The head of the European Commission’s Directorate General for Competition, Alexander Italianer, has said that “potentially anti-competitive restrictions on how goods and services are distributed will be high on the agenda of antitrust enforcers in the coming year.”
The quote from Italianer, speaking at the 63rd ABA Antitrust Law Spring Meeting in Washington D.C. on 16 April 2015, came a day after the head of the Belgian Competition Authority, Jacques Steenbergen, stated that restrictive agreements between producers and suppliers pose a challenge to antitrust authorities in Europe and require close observation. Speaking at the same conference, Steenbergen added that: “A number of us – the Germans, the French, ourselves and the British – had to face the fact that we underestimated the impact of vertical restrictions.”
Since ‘modernisation’ in 2004, the enforcement of vertical issues has effectively fallen to the national competition authorities, and the approach taken by them has varied quite widely from one member state to the next. However, more recently there has been a notable increase in scrutiny of distribution arrangements, particularly focusing on the new challenges raised by the huge growth in online sales and the innovation in routes to market that has generated.
The enforcement of vertical restrictions in Europe
Historically, the French Competition Authority, l’Autorité de la Concurrence (the “Autorité”), has been one of the more active competition authorities in relation to the enforcement of competition rules against vertical arrangements.
In 2012, the Autorité fined Nestlé, Mars and Colgate-Palmolive, as well as a number of their subsidiaries, for imposing resale prices and territorial restrictions throughout France on the markets for dry pet foods for a period of five years. The companies were found to have engaged in concerted practices with their independent wholesalers which directly affected the prices charged to end-consumers and were fined €35.3 million.
In relation to online sales, the Autorité also fined Danish luxury hi-fi manufacturer Bang & Olufsen France €900,000 for banning its approved distributors from selling its products via the internet. The fine came 10 years after the Autorité began its investigation in 2002, when France’s Minister for the Economy, Finance and Industry referred conduct in the hi-fi and home cinema equipment sector to the Autorité’s predecessor, the Conseil de la Concurrence.
In 2013, the French Supreme Court confirmed the decision of the Autorité to fine 13 companies in the luxury fragrance sector more than €40 million for entering into agreements with their distributors which imposed a “recommended retail price” for perfumes, set a maximum discount off the recommended retail price and introduced a pricing control system.
Germany’s competition authority, the Bundeskartellamt, is one of the EU’s most active regulators when it comes to tackling the issue of vertical restrictions. This is underlined by the considerable number of ongoing investigations and court proceedings involving issues which directly impact upon consumers, such as best price clauses employed by hotel booking portals.
Restrictions on online selling have recently been, and continue to be, a key focus for antitrust enforcement activity in Germany. In 2013, the Court of Appeal of Berlin ruled that a prohibition against retailers making sales of “Scout” satchels via internet platforms would have to be regarded as a restriction on sales to a specific customer group, and would be considered a hard-core restriction (see our earlier briefing on this matter here).
Perhaps most notably however, in April 2014, the Bundeskartellamt warned running shoe company ASICS that its selective distribution system for running shoes, which banned any use of online market places, support for price comparison engines and use of the ASICS brand names on third party websites, was in violation of German and EU competition law.
This case, while still pending, appears to suggest that suppliers may regulate – but not prohibit – online resale by way of a selective distribution network in which requirements and restrictions on online sales may not exceed similar obligations imposed on resellers for other, namely offline, distribution channels. Interestingly, this approach is stricter than the approach taken in the Guidelines on Vertical Restraints which states that where the distributor’s website is hosted by a third party platform, the supplier may require that customers do not visit the distributor’s website through a site carrying the name or the logo of the third party platform.
Shortly after, in July 2014, the Bundeskartellamt closed its investigation into household sportswear and sports articles company adidas when the company agreed to remove a restriction that prevented its approved resellers from selling products via internet auction sites and online marketplaces. The company also dropped a restriction preventing its resellers from using terms related to adidas brands as search words for advertising on search engines, such as the use of Google AdWords.
The UK Competition and Markets Authority (the “CMA”) (or its predecessor, the Office of Fair Trading) until quite recently had publicly focused more on rooting out and pursuing criminal and civil cartels; it has investigated distribution arrangements primarily in the context of so-called ‘hub-and-spoke’ cartels, whereby competing retailers co-ordinate their conduct via a common supplier. Arguably, the most famous examples of the ‘hub-and-spoke’ cartel are the cases known as “Toys and Games” and “Replica Kits”. In these cases, retailers and manufacturers were held to have been part of a concerted practice whereby retailers had coordinated their behaviour through information exchanged via the manufacturers.
Today, however, the CMA has begun to take a much closer look at vertical restraints, especially those in relation to online sales and recently held a vertical restraints roundtable with numerous industry associations, lawyers and economists for discussion and debate on the subject of vertical restraints and online retailing. Some of the main concerns raised by the CMA were that vertical restrictions can soften intra-brand competition, reduce discounting and can result in higher prices for consumers by limiting their ability to compare prices and get value for money.
The CMA has recently opened investigations into conduct in the clothing, footwear and fashion sector and potential anti-competitive practices in the commercial catering equipment sector. These cases follow-on from the OFT’s previous work in relation to vertical arrangements, especially its findings in two cases involving the manufacturers of mobility scooters and their respective retailers that involved the banning of online sales and the advertising of prices online as well as the advertising of prices below recommended retail prices. The so-called “Mobility Scooter” cases were “prioritised for their impact both on vulnerable consumers and on online commerce, as well as their precedential and deterrent value” and it is clear that online markets and vertical restraints are a major priority for the CMA going forward.
As business is increasingly conducted online, the Dutch Authority for Consumers and Markets (the “Authority”) is also preparing to prioritise the protection of consumers. On 20 April 2015, the Authority published a strategy document for the review and prioritisation of vertical agreements.
The Authority has stated that it will take an economic approach to the review of vertical arrangements and will attempt to “look into cases that have the greatest impact on consumer welfare”. These cases will then be deemed priorities and investigations will likely be conducted to examine whether or not the vertical restrictions applied fall foul of competition law.
The enforcement of vertical cases has differed widely across the EU in the past few years with some authorities actively pursuing ‘hardcore’ restrictions and others seeming to prioritise cartel enforcement. More recently there has been a step-change in the take up of vertical cases and it is clear that vertical arrangements will face increased scrutiny by competition authorities across Europe, especially, it seems, where branded goods or online restrictions are involved.
The development and functioning of online markets is essential both for cross-border trade and allowing consumers to compare prices and offerings. Therefore, e-commerce is, and will increasingly be, at the heart of pan-European antitrust enforcement.
As sales channels develop faster than the courts and national competition authorities are able to develop legal principles and guidance, it is not always straightforward for companies to maintain compliance. Organisations must therefore ensure that their trading and distribution practices are reviewed regularly as regulators can impose substantial fines for competition law breaches. Such fines continue to grow and investigations are costly and disruptive. Furthermore, where companies are found to have breached competition law, they expose themselves to the threat of further costs through third party litigation claims in national courts.