There is a debate in competition law at present concerning whether a company can restrict online sales for their products. Under New Zealand competition law, a supplier restricting its customers from selling on online platforms could be penalised if:
- the supplier has market power and imposes restrictions to take advantage of that market power for an anti-competitive purpose;
- the restrictions have the aim or effect of substantially lessening competition in a market; or
- that supplier also competes downstream with those customers (ie, by selling directly to consumers itself), in which case the restriction could be regarded as an output restriction between competitors under the new expanded cartel prohibition.
However, legitimate and pro-competitive justifications can be relevant in assessing the legality of such restrictions under any of the following prohibitions:
- the market power prohibition requires a company's 'substantial purpose' to be the prevention of another party from competing or eliminating a party from the market;
- the substantial lessening of competition effect test is a 'net test', whereby pro-competitive effects – including efficiencies – need to be balanced against any anti-competitive effects in the relevant market and the purpose test looks at what the firm's substantial purpose is; and
- the new expanded cartel prohibition is subject to an exemption in vertical supply contracts which exempts any restrictions that do not have the "dominant purpose of lessening competition between the parties".
The recognition that businesses have a legitimate interest in protecting the luxury image of their brands through restricting online sales is relevant in considering such restrictions under New Zealand law.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
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