A European cosmetics association publication quoted a chief executive officer as stating that: "We operate in a commodity space that's totally driven by price. People will shop in the mall for the latest fragrance and then go online to see who's got the best deal and that's who we see as our core customer."
Against this backdrop, it is understandable why manufacturers of branded products seek to support the bricks-and-mortar retail trade against online trade. It is common legal practice that a complete prohibition on internet selling is not permissible. According to the Guidelines on the EU Block Exemption Regulation on Vertical Restraints, it is deemed to be a violation of competition law if the proportion of a distributor's internet sales in comparison to its overall sales is limited by contract. This also applies to any price and/or rebate splitting in favour of offline sales.
On the other hand, it is recognised in principle that qualitative requirements may be imposed on the distribution of products via the Internet, in particular with reference to branded articles. In sales practice, until now it has been assumed that a manufacturer can require its distributors not to sell products via third-party platforms. In particular, this stems from the wording of Margin 54 of the guidelines:
"Similarly, a supplier may require that its distributors use third party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors' use of the internet. For instance, 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 logo of the third party platform."
It is obvious that eBay is such a platform. However, if Amazon sells in its own name and on its own account, it is a normal distributor. The situation is different for Amazon Marketplace; there the customer buys not from Amazon, but from the respective distributor which uses Amazon as a third-party platform.
A recent Berlin Court of Appeal judgment(1) involved a dispute on the distribution of Scout school bags. School bag manufacturer Sternjakob had prohibited any sales via eBay "or similar auction platforms" in its selection criteria for admitted distribution partners. This prohibition was challenged by a Berlin-based stationer who sold the Scout products in his retail shop and online. The Berlin Regional Court and the Berlin Court of Appeal (at first and second instances, respectively) held that the eBay clause was inadmissible under German and EU competition law.
Nevertheless, the appeal court took an approach in favour of branded articles. The court shared the disputed view that a purchaser of a product may be prohibited from reselling this product via an internet platform such as eBay within the framework of a selective distribution system. The court drew this conclusion from recognised principles of European case law which state that selective distribution systems are not anti-competitive if the selection of resellers is based on objective quality criteria which refer to the professional competence of the reseller, its staff or its material resources and equipment, and which are applied in a uniform way without discrimination.
In light of this, the appeal court reviewed whether the products referred to justified the establishment of a selective distribution system. It affirmed this for high-quality branded articles – in particular if such articles were durable and technically sophisticated goods, so that either consultation or after-sales service provided by the reseller was needed. When reviewing the extent to which a certain product image required selling through resellers selected for their qualifications, the appeal court trod new legal ground. Picking up a proposal in legal literature, the court distinguished between the 'image as an element of the product' and the 'signalling of high product quality by investments in the product image'; one of these aspects should be sufficient as a valid argument for qualitative distribution. With regard to Scout's school bags and backpacks, the appeal court doubted that the defendant had created a brand image that had become an element of the products. Even if the advertising emphasised the elements 'cool' and 'stylish', the focus was still on quality and safety aspects. However, the second alternative could be affirmed because the products were of high quality, which also justified a selective distribution system. This image of the products would be jeopardised if they were sold via eBay since the auction platform is often seen by the public as a kind of flea market.
So far, so good for the manufacturer. However, in the appeal court's opinion, Sternjakob had made a mistake which was decisive for the outcome of the proceedings. The company also distributed its products through a discount chain – thus, in the same environment which it claimed was detrimental to its products. This was regarded as an act of discrimination, meaning that a substantial element for the approval of the distribution system was missing. According to the court, the appreciability of the restraint of competition is to be affirmed because it constituted a hardcore restriction in the form of an exclusive customer group allocation. This was unconvincing because the restriction should actually be qualified as a restriction on the method of distribution – for example, if a distributor was prohibited from selling products on rummage tables, the issue would be how the products were sold, rather than to whom were they sold.
The Kiel Regional Court came to the same result in a recent judgment.(2) The defendant, Casio, manufactures digital cameras. The distribution contracts expressly listed eBay and Amazon Marketplace as inadmissible marketplaces. The Kiel Regional Court did not address any considerations concerning qualitative distribution, since the defendant had not claimed the existence of such a distribution system. In addition, the court affirmed the hardcore restriction on the grounds that the sales prohibition considerably hampered access to customers who primarily perform their internet sales via platforms or marketplaces.
The Federal Cartel Office (FCO) is involved in a number of proceedings concerning online trade. In view of the doubts raised by the FCO, Sennheiser, which manufactures headphones, earphones, headsets and other consumer audio products, has removed its contractual prohibition on selling via Amazon Marketplace.(3) The particularity in this case is that Sennheiser has authorised Amazon as a distributor. According to the FCO, it is doubtful whether a distributor authorised within the framework of a selective distribution system can be a third party within the meaning of Margin 54 of the guidelines. The FCO characterised the Sennheiser products as standardised electronic products for end consumers (ie, products that require no special consultancy services). The FCO regarded Amazon Marketplace as a platform that complies with all prescribed quality requirements, so that a prohibition of platform selling would not increase efficiency in the given circumstances. Finally, the FCO noted that further proceedings were pending with regard to eBay and other platforms. Thus, what is true for Amazon Marketplace may not necessarily be true for eBay.
It remains to be seen whether the Federal Court of Justice will clarify the situation. At present, existing case law teaches that a prohibition to market products via third-party platforms tends to be in conflict with competition law if:
- the manufacturer does not run a selective distribution system;
- the products do not require intensive consultancy or aftersales service, or they have no special image or, investments do not signal high-product quality;
- the distribution system is inconsistently applied in practice – for instance, if marketing via eBay is prohibited even though the manufacturer itself distributes to discounters, or if marketing via Amazon Marketplace is prohibited even though the manufacturer itself has authorised Amazon as a distributor; or
- the excluded platform is of high quality (affirmed by the FCO with regard to Amazon Marketplace and denied by the Berlin Court of Appeal with regard to eBay).
For further information on this topic please contact Dietmar Rahlmeyer at CMS Hasche Sigle by telephone (+49 211 49 34 0), fax(+49 211 49 34 126) or email (email@example.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.