Sales restrictions, distribution and competition: what is or is not permitted?

This article was published on www.maverick-law.com 

The European Commission (the “Commission”) has been involved for some time already in a tour de force regarding the enforcement of competition law in respect of vertical restraints, such as resale price maintenance (RPM) and (online) territorial restrictions. This focus of the Commission comes as no surprise, in light of the objectives of the European Union (i.e. free trade within the internal market) and the rapid increase in possibilities for consumers to purchase products and services in the EU through the Internet. An earlier investigation by the Commission has shown that manufacturers impose restrictions on their customers on a large scale to keep a grip on the sale of their products. The Commission has therefore launched several investigations.

European and national investigations

The march began with a fine of approximately €111 million being imposed on four consumer electronics producers (Asus, Denon & Marantz, Philips and Pioneer) on the grounds of prohibited resale price maintenance. All four of those producers prescribed fixed or minimum prices for their retailers. Those retailers were monitored and, where necessary, controlled to ensure that they did not charge prices below those prescribed by the manufacturer, even going so far as exerting commercial pressure, such as temporarily blocking accounts and suspending deliveries of the products in question.

A fine of €40 million was subsequently imposed on the Guess clothing brand. In its decision, the Commission found that Guess had wrongly imposed drastic contractual sales restrictions on its distributors. Guess’s European selective distribution system was therefore in breach of the competition rules on several points. Guess imposed all kinds of restrictions on its distributors, varying from a ban on sales outside allocated areas, a ban on the use of the brand name and other Guess trademarks for online advertisements, a ban on cross-selling among selective distributors, and (indirect) price maintenance.

Fines were also imposed on sports manufacturer Nike and on the Japanese company of Sanrio. Nike was fined €12.5 million for hindering its (licenced) buyers in cross-border sales. Nike had imposed restrictions on its (licenced) buyers, such as a ban on sales outside the allocated area, the obligation to refer orders from outside the area to Nike, and financial sanctions for sales outside the territory. Sanrio, the owner of the Hello Kitty figure, was fined €6.2 million for breaches similar to those of Nike.

The Commission imposed a fine of €6.7 million on the Meliá hotel chain for imposing discriminatory sales conditions on tour operators when renting out hotel rooms to consumers. Meliá had made the price and other conditions dependent on the consumer’s nationality. In the Commission’s opinion, that discrimination resulted in European consumers being unable to benefit from the European internal market by shopping on the basis of the best available price.

NBCUniversal was recently fined €14.3 million for applying excessively strict conditions when granting licences. NBCUniversal had granted non-exclusive licensing rights for the sale of products with pictures whose trademark it owned. The products in question included mugs, T-shirts and bags with pictures of the Minions, Jurassic World, Trolls and other popular figures from NBCUniversal’s movies. The licensing conditions provided, among other things, that the licensees were allowed to sell the products only in certain countries and to certain customers. Also, some products could not be offered or resold online. If licensees failed to comply with the sales restrictions, the contracts were not renewed. To enforce the sales restrictions, NBCUniversal obligated the licensees also to impose the sales restrictions on their customers. By acting in this manner, NBCUniversal undermined the European internal market, in the Commission’s opinion.

The national competition authorities are also actively taking measures. The French competition authority, for instance, fined Apple €1.1 billion for prohibited cartel agreements with two wholesalers, Tech Data and Ingram Micro, and for abusing its dominant position. Among other things, Apple and the two wholesalers had allocated products and customers. Apple furthermore imposed fixed resale prices on its independent (premium) resellers by obligating them to charge the same price as Apple.

As a result, the prices were systematically kept at the same high level. Apple furthermore abused the economic independence of those resellers, for instance by limiting the supply of (new) products and applying an obscure and unpredictable discount system. The ACM (Netherlands Authority for Consumers and Markets) is apparently still investigating possible prohibited price-fixing agreements between manufacturers and retailers (online and other) of consumer goods. It is believed that some manufacturers have tried to make agreements on minimum prices with retailers.

Prohibited and permitted restrictions

The fines and investigations of the Commission and national competition authorities make it clear that suppliers must beware of imposing unauthorised sales restrictions on their distributors. The main examples are:

- prescribing fixed or minimum prices;
- limiting sales to consumers; and
- limiting the customers to which or areas in which sales are permitted.

Suppliers are permitted to set up a selective distribution system. In such a selective distribution system, a supplier selects the distributors on the basis of predetermined criteria. This ensures that distributors meet certain quality standard. Sales by selected distributors to non-selected distributors may be restricted. This creates a closed distribution system.

Suppliers are furthermore permitted to set up an exclusive distribution system by allocating a certain area or group of customers exclusively to one distributor. Other distributors can thereby be prevented from operating in that area or selling to the customers in question. Passive sales (when customers approach a seller on their own initiative) must be permitted, however.

The competition rules furthermore prescribe that a distributor must also always be able to passively offer products via the Internet. A supplier may therefore not obligate distributors:

- to block websites for customers from other regions or countries;
- to refer customers from certain regions or countries to another distributor;
- to terminate transactions of customers with credit card data from other countries;
- to limit sales via the Internet to a certain maximum:
- to pay higher prices for products sold by one and the same distributor online; or
- to refrain from using the supplier’s brand name and other trademarks in online search advertisements.

A supplier may, however, obligate distributors:

- to refrain from active sales efforts in other regions or countries (such as a ban on targeted banners or online advertising for customers in a specific area);
- not to sell products via online marketplaces (see our earlier blog);
- to have at least one brick-and-mortar store or showroom;
- to sell a certain minimum quantity offline, i.e. in a brick-and-mortar store;
- to observe quality requirements for the appearance of the website or the use of an online platform; and
- to have a (telephone) helpdesk or provide aftersales service.

A supplier may furthermore stimulate the offline sale of products, for instance by:

- temporarily restricting new products via the Internet;
- paying distributors a fixed fee to support offline sales efforts; and
- applying a different price level to distributors that sell (or also sell) via the Internet than to distributors that sell only via brick-and-mortar stores.

Another interesting question is to what extent a supplier may prohibit its distributors from using price comparison websites. A German court previously found that such a restriction limits competition and is therefore prohibited. But the German court’s judgment related to an absolute ban on using price comparison websites. The Commission had previously found that objective and qualitative criteria may in any event be imposed on the use of this type of website. The ACM subscribes to that opinion. According to the ACM, a ban on price comparison websites may constitute a hardcore restriction if it is not based on objective quality criteria. Due to the increasing presence of price comparison websites, the discussion on this subject is likely to continue.

More information on consumer rules and the ACM can be found at consumentenrecht.info.

More information on dawn raids of the ACM and the European Commission can be found at invalacm.nl.