On June 9, 2016, the UK’s Competition and Markets authority (the “CMA”) issued a Statement of Objections notifying Ping Europe Limited (“Ping”) of a proposed infringement decision under the UK Competition Act 1998 and/or Article 101 of the Treaty on the Functioning of the European Union {“TFEU”). The Statement of Objections relates to Ping’s prohibition of sales of Ping’s golf clubs by retailer customers online.

The CMA’s Senior Director for the case issued a statement that the CMA considers online sales bans to be an impermissible restriction of competition because such a restriction: (1) prevents retailers from competing to attract consumers who use the internet to find the best deals; and (2) prevents retailers from reaching a large proportion of customers. The Statement of Objections is not a final ruling that there has been an infringement, so Ping now has the opportunity to respond to the CMA’s concerns and put forward justifications for its conduct before any final decision is made.

Why is this important?

It is estimated that by the end of 2016, consumers in the UK will have spent approximately £126 billion on online purchases. With these figures in mind, a supplier’s prohibition of retailer sales in what CMA has referred to as “an increasingly important distribution channel,” seems proper for a competition authority to investigate.

What are the EU rules on online bans?

The European Commission’s Guidelines on Vertical Restrictions (2010) (the “Guidelines”) declare that preventing a distributor from selling goods online is a “hardcore” restriction of competition, with the supplier having the burden of proving that the restriction is reasonable with respect to its products. In the Commission’s view, “In principle, every distributor must be allowed to use the internet to sell products.” Notably, the Guidelines state that a supplier like Ping can, without prohibiting online sales, require that a certain absolute amount (whether in volume or in value) must be sold off-line to ensure a minimum level of operation of a buyer’s bricks-and-mortar outlets. This can be the same for all buyers or determined individually for each buyer by objective criteria.

A supplier also can ensure that online sales are consistent with its distribution model by requiring that certain quality standards for using the internet are met, unless the object is to limit the distributors online sales. Thus, the Commission explains in the Guidelines, it regards as a hardcore restriction any obligation imposed by a supplier that dissuades dealers from using the internet to reach more and different customers, for example, criteria for online sales that are not equivalent to the criteria imposed for sales from brick-and-mortar shops. This does not mean that the criteria must be identical to those imposed for off-line sales; the criteria just must be equivalent.

A hardcore restriction imposed by a supplier gives rise to the presumption that the restriction is unlawful under TFEU Article 101(1), and that the block exemption for non-price vertical agreements for companies without market power does not apply. However, a supplier could try to demonstrate the procompetitive effects, for example, of an online sales ban (or restriction) under Article 101(3), which would be factored into the assessment of whether there will be an infringement decision by the relevant competition authority.

How have internet restrictions been treated elsewhere in Europe?

Enforcement in Germany.

While the CMA’s focus on online sales bans is relatively recent, regulators and courts in Germany have had more experience in dealing with this form of anticompetitive behavior.

In 2013, the Bundeskartellamt (The Federal Cartel Office in Germany (the “FCO”)) reviewed Sennheiser’s selective distribution system for distributing its headsets and earphones. Sennheiser had banned sales of its products on third-party internet platforms such as Amazon, even though these third party platforms were approved Sennheiser dealers themselves. The FCO declared that a manufacturer cannot restrict the use of an on line platform operated by an authorized reseller who has complied with all qualitative requirements. Sennheiser thereupon ended its ban on online sales through third party platforms, and the FCO withdrew its proceedings.

In 2014 and 2015, the FCO also dealt with online sales bans in relation to Adidas and Asics. It found that their bans on sales through third-party internet platforms in selective distribution systems reduces intrabrand competition and harms small-to-medium sized retailers who depend on third party platforms to attract online customers. Adidas removed the clauses restricting these sales prompting the FCO to end the proceedings. A decision was issued against Asics, which had changed its distribution system.

An online sales ban is also central to a claim currently pending before the Regional Court of Frankfurt. The case involves a dispute between fragrance manufacturer Coty Inc. (“Coty”) and an authorized distributor of its fragrances, Parfumerie Akzente Gmbh (“Akzente[1]). In 2012, Coty sought to obtain a court order to stop Akzente from selling Coty products via the German arm of Amazon and other online platforms. Coty claimed that Akzente’s conduct violated the terms of his membership in Coty’s selective distribution system. The Regional Court found that the restrictions were unenforceable as they were in breach of German competition law and Article 101 TFEU. Coty appealed the Regional Court’s decision, and the ECJ has been asked for guidance on whether online sales bans are in breach of Article 101(1).

The Coty case clearly highlights the conflict between suppliers who wish to protect distributors and retailers from the allegedly unfair competition that results from low cost online platforms claimed to free ride on the efforts of a supplier to sell to retailers who promote its products as luxury goods, and resellers who want to make use of the internet as a distribution channel to reach a wider range of consumers.

The referral to the ECJ centers on the following questions:

  1. whether a selective distribution system that has as its aim the distribution of goods in a manner that ensures a “luxury image” for the goods constitutes an aspect of competition that is compatible with Article 101(1) TFEU?; and
  2. If the first question is answered in the affirmative, is it permissible for the manufacturer to prohibit retailers from engaging third-party undertakings to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened n the specific case?

This referral to the ECJ will, it is hoped, provide greater certainty for suppliers as to the legality of these online sales bans and the grounds on which they are sustainable. Many suppliers who wish to protect the images of their brands argue that their distribution systems are incompatible with channels such as Ebay or Amazon. Meanwhile, whether and when these bans are justifiable remains an open question.