Vertical Expressions of Retail’s Forbidden Desires – Resale Price Maintenance, Other Vertical Restraints & the Revision of the Vertical Block Exemption Regulation
The retail landscape has been massively changing over the past two decades, especially in the recent years. There is a general trend towards online sales with newly emerging distribution formats and companies heavily challenging traditional brick-and-mortar chains. Online market places and retailers offer a variety of sales opportunities from different (competing) manufacturers, which are easily accessible and comparable for potential customers and other interested parties alike, while price comparison websites even provide direct purchase options. On the other hand, this also increases the price transparency among competing retailers, the market power in the retailing has been shifting, traditional online sellers are also beginning to set up classic brick-and-mortar stores and manufacturers of all kinds are increasingly engaged in dual distribution (selling through their own (online) stores as well as through distributors).
This shows that traditional and modern distribution systems are moving very close together. Meanwhile these new integrated approaches also include risks from the application of EU and German competition law and draw the attention of the competition authorities as it has been reflected recently by several decisions of the German Federal Cartel Office (the “FCO”) as well as the European Commission (the “Commission”). All in all, an appropriate and effective distribution strategy is becoming more and more important for manufactures. That in mind, it should also be noted that the applicable legislation may shift in the coming years, as discussions about the reform of the soon-to-expire Vertical Block Exemption Regulation (EU No. 330/2010 or “VBER” - a centrepiece of the European competition law in regard to supplier-distributor relations) have just started.
The currently ongoing public consultation process on the VBER’s potential renewal provides a welcomed chance for all stakeholders to provide the Commission with necessary views on the needs for changes to the regulation but should also be taken as an opportunity for manufacturers and distributors alike to review the present conditions of their professional relationships.
The current legal framework in EU competition law for supplier-distributor relationships
Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices that may affect trade between EU Member States (as well as EEA States) and that have as their object or effect the prevention, restriction or distortion of competition within the internal market. The prohibition applies to all agreements between unrelated undertakings that may have an appreciable effect on trade between Member States. Article 101(1) TFEU applies both to arrangements between market participants active on the same market – cartels and so-called horizontal agreements, i.e., between actual or potential competitors – and/or active on markets at a different level of the supply chain – so-called vertical agreements, i.e., between a supplier and its customers/distributors.
Even if an agreement does fall within Article 101(1) TFEU, the prohibition may be declared inapplicable under Article 101(3) TFEU if:
(i) the agreement contributes to improving the production or distribution of goods or to promoting technical or economic progress;
(ii) allows consumers a fair share of the resulting benefit;
(iii) the restrictions on competition are essential for the attainment of these objectives; and
(iv) the restrictions do not allow competition to be substantially eliminated.
For agreements in the vertical context, the Commission has utilized its power to enact regulations, known as block exemptions, which exempt certain categories of agreements from Article 101(1) TFEU if an agreement meets the conditions set out in the relevant block exemption. These block exemptions provide a degree of legal certainty. To avoid that companies need to self-assess the existence of anti-competitive effects for each vertical agreement, the Commission has enacted the Vertical Block Exemption Regulation (the “VBER”). The VBER provides a safe harbour to a vertical agreement, which might otherwise be seen as prima facie harmful to competition, provided (i) the parties’ respective market shares on the markets concerned are less than 30%, and (ii) the agreement does not contain any so-called “hardcore” restrictions. Hardcore restrictions in the vertical context mainly refer to excessive price fixing by the supplier and undue limitations of sales channels and opportunities for the distributors, effectively mirroring the respective forbidden hardcore restrictions in horizontal relationships. The VBER has also been accompanied by a Commission Notice on “Guidelines on Vertical Restraints”.
The VBER consultation process
Just like its predecessor, Regulation EC No. 2790/1999, the current VBER features an expiration date, which has been set for 31 May 2022. At the end of last year, the Commission started a review to gather information on the functioning of the VBER that will allow it to decide in time, whether it should let the Regulation lapse, prolong its duration or revise it.
In the roadmap documents the Commission noted that the evaluation will be based on several criteria:
Effectiveness: - to which extent has the VBER proven effective in identifying the vertical agreements between companies for which it can be assumed that they meet the conditions of Article 101(3) TFEU?
Efficiency: - has the VBER reduced the costs for 1. undertakings and 2. the competition authorities in ensuring compliance with Article 101 TFEU?
Relevance: - does the scope of the VBER, in light of the new market developments, still correspond to its objective?
Coherence: - is the VBER still in line with the Commission’s overall enforcement policy and practice regarding competition law, including the area of mergers and state aid?
