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 oe.cd/hsa.

1. Brass 1: U.S. Treatment of Hub & Spoke and Resale Price
Maintenance
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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
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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?
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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?
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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?
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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)
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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
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8. Is Mere Knowledge Without Agreement Enough? Are Plus Factors
Needed?
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“[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)
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9. Plus Factors Evidencing Collusion
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• 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
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10. Brass 2: Best Practices for Compliance
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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
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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
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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
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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
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Compliance for Vertical Arrangements