Bundeskartellamt closed its investigations against adidas after the company gave up market place bans and restrictions of search engine advertising

In 2012 the German Federal Cartel Office ("FCO") opened proceedings against ASICS Deutschland GmbH  ("ASICS") and adidas AG ("adidas") to investigate alleged restrictions to sell products online.  Both in- vestigations focused in particular on the prohibition of online sales via third party  platforms or online market places, as well as on limitations to use brand names for search engine  advertising. The investigations raised international interest, since the FCO is one of the first  major competition agencies to analyse the scope of online restrictions in selective distribution  systems after the European Commission revised its Vertical Block Exemption Regula- tion No.  330/20101 ("VBER") as well as the corresponding guidelines2 ("Vertical- Guidelines"). On June 27,  2014, the FCO closed its investigation against adidas after the company abandoned per-se market  place bans and restrictions for search engine advertising. The ASICS investigation is still  pending, with negotiations for amend- ed online criteria ongoing, following a criti- cal press  release by the FCO in April 2014.3

Legal background

Selective distribution systems are legitimately operated by many brand owners to ensure that their  products are only sold through authorised dealers, required to fulfill certain criteria. Selection criteria are typically designed to protect brand image as well as quality of sales and services.

Due to their procompetitive effects on interbrand competition, selective distribution systems based on purely qualitative selection criteria  in line with the principles of the Euro- pean Court,4 do not fall within the scope of the European  cartel prohibition, Art. 101 (1) TFEU or its national equivalent.

Other selective criteria can benefit from an automatic exemption under the VBER, up to market share  limits of 30%, provided that they do not constitute hardcore restraints. Beyond the "safe harbor"  of the VBER, companies have to self-assess whether the selective crite- ria qualify for a general  exemption pursuant to Art. 101(3) TFEU. For hardcore restraints an individual exemption is only  available under limited circumstances.

Selection criteria that de facto prohibit online sales are hardcore restraints.5 Selection criteria that only govern the modalities of online sales are subject to their overall equivalence with corresponding offline sales criteria available for an exemption. In its Vertical Guidelines the Commission assesses restrictions to sell via  third party online platforms in the second category.6 This balanced view is now chal- lenged by the FCO.

Facts of the case

adidas, being one of the world's leading sports shoe and clothing manufacturers, operates a  selective   distribution   system.   In   2012,  it amended the conditions for the online sale of its products. The new agreements involved a prohibition for authorised retailers to use online  market places such as Amazon and eBay for the (re-)sale of adidas products. Still, author- ised retailers were allowed to distribute adidas products via their own online shops as well as via  "closed" third party shops such as otto.de or zalando.de. In addition, adidas allowed only one  retailer to be active on each authorised platform. adidas furthermore restricted author- ised  dealers to use its brand name for search engine advertising.

After several complaints from retailers, the FCO initiated an administrative proceeding against  adidas. As a result of extensive investigations at sporting goods manufacturers and German  retailers, adidas was notified that its ban on sales via online market places and the restrictions  imposed on authorised retailers with regard to search engine advertising gave cause for serious  competition concerns. In response to the objections by the FCO, adidas submitted an amended version  of its online sales conditions, in which it completely aban- doned its ban on market places. It  also clarified that all authorised retailers are free to use adidas brand related terms as search  words for search engine advertising such as Google AdWords.

Reasoning of the FCO

Within the affected segment of sports shoes and clothing, the FCO defines separate relevant  markets, inter alia for football clothing and football shoes, respectively. The FCO considers the  market shares of adidas on at least two of those markets to exceed 30%.7 Therefore, the FCO mainly  analyses an exemption for the restrictions in questions under Art. 101 (3) TFEU and Sec. 2 GWB, and  not under the VBER.

The FCO concludes that the per se prohibition of online market places is not a purely qualita- tive  selection criterion, but an appreciable restriction of competition.8 It further holds that a  general exemption pursuant to Art. 101(3) TFEU/Sec. 2 GWB is unavailable, as the restrictions  neither create efficiency gains, nor consumer benefits and are in any event not indispensible.9 In  particular for small dealers market places are the only effective way for selling online. A per se ban on online market places is not appropriate to address the problem of freeriding. Moreover, the legitimate purpose  of a supplier to protect a certain brand image cannot serve as a blanket to justify a per se restriction of online market places, regardless of their respective sales surrounding.10 The  requirement of certain sales services is likewise not accepted as a justification. According to  the FCO there are more appropriate and less restrictive measures than a per se ban of market places  to address quality concerns. This applies in particular to criteria governing the modalities of the  distribution via online market places.11

The FCO, eventually, adds some remarks regarding the assessment on markets where adidas' shares are  below the 30% limit and that could hence benefit from the VBER.12 The FCO claims good reasons to  assess a per se prohibition of market places within the VBER "similarly". The FCO explains that it  will gen- erally distinguish between permissible quality requirements for modalities of online  distribu- tion and hardcore restrictions of competition directed against online distribution as  such.13 The FCO's preliminary view is that online dis- tribution criteria like the one in question  are likely to fall within the second category as they de facto exclude internet sales.

Comment

The case summary provides information for assessing and drafting selective internet crite- ria  outside the scope of the Vertical BER. The case summary, however, fails to give guidance on how to  structure platform bans so that they would be accepted by the FCO as not going beyond what is  necessary to protect legitimate supplier interests.

It is unfortunate that the FCO once more suggests that price competition is the only relevant  parameter to consider in assessing the competitive effects of selection criteria, ignoring that  for many products quality of sales and service as well as a certain brand image is of equally high  importance. It is also unfortunate that the FCO at least for certain consumer goods seems to boil  down the relevance of third party platforms to the simple equation: no access to online platforms,  no access to internet distribution. This view is difficult to accept, not only for being at odds with the Commission view as expressed in its Vertical Guidelines, but  also for not being in line with more nu- anced German court decisions, in an, admit- tedly, very controversial judicial landscape.14

Brand owners selling products in Germany should carefully watch the outcome of the ASICS  investigation. It is to be hoped that in closing this investigation the FCO will provide more  clarity on its approach towards online criteria within the VBER. Brand owners should, however,  manage their expectations: the reasoning of the FCO made clear that per se platform bans will  be subject to challenges in Germany, in particular when applied in distribution setups with low  standards for offline crite- ria (or even in non-selective distribution systems). Exemptions are  likely to remain availa- ble when such provisions are tailored to the requirements of the products  in question, are in line with the offline sales criteria and specifically take account of the  sales surrounding of- fered by the respective online platforms.