EU added value: - has the VBER contributed to ensuring a consistent application of Article 101 TFEU to vertical agreements by the national competition authorities and the courts?
The Commission has already indicated that the review process will pay closer attention to the developments in the online market during the recent years. While this might not come off as a surprise given the numerous cases and investigations regarding vertical interdependencies during the last years it should be noted as this intention may also shape upcoming changes to the block exemption during the review process.
An initial feedback process was already concluded in December 2018. The Commission also opened a public consultation, which will end on 27 May 2019. The Commission intends to complete the review process overall by the first half of 2020. This review may greatly affect any company with an extensive distribution network or with other strong ties to businesses on a different market level in the next years.
Resale price maintenance and its forms
Among the vertical restraints not exempted by the current VBER, resale price maintenance forms one of the key “hardcore” restrictions of competition, which may only under extraordinary circumstances be exempted under Article 101(3) TFEU if it is deemed to lead to additional efficiencies. Resale price maintenance (“RPM”) refers to the practice of controlling or influencing the pricing of a reseller by either expressly of effectively setting fixed or lower limits to the resale price. In recent years, both the European Commission and national competition authorities (“NCAs”) have shown an increased interest in this kind of conduct and have on occasion issued substantial fines. Meanwhile, there are numerous ways in which RPM might be effectuated – both direct and indirect –, which may not always be clear to the participants to such arrangements.
In the case of contractual provisions or concerted practices that directly establish the resale price, the infringement is clear. However, RPM can also be achieved through indirect means. Examples of the latter are an agreement fixing the distributor’s margin, fixing the maximum level of discount the distributor may grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the observance of a given price level, linking the prescribed resale price to the resale prices of competitors, etc. It is also not permitted to set a specific pricing model or price surcharges.
The setting of maximum sales prices and the issuing of non-binding price recommendations do not constitute hardcore restrictions of competition if they do not amount to a fixed or minimum sales price as a result of pressure (“no stick”) from, or incentives (“no carrot”) offered by, the supplier.[1]
Pressure may relate to threats, intimidation, warnings, penalties, delay or suspension of deliveries or even contract terminations in relation to observance of a given price level. Also, a “price maintenance measure” or the simple request regarding the profitability of a price can be mentioned in this context if it is made in connection with the resale price. The circumstances of the individual case are decisive; in particular the power relations between the supplier and the distributor (market position of the supplier, significance of the product, etc.) and the market situation itself. Even if the supplier leaves the distributor unclear about the background of contacting the distributor with a request, this may under certain circumstances be seen as an attempt to exert pressure.
Incentives in this context mean that price undercutting is prevented by the promise of benefits. This includes the granting of discounts, kick-back payments, advertising subsidies etc. An illicit incentive may also be assumed if the supplier raffles off a prize within the framework of an advertising campaign, provided that a certain resale price is maintained during the campaign period.
Obviously, RPM between companies belonging to the same group or between an agent and a principal (whereby the commercial risk is predominantly with the principal) are allowed. Indeed, agreements in such circumstances are considered to have been made within one and the same economic entity and are therefore excluded from the scope of application of Article 101(1) TFEU, as the application of Article 101(1) TFEU requires an agreement between at least two unrelated undertakings.
Recent enforcement action regarding RPM by the Commission and the NCAs in Germany and the Netherlands
In practice, public enforcement in this context had been relatively limited as the focus in the context of Article 101 TFEU was – and arguably still is, albeit to a lesser extent – on cartels. Cartels are generally considered to be more harmful than RPM and, more importantly, are – or were[2] – easier to detect. This is mainly because of immunity/leniency programs which typically apply to cartels only. I.e. they do not apply to RPM unless in the context of a so-called hub-and-spoke cartel.[3]
Indeed, the enforcement of the prohibition of RPM for the most part came from the national courts and tribunals as clauses in breach of competition law – including clauses containing RPM – are null and void (and therefore unenforceable). However, recently, competition authorities in Europe have been increasingly showing an interest in investigating vertical restrictions such as territorial restrictions in online sales and RPM.
EU. On 17 December 2018, the Commission announced that it had fined Guess € 40 million for anticompetitive agreements to block cross-border sales. The Commission found, inter alia, that Guess’ distribution agreements restricted authorised retailers from independently deciding on the retail price at which they sell Guess products.
