E-commerce Policies & Distribution Agreements: is it time to amend yours?

In recent months, EU and national competition authorities have ramped up competition law enforcement against suppliers of branded goods ranging from sportswear and fashion clothing to musical instruments. Any supplier or retailer of branded goods should now ensure their e-commerce policies and distribution agreements are still fit for purpose.

Two recent EU cases involved well-known apparel suppliers seeking to prevent sales or promotion of their merchandise across European borders. On 25 March 2019, the European Commission (the “Commission”) fined Nike €12.5m for restricting online and cross-border sales of licensed football merchandise. The Nike decision follows the Guess decision in December 2018 and demonstrates the Commission's continued commitment to pursuing restrictive practices imposed by brands in vertical agreements with distributors and retailers. In addition, the Commission fined four manufacturers in 2018 for engaging in online resale price maintenance (“RPM”): Philips, Pioneer, Asus and Denon & Marantz.

National competition authorities also continue to enforce the competition law rules applying to vertical arrangements vigorously, particularly where RPM is alleged. The UK's Competition and Markets Authority's (“CMA”) recent 'provisional finding' that digital piano and keyboard supplier, Casio Electronics, allegedly breached competition law by restricting its retailers' freedom to discount equipment online is a case in point. This follows recent CMA confirmation that one of its four ongoing investigations into suspected anti-competitive arrangements in the musical instruments and equipment sector involved guitar supplier, Fender Europe, which was fined for concealing documents during a CMA 'dawn raid' inspection.

 

The Commission's findings in the Nike decision

As a licensor of intellectual property rights, Nike licenses third parties to manufacture and distribute 'licensed merchandise'. Many of these products feature the brands of football clubs or federations with whom Nike has partnered, rather than just Nike's own trademarks. In summary, after its two-year investigation, the Commission found that Nike's non-exclusive licensing and distribution agreements breached EU competition law by:

• imposing direct measures that restricted out-of-territory sales by licensees (such as contractual provisions expressly prohibiting these sales), as well as indirect measures that monitored and penalised such sales (such as threatening licensees with ending their contract if they sold out-of-territory);
• compelling 'master licensees' in each territory to enforce cross-border restrictions vis-à-vis their sub-licensees; and
• prohibiting licensees from supplying licensed merchandise to retailers who could be selling outside the allocated territories. Nike would also intervene to ensure that retailers stopped buying products from licensees in other territories.

The Commission found that, by restricting cross-border sales, Nike was able to partition the single market and maintain different prices for the same products, or sell a range of products at higher prices in different countries, to the ultimate detriment of consumers.

 

The Commission's findings in the Guess decision

On 17 December 2018, the Commission fined the global fashion retailer Guess? Inc. and its subsidiaries (“Guess”) €39.8m for imposing anti-competitive restrictions on its authorised distributors in its selective distribution system. The Guess decision stems from the Commission's e-commerce sector inquiry and has important implications for retailers: it reiterates the Commission's current enforcement focus in the online distribution sector following the Coty ruling (which we previously discussed here) and complements the scope of the Geo-blocking Regulation which came into force on 3 December 2018 (discussed here).

 

In summary, the Commission found that Guess had prevented its authorised wholesalers and retailers in its selective distribution system from:

• using Guess's brand names and trademarks as keywords for online search advertising;
• selling online without Guess's prior written permission (which Guess had full discretion to grant or refuse);
• selling to end-users outside their allocated territories;
• cross-selling among members of the selective distribution system; and
• independently determining their resale prices for Guess products.

The Commission concluded that these restrictions effectively allowed Guess to protect its own online sales business and partitioned national markets in contravention of EU competition law.

 

Online search advertising restrictions

The Commission found that an absolute ban on retailers from using Guess's brand names and trademarks as keywords for online advertising (and therefore reserving this privilege exclusively to Guess) constituted a 'by object' restriction of competition on the basis that it limited the retailers' 'findability' in the online space and, ultimately, their ability to sell online. Crucially, the Commission did not link this finding to the other restrictions imposed on the retailers, but considered the online search ban to be a hardcore restriction in and of itself.

As a result, it may now be much harder for brand owners to successfully justify an 'AdWords' restriction under EU competition law. In the Guidelines on Vertical Restraints, the Commission commented that, “in principle, every distributor must be allowed to use the internet to sell products”. The Commission was clear in this case that the internet is a powerful tool which can reach a greater number and variety of customers than via traditional routes. Case law confirmed this in the case of Pierre Fabre, where a contractual provision prohibited the internet as a method of marketing. This was also seen to restrict competition by object.

 

Online sales restrictions

The Guess decision reaffirms the Coty ruling that a selective distribution system which imposes a requirement on its retailers to obtain prior authorisation for online sales without specified quality criteria will constitute a 'by object' restriction of competition. In this case, Guess retained full discretion for authorising its retailers' online sales and no qualitative criteria had been specified for deciding whether or not to grant an authorisation. The Commission found that the authorisation requirement protected Guess's own online sales activities from intra-brand competition and limited the retailers' ability to sell products to customers.

 

Restrictions on cross-border sales

The Guess decision also complements the Geo-blocking Regulation, reaffirming that restrictions on passive cross-border sales or advertising to end-users located outside an allocated territory within a selective distribution system will infringe EU competition law.

 

Restrictions on cross-selling among members

The Commission found that Guess's selective distribution system restricted cross-selling among authorised wholesalers and retailers. In accordance with established case law, this constituted a 'by object' restriction of competition and was a clear-cut violation of EU competition law. The Commission reiterated the settled principle that distributors in a selective distribution system must be free to supply to other authorised members of the system, including distributors operating at different levels of the supply chain.

 

Resale price maintenance

The Commission found that the RPM clauses imposed on Guess's authorised retailers constituted a 'by object' infringement.

 

Current enforcement focus on e-commerce

The Nike and Guess decisions are further illustrations that the e-commerce sector continues to feature prominently on the European - and national - competition authorities' agenda, particularly following the Commission's recent inquiry into the sector. We may therefore see further Commission and national regulator decisions in this area in the coming months. Notably, the Commission's investigations into certain licensing and distribution practices of Sanrio and Universal Studios, opened at the same time as its investigation into Nike in 2017, remain ongoing.

In this current enforcement climate, brand owners, suppliers and retailers should carefully review their licensing arrangements, distribution agreements and e-commerce policies to ensure that counterparties are not limited in their ability to sell or to advertise effectively online.

 

If you would like further information or advice regarding competition law, please contact Freeths' National Head of Competition, Andrew Maxwell.