l e s f o r p o l i c y h o l d e r s u n d e r c e r t a i n i n s u r a n c e p l a n s . A l t h o u g h the f a c t s d i s c l o s e d h o r i z o n t a l p r i c e f i x i n g , the v e r t i c a l per se r u l e was r e l i e d u p o n .  200  September  19th, 1988, C o u r t of A p p e a l o f N e w Z e a l a n d , C A 8 5 / 8 8 .  99  sought to set m a x i m u m r e t a i l p r i c e s f o r its r e c o r d s , cassettes a n d discs as a c o n d i t i o n o f s u p p l y i n g t h e m to retailers.  It g a v e e v i d e n c e that its p h i l o s o p h y was  to keep its p r o d u c t s at a c o m p e t i t i v e l e v e l a n d g e n e r a l l y b e l o w that c h a r g e d b y its c o m p e t i t o r s so as to m a x i m i z e sales i n the l o n g t e r m .  ( O n e m a y also assume that it  w i s h e d to e n s u r e some measure o f p r i c e s t a b i l i t y b y i t s e l f a d v e r t i s i n g the price nationally.  maximum  T h e s e seem to be the o b v i o u s r a t i o n a l e s f o r a d o p t i n g the p o l i c y ) .  E v e n so, the f i x e d m a x i m u m resale p r i c e gave the r e t a i l e r s a m a r g i n o f 38-43%, c o m p a r i n g f a v o u r a b l y w i t h the m a r g i n o f other d i s t r i b u t o r s o f as l o w as 33  1/3%.  In the H i g h C o u r t , R P M a n d m a x i m u m p r i c e s t i p u l a t i o n s w e r e f o u n d to be quite different  i n c o n c e p t a n d e f f e c t , the C o u r t c o n c l u d i n g that m a x i m u m p r i c e  s t i p u l a t i o n s m a y or m a y not r e d u c e c o m p e t i t i o n i n a m a r k e t d e p e n d e n t o n the circumstances.  T h e C o u r t o f A p p e a l was not r e q u i r e d to d e c i d e this issue, but  c i t e d a l e n g t h y passage f r o m H a r l a n J.'s dissent i n A l b r e c h t i n s u p p o r t o f the a p p e l l a n t ' s c o n c e s s i o n that m a x i m u m r e t a i l p r i c i n g is not i n i t s e l f i l l e g a l or .  •  anticompetitive.  201  T h e C o u r t o f A p p e a l was i n no d o u b t o n the f a c t s that the r e s p o n d e n t ' s m a x i m u m r e t a i l p r i c i n g n e i t h e r h a d nor was l i k e l y to h a v e the e f f e c t  of  s u b s t a n t i a l l y l e s s e n i n g c o m p e t i t i o n i n the r e l e v a n t m a r k e t u n d e r s e c t i o n 27 o f the Act.  T h e C o u r t also rejected the a p p e l l a n t ' s c o n t e n t i o n that a separate  market  e x i s t e d f o r e a c h i n d i v i d u a l r e c o r d , tape a n d d i s c a n d there was t h e r e f o r e question of d o m i n a n c e under section 3 6 .  201  Id. at 23.  202  Id. at 20-21  a n d 26.  2 0 2  no  100  S i m i l a r j u s t i f i c a t i o n s to those p r e s e n t e d b y the m a j o r i t y i n A l b r e c h t were e i t h e r d i s m i s s e d or f o u n d to be u n c o n v i n c i n g . In p a r t i c u l a r , the a p p e l l a n t s a r g u e d that the r e s p o n d e n t ' s e n f o r c e m e n t a c t i o n r e s u l t e d i n v i r t u a l p r i c e u n i f o r m i t y i n the r e t a i l p r i c i n g o f the r e s p o n d e n t ' s p r o d u c t s i n c o n t r a s t w i t h a degree o f p r i c e v a r i a t i o n f o r the p r o d u c t s o f other s u p p l i e r s . T h e y d i d not h o w e v e r say h o w the m a x i m u m p r i c e s t i p u l a t i o n t h r e a t e n e d or a f f e c t e d t h e i r p r o f i t s a n d t h e i r a b i l i t y to c o m p e t e n o r w h y they n e e d e d a h i g h e r m a r k - u p f r o m the r e s p o n d e n t i n r e g a r d to its p r o d u c t s t h a n f o r those o f o t h e r s u p p l i e r s . I n d e e d , the e v i d e n c e s h o w e d that s e v e r a l stores s t i l l c o m p e t e d f o r p r i c e o n the r e s p o n d e n t ' s a l b u m s a n d o v e r a l l there was no e v i d e n c e o f a n y a c t u a l or l i k e l y l e s s e n i n g o f p r i c e c o m p e t i t i o n i n the relevant m a r k e t .  2 0 3  T h e C o u r t c o n c l u d e d by s a y i n g :  2 0 4  [I]n a r e a l sense [the respondents] p r i c e c e i l i n g is p r o c o m p e t i t i o n i n that it p r o v i d e s a c h e c k o n r e t a i l e r s w h o t h r o u g h l o c a t i o n or o t h e r w i s e h a v e less c o m p e t i t i o n - i n d u c e d c o n s t r a i n t s o v e r the p r i c e s they c h a r g e .  T o put it a n o t h e r w a y , there is a r e a l p r o s p e c t that w i t h o u t m a x i m u m p r i c i n g s t i p u l a t i o n s r e t a i l e r s i n this m a r k e t w i l l not pass o n [the respondent's] costs s a v i n g s o n to the p u b l i c .  Id. at 26. A s i m i l a r a r g u m e n t to that r a i s e d b y the a p p e l l a n t s i n T r u T o n e , n a m e l y that m a x i m u m p r i c e s p r e v e n t d i s t r i b u t o r s f r o m o b t a i n i n g the b e n e f i t o f h i g h e r p r i c e s s h o u l d the m a r k e t so w a r r a n t , was n o t e d i n the R e p o r t to the H o n . T h e M i n i s t e r o f T r a d e a n d I n d u s t r y o f the I n q u i r y i n t o the T e r m s o f M o t o r V e h i c l e F r a n c h i s e A g r e e m e n t s (1985) i n r e g a r d to the m a x i m u m p r i c e s s p e c i f i e d b y n a t i o n a l f r a n c h i s e h o l d e r s . T h e essence o f the m o t o r v e h i c l e d e a l e r s ' a r g u m e n t was that i n a d e r e g u l a t e d e n v i r o n m e n t , d e a l e r s s h o u l d be a b l e to c h a r g e h i g h e r p r i c e s i f they w i s h , p a r t i c u l a r l y i n respect o f m a k e s i n short s u p p l y . T h e C o m m i s s i o n , l i k e the C o u r t i n T r u T o n e , was not r e q u i r e d to c o m m e n t on this issue, the dealers also p r e s e n t i n g no e v i d e n c e . T h e n a t i o n a l f r a n c h i s e h o l d e r s o b v i o u s l y h a d a l e g i t i m a t e interest i n p r e v e n t i n g t h e i r dealers f r o m t a k i n g f u l l a d v a n t a g e o f a n y s i t u a t i o n o f short s u p p l y o n the basis that a n y p r i c e i n c r e a s e s w o u l d cost t h e m l o n g - r u n g o o d w i l l a n d strategic p o s i t i o n .  Id. at 26-27.  T h i s is not to say that p r i c e c e i l i n g s are b e n i g n .  T h e y m a y i n f a c t be  a n t i c o m p e t i t i v e i n some s i t u a t i o n s but i n f e w e n o u g h to m a k e a per se p r o h i b i t i o n inappropriate.  T h e a d v a n t a g e o f the present t r e a t m e n t is that a n y s u b s t a n t i a l  anticompetitive  e f f e c t s c a n be d i s c e r n e d , w e i g h e d against a n y  e f f e c t s a n d the p r a c t i c e s t r u c k d o w n i f necessary. N o c h a n g e  procompetitive t h e r e f o r e seems  w a r r a n t e d at the present p o i n t i n time.  (e)  R e c o m m e n d e d Resale Prices  T h e i n c l u s i o n o f section 39 o f the A c t a l l o w i n g the r e c o m m e n d i n g o f resale p r i c e s b y a s u p p l i e r was u n d o u b t e d l y i n f l u e n c e d b y the R e p o r t o f the  United  K i n g d o m Mergers and Monopolies C o m m i s s i o n on R e c o m m e n d e d Prices i n  1969.  2 0 5  T h e R e p o r t was p r o m p t e d b y e v i d e n c e that r e c o m m e n d e d p r i c e s were b e i n g used to s i m u l a t e resale p r i c e m a i n t e n a n c e a n d were i n f a c t h a v i n g the d e s i r e d  effect.  2 0 6  T h e M o n o p o l i e s 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 t i m e to c o n s i d e r the a l l e g e d a d v a n t a g e s o f r e c o m m e n d e d p r i c e s .  It r e j e c t e d the s u b m i s s i o n  that s u c h p r i c e s r e d u c e d a d m i n i s t r a t i v e costs b y a s s i s t i n g resellers to p r i c e t h e i r goods, there b e i n g no reason w h y i n d e p e n d e n t resellers c o u l d not u n d e r t a k e e x e r c i s e themselves.  this  T h e C o m m i s s i o n d i d h o w e v e r s u p p o r t to some extent the  s u b m i s s i o n that r e c o m m e n d e d prices m a k e a d v e r t i s i n g m o r e e f f e c t i v e , f o r n e w p r o d u c t s , b y the p u b l i s h i n g o f a "de f a c t o " m a x i m u m p r i c e .  2 0 5  R e c o m m e n d e d R e s a l e P r i c e s (1968-69 H . C . 100  2 0 6  M e r k i n & W i l l i a m s , s u p r a note 145 at 234.  2 0 7  Id. at 235.  2 0 7  particularly  102  A s to the g e n e r a l e f f e c t o f r e c o m m e n d e d p r i c e s o n p r i c e l e v e l s , the C o m m i s s i o n ' s f i n d i n g s were i n c o n c l u s i v e to say the least.  