Swiss COMCO continues to focus on cross-border passive sales restrictions

In the last couple of years, the Swiss Competition Commission (COMCO) has continued its vigorous campaign against vertical restraints aiming at the foreclosure of Swiss markets. To this end, it has acted aggressively against suspected restrictions on passive sales to Switzerland. COMCO’s campaign has been supported by the Swiss media which, in some cases, attacked the parties for allegedly “ripping off” Swiss consumers.

COMCO claimed repeatedly that its investigations contributed to the government’s fight against high Swiss retail prices. At least in some of COMCO’s recent cases, however, high Swiss retail prices may rather be attributed to high costs of Swiss distribution channels, Swiss consumers’ purchase power, Swiss consumers’ preference for high quality product versions, etc. Also, in some of these cases, evidence for significant effects on the Swiss market of these alleged restrictions was sparse and inconclusive.

To date, COMCO’s campaign has lead to the following investigations and sanctions:

Gaba: In November 2009, COMCO imposed a fine of CHF 4.8 million on Gaba for restricting passive sales of Elmex toothpaste to Switzerland.

Electrolux/V-ZUG: In July 2011, in a precedent setting case, COMCO prohibited clauses in Electrolux’ and V-ZUG’s distribution agreements banning or restricting online sales of home appliances. However, COMCO refrained from imposing fines on the parties.

Nikon: In November 2011, following a dawn raid in March 2010 and a complex investigation involving information requests to EEA and US dealers, Nikon’s Swiss subsidiary was fined CHF 12.5 million by COMCO for restricting passive sales of cameras and lenses to Switzerland.

Harley Davidson: In January 2012, COMCO initiated preliminary proceedings regarding a suspected restriction of passive sales of motor bikes to Switzerland.

BMW: In Mai 2012, BMW was fined CHF 156 million by COMCO for restricting passive sales of BMW and MINI cars to Switzerland.

IFPI/Phononet: In July 2012, the Swiss section of the International Federation of the Phonographic Industry (IFPI) and its members were fined CHF 3.5 million for restricting passive sales of music records into Switzerland.

Opinion on discrimination against grey market dealers: In a precedent setting opinion published in August 2012, COMCO advised an EEA grey market dealer that a manufacturer’s rebate cuts on products intended to be exported from the EEA to Switzerland may qualify as an unlawful restriction of passive sales to Switzerland.

Altimum: Following a dawn raid in Mai 2010, COMCO investigated whether Altimum SA restricted passive sales of mountaineering equipment from the EEA to Switzerland. In October 2012, COMCO dropped its passive sales restriction claim. However, Altimum was fined CHF 470’000 for having engaged in resale price maintenance.

COMCO’s fines have not been confirmed by appellate courts yet. Nevertheless, according to statements of COMCO officials, COMCO intends to continue its campaign against any conduct which, based on the precedents mentioned above, it considers a restriction on passive sales to Switzerland.

What is COMCO’s view on channel management and direct marketing?

In the cases mentioned above, COMCO took a rather strict approach to various tools of channel management and direct marketing, as the following overview shows:

Explicit ban on exports: Distribution agreements with EEA or US distributors often contain clauses allowing for passive sales within the EEA or the US, but prohibiting distributors and retailers from selling products to customers located outside the EEA or US markets. While such restrictions on exports may comply with EU and US competition law, they are regarded by COMCO as restrictions on passive sales into Switzerland. The evidentiary requirements for establishing actual and significant effects of such clauses within the Swiss markets are very low, nearly resulting in per se illegality of these clauses under Swiss competition law.

Implicit ban on exports: In Nikon, COMCO, relying on circumstantial evidence (internal email communications of Nikon country managers), qualified various provisions of EEA distributorship agreements as implicit ban on exports to Switzerland. These clauses included standard provisions obliging a distributor to actively market or entitling a distributor to distribute contract products in a specific territory within the EEA as well as provisions obliging EEA distributors to report the geographical origin of enquiries or the quantity of products that were to be exported. Whether or not COMCO presented sufficient evidence of a restraint of competition in Switzerland and of a causal relationship between these clauses and the alleged restraint is currently examined by the appeal court.

Exclusive purchase obligations: In BMW and Nikon, COMCO considered a Swiss distributor’s obligation to exclusively purchase the products from the manufacturer’s Swiss subsidiary or from Swiss distributors as a restriction on passive sales into Switzerland. This approach appears to be much stricter than the assessment of exclusive purchase obligations under the European Verticals Block Exemption Regulation and Guidelines.

Differentiation of discounts: In an advice to a distributor seated in the EEA, COMCO concluded that a manufacturer’s differentiation of discounts to a distributor depending on the territory the distributor intends to export the products to may render exports to Switzerland highly inefficient and, even though not directly prohibiting parallel trade, may amount to an indirect restriction on passive sales.

Cash back promotions and warranty extension programmes of manufacturers: During the Nikon investigation, COMCO scrutinized Nikon Switzerland’s cash back promotions and national warranty extension programmes which did not cover grey market imports. COMCO initially claimed that these kinds of programmes typically aimed at restricting passive sales to Switzerland. Finally, COMCO accepted that Nikon’s programmes were a tool of intrabrand competition between importers and refrained from qualifying them as vertical agreements restricting passive sales. However, COMCO added that, if used to gather information suitable to identify the origin of parallel imports (e.g. product serial numbers), these tools may be considered unlawful vertical agreements.

Tracking of product serial numbers: According to COMCO, tracking serial numbers a strongly indicates for unlawful restrictions on passive sales into Switzerland, unless it is limited to legitimate business purposes (e.g. detecting cross-supplies to non-authorised dealers in selective distribution systems, detecting theft or piracy, etc.).

Online distribution: In Electrolux/V-Zug, COMCO stated that prohibiting online sales is considered a strong indication of unlawful restrictions on passive sales. In particular, COMCO is determined to act against a distributor’s obligations (i) to restrict access to the website for non-Swiss customers, (ii) to reroute non-Swiss customers to the manufacturer’s or another Swiss distributor’s websites, and (iii) to terminate online transactions with non-Swiss customers as soon as a non-Swiss shipping or creditcard billing address is entered.

How to reduce the risks of COMCO’s strict approach?

Manufacturers and distributors should be aware that, in spite of the Swiss market’s small economic significance, the financial and reputational risks of a COMCO investigation are considerable. As COMCO’s recent case law shows, COMCO does not hesitate to conduct dawn raids at Swiss headquarters, to send questionnaires to EEA and US dealers, and to scrutinize EEA and US distributorship agreements.

Manufacturers and distributors doing business in Switzerland are therefore advised to ensure that:

– their Swiss channel management and direct marketing comply with the guidelines set by COMCO’s recent case law, in particular by amending the compliance training of Swiss, EEA and even US country managers and sales teams;

– their Swiss, EEA and US distributorship agreements contain no obligations which, in COMCO’s view, may be used to restrict passive sales to Switzerland (i.e. no explicit and implicit ban on exports); and

– their external and internal communication (emails, letters, public statements, etc.) and documents (strategy papers, staff guidelines, etc.) provide no basis for suspicion of passive sales restrictions.