A DVO CA TES & SO LICITO RS N OTA RY PU BLIC B-11-8, Level 11, Megan Avenue II, Jalan Yap Kwan Seng, 50450 Kuala Lumpur, Malaysia. Tel :

(+603) 2166 3225

Fax :

(+603) 2166 3227

Email :

[email protected]

1 3 F e br uar y 2 0 14

J L P W

LRECENT E GCOMPETITION A L LAW N EISSUES W INSMALAYSIA A L E R T REC ENT CO MPE TIT IO N L AW IS SUE S I N MALAY SI A

The Malaysian Competition Act 2010 (the “Act”) which was gazetted on June 10 in year 2010, and came into effect on 1 January 2012 is the first complete competition law in Malaysia. It was aimed at providing a legal framework for restraining anti-competitive practices, such as cartels1 and collusions, and promoting a competitive market environment, and thus, enhancing consumer welfare, business practices and economic development. This applies to all commercial activities – both within Malaysia and transacted outside Malaysia – that have negative or anti-competitive effects in any market in Malaysia, except for those carried out by the energy, communications and multimedia sectors. Following the two major Malaysian airlines, Malaysia Airlines Bhd (“MAS”) and AirAsia Bhd (“AirAsia”), share-swap deal which resulted in MAS and AirAsia being fined RM10million each by the Malaysia Competition Commission (“MyCC”) for anti-competitive behaviour (and AirAsia has submitted its written response to that decision), there is another attention-grabbing issue which aroused in April 2012 - Nestlé Products Sdn Bhd (“Nestlé”) has filed an individual exemption application to the MyCC to exclude its pricing policy called the “Brand Equity Protection Policy (BEPP)” from complying with the Act. The event has triggered the anti-competition watchdog to conduct a second “market review” (after the first review being conducted on air transport industry), which will now be on the food processing industry. MyCC CEO, Shila Dorai Raj told the media that the regulator will impose a RM50,000 fee for each party who seeks to make an application for exemption. Each successful individual exemption will be charged an annual fee of RM10,000 while those granted block exemptions will be charged RM20,000. According to Shila, the application fee is payable for the company and MyCC has yet to reach a conclusion on whether the exemptions are reasonable.

                                                                                                                        1

 Refers  to  a  combination  of  enterprises  formed  to  regulate  production,  pricing  and  marketing  of   goods  by  the  members.  Cartels  usually  operate  in  secret.   SOURCE:  Competition  Act  2010:  Handbook  for  General  Public  

Jeff Leong, Poon & Wong ©

1  

      Under the Act, the applicants have to prove that their existing commercial agreements or arrangement fulfilled the following four criteria in order to earn an exemption: 1. There are significant identifiable technological, efficiency or social benefits directly arising from the agreement; 2. The benefits could not reasonably have been provided by the parties to the agreement without the agreement having the effect of preventing, restricting or distorting competition; 3. The detrimental effect of the agreement on competition is proportionate to the benefits provided; and 4. The agreement does not allow the enterprise concerned to eliminate competition completely in respect of a substantial part of the goods or services In May 2012, the Federation of Malaysian Consumers Associations (FOMCA) has filed a complaint to the MyCC against Nestlé for price fixing. Its CEO, Datuk Paul Selva Raj said, FOMCA had received information that Nestlé had determined retail prices of its products, and thus, eliminating competition. Datuk Paul said under its BEPP, Nestlé dictated the price that retailers must charge for its products like Milo, Nescafe and Maggi. Retailers therefore, do not have the option to sell these products at lower prices or action can be taken against them. As a response to the complaint, Nestlé Malaysia has issued a statement denying charges of price-fixing. Nestlé claimed that its BEPP, which was alleged to have elements of price-fixing relating to three of its products – Milo, Nescafe and Maggi – was only used to prevent loss leader2 selling activities by retailers. In other words, its BEPP allows only loss leaders to have its price set by the company. Nestlé senior corporate spokeswoman, Melanie Kohli, said Nestlé’s BEPP did not influent price setting by customers, it only prevents the misuse of Nestlé brands as promotional loss leaders by selected retailers. Such activities can have the long-term effect of weakening and eroding the brand equity of Nestlé’s products. Kohli also explained that Nestlé had sought confirmation of its position – regarding its BEPP – from the MyCC and provided it with a full statement of facts on its application. "Exemption applicants are not automatically granted exemptions," said MyCC CEO, Pn Shila Dorai Raj, in response to the Federation of Malaysian Consumer Associations' (FOMCA) claim that the MyCC had given the exemption to Nestlé. "All applications for exemptions must undergo the necessary assessments to determine if they meet the necessary criteria."