The Commission found  that i n trades w h e r e the p r a c t i c e of r e c o m m e n d e d resale p r i c e s was p r e v a l e n t , p r i c e s t e n d e d to be u n i f o r m , a l t h o u g h they m i g h t be h i g h e r or l o w e r t h a n i n trades w h e r e it was not p r e v a l e n t .  M o r e i m p o r t a n t l y , it was also f o u n d that the n u m b e r  o f cases i n w h i c h p r i c e s w i l l be h i g h e r w h e r e a r e c o m m e n d e d p r i c e is f o l l o w e d was l i k e l y to be s i g n i f i c a n t p a r t i c u l a r l y w h e r e the r e c o m m e n d a t i o n o f resale p r i c e s was used i n c o n j u n c t i o n w i t h p r a c t i c e s s u c h as r e s t r i c t i o n o f outlets i n terms o f t e r r i t o r y or p r o d u c t a n d / o r i f there was a m o n o p o l y i n the s u p p l y i n g i n d u s t r y .  In  other cases, w h e r e , f o r i n s t a n c e , a s u p p l i e r was e n t e r i n g the i n d u s t r y , it was f o u n d that the e f f e c t o f the p r a c t i c e m i g h t be to keep p r i c e s l o w e r .  D e p e n d i n g t h e n on  the t r a d e c o n c e r n e d , the p r a c t i c e m i g h t be either b e n e f i c i a l or h a r m f u l to the public  interest.  H a v i n g r e a c h e d this c o n c l u s i o n , the M o n o p o l i e s C o m m i s s i o n d i d not r e c o m m e n d that the p r a c t i c e s h o u l d be b a n n e d i n a l l c i r c u m s t a n c e s but d i d r e c o m m e n d b a n n i n g the r e c o m m e n d i n g of resale p r i c e s i n selected cases a f t e r investigation.  N e i t h e r A u s t r a l i a n o r N e w Z e a l a n d took u p this s e c o n d o p t i o n ,  r e q u i r i n g i n s t e a d , as a l r e a d y n o t e d , an e x p l i c i t statement that r e c o m m e n d e d resale p r i c e s are o n l y r e c o m m e n d e d a n d that there is no o b l i g a t i o n to c o m p l y w i t h a n y recommendation.  C a n a d a s i m i l a r l y , as also a l r e a d y n o t e d , r e q u i r e s that a p r o d u c e r  or s u p p l i e r m a k e it c l e a r that a p e r s o n is u n d e r no o b l i g a t i o n to a c c e p t a suggested resale p r i c e a n d w i l l i n no w a y s u f f e r i n its business r e l a t i o n s i f it does not the s u g g e s t i o n . C o m p l i a n c e w i t h the C a n a d i a n C o m p e t i t i o n A c t f u r t h e r  follow  requires  that s u p p l i e r s o f a p r o d u c t , other t h a n r e t a i l e r s , must i n d i c a t e that the p r o d u c t c a n  103  be sold at a l o w e r p r i c e .  2 0 8  D o e s the m a n d a t e d use o f r e c o m m e n d e d prices e f f e c t i v e l y l e g a l i z e R P M , by a l l o w i n g s u p p l i e r s to do i n d i r e c t l y w h a t the law f o r b i d s t h e m to do d i r e c t l y , e v e n w i t h these strict r e q u i r e m e n t s ?  It was s h o w n i n P a r t IIB  that there is some r i s k i n  the s p e c i f i c a t i o n o f a r e c o m m e n d e d p r i c e b e i n g seen as the s p e c i f i c a t i o n o f a p r i c e b e l o w w h i c h goods are not to be sold a n d t h e r e f o r e b e i n g c a u g h t b y s e c t i o n 37. B u t s u p p l i e r s are o f t e n a b l e to use s u b t l e r t e c h n i q u e s s u c h as p r e t i c k e t i n g , c a t a l o g u e s , p r i c e lists, a n d p r o m o t i o n a l l i t e r a t u r e to take a d v a n t a g e o f the exemption.  P r e t i c k e t i n g a n d so o n s t r o n g l y suggest that a d i s t r i b u t o r s h o u l d sell an  i t e m at the set p r i c e .  A d v e r t i s i n g b y a s u p p l i e r a n n o u n c i n g the r e c o m m e n d e d  resale p r i c e o f a p r o d u c t w i l l l i k e l y m a k e a d i s t r i b u t o r r e l u c t a n t to c h a r g e a d i f f e r e n t p r i c e , o t h e r w i s e the d i s t r i b u t o r m a y be r e q u i r e d to c r e a t e , d e v e l o p a n d p a y f o r its o w n a d v e r t i s e m e n t s .  2 0 9  A d i s t r i b u t o r m a y w e l l use a r e c o m m e n d e d  resale p r i c e f o r c o m p a r a t i v e a d v e r t i s i n g purposes but this i n i t s e l f r u n s the risk of  S e c t i o n 38(3) a n d (4). T h e s e p r o v i s i o n s were b r o u g h t i n w i t h the 1975 a m e n d m e n t s , the s i t u a t i o n b e f o r e this t i m e b e i n g that suggested p r i c e s were not a t t a c k e d p r o v i d e d that n o t h i n g was d o n e to e n f o r c e t h e m . It is n o t a b l e that the M c Q u a r r i e R e p o r t , s u p r a note 148 at 71, o r i g i n a l l y r e c o m m e n d e d that it s h o u l d be m a d e an o f f e n c e f o r a s u p p l i e r "[t]o r e c o m m e n d or p r e s c r i b e m i n i m u m resale p r i c e s f p r his p r o d u c t s " , a l t h o u g h the C o m m i t t e e was c o n c e r n e d to ensure that the e s t a b l i s h e d p r a c t i c e o f i s s u i n g p r i c e lists not be i n t e r f e r r e d w i t h .  A s u p p l i e r m a y also enter i n t o some f o r m o f j o i n t a d v e r t i s i n g a r r a n g e m e n t w i t h a d i s t r i b u t o r , c o n d i t i o n i n g its c o n t r i b u t i o n u p o n the d i s t r i b u t o r a g r e e i n g not to a d v e r t i s e a p r o d u c t at a p r i c e less t h a n r e c o m m e n d e d by the s u p p l i e r . B u t e v e n this sort of a r r a n g e m e n t m a y be at r i s k . See T r a d e P r a c t i c e s C o m m i s s i o n v. S h a r p C o r p o r a t i o n o f A u s t r a l i a P t v . L t d . (1975) 8 A . L . R . 1255 ( H e a r i n g o n D e c e m b e r 11th, 1975, n o t e d at p. 17 o f 1975-76 A T P R R e p o r t ) w h e r e the T P C a l l e g e d that the s u b s i d i z a t i o n b y S h a r p of 50% o f a reseller's a d v e r t i s i n g costs was d e p e n d e n t on the reseller s e l l i n g at S h a r p ' s r e c o m m e n d r e t a i l p r i c e s . A f i n e o f $5,000 was i m p o s e d . C f . P D O . Inc. v. N i s s a n Motor C o r p . 577 F . 2 d 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 w h e r e b y a n a d v e r t i s e m e n t m a y be h e l d to be m i s l e a d i n g a n d d e c e p t i v e i f it c o m p a r e s a s e l l i n g p r i c e w i t h a h i g h e r ' r e c o m m e n d e d p r i c e ' a n d leads c o n s u m e r s i n t o the e r r o n e o u s b e l i e f that the d i f f e r e n c e the t w o i n f a c t represents a n a c t u a l s a v i n g .  between  T h e r e m a y o b v i o u s l y be a s a v i n g i f  the ' r e c o m m e n d e d p r i c e ' is the p r i c e h a b i t u a l l y c h a r g e d , b u t m o r e o f t e n t h a n not the u s u a l p r i c e c h a r g e d is less t h a n the r e c o m m e n d e d p r i c e a n d closer to the advertised price.  T o this extent, the c o n s u m e r is l i k e l y to be m i s l e d or d e c e i v e d .  T h e use o f r e c o m m e n d e d resale p r i c e s o b v i o u s l y has v a r i o u s a d v a n t a g e s i n terms o f p r i c e u n i f o r m i t y a n d s t a b i l i t y .  It does h o w e v e r h a v e a l l the h a l l m a r k s o f  outright R P M by r e d u c i n g price competition, especially where a large n u m b e r of a s u p p l i e r ' s d i s t r i b u t o r s a d h e r e to the r e c o m m e n d e d resale p r i c e r a t h e r t h a n e n g a g i n g i n their o w n p r i c i n g .  V e r y r e a l a r g u m e n t s c a n t h e r e f o r e b y m a d e f o r the r e p e a l o f  this e x e m p t i o n i f the present t r e a t m e n t o f R P M is to be c o n t i n u e d .  (f)  Withholding of Supplies  It w i l l be r e c a l l e d f r o m the p r e v i o u s s e c t i o n that a s u p p l i e r m a y be h e l d to h a v e e n g a g e d i n the p r a c t i c e o f R P M w h e r e i n r e g a r d to, s a y , s e c t i o n 37(3)(d)(ii) o f the A c t , it c a n be i n f e r r e d that a " s u b s t a n t i a l " or "operative" r e a s o n a c t u a t i n g the s u p p l i e r i n w i t h h o l d i n g goods f r o m a reseller is that (a) the reseller has s o l d or is l i k e l y to sell the s u p p l i e r ' s goods at a p r i c e less t h a n s p e c i f i e d , or (b) the three f a c t u a l elements m e n t i o n e d i n section 42 are p r o v e d a n d the s u p p l i e r does not r e b u t the p r e s u m p t i o n b y p r o v i d i n g e v i d e n c e to the c o n t r a r y .  