E-commerce in the main European economies is expected to grow by approximately 20 percent in 2015 and 2016. As a result of the rise of online retail, both manufacturers (brands) and retailers are facing unique problems, such as limited product experience by potential customers, price erosion and free riding. To prevent such problems, brands may wish to impose online sales restrictions in their distribution contracts. This article addresses the compatibility of such policies with European Competition Law.
Competition concerns with respect to online sales
The ultimate goal of competition law is protecting the interests of consumers. When consumers enjoy a free choice among the product offerings of rival suppliers, market forces ensure that an optimal ratio between quality, quantity and price is achieved. Unsurprisingly, the authorities are wary of restrictions imposed by brand owners on the sale of their products online.
Can Internet sales be restricted?
The short answer to this question is prohibited: no; restricted: yes. Nevertheless, there are certain limited exceptions in which such a prohibition can occur, for example when a retailer makes substantial investments in developing a new market. Protection against competition from other retailers (including in online sales channels) may then be permissible for a limited amount of time (generally up to two years). Restrictions can be imposed in a selective distribution system. Provided that both parties to the selective distribution agreement have a market share that does not exceed 30 percent, in the EU an automatic exemption to the competition rules applies, allowing brands to bind retailers to quality requirements and to prohibit sales to non-authorized retailers or resellers. Examples of permissible quality requirements include (i) requiring the retailer to have at least one physical (offline) shop or showroom; (ii) requiring the retailer to sell a certain minimum number of goods (or a minimum sales value) offline, in order to guarantee that the physical store works properly; and (iii) imposing quality requirements for the websites used by retailers or requiring a certain service level for online sales that is normally associated with offline shopping. Such requirements may include:
- Standards for the design of the website
- Site functionalities, like navigation
- Customer service, such as accessibility of a multilingual helpdesk or service team
It should be kept in mind, though, that any such requirements must be equivalent to the standards set for offline sales and must not amount to an indirect restriction on internet sales.
What about prohibitions to sell on online market places?
A specific form of quality requirement used by some brands is a ban on sales via online market places like eBay and Amazon. Often the justification for such restrictions centers around protecting the premium nature of the brand. Although such concerns are real, in two recent investigations into the online sales policies of Adidas and Asics, the German competition authority was very critical of this kind of restriction. This underscores that the use of online market places may be necessary in particular for small retailers in order to compete online with more powerful retailers. The negative effect on competition must be carefully weighed against any perceived advantages for brand owners. The recent German investigation suggests that outright prohibitions on the use of online market places are very hard to justify, in particular where less restrictive measures (such as imposing quality requirements) may alleviate brand owners’ concerns.
Can exclusive territories be protected against internet sales?
When brands make use of exclusive distribution, they agree to sell products to only one distributor for resale in a certain territory. In order to protect such distribution exclusively in a territory, some brands request that retailers in other territories take action to prevent sales by them to customers in the reserved territory, for instance by geo-blocking or by compulsory re-routing of customers to a national website. Such measures may conflict with competition law. In the EU, only active sales (i.e. actively targeting customers in other territories) may be restricted. Passive sales (i.e. responding to an unsolicited request from a customer outside the territory) may not be restricted. Internet sales are considered passive. However, it can be prohibited for online sellers to specifically target customers in another territory, for instance by direct mailing, by using territory-based banners and territory-based advertisements via search engines.
Brand owners should be aware that competition authorities in the EU are paying close attention to online sales. The European approach to sales restraints is becoming stricter. Also, brand owners based outside the EU should check their policies for EU-based retailers and resellers to ensure they are in compliance with EU competition laws.
“Why can a French tourist buy a pair of Italian shoes in Rome, while she is re-routed to a French website when she tries to buy them online from home?”
Margarethe Vestager, EU Competition Commissioner