                                                                                                                        2

 Refers  to  an  article  offered  below  cost  in  the  hope  that  customers  attracted  by  it  will  buy  other   goods.   SOURCE:   Collins English Dictionary – Complete and Unabridged © HarperCollins Publishers 1991, 1994, 1998, 2000, 2003  

Jeff Leong, Poon & Wong ©

2  

      Following a series of discussions with MyCC, in February 2013, Nestlé has withdrawn its application for individual exemption. Nestlé’s pricing policy was a major concern for the MyCC as it has elements of Resale Price Maintenance (RPM)3, an anti-competitive conduct that prevents resellers from setting their prices independently, potentially leading to increased prices for consumers. As set out in the Competition Act 2010: Handbook for General Public, RPM is done in several ways, which include specifying either: 1. a minimum retail price, or 2. a recommended retail price, or 3. even a maximum selling price. "While the MyCC recognizes the rights of Nestlé to promote and enhance its brand equity under the BEPP, the pricing policy as contained in the BEPP was likely to infringe section 4 (1) of the Act4 as it essentially constitutes a Resale Price Maintenance (RPM)," said MyCC’s Chairman, Tan Sri Dato’ Seri Siti Norma Yaakob. "In this regard, we have requested Nestlé to dismantle its pricing policy contained in the BEPP." Nestlé has agreed to comply in dismantling the said pricing policy and issued notices to the trade on the same. “The main underlying reason for withdrawing the application followed Nestlé’s conclusion that, while its concerns remain valid, perhaps MyCC may not be the appropriate forum to address the issues relating to loss leader selling and that these should be addressed by other organisations of government and more

                                                                                                                        3

 Where  prices  are  fixed  when  a  manufacturer  dictates  the  price  of  goods  and  services  for  reselling  by   its  suppliers’  down  the  line.  Retailers  will  then  not  have  the  freedom  to  vary  prices  or  offer  their  own   discounts  to  their  customers.   SOURCE:  Competition  Act  2010:  Handbook  for  General  Public   4

 Information  on  Section  4  of  the  Competition  Act  2010   Section  4:  Prohibited  horizontal  and  vertical  agreement   4.  (1)  A  horizontal  or  vertical  agreement  between  enterprises  is  prohibited  insofar  as  the  agreement   has  the  object  or  effect  of  significantly  preventing,  restricting  or  distorting  competition  in  any  market   for  goods  or  services.   (2)  Without  prejudice  to  the  generality  of  subsection  (1),  a  horizontal  agreement     between  enterprises  which  has  the  object  to-­‐       (a)  fix,  directly  or  indirectly,  a  purchase  or  selling  price  or  any  other  trading  conditions;       (b)  share  market  or  sources  of  supply;       (c)  limit  or  control-­‐         (i)  production;         (ii)  market  outlets  or  market  access;         (iii)  technical  or  technological  development;  or         (iv)  investment;  or       (d)  perform  an  act  of  bid  rigging,  is  deemed  to  have  the  object  of  significantly  preventing,     restricting,  or  distorting  competition  in  any  market  for  goods  or  services.   (3)  Any  enterprise  which  is  a  party  to  an  agreement  which  is  prohibited  under  this   section  shall  be  liable  for  infringement  of  the  prohibition.   SOURCE:  Malaysia  Competition  Commission  (MyCC)  