See text a c c o m p a n y i n g notes 61-70 s u p r a  105  F r o m t h i s , the q u e s t i o n arises as to the extent to w h i c h a s u p p l i e r is f r e e to a d o p t a m a r k e t i n g strategy that i n v o l v e s s e l e c t i n g o n l y c e r t a i n d i s t r i b u t o r s to m a r k e t a n d sell its p r o d u c t s .  In other w o r d s , is a s u p p l i e r o b l i g e d to d e a l w i t h ' a l l -  c o m e r s ' regardless o f its m a r k e t i n g strategy.  A s u p p l i e r ' s f r e e d o m to d e a l is  c o u n t e r e d b y the c o m p e t i n g c l a i m s o f d i s t r i b u t o r s ( p a r t i c u l a r l y  new a n d small  d i s t r i b u t o r s ) to be a b l e to c a r r y o n business w i t h o u t i n t e r f e r e n c e f r o m the r e s t r i c t i v e d i s t r i b u t i o n p r a c t i c e s o f s u p p l i e r s a n d b y the interests o f c o n s u m e r s i n more e f f i c i e n t d i s t r i b u t i o n a n d lower prices.  A s u p p l i e r ' s d e c i s i o n to restrict its c h a n n e l s o f d i s t r i b u t i o n m a y be f o r a n y one or m o r e o f the f o l l o w i n g reasons w h i c h are t o t a l l y u n c o n n e c t e d w i t h R P M :  (a)  a s u p p l i e r m a y , f o r e x a m p l e , d e c i d e to s u p p l y w h o l e s a l e r s o n l y , a n d  not r e t a i l e r s or i n d e e d c o n s u m e r s ;  (b)  a s u p p l i e r m a y d e c i d e to d e a l o n l y w i t h , say, s p e c i a l i s t c l o t h i n g stores  to the e x c l u s i o n o f d e p a r t m e n t or d i s c o u n t stores;  (c)  a g i v e n q u a n t i t y m a y be too large to be s u p p l i e d w i t h o u t d i s r u p t i n g  a s u p p l i e r ' s p r o d u c t i o n , storage or d i s t r i b u t i o n , or c o n v e r s e l y it m a y be so s m a l l as to be u n p r o f i t a b l e ;  ^  (d)  a d i s t r i b u t o r m a y r e f u s e to sell other p r o d u c t s o f the s u p p l i e r ;  (e)  a d i s t r i b u t o r m a y l a c k the t e c h n i c a l e x p e r t i s e to h a n d l e p r o d u c t s  r e q u i r i n g c o m p l e x s e r v i c e or i n s t a l l a t i o n ;  106  (f)  a d i s t r i b u t o r m a y l a c k the f i n a n c i a l resources necessary to h a n d l e a  p r o d u c t r e q u i r i n g a large i n v e s t m e n t i n terms o f p r o m o t i o n a n d d i s t r i b u t i o n facilities;  (g)  the c r e d i t status o f a d i s t r i b u t o r m a y be suspect or u n k n o w n to the  s u p p l i e r , or there m a y be a h i s t o r y o f u n p a i d or o v e r d u e a c c o u n t s ;  (h)  a s u p p l i e r m a y w i s h to ensure that the m a r k e t i n g o f its p r o d u c t s  a t t a i n s a c e r t a i n s t a n d a r d a n d that the p r e s e n t a t i o n o f its p r o d u c t s a p p e a l s to the m a r k e t segment f o r w h i c h it is i n t e n d e d ;  (i) exorbitantly  the expense o f t r a n s p o r t i n g p r o d u c t s to a d i s t r i b u t o r m a y be h i g h or t r a n s p o r t a t i o n m a y be just p l a i n l y u n f e a s i b l e a n d i m p r a c t i c a l ;  and  (j)  a s u p p l i e r m a y not h a v e the resources to m a i n t a i n c o n t a c t w i t h a n d  p r o v i d e o n g o i n g t e c h n i c a l , m a r k e t i n g a n d sales assistance to a large n u m b e r o f distributors.  2 1 1  A w i t h h o l d i n g o f s u p p l y f o r m a r k e t i n g reasons s u c h as these s h o u l d not be c a u g h t b y the A c t unless there are serious a n t i c o m p e t i t i v e c o n s e q u e n c e s .  2 1 2  See g e n e r a l l y A u s t r a l i a n T r a d e P r a c t i c e s C o m m i s s i o n , G u i d e l i n e o n R e f u l s a l to S u p p l y . I n f o r m a t i o n C i r c u l a r N o . 17 (30 J u n e 1976).  In g e n e r a l terms, the A c t does not p r o h i b i t a r e f u s a l to d e a l per se n o r does it p l a c e a n o b l i g a t i o n u p o n a p e r s o n to d e a l w i t h a n y o n e or e v e r y o n e . If a s u p p l i e r is i n a d o m i n a n t p o s i t i o n i n a m a r k e t a n d it r e f u s e s to s u p p l y a d i s t r i b u t o r or p o t e n t i a l d i s t r i b u t o r , this m a y a m o u n t to the use o f a d o m i n a n t p o s i t i o n f o r the p u r p o s e o f r e s t r i c t i n g the e n t r y o f or e l i m i n a t i n g a d i s t r i b u t o r f r o m the m a r k e t , or p r e v e n t i n g or d e t e r r i n g c o m p e t i t i v e  107  I n v a r i a b l y h o w e v e r , a w i t h h o l d i n g o f s u p p l y is f o r reasons c o n n e c t e d w i t h R P M because p r i c e is so o f t e n an element i n a m a r k e t i n g strategy w h i c h calls f o r selective distribution.  T h e p r o b l e m lies i n d i s t i n g u i s h i n g those s i t u a t i o n s i n w h i c h  the m a i n t e n a n c e o f resale p r i c e s is not the r e a l reason f o r the w i t h h o l d i n g those i n w h i c h it i s .  (a)  2 1 3  from  E x a m p l e s o f the f o r m e r m i g h t be:-  a s u p p l i e r m a y w a n t its d i s t r i b u t o r s to u n d e r t a k e a c e r t a i n l e v e l of  instore p r o m o t i o n a n d a d v e r t i s i n g i n the m a r k e t i n g o f its p r o d u c t s a n d w i l l o n l y s u p p l y those w h o are p r e p a r e d to put i n the necessary e f f o r t a n d i n c u r costs.  appropriate  T h o s e d i s t r i b u t o r s s e e k i n g to ' f r e e - r i d e ' on the m a r k e t i n g e f f o r t s o f  other,  m a y cause the latter g r o u p to c u r t a i l or e v e n cease altogether t h e i r p r o m o t i o n a n d a d v e r t i s i n g o f the s u p p l i e r ' s p r o d u c t s i f they f e e l they are b e a r i n g a n u n f a i r burden.  T h e s u p p l i e r ' s sales w i l l i n e v i t a b l y f a l l as a result.  c o n d u c t i n the m a r k e t so as to c o n t r a v e n e section 36. F u r t h e r a s u p p l i e r w h o r e f u s e s to s u p p l y a d i s t r i b u t o r i n o r d e r to i n d u c e the d i s t r i b u t o r not to d e a l w i t h a t h i r d p a r t y m a y be s a i d to h a v e e n t e r e d i n t o or g i v e n e f f e c t to a p r o v i s i o n i n a c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g that s u b s t a n t i a l l y lessens c o m p e t i t i o n i n a m a r k e t so as to c o n t r a v e n e s e c t i o n 27. (In this s i t u a t i o n also, a s u p p l i e r m a y be at r i s k u n d e r s e c t i o n 36). A u s t r a l i a n a u t h o r i t y gives some s u p p o r t f o r a r e f u s a l to s u p p l y w h e r e there h a v e been no p r i o r d e a l i n g s , e v e n i f there is no a l t e r n a t i v e s u p p l i e r (see M a c L e a n & A n o r v. S h e l l C h e m i c a l ( A u s t r a l i a ) P t v . L t d . (1984) A . T . P . R . 40-462 a n d Q u e e n s l a n d Wire Industries P t v . L t d . v. T h e B r o k e n H i l l P r o p r i e t a r y 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 a u t h o r i t y o n the other h a n d places a s p e c i a l o b l i g a t i o n on those i n a d o m i n a n t p o s i t i o n to s u p p l y (see R e s t r i c t i v e T r a d e P r a c t i c e s C o m m i s s i o n , R e p o r t C o n c e r n i n g the M a n u f a c t u r e . D i s t r i b u t i o n a n d Sale o f A m m u n i t i o n i n C a n a d a ( O t t a w a , Q u e e n s P r i n t e r , 1959) a n d R. v. E l e c t r i c R e d u c t i o n C o . o f C a n a d a . (1970) 61 C . P . R . 235) S e c t i o n 47 (to be r e n u m b e r e d s e c t i o n 75) o f the C a n a d i a n A c t also a l l o w s the R T P C to o r d e r one or more s u p p l i e r s to a c c e p t a c u s t o m e r w i t h i n a s p e c i f i e d t i m e on u s u a l trade terms i f c e r t a i n c o n d i t i o n s are met. T h e p o s i t i o n is q u i t e d i f f e r e n t h o w e v e r once a d i s t r i b u t o r has been a p p o i n t e d a n d s u p p l i e s h a v e been m a d e a v a i l a b l e , unless there are g o o d c o m m e r c i a l reasons f o r the subsequent r e f u s a l . See U n i t e d B r a n d s C o n t i n e n t a l B . V . v. C o m m i s s i o n [1978] E . C . R . 207.  T h e p r o b l e m is l a r g e l y e v i d e n t i a r y w i t h s u r r o u n d i n g f a c t s o f t e n c o m p l i c a t i n g the m a t t e r f o r e x a m p l e , p e r i o d i c r e f u s a l s to s u p p l y w h i l e a c c o u n t s r e m a i n o u t s t a n d i n g , e r r a t i c s u p p l y i n response to c o m p l a i n t s to a u t h o r i t i e s a n d d e l i b e r a t e late d e l i v e r y .  