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Hub-and Spoke arrangements – BRASS – December 2019 OECD discussion


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This presentation by Rachel Brass, Partner, Gibson Dunn, was made during the discussion “Hub-and-spoke arrangements” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at

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Hub-and Spoke arrangements – BRASS – December 2019 OECD discussion

  1. 1. Brass 1: U.S. Treatment of Hub & Spoke and Resale Price Maintenance 1Gibson Dunn
  2. 2. • A cartel in which a firm (the hub) organizes collusion (the rim of the wheel or the rim) among upstream or downstream firms (the spokes) through vertical restraints • Such a conspiracy may be illegal per se under antitrust law where the horizontal agreement among the spokes (the rim) is per se unlawful • Critical question of proof in the U.S.: Is there a rim? Overview of Hub & Spoke Under U.S. Law 2Gibson Dunn
  3. 3. • Encourages retailers to invest in promoting and supporting the product • May facilitate entry of new product or production method (organic, “clean,” Made in America) by assuring retailers of a profit margin • May enhance premium brand image • Response to complaints by retailers about discounting by their competitors • Facilitate collusion among manufacturers Interplay between hub & spoke and RPM: Why would manufacturers want to use RPM? 3
  4. 4. • Can stimulate interbrand competition  Encourages retailers to promote the product  Encourages retailers to carry the product • May facilitate entry of new product, giving consumers more choices • May increase the level of retail services available to consumers • May facilitate franchising and market-wide promotions What is “pro-competitive” about RPM? 4Gibson Dunn
  5. 5. • Reduces intra-brand competition  May eliminate discounting of the product • May reduce incentives to carry products by new entrants • May reduce pressure on manufacturer to reduce price • May facilitate tacit or actual collusion among manufacturers or retailers • May impede competition by discount retailers • May “soften” competition What is anticompetitive about RPM? 5Gibson Dunn
  6. 6. • Overruled per se rule in favor of rule of reason  Per se rules reserved for restraints “that would always or almost always tend to restrict competition and decrease output.”  Economic effects of RPM may be good or bad, depending on circumstances  Primary concern is inter-brand competition • Some relevant factors  Number of manufacturers using the practice  Source of (and reason for) the practice  Manufacturer’s market power U.S.: Leegin v. PSKS (2007) 6Gibson Dunn
  7. 7. • In the 1980s, TRU was the largest toy retailer in the United States. • Responding to the emergence of low-priced warehouse clubs, in the late 1980s TRU started aggressively negotiating vertical agreements with toy manufacturers pressing them not to deal with warehouse clubs. • FTC investigated for Section 1 (collusion) violation. The FTC concluded that “TRU organized and enforced a horizontal agreement among its various suppliers” • “Key toy manufacturers were unwilling to refuse to sell to or discriminate against the clubs unless they were assured that their competitors would do the same” • The FTC found that TRU “acted as the central player in the middle of what might be called a hub-and-spoke conspiracy, shuttling commitments back and forth between toy manufacturers and helping to hammer out points of shared understanding.” Federal Trade Commission v. Toys-R-Us 7Gibson Dunn
  8. 8. Is Mere Knowledge Without Agreement Enough? Are Plus Factors Needed? 8 “[W]here parties to vertical agreement have knowledge that other market participants are bound by identical agreements, and their participation is contingent upon that knowledge, they may be considered participants in a horizontal agreement in restraint of trade.” Laumann v. National Hockey League, et al., 907 F. Supp. 2d 465 (S.D.N.Y. 2012) Allegation that dealer spokes all “knew” about hub’s plan to maintain its market position and that all other dealers agreed to same exclusive dealing arrangements with Dentsply is not sufficient to survive motion to dismiss. Howard Hess Dental Labs. Inc. v. Dentsply Int’l , Inc., 602, F.3d 237 (3d Cir. 2010) Gibson Dunn
  9. 9. Plus Factors Evidencing Collusion 9 • Action that reflects a marked change from prior practice • Action against a participant’s independent business interests • Conditioning an agreement on the participation of other suppliers or retailers • Communications between spokes Gibson Dunn
  10. 10. Brass 2: Best Practices for Compliance 10Gibson Dunn
  11. 11. 1. Recommendations not requirements. • Explain clear rationale for pricing recommendation • Suppliers should assess and document their rationales for adopting such a policy. • Do those rationales match up with the procompetitive justifications identified by the Supreme Court in Leegin, or with another recognized procompetitive justification? • Is a less restrictive option available? • Extra caution required when retailer-initiated • Does the restraint benefit the supplier itself, or could it facilitate a distributor/retailer cartel or serve the interests of a dominant retailer? • In EU, special care that recommendation is genuine recommendation, not requirement. Compliance for Vertical Arrangements 11Gibson Dunn
  12. 12. 2. What is the nature of the recommendation? • Differences for minimum and maximum suggested pricing? • What about a short-term promotion price? Compliance for Vertical Arrangements 12Gibson Dunn
  13. 13. 3. Avoid enforcement • Do not monitor compliance with or otherwise police whether retailers follow recommendations • Do not engage with competing suppliers regarding adoption of similar policies • Do not tie incentives or other treatment to compliance with recommendations • Adopt clear guidance / expectations regarding retailer compliance with competition laws. Compliance for Vertical Arrangements Gibson Dunn 13
  14. 14. 14 4. Avoid “plus factor” conduct • Extra care around marked changes from prior practice • Only act in independent business interests • Never conditioning an agreement on the participation of others • Extra caution in trade association, standard setting, or other industry settings Gibson Dunn Compliance for Vertical Arrangements