On January 9, 2015, the Higher Regional Court of Düsseldorf in Germany handed down its first decision with regard to vertical restraints due to a so called “best price clause” of the online hotel booking platform HRS. The court has now confirmed the December 2013 prohibition decision of the German antitrust watchdog, the Bundeskartellamt, that HRS’ “best price clauses” violate German and European competition law. This decision, as well as other recent developments across European competition authorities, is likely to have an impact on companies doing business in the EU and on their sales and distribution agreements.
HRS had agreed to a most-favoured-treatment clause with its hotel partners guaranteeing that, of all online booking offers, HRS would always be granted the best room price, highest room availability and most-favourable booking and cancellation conditions. Now, however, HRS is no longer the market leader in Germany as it was when the Bundeskartellamt started investigating it some years ago, and, although investigations concerning its booking portal rivals Booking.com and Expedia are still ongoing, its rivals may still use their best-price clauses in their dealings with hotels. This certainly is not a fair situation for HRS and should be avoided by competition authorities.
Many competition authorities in the EU are increasingly developing a greater appetite to investigate online markets in detail. Online sales in the European Union reached €155 billion (US $183 billion) in 2014 and are expected to rise rapidly within the next few years. One of the main focuses of EU competition authorities in 2014 was the continued enforcement effort in vertical agreements, especially regarding (potential) vertical restraints in e-commerce markets and their impact on bricks-and-mortar outlets. It is expected that European competition authorities will further focus on vertical issues in 2015.
In the area of online sales, companies usually establish selective distribution systems for their brands. Through selective distribution systems, brand owners are able to limit sales to certain channels or authorized dealers. With the publication of its guidelines on vertical restraints some time ago, the European Commission fired a slight warning shot to companies that try to use their distribution systems for (discriminating) vertical restraints. In general, the Guidelines state that every distributor must be allowed to use the Internet to sell its products. One of the main targets of the antitrust authorities are brand owners that try to prevent resellers from using online market places, such as Amazon, eBay and/or price comparison websites. Since then, national European competition authorities (NCA’s) and the EC itself are increasingly investigating vertical restraints with regard to online markets.
In November 2014, the UK antitrust watchdog CMA announced that it needed to understand developments and their implications with regard to online sales and e-commerce activities. As a result, the agency is currently carrying out detailed analysis of the online markets by sending out detailed questionnaires to market players. It is to be expected that the authority will take further actions in 2015 after finishing its market examinations.
The antitrust authorities are also working closely together through the European Competition Network (ECN) to exchange information and share experiences with vertical cases. The European Commission recently made reducing barriers in the digital market as one of its top priorities for the next few years.
Companies face more than economic risk from the EC and/or the NCA’s public enforcement activities regarding (potential) vertical restraints in the e-commerce sector. They also confront, the risk of private enforcement by other market players. One of the most recent examples of private enforcement due to vertical restraints in the online markets is the lawsuit of Reuter, a German retailer that sells sanitary equipment via the Internet (and physical outlets). Dornbracht, a German manufacturer of luxury sanitary fittings, used a clause in its distribution agreements that offered wholesalers a substantial additional discount if they sold the company’s fittings to retailers with bricks-and-mortar shops and who offered a certain level of service quality (e.g., after sales care, etc.). The German Bundeskartellamt investigated the clause and found it a clear breach of German and European antitrust law. Dornbracht then agreed to remove the clause from its distribution agreements and the Bundeskartellamt did not impose a fine on the company. However, Reuter then brought an action for damages against Dornbracht, and the Court awarded Reuter damages of approximately €1 million (US $1.2 million) for lost profits due to higher purchase prices in the market. The German Supreme Court dismissed Dornbracht’s appeal in its entirety. The ruling is also notable because the Court found the CEO of Dornbracht to be jointly and severally liable to Reuter, on the basis that the CEO caused the infringement.
Companies with business in the EU should keep in mind that NCAs, as well as the EC itself, are intensively investigating online sales markets with an eye on (potential) vertical restraints. Selective distribution systems are facing strong challenges according to the latest developments in German and European antitrust law. Companies are well advised to check their distribution agreements in advance to minimize economic risks that could arise out of public as well as private enforcement actions.