108  (b)  a s u p p l i e r m a y w a n t to p r e v e n t its p r o d u c t s f r o m b e i n g ' s p e c i a l l e d ' or  ' l o s s - l e a d e r e d ' either (i) to protect its s m a l l e r d i s t r i b u t o r s f r o m excess p r i c e c o m p e t i t i o n or (ii) to a v o i d b r i n g i n g the r e p u t a t i o n o f its p r o d u c t s i n t o d i s r e p u t e and thereby detrimentally  a f f e c t i n g g o o d w i l l a n d f u t u r e sales.  If  smaller  d i s t r i b u t o r s are d r i v e n out o f the m a r k e t or those w h o d o a d h e r e to s p e c i f i e d p r i c e s are u n a b l e or u n w i l l i n g to meet the d i s c o u n t e d p r i c e , the r e d u c e d n u m b e r o f d i s t r i b u t o r s or r e d u c e d p r o m o t i o n a l e f f o r t m a y l e a d to a decrease i n sales o v e r a l l .  (c)  a s u p p l i e r m a y b e l i e v e , as e m p i r i c a l e v i d e n c e has s h o w n i n some  cases, that the o p t i m a l p r i c e at w h i c h the sale o f its p r o d u c t s w i l l be most s u c c e s s f u l is not n e c e s s a r i l y the lowest p r i c e . a i m e d at the m o r e a f f l u e n t  C e r t a i n l y i n r e g a r d to p r o d u c t s  segment o f the m a r k e t , h i g h e r p r i c e s m a y m a k e  p r o d u c t s m o r e a p p e a l i n g as a n i n d i c a t i o n o f q u a l i t y .  If the p r o d u c t s b e c o m e the  subject o f p r i c e c u t t i n g , t h e i r i m a g e m a y be t a r n i s h e d , c e r t a i n segments o f the m a r k e t m a y cease to b u y t h e m a n d those d i s t r i b u t o r s n o r m a l l y c a t e r i n g to this m a r k e t segment w i l l r e d u c e or e v e n cease s t o c k i n g the p r o d u c t s .  2 1 4  If R P M is a n element o f a s u p p l i e r ' s m a r k e t i n g strategy, t h e n a w i t h h o l d i n g o f s u p p l y i n a n y o f the a b o v e s i t u a t i o n s w i l l s e e m i n g l y be c o n d e m n e d n o m a t t e r h o w s u b s t a n t i a l a n y n o n - p r i c e r e l a t e d reasons m a y be.  T h i s p r o b l e m arises because s e c t i o n 2(5)(b) o n l y r e q u i r e s that the reason w h y a p e r s o n engages i n c e r t a i n c o n d u c t ( w h i c h by v i r t u e o f s e c t i o n 2(2)(a)  See K . L i n d g r e n a n d L . E n t r e k i n , "Resale P r i c e M a i n t e n a n c e i n the L i g h t o f M a r k e t i n g Strategy I n v o l v i n g S e l e c t i v e D i s t r i b u t i o n " , (1973) 1 A . B . L . R . 130.  i n c l u d e s " r e f u s i n g to do a n y act")  n e e d be "a" s u b s t a n t i a l r e a s o n r a t h e r t h a n "the"  substantial reason.  T h e m o t i v a t i o n a l a n a l y s i s w h i c h the present A c t r e q u i r e s the C o m m i s s i o n a n d the C o u r t s to u n d e r t a k e is f r a u g h t w i t h d i f f i c u l t i e s g i v e n that a n y business decision involves m i x e d motives.  T h e present a n a l y s i s also r e n d e r s the C o m m i s s i o n  a n d the C o u r t s u n a b l e to w e i g h u p the a n t i c o m p e t i t i v e e f f e c t s o f a n y strategy i n v o l v i n g R P M .  (a)  marketing  A n u m b e r o f s o l u t i o n s m a y be p r o p o s e d .  a s u p p l i e r m a y be a l l o w e d c o m p l e t e f r e e d o m to w i t h h o l d s u p p l i e s  f r o m a n y d i s t r i b u t o r it c h o o s e s .  2 1 6  T h i s a l t e r n a t i v e is h o w e v e r u n p a l a t a b l e g i v e n  the a n t i c o m p e t i t i v e e f f e c t s w h i c h m a y result w h e r e the s u p p l i e r possesses m a r k e t power;  217  (b)  the s i t u a t i o n s i n w h i c h a s u p p l i e r m a y l e g i t i m a t e l y  withhold  s u p p l i e r s as p a r t o f its m a r k e t i n g strategy m a y be l i s t e d ( f o r e x a m p l e , i n a d e q u a t e promotion of a supplier's products, disproportionate emphasis on a competing s u p p l i e r ' s b r a n d s , p o o r p a y m e n t r e c o r d , f r a u d u l e n t sales p r a c t i c e s a n d so on).  Such  S e c t i o n 2(2)(c) goes o n to p r o v i d e that a r e f u s a l to d o a n y act i n c l u d e s " ( i ) [ r ] e f r a i n i n g (otherwise t h a n i n a d v e r t e n t l y ) f r o m d o i n g that act; or (ii) [ m ] a k i n g it k n o w n that that act w i l l not be done".  T h e c o n v e r s e is to i m p o s e a d u t y on s u p p l i e r s to d e a l w i t h d i s t r i b u t o r s w h o meet some t h r e s h o l d o f r e s p o n s i b i l i t y . T h i s m a y be a p p r o p r i a t e w h e n j u s t i f i e d b y s o c i a l a n d p o l i t i c a l ends but is w h o l l y i n a p p r o p r i a t e f r o m a n e c o n o m i c s t a n d p o i n t i n r e g a r d to this p a r t i c u l a r issue. C f \ A n d e r s o n , s u p r a , note 163 at 790.  N o case has yet been h e a r d u n d e r the present A c t d e a l i n g w i t h a p u r e r e f u s a l to d e a l .  110  a list is h o w e v e r l i k e l y to be e x t e n s i v e , a n d e v e n then i n a d e q u a t e l y a n d c l u m s i l y drawn.  (c)  the s i t u a t i o n s i n w h i c h a s u p p l i e r m a y not l e g i t i m a t e l y  withhold  s u p p l i e s m a y be l i s t e d i n m o r e s o p h i s t i c a t e d a n d n a r r o w e r terms t h a n is at present the case.  A s i n (b), a s u p p l i e r s h o u l d be able to w i t h h o l d s u p p l i e s f r o m a s e c o n d  p e r s o n f o r reasons u n c o n n e c t e d w i t h R P M ( f o r e x a m p l e , w h e r e the s u p p l i e r l e g i t i m a t e l y d o u b t s the d i s t r i b u t o r ' s c r e d i t w o r t h i n e s s or d e c i d e s that the d i s t r i b u t o r m a y not p r o v i d e a d e q u a t e services). A g a i n , s u c h a list is l i k e l y to be d i f f i c u l t to d r a w .  (d)  a n y p r a c t i c e , w h e t h e r or not it i n v o l v e s an element o f R P M , w o u l d  be subject to the g e n e r a l tests o f the A c t , n a m e l y a " s u b s t a n t i a l l e s s e n i n g o f c o m p e t i t i o n " test i n respect of a n y c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g or a 'use o f d o m i n a n t p o s i t i o n ' test i n respect o f u n i l a t e r a l a c t i o n b y a s u p p l i e r possessing a s u f f i c i e n t degree of m a r k e t power.  T h e p r o b l e m w i t h this a l t e r n a t i v e is that a  s u p p l i e r ' s a c t i o n s are j u d g e d m e r e l y o n the basis o f t h e i r e f f e c t o n c o m p e t i t i o n a n d so a s u p p l i e r m a y be c o m p e l l e d to d e a l w i t h d i s t r i b u t o r s w h o do not f i t i n w i t h its m a r k e t i n g strategy yet p r o v i d e a great d e a l o f p r i c e c o m p e t i t i o n .  It c a n be seen that none o f the a b o v e s o l u t i o n s c a n a c h i e v e the p e r f e c t result b u t , w i t h i n the p o l i c y o f the A c t , it is s u b m i t t e d that i f a s u p p l i e r has a p r e d o m i n a t e l y l a w f u l p u r p o s e f o r w i t h h o l d i n g s u p p l i e s f r o m one or m o r e d i s t r i b u t o r s as p a r t o f its m a r k e t i n g strategy a n d s u c h strategy does not h a v e a n t i c o m p e t i t i v e e f f e c t s , then it s h o u l d not be c o n d e m n e d as u n l a w f u l e v e n t h o u g h it c o n t a i n s a n element o f R P M .  T o this extent, s o l u t i o n (d), or at least a m o d i f i e d  f o r m t h e r e o f , w o u l d seem to be most a p p r o p r i a t e , n e c e s s i t a t i n g the r e p e a l o f some,  Ill i f not a l l , o f the present R P M p r o v i s i o n s . H o w this r e c o m m e n d e d t r e a t m e n t o f the w i t h h o l d i n g o f s u p p l i e s s h o u l d f i t i n w i t h the o v e r a l l t r e a t m e n t o f R P M u n d e r the A c t w i l l be d i s c u s s e d i n the c o n c l u s i o n to this P a r t .  (g)  Loss-Leadering  T h e o m i s s i o n o f a d e f e n c e o f l o s s - l e a d e r i n g i n b o t h the 1975 a n d the  1986  A c t s is n o t a b l e w h e n one c o m p a r e s the C a n a d i a n , A u s t r a l i a n a n d also the E n g l i s h legislation.  O f a l l the j u s t i f i c a t i o n s f o r r e t a i n i n g R P M , it was the f e a r o f loss  l e a d e r s e l l i n g w h i c h was most c o m m o n l y r a i s e d i n a r g u m e n t s b y s u p p l i e r s , a n d the f a c t o r w h i c h most a c c o u n t e d f o r the i n i t i a l r e l u c t a n c e to legislate a g a i n s t  RPM.  