Many retailers are faced with the question if and how they can restrict the ability of their re-sellers to purchase keywords in order to advertise and sell products online. A complete prohibition on keyword advertising may constitute a hard-core restriction on competition. The competition authorities are keen to ensure that there is healthy intra-brand competition both online and off-line and they view internet selling as an important method of cross-border trade that should not be unduly restricted. Arguably, keywords are needed to enable online sales so a franchise or distribution agreement that prohibits keyword advertising may be viewed as anti-competitive.
Selective distribution and franchise agreements are normally used by a retail brand to maintain greater control over the resale of their products. Competition law recognises this and provides guidance on permitted controls in the form of the Vertical Block Exemption (VBER) which applies across the EU. Within a selective distribution or franchise system, authorised re-sellers must be free to sell their products to all end users both on and off-line. It is not permitted to restrict passive sales (where the customer has requested the product including via online offers). In short, it is not possible to provide that re-sellers may not have a website on which they advertise the products as this is viewed like a virtual "shop window".
The EU Context
The European Commission is currently engaged in a sector enquiry into e-commerce as part of its mission to improve the EU “Digital Single Market” for goods and services.
Whilst its primary concern is to remove barriers to online sales, the Commission recognises that brand owners have a legitimate interest in protecting their IP rights, trademarks, and reputation gained through the way in which the products are sold. It acknowledges that brand owners will want to take steps to protect and further promote brand image, and that brand owners should be permitted to impose quality standards on their re-sellers.
Restrictions on Online Sales
While an outright prohibition of online sales will breach competition rules, brand owners have increasingly placed restrictions on re-sellers regarding their use of brand names in online advertising price comparison websites, marketplace platforms such as Amazon or eBay, or from using their trademark as keywords in advertising services such as Google Adwords.
From the brand owners’ perspective, such restrictions are often justified by the need to protect brand quality. However, competition authorities will be concerned to ensure any such restrictions do not go further than is necessary and do not unduly restrict online sales by comparison with any equivalent restrictions on physical resellers.
This conflict between maintaining brand image and restricting passive sales has recently come to a head in Germany in connection with enforcement activity by the German Cartel Office. The German Cartel Office investigated two sporting companies, Adidas and Asics, for restricting the internet sales of their authorised dealers as part of a wide ranging investigation into how brands sell their goods online. Asics and Adidas prohibited their dealers from using price comparison websites to drive traffic to their site and from using their brand names on the websites of third parties to guide customers to the third parties’ online stores. The brand owners also prohibited the re-sellers from using online market places and restricted their re-sellers’ use of their name as key words on Google Adwords.
As a result of the German Cartel Office investigation, Adidas agreed to remove these restrictions on its re-sellers. However, Asics did not change its practice.
In August 2015, the German Cartel Office announced that Asics had violated competition law. In its decision, the German Cartel Office leaves no doubt that the constraints restrict intra-brand competition. In particular, these restrictions were said to have particularly affected SME businesses who distribute the product as they would be unable to compete in the market without the aid of these marketing tools. The German Cartel Office noted that Asics did not have any comparable restrictions for its re-sellers that operate bricks and mortar stores.
What does this mean for brand owners and retailers?
Where does this leave us? At least in Germany, any absolute prohibition on using trademarks as keywords in advertising online is likely to be in breach of competition law rules. Interestingly, the German Cartel Office has called for action to be taken to deal with such issues at an EU level. Obviously in the case of Adidas, the prohibition was combined with a broad range of additional restrictions. Nevertheless, brand owners and retailers alike should look at working on the basis of an agreed policy for online advertising that sets out permitted and restricted activities. In the policy an emphasis needs to be placed on restrictions on online sales based on quality requirements rather than blanket prohibitions.