When businesses try to steer clear of violating competition law, they instinctively think of avoiding contracts or arrangements with competitors that might be problematic, such as price-fixing or market-sharing. It is natural for businesses to prioritize the avoidance of such conduct with competitors from a compliance perspective, as it can result in very high penalties, disqualification from management, and even imprisonment in some jurisdictions. 

However, it is important to bear in mind that competition law does not just apply to such so-called “horizontal” arrangements (the conduct is called “horizontal” because it involves businesses at the same level of the supply chain). It also applies to arrangements with suppliers or customers (so-called “vertical” arrangements because they involve businesses at different levels in the supply chain such as purchase, supply or distribution agreements). A recent case brought by Hong Kong’s Competition Commission before the Competition Tribunal, discussed further below, makes this clear.

The Commission has said in its guidelines that it will generally view vertical arrangements less suspiciously than horizontal arrangements – at least where they don’t involve companies with significant market power. But there are exceptions. One of these is so-called “resale price maintenance” (RPM). This is where a supplier imposes a restriction on a purchaser (such as a distributor or retailer) as to the price at which the purchaser can re-sell the products. The supplier may want to do so because they feel that heavy discounts may tarnish the image of the brand, or because they don’t want their distributors or retailers to be fighting each other on price (or both).

Imposing maximum prices is generally unproblematic (because they benefit consumers), as is making non-binding pricing recommendations (although there can be exceptions in both cases). But requiring the purchaser to re-sell the products at a fixed price, or setting a minimum price for the resale of the products, is problematic. This is because it prevents the purchaser from selling at a lower price than the fixed or minimum price, which would benefit consumers. Where there is more than one distributor in a given territory, it also restricts the ability of the distributors to undercut each other on price. Competition authorities are concerned not just with competition at the supplier’s level, but also at the distributors’ level (so-called “intra-brand” competition).

It is RPM that is at issue in the case that the Commission has recently brought before the Tribunal, mentioned above. In this case, the Commission alleges that a Hong Kong monosodium glutamate supplier imposed and enforced minimum resale prices for the product in its agreements with its two main Hong Kong distributors. It alleges that this conduct had the object of harming competition, contrary to the Competition Ordinance. If the Commission’s view is correct, it will not have to prove that the RPM had the actual effect of harming competition in the market.

Not only that, the Commission alleges that this conduct falls into the category of “serious anti-competitive conduct” (SAC) under the Competition Ordinance, which includes “fixing, maintaining, increasing or controlling the price for the supply of goods or services”. The Commission believes that this wording includes not just price-fixing between competitors, but also price-fixing between suppliers and resellers, i.e. RPM. If this is correct, it means that the Commission does not have to give the businesses concerned the chance to remedy their conduct before taking the case to the Tribunal – the Commission can take the case directly to the Tribunal (as it has done).

Although conduct may fall within the SAC category, the Commission acknowledges that it might still be excused by the Competition Ordinance if it has sufficient efficiencies and consumer benefits to outweigh the harm to competition. But this would be for the businesses to prove, not the Commission.

A final point to note is that while RPM has been initiated more commonly by suppliers rather than resellers, resellers may also be guilty of a competition law contravention if they agree they agree to the minimum or fixed resale prices. In the case discussed, the Commission has chosen to take action against the supplier rather than the resellers.

This case raises a number of complex issues, which hopefully the Competition Tribunal will clarify in due course. In the meantime businesses would be well-advised to continue to take specialist legal advice on their proposed vertical (as well as horizontal) arrangements.