T h e c o n c e r n of s u p p l i e r s was that loss l e a d e r i n g t e n d e d to b r i n g the r e p u t a t i o n their products into disrepute a n d thereby detrimentally f u t u r e sales o f t h e i r p r o d u c t s .  2 1 8  of  a f f e c t e d the g o o d w i l l a n d  A r e l a t e d c o n c e r n o f s u p p l i e r s was that p r o d u c t s  f r e q u e n t l y used as loss-leaders m i g h t cause some d i s t r i b u t o r s to cease p r o m o t i n g or e v e n to d i s c o n t i n u e s e l l i n g the s u p p l i e r s ' b r a n d s because it was u n p r o f i t a b l e to do so.  T h i s w o u l d t h e r e b y leave s u p p l i e r s w i t h f e w e r outlets a n d a l i k e l y d r o p i n  sales.  I n d e e d , loss-leader tactics m i g h t e v e n cause some d i s t r i b u t o r s to go out o f  business w h e r e the p r o d u c t s i n q u e s t i o n c o n s t i t u t e d a m a j o r p a r t o f t h e i r business a n d they w e r e a b l e to s u r v i v e at c o m p e t i t i v e but not l o s s - l e a d e r p r i c e s .  L o s s l e a d e r s e l l i n g was the subject o f a m a j o r i n q u i r y b y the R e s t r i c t i v e T r a d e Practices Commission ("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 p r e v e n t loss l e a d e r i n g was a c c e p t e d b y the L l o y d - J a c o b C o m m i t t e e i n the U n i t e d K i n g d o m i n 1949 as s u f f i c i e n t j u s t i f i c a t i o n p r o h i b i t i n g c o l l e c t i v e R P M a n d not i n d i v i d u a l R P M .  219  for  R e s t r i c t i v e T r a d e P r a c t i c e s C o m m i s s i o n , R e p o r t o n an I n q u i r y i n t o L o s s L e a d e r S e l l i n g . ( O t t a w a , Q u e e n ' s P r i n t e r , 1955) at 261-66.  112  the t e r m "loss-leader s e l l i n g " m a y be a p p l i e d to a n y l e v e l o f p r i c i n g , e x t e n d i n g f r o m a p r i c e i n a n y degree l o w e r t h a n a s u p p l i e r ' s suggested resale p r i c e to a p r i c e at or b e l o w net p u r c h a s e cost.  T h e e v i d e n c e up to the t i m e o f the  inquiry  i n d i c a t e d to the R T P C that sales b e l o w net p u r c h a s e cost were m a d e  infrequently,  a n d w h e n s u c h s e l l i n g was e n g a g e d i n , it was g e n e r a l l y f o r p e r i o d s o f short d u r a t i o n by merchants of comparable standing.  N o n e e d was t h e r e f o r e seen to  r e c o m m e n d l e g i s l a t i v e a c t i o n to c o n t r o l or suppress the p r a c t i c e .  D e s p i t e the 1955 R e p o r t , a l e g i s l a t i v e a m e n d m e n t was passed i n C a n a d a i n I960  2 2 0  to p r o v i d e f o r a d e f e n c e to a r e f u s a l to d e a l w h i c h was based o n a  p r o s p e c t i v e c u s t o m e r ' s p r a c t i c e o f l o s s - l e a d e r i n g . S e c t i o n 3 o f the R e s a l e P r i c e s A c t 1964 ( U K ) p r o v i d e d a s i m i l a r d e f e n c e b y w a y o f a n e x c e p t i o n to the g e n e r a l r u l e that goods m a y be w i t h h e l d f r o m "dealers" w h o h a v e cut or w o u l d be l i k e l y to cut the s u p p l i e r ' s resale p r i c e legislation in  2 2 1  a n d A u s t r a l i a f o l l o w e d suit i n e n a c t i n g its R P M  1971.  T h e p o l i c y o f the A u s t r a l i a n A c t is to a l l o w a s u p p l i e r to p r o t e c t i t s e l f  from  a reseller w h o engages i n the sale o f the s u p p l i e r ' s goods at a loss i n o r d e r to a t t r a c t c u s t o m or to p r o m o t e the reseller's business i n some w a y , r e s u l t i n g i n the s u p p l i e r ' s goods g a i n i n g a r e p u t a t i o n as i n f e r i o r goods a n d d a m a g i n g the m a r k e t  S . C . 1960 c. 45, s e c t i o n 14 a d d i n g s e c t i o n 34(5) to the C o m b i n e s A c t (now s e c t i o n 38(9) of the C o m p e t i t i o n A c t ) .  Investigation  See L e v e r , s u p r a note 142 at 95-96 a n d In R e N e t B o o k A g r e e m e n t (1957) [1962] 1 W L R 1347 w h e r e i m p r a c t i c a l i t y o f p r e v e n t i n g the use o f goods as loss leaders w i t h o u t a n e f f e c t i v e system o f R P M was r e c o g n i z e d i n the case o f books.  113  prospects o f the s u p p l i e r .  2 2 2  A c c o r d i n g l y , as p r e v i o u s l y n o t e d , a s u p p l i e r c a n  l a w f u l l y w i t h h o l d the s u p p l y o f goods to a s e c o n d person w h o , w i t h i n the p r e c e d i n g t w e l v e m o n t h s , has s o l d goods o b t a i n e d f r o m the s u p p l i e r at less t h a n t h e i r cost f o r the p u r p o s e o f a t t r a c t i n g or o t h e r w i s e p r o m o t i n g business f r o m persons l i k e l y to p u r c h a s e other g o o d s .  2 2 3  H o w e v e r , i n t a k i n g a d v a n t a g e o f that  d e f e n c e , the s u p p l i e r c a n n o t use as the reason f o r the w i t h h o l d i n g  of supplies a  g e n u i n e seasonal or c l e a r a n c e sale o f goods that were not a c q u i r e d f o r the p u r p o s e o f b e i n g s o l d at that sale, or a sale that takes p l a c e w i t h its c o n s e n t .  2 2 4  T h e e x c e p t i o n f o r l o s s - l e a d e r i n g has h o w e v e r p r o v e d to be o f l i t t l e p r a c t i c a l s i g n i f i c a n c e w i t h o n l y three cases h a v i n g been d e c i d e d i n A u s t r a l i a to date a n d only four in Canada.  T h i s supports the v i e w expressed by the R P T C i n its  R e p o r t w h e r e i n it f o u n d little e v i d e n c e o f sales below cost.  1955  In this r e g a r d , a  d i s t i n c t i o n must be m a d e b e t w e e n a sale below cost a n d a sale y i e l d i n g no net profit.  222  2 2 3  2 2 5  E x a m p l e s o f the latter are f a r m o r e p r e v a l e n t .  See D o n a l d & H e y d o n , s u p r a note 1 at  It is not u n c o m m o n f o r a  381.  S e c t i o n 98(2).  224  S e c t i o n 98(3). See also C a n a d i a n C o m p e t i t i o n A c t , s e c t i o n 38(9) a c c o m p a n y i n g note 42 s u p r a .  225  Some d i f f i c u l t y has been e x p e r i e n c e d i n d e f i n i n g the terms "cost" a n d "loss" i n the c o n t e x t o f the loss-leader p r o v i s i o n s . In T r a d e P r a c t i c e s C o m m i s s i o n 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, the A u s t r a l i a n F e d e r a l C o u r t was o f the o p i n i o n that "cost" r e f e r r e d to "the cost o f o b t a i n i n g or l a n d i n g the goods: that is, ' l a n d e d ' or d e l i v e r e d cost or, as it is p u t , net a c q u i s i t i o n cost". In r e g a r d to the e x p r e s s i o n "loss", the C o u r t saw the "simplest a n d most o b v i o u s m e a n i n g " as b e i n g "a s e l l i n g p r i c e that is below the d e l i v e r e d cost to the seller ... a n y d e p a r t u r e f r o m the a c q u i s i t i o n cost test is f r a u g h t w i t h d i f f i c u l t i e s o f a p p l i c a t i o n " . (Id. at 772-76). See also R v. H D L e e o f C a n a d a L t d (1980) 57 C . P . R . (2d) 186. ["The t e r m used i n the statute is not ' l e a d e r ' w h i c h is d e f i n e d i n Webster as ' a n a r t i c l e o f f e r e d at a n a t t r a c t i v e s p e c i a l low p r i c e to s t i m u l a t e business", but ' l o s s - l e a d e r ' w h i c h  a n d text  114  d i s t r i b u t o r to sell a s t r o n g l y b r a n d e d p r o d u c t at or close to its cost p r i c e i n o r d e r to a t t r a c t c u s t o m e r s w h o , once i n the store, w i l l b u y other items o n w h i c h s u b s t a n t i a l p r o f i t s c a n be m a d e .  O f course, a distributor w i l l profit f r o m such a  m a r k e t i n g strategy o n l y to the extent that c o n s u m e r s f i n d the low p r i c e so attractive  that they w i l l p a t r o n i z e the d i s t r i b u t o r ' s store.  It is c o n c e i v a b l e that  successive o f f e r i n g s o f a p r o d u c t at v e r y low prices m a y u l t i m a t e l y  affect  the  v a l u e o f the p r o d u c t i n the c o n s u m e r ' s eyes, but m o r e o f t e n t h a n not, the strategy is a i m e d at b u i l d i n g t r a f f i c i n the p r o d u c t itself.  