Jeff Leong, Poon & Wong ©

3  

      appropriately by the Ministry of Domestic Trade, Cooperatives and Consumerism,” the company told The Malaysian Reserve. When further exploring this matter, we can see that engaging in minimum Resale Price Maintenance (RPM) might not completely be an anti-competition behaviour. The development of competition law in the United States is interesting and is good as a reference. In Dr. Miles Medical Co. v. John D. Park and Sons Co., 220 U.S. 373 (1911), the U.S. Supreme Court established that RPM is per se unlawful under Section of the Sherman Antitrust Act. However, this precedent was overruled in Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 2705 (2007), where the Court held that manufacturer-imposed minimum resale prices can give rise to efficient competition for customer sales between retailers in ways other than reducing the retail price and that minimum resale price agreements would be weighed under the more lenient Rule of Reason legal standard which proposes that the circumstances in which the action was committed must be considered. Since then, the Supreme Court had departed from its strict prohibition of minimum RPM agreements. Note that, minimum RPM is not per se legal after the Leegin decision. Nevertheless, Leegin itself recognised at least two behaviours wherein a purely vertical minimum RPM agreement might be unlawful, which both in view of market power—either the retailer’s or the manufacturer’s: •

“A dominant retailer . . . might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network.”5

•

“A manufacturer with market power . . . might use resale price maintenance to give retailers an incentive not to sell the products of smaller rivals or new entrants.” 6

In the aftermath of the ruling in Leegin, the Federal Trade Commission (FTC) granted shoe manufacturer Nine West’s Petition to modify a March 2000 Consent Order (“Petition”) to permit Nine West to enter into RPM agreements with its dealers. The FTC noted that the Supreme Court had not announced RPM to be per se legal in Leegin, and that the Court had applied the Rule of Reason in determining whether RPM might be anti-competitive in some circumstances. The FTC granted the Petition based on the conclusion that consumers would not likely be harmed if Nine West established RPM with its retail dealers on the ground that FTC found that Nine West had “only a modest market share” and that there was also no evidence of a dominant, inefficient retailer in the market. However, the FTC required Nine West report periodically to the FTC so that it could monitor the effects of Nine West’s RPM program.

                                                                                                                        5

 Leegin,  127  S.  Ct.  at  2717.  

6

 Id.  

Jeff Leong, Poon & Wong ©

4  

      Nine West’s argument in its Petition is worth thinking about. Nine West stated that its minimum RPM practices were pro-competitive because of three reasons: 1. they contributed to Nine West's brand equity; 2. they prevented free-riding by discounting resellers; and 3. these practices would be generally available to Nine West's competitors. The following sets out few points that show RPM could have potential procompetitive effects, and thus giving consumers better choices and increasing consumer welfare: •

Although RPM agreements can reduce “intrabrand” competition among resellers selling the same brand, it can be compensated by the increased “interbrand” competition - for example, competition between the Samsung and Apple brands of smart phone. Minimum RPM agreements encourage resellers to invest in retail services efforts to sell that brand against competing brands when the resellers are not worried that they will face discount price competition from other resellers of the same brand.7 With better retail services, consumer demand will increase and resellers will generate more sales income and are able to enhance their retail services further. Ultimately, consumers will get to enjoy high quality retail services.

•

It is not uncommon for a customer to enter a shop to enjoy its retail services such as knowledgeable salesperson, and ended up buying the same goods from another shop which offers a lower price but lower service. Minimum RPM agreements can mitigate the risk that one reseller might “free ride” on another reseller’s delivery of their services.

•

RPM can also ease the entry of new brands into the market by allowing resellers to offer the required pre-sale services to compete with existing brands.

