In 1991 the Japan Fair Trade Commission (JFTC), Asia's oldest competition authority, issued its first guidelines concerning distribution systems. Similar to the guidelines in other jurisdictions at the time, the JFTC guidelines had a rigid framwork which did not always accomodate the evolving economic realities. However, over the past two years, the JFTC has significantly amended its guidelines, giving particular consideration to the EU Commission's 2010 guidelines on vertical restraints.
One of the most significant amendments to the distribution guidelines relates to the safety zone defined by the JFTC. While the authority's previous guidelines provided for a safe harbour only where the market shares of the manufacturer and the distributer in their respective markets were extremely low (ie, below 10%), the new guidelines provide for a safe harbour when their market shares are less than 20%.
Another important amendment relates to the issue of retail price maintenance (RPM). Under the previous guidelines, RPM was considered illegal. However, the new guidelines clarify that RPM can, by exception, be deemed legal provided that it has "justifiable grounds", thereby allowing more wiggle room – at least on the face of the guidelines text. In particular, the JFTC now recognises that the pro-competitive effects of avoiding the free-rider problem and the promotion of inter-brand competition may, in certain circumstances, justify RPM.
The JFTC has also expanded the guidelines on vertical non-price-related restraints such as:
- territorial restrictions;
- customer restrictions;
- the setup of selective distribution systems; and
- restrictions on retailers' sales methods.
The JFTC appears to be attempting to catch up with other, more aggressive authorities and, in particular, aligning its guidelines and enforcement priorities with those of the EU Commission. This is illustrated by the fact that, following the EU Commission's example, in 2016 the JFTC conducted a market hearing in regard to online business sectors with the Ministry of Economy, Trade and Industry, and has expressed strong interest in this area. Further, the recent European Court of Justice (ECJ) decision in Coty provides valuable guidance on how the JFTC's enforcement policy with respect to selective distribution systems and restrictions on retailers' sales methods may develop in the future.
The recent Coty case arose against the backdrop of the well-known 2011 Pierre Fabre case, in which the ECJ held that a general and absolute ban on internet sales in the context of a selective distribution network constitutes the restriction of competition "by object" under Article 101(1) of the Treaty on the Functioning of the European Union. However, the interpretation of this ruling remained unclear. While some saw little space for manufacturers to restrict the internet sales of their distributors, others interpreted the court's ruling more restrictively. The issue is also not fully clarified in the JFTC guidelines, and these European cases have attracted attention among Japanese practitioners.
Coty provided the ECJ with the opportunity to clarify its position, which it did to some extent. It held that in a selective distribution system for luxury goods, a clause which prohibits distributors from selling such goods in a discernible manner on third-party internet platforms is not illegal per se. Rather, the clause can be deemed legal provided that it:
- aims to preserve the luxury image of the contractual good;
- is laid down uniformly and not applied in a discriminatory fashion; and
- is proportionate in light of the objective pursued.
There are two key points in Coty. First, the facts were quite different from those in Pierre Fabre. While in Pierre Fabre there was an outright ban of sales over the internet, this was not the case in Coty. In fact, authorised Coty retailers were explicitly entitled to sell the products on the Internet, albeit in a restricted way. Second, the Coty ruling appears to be limited to selective distribution systems for luxury goods only. Therefore, it is unclear whether the safe harbour of Coty is also available for selective distribution systems that are not primarily designed to preserve the luxury image of the contractual goods.
No cases have occurred in which the JFTC has had to decide on the legality of a particular selective distribution system or restrictions on internet sales. However, given that the number of traditional cartel cases is declining, the JFTC is likely to shift its focus to this area and follow in the footsteps of the EU Commission. At this stage, the JFTC will likely also take a closer look at EU precedents and, in particular, Pierre Fabre and Coty.
In general terms, the JFTC will likely set its enforcement priorities along the following lines:
- The risk of the JFTC scrutinising a certain distribution practice will increase, the higher a manufacturer's market shares on a given market.
- With regard to the setup of selective distribution systems, companies will have a stronger defence before the JFTC in cases where:
- resellers are chosen on the basis of objective criteria which are applied in a non-discriminatory fashion; and
- these criteria do not exceed what is necessary.
- With regard to certain restrictions on internet sales, companies will have a stronger defence before the JFTC in cases where they:
- pursue a legitimate objective;
- are laid down uniformly and are not applied in a discriminatory fashion; and
- are proportionate.
- Given that the JFTC's guidelines explicitly recognise brands and brand image as factors to consider, the authority has grounds to recognise the intention to protect a luxury image of a particular product as a legitimate objective, although the enforcement of this remains to be seen.
- The JFTC will likely consider the complete ban of internet sales imposed by a manufacturer on distributors to be problematic. Even in the context of selective distribution systems or where luxury products are concerned, the authority will likely consider that the prohibition of internet sales is justifiable only in exceptional cases, if at all.
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