A supplier, especially where a  p r o d u c t is r e a s o n a b l y new to a m a r k e t , m a y w e l l s u p p o r t a d i s t r i b u t o r ' s a c t i o n s to p u s h t h r o u g h large v o l u m e s o f the p r o d u c t at l o w p r i c e s i f the p r o d u c t is l i k e l y to r e c e i v e large e x p o s u r e a n d result i n h i g h e r l o n g - t e r m sales t h r o u g h c u s t o m e r awareness.  T h e use o f a p r o d u c t as a loss-leader i n this s i t u a t i o n is o b v i o u s l y v e r y  m u c h i n the s u p p l i e r ' s interest.  It must not be f o r g o t t e n  h o w e v e r that the r i s k o f  a r e p u t a t i o n b e i n g lost d e p e n d s on there b e i n g a r e p u t a t i o n to be u p h e l d i n the first place.  If  T o this e x t e n t , m a n y s u p p l i e r ' s c o n c e r n s m a y w e l l be o v e r s t a t e d .  a s u p p l i e r is c o n c e r n e d a b o u t possible loss-leader s e l l i n g , it c a n a l w a y s  a d j u s t its w h o l e s a l e p r i c e u p w a r d s , t h e r e b y m a k i n g it less p r o f i t a b l e f o r a d i s t r i b u t o r to engage i n this p r a c t i c e .  A l t e r n a t i v e l y , it c a n r e f u s e to sell to  d i s t r i b u t o r s that are l i k e l y to d i s c o u n t its p r o d u c t h e a v i l y , g i v e n o f c o u r s e that there has been no p r i o r r e c o r d o f d e a l i n g .  T h i s presumes h o w e v e r that the  d i s t r i b u t o r is not i n a p o s i t i o n o f m a r k e t power.  It is o f t e n the case that a  d i s t r i b u t o r has s u f f i c i e n t c l o u t to i n d u c e a s u p p l i e r to s u p p l y it w i t h a large v o l u m e o f p r o d u c t s at a low or e v e n u n r e a s o n a b l y l o w p r i c e f o r a s p e c i a l p r o m o t i o n u n d e r threat o f d i s c o n t i n u i n g its p u r c h a s e s i f s u p p l y is not so m a d e . T h e s u p p l i e r must then d e c i d e w h e t h e r or not to a c c e d e to the t h r e a t i n o r d e r to c l e a r l y i n d i c a t e s a m e a n i n g o f s e l l i n g at a loss or at least w i t h o u t a p r o f i t . (Id. at 197)].  115  keep the d i s t r i b u t o r i n q u e s t i o n as a c u s t o m e r i n the l o n g t e r m .  If  the s u p p l i e r  does a c c e d e , it t h e n f a c e s the r i s k o f l o s i n g its other d i s t r i b u t o r s w h o m a y not be able to c o m p e t e at the low p r i c e , w h i l e the d i s t r i b u t o r i n q u e s t i o n m a y  itself  e v e n t u a l l y s w i t c h s u p p l i e r s l e a v i n g the o r i g i n a l s u p p l i e r i n r e a l d i f f i c u l t i e s .  The  p r o b l e m i n r e f u s i n g to s u p p l y is w h e t h e r or not the p r i c e sought b y the d i s t r i b u t o r is i n f a c t b e l o w the s u p p l i e r ' s f u n d a m e n t a l a c q u i s i t i o n cost or r e a l l y just r e f l e c t s a quantity discount.  B e c a u s e ' l o s s - l e a d e r i n g ' as s u c h is e x c e p t i o n a l a n d s p o r a d i c i n n a t u r e  and  because it is u n l i k e l y that s u p p l i e r s are i n f a c t p r e j u d i c e d i n the l o n g - t e r m b y s u c h a p r a c t i c e ( i n d e e d , they are more l i k e l y to b e n e f i t ) , there seems no n e e d to i n c o r p o r a t e a d e f e n c e i n t o the A c t a l o n g the lines o f that i n 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)  Administration and Enforcement  R e f e r e n c e has been m a d e at v a r i o u s times i n the f o r e g o i n g pages to the d i f f e r e n t rules o f a n a l y s i s a d v o c a t e d b y p a r t i c u l a r c o m m e n t a t o r s d e p e n d i n g u p o n the S c h o o l to w h i c h they b e l o n g a n d the theories they espouse. In the m a i n , the c h o i c e o f a p a r t i c u l a r r u l e comes d o w n to the e c o n o m i c e f f e c t s w h i c h these c o m m e n t a t o r s b e l i e v e the p r a c t i c e has on c o m p e t i t i o n a n d , i m p o r t a n t l y  for  i m m e d i a t e p u r p o s e s , the costs a n d e f f i c i e n c y o f a d m i n i s t r a t i o n a n d e n f o r c e m e n t .  A t one e x t r e m e is the r u l e o f per se i l l e g a l i t y a d o p t e d b y the f o u r j u r i s d i c t i o n s u n d e r r e v i e w a n d a d v o c a t e d b y , most n o t a b l y , P r o f e s s o r s C o m a n o r a n d P i t o f s k y as w e l l as b y s m a l l d i s t r i b u t o r s a n d not so s m a l l d i s c o u n t e r s .  The  f o r m e r s u p p o r t the r u l e o n the basis o f a m i x t u r e o f e c o n o m i c t h e o r y a n d s o c i a l  116  and political v a l u e s ,  2 2 6  w h i l e the latter h a v e a m o r e p e r s o n a l interest, seeing the  e n d o f per se t r e a t m e n t r e s u l t i n g i n the loss o f a s i g n i f i c a n t b a r g a i n i n g tool i n their relationships with s u p p l i e r s .  2 2 7  T h e y base t h e i r a r g u m e n t on p r i c e  c o m p e t i t i o n b e i n g the l i f e b l o o d o f c o m m e r c e .  It w i l l be r e c a l l e d f r o m the i n t r o d u c t i o n that a per se r u l e o f  illegality  deems a p r a c t i c e so t y p i c a l l y h a r m f u l to c o m p e t i t i o n a n d so d e v o i d o f c r e d i b l e b e n e f i t s to be p r e s u m e d u n l a w f u l w i t h o u t a n y p r o o f o f p u r p o s e or i n t e n t a n d w i t h o u t a n y i n q u i r y i n t o the e f f e c t s o f the p r a c t i c e .  T h e r u l e has a n u m b e r of  a d v a n t a g e s f r o m a n a d m i n i s t r a t i v e a n d e n f o r c e m e n t s t a n d p o i n t i n that it a v o i d s d i f f i c u l t a n d costly l i t i g a t i o n , it p r o v i d e s p r e d i c t a b l e results f o r p l a n n i n g p u r p o s e s , it saves e n f o r c e m e n t agencies a n d courts f r o m e n g a g i n g i n u n w i e l d y e c o n o m i c a n a l y s i s a n d last, but not least, it c o n t r i b u t e s to e f f i c i e n t  enforcement.  2 2 8  A t the other extreme is a r u l e o f per se l e g a l i t y s u p p o r t e d p r e d o m i n a n t l y  by  m e m b e r s o f the C h i c a g o S c h o o l w h o a r g u e that R P M is a l w a y s b e n e f i c i a l to consumers.  U n d e r s u c h a r u l e , R P M w o u l d be l a w f u l , no m a t t e r w h a t the  share o f the s u p p l i e r .  2 2 9  market  T h e u n d e r l y i n g p r e m i s e is that e c o n o m i c e f f i c i e n c y  p r o v i d e s the o n l y w o r k a b l e s t a n d a r d f r o m w h i c h a n a p p r o p r i a t e r u l e c a n be  226  B o t h c o m m e n t a t o r s do c o n c e d e the need f o r some c a r e f u l l y e x c e p t i o n s s u c h as f o r new entrants a n d w e a k c o m p e t i t o r s . s u p r a note 96 a n d P i t o f s k y , s u p r a note 97.  227  G e r l a , s u p r a note  228  M . M c K i b b e n , " T h e R e s a l e P r i c e M a i n t e n a n c e C o m p r o m i s e - A P r e s u m p t i o n of  113.  I l l e g a l i t y " , 38 V a n d . L . R e v . 163 (1985) at 184-85.  229  drawn See C o m a n o r ,  See e.g. B o r k s u p r a note 88 at 289-91.  derived.  T h e e f f i c i e n c y a p p r o a c h c l a i m s the same a d v a n t a g e s as a r u l e o f per se  i l l e g a l i t y , n a m e l y c l e a r a n d p r e d i c t a b l e rules f o r d e c i s i o n - m a k i n g , j u d i c i a l e c o n o m y and legal  certainty.  2 3 1  A r u l e o f r e a s o n a n a l y s i s is f a v o u r e d b y those a d o p t i n g the m i d d l e ground.  2 3 2  In the N e w Z e a l a n d c o n t e x t , this w o u l d m e a n s u b j e c t i n g R P M to the  m o r e g e n e r a l p r o v i s i o n s o f the A c t , n a m e l y sections 27 a n d 36.  The principal  a d v a n t a g e o f the r u l e o f r e a s o n is a r e c o g n i t i o n that there m a y be v a r i o u s e f f i c i e n c i e s f l o w i n g f r o m the use o f R P M , a n d that the p r o - c o m p e t i t i v e e f f e c t s o f the p r a c t i c e i n a n y p a r t i c u l a r case m a y be w e i g h e d against its a n t i c o m p e t i t i v e effects.  