On 24 July 2018, the Commission announced that it had imposed fines that amounted to over € 111 million in total on four consumer electronics manufacturers for fixing online resale prices.The Commission alleges that each of Asus, Denon & Marantz, Philips,and Pioneer engaged in RPM by restricting the ability of their online retailers to set their own retail prices for certain consumer electronics products (e.g., kitchen appliances, notebooks and hi-fi products). In the Commission’s view, the manufacturers intervened particularly in relation to online retailers. If those retailers did not follow the prices requested by the manufacturers, they faced threats or sanctions such as the blocking of supplies. The Commission considered in this context that online retailers often use pricing algorithms which automatically adapt retail prices to those of competitors. As a result, the pricing restrictions imposed on online retailers typically had a broader impact on overall online prices for the respective consumer electronics products. Furthermore, the use of monitoring tools allowed the manufacturers to effectively track resale price setting in the distribution network and to intervene swiftly in case of price decreases.
Germany. Besides, action against resale price maintenance has mostly been taken by the national antitrust authorities in recent years. The German Federal Cartel was notably active, imposing substantial fines, for example, in January 2019 against the bicycle purchasing cooperative ZEG (approx. € 13.4 million), in 2017 against the clothing manufacturer Wellensteyn and the trading company Peek & Cloppenburg (approx. € 10.9 million), against five furniture manufacturers (approx. € 4.4 million), in 2016 against LEGO (€ 130,000), or in 2015 against three mattress manufacturers (approx. € 27 million). Further fines of around € 260 million were imposed between 2014 and 2016 on 27 manufacturers of beer, confectionery, coffee, pet food, baby food and cosmetics and grocery dealers.
The Netherlands. On 27 December 2018, the Dutch Competition Authority (the “ACM”) announced that it had launched an investigation into price-fixing agreements between consumer-goods manufacturers and retailers, including online retailers. The ACM indicated that it suspects that certain consumer-goods manufacturers concluded minimum price agreements with retailers for their products. As part of the investigation, the ACM has apparently conducted dawn raids with respect to various companies. Although not much detail is known to date regarding the sector involved or on why the investigation has been started, the launch of the investigation in and of itself appears to mark a change in the ACM’s thinking about RPM and enforcement priorities.
Other vertical restraints
While RPM has among the numerous forms of possible vertical restraints lately drawn most of the attention of the competition authorities, it should be noted that there also have been important decisions with regard to other forms of vertical restrains of competition in the recent years. Namely, the ECJ refined its standpoint with regard to the possibility of the limitation of online sales in selective distributions systems in the Coty case and the European Commission introduced some new aspects with regard to options for independent online advertising by the distributors in the Guess case.
The Coty case - third party platform bans under EU and German competition law
Brand manufacturers often use authorised dealers to sell their products. In such selective distribution systems manufacturers often want to keep their distributors from selling the goods online via third-party platforms such as eBay or Amazon, to avoid a decay of the company image (and effectively sales prices) as their products become ubiquitous. The German Federal Cartel Office and some German courts previously assumed that such a third-party platform bans were generally inadmissible. In the case of perfume manufacturer Coty against the distributor Parfümerie Akzente GmbH, the Higher Regional Court of Frankfurt had to decide on July 12, 2018.
Coty organizes its distribution in Germany exclusively via a selective distribution system, in which the distributors are, among other things, obliged not to offer the products on the Internet via the trading platforms of third parties. In this way, the ban also covers all Internet trading platforms currently relevant to the market, in particular eBay and Amazon. The ban is intended to protect the prestige character of the branded products. Parfümerie Akzente GmbH had violated the ban by offering goods of Coty Deutschland GmbH via Amazon.
To prevent this, Coty took the case to the Regional Court Frankfurt am Main, where the case was dismissed. During the appeal filed against this, the Higher Regional Court of Frankfurt referred to the European Court of Justice for a preliminary ruling regarding the question whether general third-party platform prohibitions are always to be considered as anti-competitive within the meaning of Article 101 TFEU. The ECJ took the chance to further refine its previous guidelines laid down in the judgments to the cases “Metro” in 1977 and “Pierre Fabre” in 2011 and ruled that such a distribution system may be necessary and therefore justified if, for example, it is intended to protect the luxurious image of certain products.
Whether the third-party platform ban was at all anti-competitive or merely sufficiently justified in the present case was left open by the Higher Regional Court in its decision. Nevertheless, the court ruled in favour of the manufacturer. The Higher Regional Court assumed that the selective distribution system was in any case exempted under the VBER even if it had otherwise violated § 1 GWB (German Act against Restraints of Competition), Art. 101 Sec. 1 TFEU. A hardcore restriction was dismissed due to the fact that a prohibition of platforms only specifies the form in which a trader may sell, not to whom he may do so.
The decision makes it clear that the Higher Regional Court of Frankfurt considers that third-party platform bans are generally permissible if the conditions of the vertical block exemption are fulfilled. However, even in cases where the vertical block exemption does not apply, it may be argued that the ban is necessary, for example to protect the image of a product.
