I. The case
In a recent decision relating to vertical price fixing practices, the Bundeskartellamt condemned a selective distribution system which violated competition law by enforcing adherence to recommended prices.
On 31 July 2013, the Federal Cartel Office (Bundeskartellamt) imposed fines of approximately EUR 6.5 million on the German company WALA Heilmittel GmbH (“WALA”) because of vertical price fixing practices which included selective distribution contracts which depended on the distributors’ adherence to recommended prices.
The Bundeskartellamt held that the company had put undue pressure on retailers for years, obliging them to comply with WALA’s recommended prices for its natural cosmetic products sold under the brand “Dr. Hauschka”. According to the Bundeskartellamt, ever since 2003, WALA had systematically based its distribution system on strict adherence to stipulated end consumer prices and put unreasonable pressure on retailers to prevent them from undercutting the recommended prices by threatening to deny or actually denying the supply of products.
In 2007, the company introduced a “selective distribution system” which allowed supply only to selected distributors meeting certain criteria. The conclusion and continuation of the contracts with the authorised distributors was made subject to the distributors' adherence to the recommended prices. The contracts also included clauses restricting internet sales. Furthermore, the investigation uncovered evidence that the company had engaged in illegal agreements on end consumer prices for its products with several specialised retailers which are active throughout Germany.
A negotiated settlement was reached between WALA and the Bundeskartellamt, and the German regulator’s investigation was terminated. WALA undertook to phrase and structure its future contracts in such a way as to ensure that (i) the contracts cannot be abused to support price fixing schemes, (ii) distributors will be treated equally and (iii) internet sales will not be restricted.
II. Legal Background and Preventive Measures
This case shows that the Bundeskartellamt is increasingly vigilant over anti-competitive restrictions in vertical agreements.
Under the German Act Against Restraints of Competition (GWB) and the Treaty on the Functioning of the European Union (TFEU), agreements which have as their object or effect the prevention, restriction or distortion of competition, are prohibited. However, both the GWB and the TFEU allow some exemptions. The “Vertical Block Exemption Regulation” (Commission Regulation (EU) No. 330/2010 of 20 April 2010) exempts restrictions in all vertical agreements which are concluded between companies that have certain limited market power unless they are hardcore or excluded restrictions. One of these hard-core restrictions stipulates that vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object the restriction of the buyer's ability to determine its sale price, cannot benefit from the Vertical Block Exemption.
By the above decision, the Bundeskartellamt has shown that all benefits of the block exemption, including the preferential treatment of selective distribution systems, are removed if competition is restricted by way of a hardcore restriction such as resale price maintenance.
When establishing a distribution system, direct, as well as indirect practices to maintain a minimum or fixed resale price are prohibited and must be avoided. This includes threatening to deny the supply of products as well as reducing incentives for companies such as making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level to try to circumvent competition law.