T h e r e is no d o u b t that the r u l e o f r e a s o n is t h e o r e t i c a l l y the best r u l e but  it has d i s t i n c t d i s a d v a n t a g e s f r o m an a d m i n i s t r a t i v e a n d e n f o r c e m e n t s t a n d p o i n t . Its d i s a d v a n t a g e s are those w h i c h m a k e the per se rules so a p p e a l i n g , n a m e l y l i t i g a t i o n m a y b e c o m e p r o t r a c t e d , d i f f i c u l t a n d e x p e n s i v e because o f the e x t e n s i v e e c o n o m i c a n a l y s i s w h i c h must be c o n d u c t e d o n e a c h o c c a s i o n i n t o the c o m p e t i t i v e e f f e c t s o f the p a r t i c u l a r p r a c t i c e , p l a n n i n g is s o m e w h a t u n p r e d i c t a b l e because of the d e v e l o p m e n t o f a n u m b e r o f o f t e n c o n f l i c t i n g modes o f a n a l y s i s , a n d e n f o r c e m e n t is less e f f i c i e n t .  It is the v e r y i n a b i l i t y , or at least d i f f i c u l t y , w h i c h  courts a n d e n f o r c e m e n t agencies w o u l d h a v e i n a r r i v i n g at a n o b j e c t i v e s t a n d a r d b y w h i c h to d e t e r m i n e the reasonableness o f a p r i c e that has m i l i t a t e d a g a i n s t the  See W. B a x t e r , " R e s p o n d i n g to the R e a c t i o n : T h e D r a f t s m a n ' s V i e w " , 71 C a l i f . L . R e v . 618 (1983) at 621.  P o s n e r , s u p r a note 88 at 22-26 a n d R. B o r k , " T h e R o l e o f the C o u r t s i n A p p l y i n g E c o n o m i c s " , 54 A n t i t r u s t L . J . 21 (1985) at 24.  See e.g. J . M e e h a n , J r . a n d R. L a r n e r , " A P r o p o s e d R u l e o f R e a s o n f o r V e r t i c a l R e s t r a i n t s o n C o m p e t i t i o n " 26 A n t i t r u s t B u l l . 195 (1981) a n d A . Phillips and J . M a h o n e y , "Unreasonable Rules and Rules of Reason: E c o n o m i c A s p e c t s of V e r t i c a l P r i c e - F i x i n g " 30 A n t i t r u s t B u l l . 99 (1985).  118  a d o p t i o n o f other t h a n a r u l e o f per se i l l e g a l i t y i n h o r i z o n t a l p r i c e f i x i n g cases. T h e most w e l l - k n o w n statement to this e f f e c t was that m a d e b y D o u g l a s J . i n 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. w h e r e he s a i d :  2 3 3  T h e reasonableness o f p r i c e s has no c o n s t a n c y d u e to the d y n a m i c q u a l i t y o f business f a c t s u n d e r l y i n g business structures. Those who f i x e d reasonable prices today w o u l d p e r p e t u a t e u n r e a s o n a b l e p r i c e s t o m o r r o w , since those p r i c e s w o u l d not be subject to c o n t i n u o u s a d m i n i s t r a t i v e s u p e r v i s i o n a n d readjustment in light of changed conditions. Those who c o n t r o l l e d the p r i c e s w o u l d c o n t r o l or e f f e c t i v e l y d o m i n a t e the m a r k e t . A s also s a i d i n U n i t e d States v. T r e n t o n Potteries C o .  2 3 4  [I]n the absence o f express l e g i s l a t i o n r e q u i r i n g it, we s h o u l d hesitate to a d o p t a c o n s t r u c t i o n m a k i n g the d i f f e r e n c e b e t w e e n legal a n d i l l e g a l c o n d u c t i n the f i e l d o f business r e l a t i o n s d e p e n d u p o n so u n c e r t a i n a test as w h e t h e r p r i c e s are r e a s o n a b l e - a d e t e r m i n a t i o n w h i c h c a n be s a t i s f a c t o r i l y made only after a complete survey of our economic o r g a n i z a t i o n a n d a c h o i c e between r i v a l p h i l o s o p h i e s .  W h i l e s u c h a n a r g u m e n t m a y be a p p r o p r i a t e f o r h o r i z o n t a l p r i c e f i x i n g cases, the greater f o r c e s o f c o m p e t i t i o n at the d i s t r i b u t o r l e v e l m a k e the a r g u m e n t less c o m p e l l i n g f o r v e r t i c a l p r i c e f i x i n g cases.  E c o n o m i c a n d business c o n d i t i o n s  also do not v a r y so c o n s t a n t l y as to r e q u i r e the l e v e l o f m o n i t o r i n g b y e n f o r c e m e n t agencies suggested.  A f o u r t h r u l e f a l l i n g also between the two extremes is a r u l e o f p r e s u m p t i v e illegality.  T h i s r u l e seeks to b a l a n c e the interests o f s u p p l i e r s , d i s t r i b u t o r s ,  c o n s u m e r s a n d e n f o r c m e n t agencies. T h e m a j o r p r e m i s e o f the r u l e is that R P M  310 U . S . at 221.  234  273 U . S . at 397-98. See also W. P e n g i l l e y , " C o m m e n t s o n A r g u m e n t s i n J u s t i f i c a t i o n of A g r e e m e n t s i n R e s t r a i n t o f 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 a n d N e w Z e a l a n d E x p e r i e n c e " , 19 A n t i t r u s t B u l l . 273 (1974).  119  m o r e o f t e n t h a n not is a n t i c o m p e t i t i v e i n n a t u r e a n d that a s u p p l i e r , as the p a r t y r e s p o n s i b l e f o r its i m p o s i t i o n , s h o u l d bear the b u r d e n o f p r o v i d i n g e v i d e n c e to the contrary.  2 3 5  O f the f e w c o m m e n t a t o r s w h o h a v e suggested s u c h a r u l e o f a n a l y s i s , no consensus seems a p p a r e n t o n h o w the a n a l y s i s s h o u l d be u n d e r t a k e n .  One United  States c o m m e n t a t o r proposes that courts m a k e a p r e l i m i n a r y f i n d i n g that the R P M scheme i n q u e s t i o n has a r e a s o n a b l e c h a n c e o f p a s s i n g the r u l e o f r e a s o n test, i f so, t h e n a f u l l i n q u i r y a c c o r d i n g to this r u l e is to be u n d e r t a k e n . t h r e s h o l d is, is not stated.  2 3 6  and  What this  E v e n the a p p r o a c h suggested b y S c h e r e r , w h o a d v o c a t e s  its use w h e r e R P M is a d o p t e d by " l e a d i n g f i r m s i n c o n c e n t r a t e d m a r k e t s " or w h e n its a d o p t i o n is " n e a r l y u b i t q u i t o u s , "  is s o m e w h a t u n c l e a r .  W h e t h e r the  market  p o w e r o f a s u p p l i e r is to be assessed or an i n q u i r y m a d e i n t o the use o f R P M t h r o u g h o u t a p a r t i c u l a r i n d u s t r y is also not stated.  P u t t i n g a s i d e this l a c k o f consensus, a r u l e o f p r e s u m p t i v e i l l e g a l i t y  retains  the b e n e f i t s o f the per se r u l e s , n a m e l y e f f i c i e n c y a n d c e r t a i n t y , a n d also a c c o m m o d a t e s a r u l e o f reason a p p r o a c h f o r those s p e c i a l cases i n w h i c h R P M m a y be s o c i a l l y b e n e f i c i a l .  T h e d i f f i c u l t y f o r a d m i n i s t r a t o r s is to d e t e r m i n e w h e n a  R P M scheme has a r e a s o n a b l e c h a n c e o f p a s s i n g the r u l e o f r e a s o n test a n d / o r w h e n the a p p r o p r i a t e t h r e s h o l d is r e a c h e d .  M c K i b b e n , s u p r a note 209 at  236  I d , at  199.  S c h e r e r , s u p r a note 74 at 707.  197.  S u c h a d e t e r m i n a t i o n m a y o f t e n be  120  a r b i t r a r y a n d i n d e e d m a y i n v o l v e as m u c h time a n d expense as a f u l l analysis.  blown  2 3 8  A f i f t h a n d s o m e w h a t h y b r i d r u l e w h i c h bears s p e c i a l c o n s i d e r a t i o n i n the N e w Z e a l a n d c o n t e x t is to c o m b i n e sections 30 a n d 37 i n t o one.  A s n o t e d a b o v e , it  is almost a l w a y s the case that v e r t i c a l p r i c e f i x i n g i n v o l v e s a c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g i n m u c h the same w a y as h o r i z o n t a l p r i c e f i x i n g . T h e j o i n t c o n s i d e r a t i o n o f h o r i z o n t a l a n d v e r t i c a l p r i c e f i x i n g c o u l d e a s i l y be a c h i e v e d b y i n s e r t i n g the w o r d s "or resold" a f t e r the w o r d " r e s u p p l i e d " i n s e c t i o n 30 ( l ) ( b ) a n d d e l e t i n g the w o r d s "in c o m p e t i t i o n w i t h e a c h o t h e r " .  2 3 9  A d o p t i o n of a  r u l e a l o n g these lines has the a d v a n t a g e s o f the per se r u l e s , yet a l l o w s parties w i l l i n g to b e a r the a p p r o p r i a t e expense, to a p p l y f o r an a u t h o r i z a t i o n w h e r e scheme i n q u e s t i o n is seen to be o f b e n e f i t to the p u b l i c .  