Online selling restrictions - don't get caught in the cross hairs
A number of businesses, particularly consumer-facing brands in the retail sector, use third party relationships such as distribution, selective distribution and franchising as a means of getting their products to market and generating goodwill in their brands.
Rapid developments in consumer technology are causing the convergence of the physical and online sales channels. For brands which sell products through third parties to customers in the EU, there are a number of legal issues to be aware of.
The European Commission, through its development of EU competition law, is committed to creating a borderless digital economy within the EU. Commercial agreements or businesses practices which seek to control distribution, including via resale price maintenance, restrictions on advertising prices online, price parity clauses and outright online sales bans, are now in the cross hairs of the regulators both at a national and European level.
2 recent cases have highlighted the risks of outright online sales bans.
Case 1 - Ping
The UK competition authority, the Competition and Markets Authority (CMA) recently fined leading golf club manufacturer Ping Europe Limited £1.45 million for breaking competition law by preventing two UK retailers from selling its golf clubs on their websites. In addition to the fine, the CMA ordered Ping to end its online sales ban and not to impose the same or equivalent terms on any other retailers.
Background
In November 2015, the CMA launched an investigation into the sports equipment sector. In June 2016, it announced that it considered Ping Europe Limited's online sales ban to be in breach of EU and UK competition law and invited Ping to respond before it made its final decision. Ping argued that the ban was an important and necessary aspect of its long–standing commitment to quality by ensuring that each customer was fitted in person, something which was not possible in an online environment.
Decision
Announcing its final decision, the CMA accepted that Ping was allowed to require a retailer to meet certain conditions before selling its products online, but asserted that any such conditions had to be compatible with competition law. It found that although Ping was pursuing a genuine commercial aim of promoting in-store custom fitting, it could and should have achieved this legitimate objective through less restrictive means than imposing an online sales ban.
Comment
Ping's fine is the latest in a series of infringement decisions by the CMA involving restrictions on online sales and represents a clear warning that the UK competition authority regards online sales bans as unlawful and will act against suppliers that impose them on their retailers. Announcing its decision, Ann Pope, Senior Director for Antitrust enforcement at the CMA, said:
"The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted. The fine the CMA has today imposed on Ping should act as a warning to companies that preventing its products from being sold online could be illegal."
The CMA made also it clear that:
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the level of the fine imposed reflected the fact that the CMA had accepted Ping's assertion, clearly intimating that the fine would have been significantly higher had the authority concluded the ban had not been in pursuit of a genuine commercial aim; and
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it also has the authority to fine retailers for entering into agreements containing anti-competitive restrictions even though it had not done so in this particular case.
Case 2 - Coty
The EU Court of Justice (CJEU) is currently considering (in the case of Coty v Parfumerie Akzente) whether authorised retailers in selective distribution systems can be prohibited from selling luxury goods on third-party internet platforms such as Amazon or eBay.
Although the CJEU has still to make is ruling, the Advocate General recently issued his opinion on this important test case. Whilst confirming that outright bans on online sales were unlawful, the Advocate General distinguished prohibitions on resellers using online third party platforms, stating that such a ban may, in the context of a selective distribution network, be a justifiable way of protecting and monitoring the quality of the products in question and does not preclude online sales since it only removes one of a number of ways of reaching customers via the internet.
Conclusion
From a compliance perspective, businesses which may have previously viewed these issues within their distribution networks as low risk need to recognize that the legal landscape is changing fast. Businesses need to think again about how best to strike the right balance between controlling the brand image and controlling the distribution channel.
Internet policies must be carefully reviewed to ensure that they not only secure the desired commercial aims but also comply with the law. Failure to comply with the law may expose businesses to fines (which can be as much as 10% of annual worldwide group turnover), unenforceable agreements and/or criminal sanctions.
The retail environment is going through a period of rapid change and there are a number of other pending legal changes which will affect the way products can be distributed within the EU.