In 2015 the Federal Cartel Office (FCO) decided that a non-competition clause in a lease agreement for shops in a factory outlet centre prohibiting the tenants from opening a shop in another outlet centre within a 150-kilometre (km) radius for more than five years after the conclusion of the first lease agreement constituted infringement of the prohibition of agreements that restrict competition under Section 1 of the Act against Restraints of Competition.

Background

Several years ago the manufacturers of well-known brands changed their distribution system and started to sell their goods through agents in outlet centres.

Outlet centres are understood to be shopping centres with a sales area of at least 5,000 square metres (usually more than 10,000 square metres). They are typically located close to highly frequented motorways with a connection to either a town with a large population or several towns with medium-sized populations. The operator of the outlet centre usually leases the shops to brand manufacturers. The brand manufacturers do not sell the current product line, but usually offer older versions of products. The sales prices of the goods sold in outlet centres are usually 30% lower than elsewhere (eg, in retail shops in town). An outlet centre as a sales channel can therefore be distinguished clearly from an independent retailer (a sales channel of a brand manufacturer's current products).

Facts

In the recent FCO case, an outlet centre operator near Frankfurt (Wertheim Village) had agreed a non-competition clause in its lease agreements with several brand manufacturers. For the duration of the lease agreement, the tenants of the outlet centre shops were prohibited from renting another shop in another outlet centre within a 150km radius around Wertheim. The lease agreement had a 10-year duration.

Assessment

The FCO held that the non-competition clause in the lease agreements entered into between the outlet centre and the brand manufacturers constituted a prohibited restraint of competition. The FCO argued that the agreement was a restriction of competition by object. For precautionary reasons, the FCO also based its decision on the findings that in any event the clause had a restrictive effect on competition.

The FCO defined the relevant product market affected by the non-competition clause as the market for renting premises for shops in outlet centres. It held that distribution of goods in an outlet centre must be distinguished from other distribution channels. The FCO based the distinction on the facts that:

  • the outlet centre allowed brand manufacturers to sell their (returned or no longer current) goods in a high-quality environment so that there was no negative influence on brand image; and
  • the operator of the outlet centre and its tenants were obliged under applicable public law to sell only non-current goods, remaining stock or second-quality products.

Consequently, the FCO deemed that, from the customer's perspective, a shop in an outlet centre is not interchangeable with shops in shopping high streets.

In geographical respects, the FCO defined an area within a radius of 90 minutes' travel time and a distance of 100km around the outlet centre (the catchment area) as the relevant market. It rejected the outlet centre operator's argument that the catchment area was much bigger and that customers would travel much further than 100km to shop at the outlet centre. The FCO relied on the fact that only 15% of all Wertheim outlet centre customers travelled from outside the 100km radius and had already decided to visit the centre before they left home.

The FCO concluded that the Wertheim outlet centre operator had a strong position on the relevant market, since the next nearest centre was 135km or 2 hours of travel time away in Metzingen. The FCO also found that the operator had favourable access to outlet centre tenants and that there were high market entry barriers due to the restrictive practice of the German authorities to approve the construction of outlet centres.

In the FCO's opinion, the non-competition clause prevented the operator of an outlet centre at Montabaur (147km from Wertheim) from renting its premises to brand manufacturers. The majority of the most important brand manufacturers were already tenants at the Wertheim outlet centre and therefore the non-competition clause prevented them from entering into lease agreements with the Montabaur outlet centre operator.

The FCO held that the non-competition clause used by the Wertheim outlet centre operator exceeded the acceptable limits for such clauses in temporal, geographic and product respects.

The acceptable maximum duration of non-competition clauses is five years. The clause may not provide for an automatic extension, since according to EU competition law standards it would be the equivalent of a clause with unlimited duration.

For the FCO, a 50km radius around the outlet centre is the acceptable maximum radius for a non-competition clause for outlet centre tenants. Although the FCO believes that such clauses should be strictly prohibited, in geographic respects the FCO limited the prohibition to a 50km radius due to several considerations within its discretion which were not explained in the decision.

The FCO rejected the argument that the non-competition clause related only to the brands sold in the Wertheim centre and held that it was not a relevant limitation of the clause.

Comment

The FCO relied on well-established standards of EU competition law in its decision. Outlet centre operators in Germany should be aware of the FCO's new practice in this area and should check whether their lease agreements comply with the authority's standards. The FCO decision is not yet final. The Wertheim outlet centre operator has appealed.

For further information on this topic please contact Rolf Hempel or Martin Cholewa at CMS Hasche Sigle by telephone (+49 40 37 63 00) or email (rolf.hempel@cms-hs.com or martin.cholewa@cms-hs.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.

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