the  T h e r e is no n e e d f o r  the  C o m m i s s i o n to m a k e a n y p r e l i m i n a r y d e t e r m i n a t i o n as to w h e t h e r the scheme is l i k e l y to pass a n a p p r o p r i a t e test or w h e t h e r a p a r t i c u l a r t h r e s h o l d o f  market  p o w e r has been r e a c h e d ; a d e t e r m i n a t i o n is o n l y r e q u i r e d a f t e r the p a r t i e s to the c o n t r a c t , a r r a n g e m e n t or u n d e r s t a n d i n g h a v e d e c i d e d to m a k e an a p p l i c a t i o n f o r a u t h o r i z a t i o n at w h i c h time the scheme c a n be j u d g e d against the c r i t e r i a  laid  T h e U . S . S u p r e m e C o u r t has t r a d i t i o n a l l y s h o w n l i t t l e interest i n rules o f p r e s u m p t i v e i l l e g a l i t y . It rejected the suggestion i n S c h w i n n w h e n P r o f e s s o r P o s n e r , w h o was then a r g u i n g f o r the U . S . G o v e r n m e n t , u r g e d a r u l e o f p r e s u m p t i v e i l l e g a l i t y r a t h e r t h a n a r u l e o f per se i l l e g a l i t y . H o w e v e r i n the h o r i z o n t a l f i e l d , rules of p r e s u m p t i v e i l l e g a l i t y or ' q u i c k l o o k s ' are s o m e w h a t i n vogue. See e.g. B r o a d c a s t M u s i c . Inc. v. C o l u m b i a B r o a d c a s t i n g Svs. Inc. 441 U.S. 1 (1979).  239  T h e w o r d s "in c o m p e t i t i o n w i t h e a c h other" do not a d d a n y t h i n g to s e c t i o n 30 a n d i n f a c t create a r i s k that some agreements w h i c h s h o u l d be c a u g h t m a y not be. See J a c k s o n , s u p r a note 168.  d o w n i n d e c i s i o n s w h i c h h a v e h a d to c o n s i d e r the a u t h o r i z a t i o n p r o v i s i o n s of the Act.  2 4 0  In c o n s i d e r i n g the p r o c e d u r e f o r a u t h o r i z a t i o n u n d e r e i t h e r a r u l e o f reason test u n d e r s e c t i o n 27 or u n d e r the h y b r i d test u n d e r s e c t i o n 30, one m a y note the d i l e m m a w h i c h w o u l d i n e v i t a b l y be f a c e d b y those d e c i d i n g w h e t h e r or not to make an application.  T h i s arises out o f the f a c t that the C o m m i s s i o n o c c u p i e s the  role o f b o t h i n v e s t i g a t o r , d e c i s i o n m a k e r a n d e n f o r c e r . a d m i s s i o n that an a r r a n g e m e n t is a n t i c o m p e t i t i v e .  A n a p p l i c a t i o n is a tacit  T h u s , i f a n a p p l i c a t i o n f o r an  a u t h o r i z a t i o n is u n s u c c e s s f u l because the a p p l i c a t i o n is u n a b l e to meet the  criteria  l a i d d o w n b y the A c t , the a p p l i c a n t then faces the r i s k o f e n f o r c e m e n t p r o c e e d i n g s b e i n g i n s t i t u t e d b y the C o m m i s s i o n , w h i c h w i l l of course h a v e been i n f o r m e d o f the s c h e m e , or i n d e e d o f a p r i v a t e a c t i o n f o r damages or i n j u n c t i o n . noted:  A s has been  2 4 1  T h i s prospect m a y w e l l h a v e the result that r a t h e r t h a n a p p l y f o r a n a u t h o r i z a t i o n , the i n c l i n a t i o n o f a p a r t y to a p a r t i c u l a r p r a c t i c e m a y be to 'sit t i g h t ' a n d , i n the event o f a n y a c t i o n u n d e r the [Act] as regards the p r a c t i c e , to d i s p u t e that it has a n a n t i c o m p e t i t i v e e f f e c t or that there has o t h e r w i s e been the w r o n g d o i n g c o m p l a i n e d of.  A s i m i l a r r u l e l a i d d o w n i n the R e s a l e P r i c e s A c t 1976 ( U . K . ) r e q u i r e s the R e s t r i c t i v e P r a c t i c e s C o u r t to grant a n e x e m p t i o n to a R P M scheme i f the l i s t e d d e t r i m e n t s w h i c h m i g h t result i f the scheme c a n not be i m p o s e d o u t w e i g h the d r a w b a c k s o f the scheme b e i n g i m p o s e d . T h e d e t r i m e n t s are (a) s u b s t a n t i a l r e d u c t i o n i n the q u a l i t y or v a r i e t y o f goods a v a i l a b l e ; (b) s u b s t a n t i a l r e d u c t i o n i n r e t a i l outlets; (c) l o n g t e r m p r i c e i n c r e a s e s , ; (d) d a n g e r to h e a l t h f r o m p u b l i c misuse o f goods; or (e) c e s s a t i o n or s u b s t a n t i a l r e d u c t i o n i n p o i n t - o f - s a l e or post-sales services r e a s o n a b l y n e c e s s a r y to protect the p u b l i c f r o m i n j u r y or to c o n f e r other p u b l i c b e n e f i t s . See M e r k i n & W i l l i a m s , s u p r a note 145 at 230-32.  D . W i l l i a m s , G . R i c k e t t s a n d F. Q u i n , " T h e C o m m e r c e A c t " ( N e w L a w S o c i e t y S e m i n a r , A p r i l / M a y 1986) at 16.  Zealand  H o w serious this r i s k is is v e r y m u c h a moot p o i n t .  F r o m the w r i t e r ' s  e x p e r i e n c e , there has been no abuse of p o s i t i o n b y the C o m m i s s i o n that has u n d u l y prejudiced any applicant.  T h e r e has h o w e v e r been some r e l u c t a n c e to o b t a i n  letters o f c o m f o r t f r o m the C o m m i s s i o n because a d v i c e g i v e n b y the C o m m i s s i o n is not b i n d i n g u p o n it i n a n y later p r o c e e d i n g s .  F r o m a n a d m i n i s t r a t i v e s t a n d p o i n t t h e n , the present per se r u l e o f  illegality  has d i s t i n c t a d v a n t a g e s i n terms o f e f f i c i e n c y o f e n f o r c e m e n t a n d s a v i n g s i n costs to a l l parties.  A g o o d case c a n h o w e v e r be m a d e out f o r a m o r e p e r m i s s i v e  t r e a t m e n t o f R P M u n d e r a r u l e that retains the b e n e f i t s o f per se t r e a t m e n t , yet a f f o r d s the f l e x i b i l i t y to c o n s i d e r schemes that m a y h a v e v a l i d b e n e f i t s .  The  present e x p e r t i s e o f C o m m i s s i o n m e m b e r s a n d the p o o l o f q u a l i f i e d p e r s o n n e l a v a i l a b l e to the H i g h C o u r t assure that d e t a i l e d e c o n o m i c a n a l y s i s c a n be c a r r i e d out i n a p p r o p r i a t e cases.  242  A s f a r as e n f o r c e m e n t itself is c o n c e r n e d , one m a y c o n s i d e r w h e t h e r  the  present a r r a y o f r e m e d i e s p r o v i d e s the o p t i m a l m i x a n d serves the d e s i r e d f u n c t i o n s i n R P M cases.  T h e c o n s e q u e n c e s o f a c o n t r a v e n t i o n o f a n y o f the  r e s t r i c t i v e t r a d e p r a c t i c e p r o v i s i o n s o f the A c t i n c l u d e p e c u n i a r y p e n a l t i e s o f up to $100,000 f o r i n f r i n g e m e n t s b y i n d i v i d u a l s a n d u p to $300,000 f o r i n f r i n g e m e n t s by  A p p o i n t e e s o f the C o m m i s s i o n , o f w h i c h one must be a b a r r i s t e r or s o l i c i t o r o f at least 5 years s t a n d i n g , are r e q u i r e d to h a v e " k n o w l e d g e o f or experience in industry, commerce, economics, law, accountancy, public a d m i n i s t r a t i o n or c o n s u m e r a f f a i r s " to q u a l i f y (Section 9(4)). F o r a p p e a l s a g a i n s t d e t e r m i n a t i o n s o f the C o m m i s s i o n , the H i g h C o u r t is r e q u i r e d to sit w i t h at least one "lay m e m b e r " , b e i n g a p e r s o n a p p o i n t e d b y the G o v e r n o r G e n e r a l h a v i n g r e g a r d to that person's " k n o w l e d g e or e x p e r i e n c e i n i n d u s t r y , c o m m e r c e , e c o n o m i c s , l a w or a c c o u n t a n c y " ( S e c t i o n 77).  123  c o m p a n i e s ( w h i c h m a y be i m p o s e d by the C o m m i s s i o n o n l y ) ;  2 4 3  i n j u n c t i o n s to  r e s t r a i n c o n d u c t i n c o n t r a v e n t i o n o f the A c t ( w h i c h m a y be sought by the C o m m i s s i o n or a n y p e r s o n ) ;  2 4 4  a n d damages f o r a n y loss or d a m a g e c a u s e d by  p a r t i c u l a r c o n d u c t ( w h i c h m a y be sought by a n y p e r s o n 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 a c t i o n is not c r i m i n a l a n d t h e r e f o r e the c i v i l s t a n d a r d o f p r o o f applies.  Almost identical enforcement and remedy provisions pertain under  the  A u s t r a l i a n A c t a l t h o u g h the p e c u n i a r y penalties are s o m e w h a t l o w e r at u p to $50,000 i n the case o f an i n d i v i d u a l a n d u p to $250,000 i n the case o f a b o d y corporate.  246  T h e d i s t i n c t i v e f e a t u r e o f the C a n a d i a n l e g i s l a t i o n is the a p p l i c a t i o n o f a c r i m i n a l s t a n d a r d to the R P M p r o v i s i o n s w i t h f i n e s f o r b o t h i n d i v i d u a l s a n d c o r p o r a t i o n s b e i n g at the d i s c r e t i o n of the C o u r t a n d i m p r i s o n m e n t o f up to f i v e years f o r  individuals.  2 4 7  2 4 3  S e c t i o n 80.  2 4 4  S e c t i o n s 81 a n d 88-90.  2 4 5  S e c t i o n 82.  246  247  S e c t i o n 76. F o r a d i s c u s s i o n o f the A u s t r a l i a n p r o v i s i o n s , see M i l l a r , s u p r a note 43 at 223 et seq. T h e highest p e n a l t y so f a r i m p o s