Staying antitrust compliant
In 2018, distribution and pricing of goods and services will remain a hot antitrust topic, throwing up compliance challenges but also bringing more clarity to the rules. Although the US continues mostly to exhibit a light touch on distribution issues, Europe and Asia are experiencing waves of enforcement.
We expect cases in 2018 to apply existing principles to new practices and to shed light on lesser-explored corners, such as how antitrust law can tackle potential concerns arising from pricing algorithms. As European Commissioner Vestager put it: ‘it’s not easy to know exactly how those algorithms work’ but ‘companies can’t escape responsibility for collusion by hiding behind a computer program’.
However, internet distribution is by no means the whole story, with practices such as resale price maintenance (RPM) attracting plenty of attention and more enforcement against excessive pricing, so far mainly in pharmaceutical and technology markets.
The issue of rebates and other commercial terms used by dominant companies is also at the fore in Europe and Asia – in the former case with the EU Court of Justice at last endorsing the need for an analysis of effects before exclusivity rebates can be considered to be anti-competitive.
The European Commission’s 2017 e-commerce sector report found that pricing restrictions or recommendations were by far the most common types of restrictive clauses reported by retailers, with 42 per cent of those surveyed saying they were subject to these clauses. But other restrictions are prevalent too: 18 per cent were restricted in their use of online market places, and a surprisingly high 11 per cent cited territorial restrictions.
As the internet grows in importance and online sales methods become ever more sophisticated, authorities, courts and lawmakers are racing to monitor and control business practices. Globally there is much similarity of approach across jurisdictions, though the US remains generally more permissive of most distribution arrangements provided they are not made between competitors. But, even in the case of jurisdictions with broadly similar rules, there can be significant differences in enforcement.
Markets subject to recent enforcement action in Europe have included, among many examples, golf clubs and mobility scooters in the UK and food supplements in Germany. The European Commission’s ongoing post e-commerce sector inquiry investigations into films, fashion, brand licensing, hotels, video games and consumer electronics may provide guidance on a variety of issues. Several of these cases involve online pricing restrictions, on which enforcers are especially vigilant. These restrictions often originate in physical outlets seeking protection from the lower prices that internet sellers are able to charge. Suppliers wanting to maintain both types of sales channel face a challenge.
Selective distribution – a model where goods may only be sold to authorised resellers that comply with specified quality criteria, or to end users – provides some room for manoeuvre. Even here, the long-established approach that these systems could exclude pure internet resellers was coming under sustained assault by the enforcement authority and courts in Germany. However, in 2017 the tables turned back in favour of manufacturers. Early in the year, an EU Advocate General opined that manufacturers do not have to allow distributors to sell through third-party platforms. This was followed in the latter half of 2017 by a Dutch court upholding Nike’s restrictions on the use of certain third-party platforms on the basis that they served to protect the brand image of a luxury product, and Caudalie winning a similar case on its skincare products in France. Finally, in December the EU Court of Justice ruled firmly in the Coty case to uphold certain restrictions on distributors’ use of third-party platforms to sell luxury goods.
For many brand owners, distribution via digital platforms is an essential part of any growth strategy. However, if pricing models are not right, bricks-and-mortar retail customers may be consistently undercut by their digital competitors. This often leads to pressure on brand owners to seek to influence online resale pricing. In many parts of the world, succumbing to that pressure would be the wrong choice. Brand owners should explore other solutions, such as incentivising appropriate levels of investment in customer service by the online players.
For many companies Asia and especially China are important growth areas for their products. Given that they cannot be directly present in each jurisdiction, companies will often work with independent distributors and agents, and so face pricing issues. As volumes of online sales continue to grow (a 2017 PwC report found that 52 per cent of Chinese consumers shop daily or weekly by phone), the enforcement focus, and the tensions this causes between traditional bricks-and-mortar retailers and online sellers, is bound to increase.
