Price maintenance

Resale price maintenance (RPM) (US) or retail price maintenance (UK) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market), the manufacturer may stop doing business with it.

Resale price maintenance prevents resellers from competing too fiercely on price, especially with regard to fungible goods. Otherwise, resellers worry it could drive down profits for themselves as well as for the manufacturer. Some argue that the manufacturer may do this because it wishes to keep resellers profitable, thus keeping the manufacturer profitable. Others contend that minimum resale price maintenance, for instance, overcomes a failure in the market for distributional services by ensuring that distributors who invest in promoting the manufacturer's product are able to recoup the additional costs of such promotion in the price that they charge consumers.

Some manufacturers also defend resale price maintenance by saying it ensures fair returns, both for manufacturer and reseller and that governments do not have the right to interfere with freedom to make contracts without a very good reason.

In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, an English contract law case, the House of Lords held that Dunlop Tyres (a tyre manufacturer) could not enforce an agreement between a tyre dealer and a tyre buyer to pay £5 per sale under a liquidated damages clause if tyres were sold (other than to motor traders) below the list price. However, this had nothing to do with the legality of resale price maintenance clauses, which was not in any question at the time: the decision was based on the doctrine of privity of contract as Selfridges had bought Dunlop's goods from an intermediary. In the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 the House of Lords upheld the enforceability of the requirement in the resale price maintenance clause, to pay £5 damages per item sold below list price, on the basis that it was not a penalty clause (which would be unenforceable) but a valid and enforceable liquidated damages clause.

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Wikipedia