United States: Vertical Agreements In The Online Sales Of Goods

The growth of e-commerce and the resulting increase in price transparency and price competition have a significant impact on companies' distribution strategies and consumer behavior. While the emergence of e-commerce has the potential to lower prices, reduce barriers to entry and increase consumer choice and transparency, the e-commerce sector inquiry (SI)1 has noted that manufacturers have become more concerned about homogeneity of prices and consistency in brand image online.

Distribution agreements with online retailers raise a number of specific issues for manufacturers, such as how to address free-riding, how to maintain or establish certain brand  image or how to ensure a high level of distribution quality. E-commerce and the implementation of distribution networks online facilitate the monitoring of resale prices (RPM), but also the introduction of online restrictions on resellers (online marketplace bans), and most favored nation (MFN)/price parity clauses.

In light of these risks specific to the e-commerce sector, vertical agreements and online distribution systems have experienced a wave of investigations by the European Commission (EC) in 2017 (whereas the last infringement decision on vertical agreements was in 2004)2  in sectors ranging from consumer electronics manufacturers to video games, from hotel booking to luxury and sports clothing. This article focuses on the most recent cases and their impact on the obligations on resellers in the online sale of goods.

PRICE LIMITATIONS AND RECOMMENDATIONS

RPM

E-commerce and its increased price transparency facilitate detection of retailers that deviate from the manufacturer's recommended prices and may limit the incentives for retailers to deviate from such pricing recommendation. It is not illegal in itself to monitor resale prices, but manufacturers should not take actions that interfere with the freedom of retailers to set their final prices to customers by making a recommended retail price or a maximum retail price equivalent to minimum or fixed price.

In this context, the EC launched RPM investigations in 2017 against consumer electronics manufacturer Asus, Denon & Marantz, Philips and Pioneer. According to the EC's preliminary view in the opening decision, these may have restricted the ability of online retailers to set their own prices. The EC noted that the effect of these suspected price restrictions may be aggravated due to the use by many online retailers of pricing software that automatically adapts retail prices to those of leading competitors. As a result, one retailer's use of RPM may spread high prices on to other retailers that may not be engaged in similar RPM and affect overall online prices for the respective consumer electronics products.3

National Competition Authorities (NCAs) in countries such as the U.K., Germany and France are also very active on RPM, such as the £2.7 million fine imposed by the CMA on a supplier of domestic light fittings in June 2017 for restricting online prices.

PRICE PARITY CLAUSES/MFN

The development of sales platforms such as Amazon has triggered the use of MFN clauses that assure the platform that the supplier will not sell its products at better terms via another platform. These practices, however, may facilitate collusion and reduce incentives for online retailers to develop innovative services or alternative business models, lower their commission rates, etc.

In May 2017, the EC made binding a set of commitments offered by Amazon in an investigation4 concerning MFN clauses contained in Amazon's distribution agreements with e-book publishers in Europe. The clauses required publishers to offer Amazon similar or better terms and conditions as those offered to its competitors, and to inform Amazon about more favorable or alternative terms given to Amazon's competitors. The clauses covered all practices that competitors use to differentiate themselves from Amazon, such as price, alternative distribution models, innovative e-books and promotions.

Amazon offered a number of commitments to address the EC's concerns, including offering not to enforce or introduce such clauses during the following five years. The commitments are particularly related to alternative/new business models, release date and catalogue of e-books, features of e-books, promotions, agency price, agency commission and wholesale price. Amazon will also allow publishers to terminate e-book contracts that contain a clause linking discount possibilities for e-books to the retail price of a given e-book on a competing platform.

MFNs are not necessarily problematic in distribution agreements. The assessment of the competitive impact of such clauses will depend on the market position of the parties, the characteristics of the market and the manner in which the MFN clause is implemented. NCAs have also been active in relation to MFN clauses and have adopted different approaches. For example, in the case of price parity clauses used by online travel agents in their contracts with hotels, Germany's Bundeskartellamt has adopted a prohibition decision, whereas the French, Italian and Swedish NCAs pursued a commitments approach.5 In September 2017, the CMA launched an investigation for the use of MFN clauses in price comparison websites in relation to home insurance products.6

QUALITY CONTROL: PROTECTION OF A BRAND IMAGE

LIMITATION TO SELL CROSS-BORDER

The EC is particularly concerned by geo-blocking and launched an investigation in 2017 on bilateral agreements concluded between Valve Corporation and five PC video game publishers.7 The EC is assessing whether their online sales practices prevent consumers from enjoying cross-border choice and buying video games at competitive prices. In June 2017, the EC also opened several investigations into the distribution practices of Nike, Guess, Sanrio and Universal Studios to assess whether they restrict retailers from selling cross-border to consumers within the EU Single Market.8

In addition, in November 2017 the European Parliament, the Council and the EC reached a political agreement on a proposed Regulation to end unjustified geo-blocking for consumers wishing to buy products or services online within the EU.9 The proposed Regulation, which will come into effect at the end of 2018, should boost e-commerce for the benefit of consumers and businesses that take advantage of the growing European online market.

ONLINE MARKET PACES BANS

Can a manufacturer operating a selective distribution system prohibit its authorized retailers from selling its products online via third-party platforms (such as Amazon)? On the specific case of luxury goods, the Court confirmed in the Coty judgment in early December that a selective distribution system aiming at preserving the luxury image of its goods is compatible with Article 101 TFEU as long as the resellers are chosen on objective and uniformly expressed criteria which do not go beyond what is necessary.10

Importantly, the Court confirmed the principle in Pierre Fabre that given their characteristics and nature, luxury goods may require the implementation of a selective distribution system in order to preserve their quality.11

In relation to the question of whether banning the use of third-party platforms for the internet sale of luxury goods is compatible with Article 101 TFEU,  the Court indicated that a prohibition of the kind in Coty was an appropriate means for preserving the luxury image of the goods. The Court then concluded that the prohibition did not go beyond what was necessary to preserve the luxury image of those goods.

The Court, however, did not provide for a general test to be applied on selective distribution networks, nor did it define the scope of luxury goods. Sellers will have to  demonstrate on a case-by-case analysis that the nature of their products deserves the same level of protection as luxury goods in the Coty case, to preserve its image of prestige and the goods' quality.

PRICE COMPARISON TOOLS

Is a restriction on the use of price comparison tools based on objective qualitative criteria? In April 2017, the German Regional Court concluded Asics breached competition law by preventing its retailers from using price comparison tools.12 In January 2017, the CMA also dealt with a ban on listing cars in price comparison tools such as Carwow.

BMW eventually changed its policy and allowed its car dealers to use such websites.13

CONCLUSION

Companies remain generally free to set up the distribution system that best serves them, whether online or offline. However, the investigations launched in 2017 show the EC's increasing focus on the implementation and achievement of the Digital Single Market, and it should be assumed that further sectors will be investigated as regards online  distribution agreements. Accordingly, particular attention should be paid when introducing restrictions that limit the means by which, and the places where, the retailer can distribute the relevant products and services.

Read the 2018 Antitrust Annual Report.

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