Asia is a particularly challenging region in which to ensure compliance because of the widely varying approaches to RPM and other vertical restrictions found in the different jurisdictions:
- in China, RPM is a hot topic and the approach is strict, verging on a per se prohibition before China’s antitrust agencies (with US medical devices company Medtronic recently fined RMB 118.5m (c €15m)), but a ‘rule of reason’ analysis before at least one Chinese court;
- in Singapore, non-dominant companies are for now effectively free to impose any preferred restrictions in their relations with distributors and sales agents; and
- the Japanese authorities have been particularly vigilant in the area of online restrictions, recently forcing Amazon to adjust its online most favoured nation (MFN) practices.
Faced with such a variety of laws in Asia, companies are often best advised to adopt a high standard across the board, providing for limited exceptions where that is feasible.
As approaches to RPM and other vertical restrictions vary widely across Asia, hard decisions have to be made when crafting a strategy across the region. Companies need to remain on top of regional developments, as some jurisdictions get tougher with enforcing against restrictions in sales and distribution arrangements.
In 2018, we are likely to see a continued trend towards more enforcement against companies that are pricing ‘excessively’ and demand for more guidance as to exactly what ‘excessive’ means. Although the law is not new, the appetite for bringing cases is, so far focusing on the pharmaceutical industry and technology sector:
- Pfizer and its distributor Flynn are currently contesting UK authority fines (£84.2m and £5.2m) for excessive pricing of Pfizer’s epilepsy medication. Following de-branding and Pfizer increasing its price 2,600 per cent, the UK CMA found that in the presence of such a significant increase, there was no need to carry out an international comparison, which might have showed similar high prices elsewhere;
- in Italy, Aspen has been fined for excessive pricing of cancer medicines and it is now under investigation by the European Commission in respect of the rest of the EU; and
- in Asia, the recent fines against Qualcomm – first in China, then South Korea and most recently in Taiwan – show that the interest in excessive pricing is not limited to Europe, and highlight the increasing risk of excessive pricing claims in the technology sector in Asia.
This renewed enthusiasm for excessive pricing cases is part of a broader interest in the fairness of commercial dealings, a concept that has so far not been satisfactorily linked to the normal theories of competitive harm deployed by enforcement authorities.
In Europe, the Intel case on the legality of exclusivity rebates granted by dominant companies continues on its way through the EU courts. A recent Court of Justice judgment introduced flexibility in this area, which had previously been subject to a more or less absolute prohibition. The case was sent back to the General Court, whose next judgment should bring further insight. More generally, this case is expected to spur European authorities into a more economic approach to other types of conduct by dominant companies.
But while Intel certainly moves the law away from knee-jerk illegality for exclusivity rebates, dominant companies are directed instead towards the murky waters of effects analysis. Murky not because of an absence of economic tools – there are well-understood techniques to deploy. However, the fact that both Intel and the European Commission undertook detailed economic analysis on the same rebate scheme and reached diametrically opposed conclusions illustrates the challenge facing those who seek to use this greater freedom.
Finally, China’s case against Tetra Pak – a virtual replay of 1992 proceedings brought against the same company in Europe – sheds light on how rife the question of rebates is in some parts of Asia.
US businesses are especially vulnerable to mistakes in the areas of distribution and pricing practices, in part because US law generally provides firms much greater latitude. As a result, although a natural instinct, simply extending distribution and pricing policies developed originally in the US into Europe and Asia can leave US firms exposed to underappreciated competition law risks.
Thomas Ensign, Antitrust Partner, Washington DC
Looking ahead in 2018
- Increased scrutiny of distribution and pricing arrangements – be prepared for more vigorous enforcement in many jurisdictions, notably from the European Commission and some Asian authorities. This certainly applies to online selling but also extends to more traditional sales models.
- Beware of differences between jurisdictions – in the case of businesses based in places where restrictions imposed on distributors are subject to relatively relaxed rules (such as the US and Singapore), build awareness that in other jurisdictions you need to check carefully what is and is not allowed. For example, in many parts of the world, RPM remains close to a per se infringement, with clear enthusiasm for enforcement spreading to Asia.
- Watch the current EU investigations – the results of the ongoing European Commission cases are likely to bring new clarity to some of the many issues that it left open in its e-commerce report, and may inform approaches in other jurisdictions.