Considering that one of the ultimate goals of the Competition Act 2010 is to enhance consumer welfare, perhaps, if it is able to prove that Nestlé’s minimum RPM practice’s procompetitive benefits outweigh the anticompetitive harms, the situation can be overturned.

                                                                                                                        7

 See  State  Oil  Co.  v.  Khan,  522  U.S.  3  (1997)  and  Continental  T.V.,  Inc.  v.  GTE  Sylvania,  Inc.,  433  U.S.  36   (1977)    

Jeff Leong, Poon & Wong ©

5  

      References:

Bernama. (2013, February 25). Nestle Withdraws Exemption Application. Retrieved from http://mrem.bernama.com/viewsm.php?idm=20769 Borneo Post. (2012, May 7). Competition Act creates new developments in retail sector. Retrieved from Borneo Post Online: http://www.theborneopost.com/2012/05/07/competition-act-creates-newdevelopments-in-retail-sector/ Bouckley, B. (2012, May 23). Nestlé Malaysia denies price-fixing claims brand equity protection. Retrieved from Baveragedaily.com: http://www.beveragedaily.com/Regulation-Safety/Nestlé-Malaysia-denies-pricefixing-claims-brand-equity-protection Competition Policy International. (2012, May 5). Nestle denies regulator's price-fixing allegations. Retrieved from Competition Policy International: https://www.competitionpolicyinternational.com/nestle-denies-regulator-s-pricefixing-allegations Crowell & Moring LLP. (2008, May 8). Nine West Steps into Leegin's Shoes: FTC Modifies 2000 Consent Order. Retrieved from Crowell & Moring LLP: http://www.crowell.com/NewsEvents/AlertsNewsletters/all/1351919 Damodaran, S. (2012, May 21). FOMCA FILES COMPLAINT TO MYCC AGAINST NESTLE. Retrieved from NTV7: http://www.ntv7.com.my/7edition/localen/FOMCA_FILES_COMPLAINT_TO_MYCC_AGAINST_NESTLE.html Focus Malaysia. (2013, January 5-11). pp. 6-8. Lane Powell Attorneys & Counselors. (2008, May 14). FTC Grants Nine West's Petition to Permit . Retrieved from Lane Powell Attorneys & Counselors: http://www.lanepowell.com/wp-content/uploads/2009/04/bc_2008_0001.pdf Library, A. m. (2012, May 23). MyCC still assessing Nestle's exemption application. Retrieved from Access my Library: http://www.accessmylibrary.com/article-1G1290594676/mycc-still-assessing-nestle.html Lindsay, M. A. (2007). Resale Price Maintenance and the World after Leegin. Antitrust, Vol. 22, No. 1, Fall 2007. © 2007 by the American Bar Association, pp. 32-40. Loh, J. (2012, April 26). Four parties apply for exemption from Competition Act. Retrieved from The Star Online: http://biz.thestar.com.my/news/story.asp?file=/2012/4/26/business/11176730&sec= business Mills, K. G. (2006). The Economics of Resale Price Maintenance.

Jeff Leong, Poon & Wong ©

6  

      Mills, K. G. (n.d.). Leegin and Procompetitive Resale Price Maintenance. MyCC. (2012, July). Competition Act 2010: Handbook for General Public. Malaysia. MyCC. (22, May 2012). Exemption Applications are under Assessment. Retrieved from Malaysia Competition Commission: http://www.mycc.gov.my/files/news/EXEMPTION%20APPLICATIONS%20ARE%20U NDER%20ASSESSMENT.pdf Pandey, T. (2013, February 26). The Malaysian Reserve. Retrieved from Nestlé to take up ‘anti-competitive’ pricing policy issue with ministry: http://themalaysianreserve.com/main/news/corporate-malaysia/3127-nestle-to-takeup-anti-competitive-pricing-policy-issue-with-ministry Winter, F. M. (1998). The Law and Economics of Resale Price. Review of Industrial Organization, 57-84.

Jeff Leong, Poon & Wong ©

7