The ruling gives manufacturers greater legal certainty with regard to the application of third-party platform bans. The possibility for manufacturers to keep their products away from Amazon or eBay, especially in the luxury goods sector, could have considerable consequences for both distributors and consumers. However, the judgement also raises the questions how to qualify a product as “luxury” and how to establish, whether a brand bears a prestige in need of protection. Meanwhile, the responsible Advocate General, Nils Wahl, who had prepared the ECJ verdict hinted that the ruling may not only be limited to luxury goods. The Higher Regional Court of Hamburg also already extended the admissibility of third-party platform bans to “high quality products” in a verdict of 22 March 2018, which also referred to the Coty decision by the ECJ. Still, it remains to be seen how other courts, and in particular the Federal Cartel Office, will assess these questions in the future in order to be able to determine the actual effects of the judgement on practice. In the case of the Coty decision an appeal to the Federal Court of Justice was not admitted.
The additional aspects of the recent fine against Guess – territories, cross-selling, online sales limitations and promotion by means of search term advertising
Apart from setting up a system for resale price maintenance, Guess had also been fined by the Commission for preventing its distributors from selling to customers outside their allocated territories and engaging in cross-selling in between the authorised distributors. Moreover, Guess had also made online sales by the distributors dependent on specific prior authorisation by Guess, which lay at the sole discretion of Guess and was not based on specific and transparent criteria. The last main offense noted – and sanctioned – by the Commission was that Guess also kept its distributors from using its brand names and trademarks for online search advertising (specifically in Google AdWords), while Guess was also engaging in independent online sales.
Although the limitation of passive and active sales to consumers outside of the allocated territory of a distributor and the prohibition of cross-selling in a selective distribution system are already clearly branded as “hardcore restrictions by Article 4 c) and d) VBER, and a general ban of online sales without justification and arbitrary restrictions for distributors in a selective distribution system had already been outlawed by previous jurisdiction (see “Metro” and “Pierre Fabre”), the verdict on the use of brand names and trademarks for online search advertising was something of a novelty.
The Commission reasoned that a manufacturer of course had a justified interest to prevent third parties from publicly using its brand names and trademarks for commercial purposes also for online advertisement through search terms like in case of Google AdWords, as this forms a core part of its protected intellectual property rights. Such limitations however have to be applied with care when a manufacturer directly competes with its selected distributors. In this case there is no danger of confusion with products and services of a third party, as the products indeed originate from the respective manufacturer. Accordingly, while the brand names and trademarks are employed for advertisement purposes beyond the control of the rights owner and without special remuneration, a manufacturer will have to tolerate such use by distributors he specifically engaged with to promote the sales of its products.
Needless to say this decision by the Commission opens up new promotion opportunities for distributors.
Conclusion
In light of the renewed enforcement activities by the competition authorities, companies involved in multi-party distribution systems should be especially careful about the conduct with their business partners when it comes to the question of RPM and other vertical restrains. As mentioned, the currently ongoing public consultation process on the VBER’s potential renewal provides a welcomed chance for all stakeholders to provide the Commission with necessary views on the needs for changes to the regulation but should also be taken as an opportunity for manufacturers and distributors alike to review the presents conditions of their professional relationships.
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| Dr. Jens Steger, M.A. (King’s College London) & Counsel, Simmons & Simmons, Frankfurt & DüsseldorfJens heads the antitrust & competition department in the Frankfurt office of Simmons & Simmons. He has several years of experience in advising and representing clients on the full spectrum of EU and German Competition law. Jens has a wealth of experience in relation to advising on how to set up a distribution system that best serves clients, while at the same time remaining compliant with the competition law rules. He furthermore represents clients (i) with fine proceedings before the Federal Cartel Office and the European Commission and (ii) against antitrust follow-on claims and enforcing compensation claims. Moreover he represents clients regarding horizontal and vertical cooperation agreements and research and development (R&D) agreements as well as Joint Ventures and on Compliance Management Systems. His main industry focus lays within the automotive, aviation, construction and finance industries. |
[1] However, also genuine maximum or recommended prices may have an anticompetitive effect (which needs to be assessed in each case individually). Maximum prices for instance may have the effect that distributors automatically set their prices at the highest level resulting in de facto fixed prices.
[2] The attractiveness for cartelists to apply for leniency has arguably declined in recent years due to the increased risk of follow-on damage claims (inter alia as a result of the EU Damages Directive).
[3] A cartel in which, e.g., suppliers (the spokes) coordinate their behaviour through their common customer (the hub) and/or vice versa.