Switzerland: Competition Switzerland - Q 3 2011

Last Updated: 18 October 2011
Article by Silvio Venturi and Pascal Favre

On July 11 2011, the Competition Commission ("Comco") closed its investigation against Electrolux AG and V-Zug AG in connection with restrictions on online retailing of household appliances (white goods) by reaching an amicable settlement. The Comco came to the conclusion that the prohibitions on sales via online stores are in principle unlawful and that Internet sales should only be restricted under some very strict conditions. This procedure allowed the Comco to establish guidelines on restrictions to online retailing, drawing on the practice of the European Commission1 and certain member states' national authorities2. The decision also provides guidance on Comco's practice in relation to selective distribution systems.

Content of the amicable settlement

The investigation opened on September 15 2010 was directed against Electrolux AG and V-Zug AG. Electrolux AG had completely forbidden its distributors (be they members of its selective distribution network or not) from selling household appliances online; as for V-Zug AG, it was imposing various restrictions on its distributors regarding such sales. Based on an amicable settlement entered into with the Comco at the end of the investigation procedure, Electrolux AG and V-Zug AG made a commitment to allow retailers who are members of their selective distribution network to trade online, and also (in principle) to do so under a different domain name from the one they use for their physical sales points. The Comco however authorised Electrolux AG and V-Zug AG to impose specific qualitative requirements on online retailing and to oblige their resellers to simultaneously run a physical sales point. The Comco also agreed that Electrolux AG and V-Zug AG may oblige their approved resellers to set up their website so as to make sure their contact details (company name and full address) as well as the addresses of their physical points of sale clearly appear on it and at first glance.

The reasoning of the Comco

The Comco considered that the bans imposed by Electrolux AG and V-Zug AG amounted to unlawful "agreements" affecting competition, despite the fact that such bans could appear as being the result of measures unilaterally imposed by these two manufacturers. As a matter of fact, it is not necessary under Swiss law to have a binding agreement between the parties involved in order to conclude to the existence of an "agreement affecting competition" (cf. Article 4 para. 1 ACart); it is sufficient to prove the existence of some sort of – conscious and intended – cooperation that may objectively affect competition on the market. In this respect, the Comco highlighted the fact that the ban on online sales announced by Electrolux AG and V-Zug AG, if it had been implemented, would have been abided by the "mixed" resellers (that is to say those who are both trading on the Internet and selling goods in physical points of sale), since their refusal to respect the announced prohibitions would have resulted in a cessation of deliveries and, subsequently, in a considerable decline in their turnover.

The Comco denied that the contemplated ban on online trading could fall within the scope of Article 5 para. 4 ACart, which forbids the setting of fixed resale prices (retail price maintenance) and the granting of territories to the extent that sales by other distributors into these territories are not permitted (absolute territorial protection). The Comco indicated in this respect that a restriction on online trading could only be likened to the setting of fixed resale prices in qualified circumstances, notably when the ban on online sales is combined with price recommendations or with agreements that influence the price policy of retailers, or when – in addition to forbidding or restricting the online business – the supplier threatens to exert or actually exerts pressure on the retailers (threats, intimidation, warnings, sanctions, delay or suspension of sales, etc.) so as to ensure that they apply a certain price level. Besides, the Comco reiterated that, according to paragraph 10 of its Notice on the Competition Law Treatment of Vertical Agreements of June 28 2010, sales on the Internet shall be regarded as passive sales and hence that a ban on these sales can fall within the scope of Article 5 para. 4 ACart if the manufacturer agrees with its exclusive retailer to prevent access to its website to customers from outside the designated territory, or if the retailer commits to introducing a system on his website that automatically redirects such customers towards the manufacturer's or another retailer's website, or if the retailer commits to interrupting any transaction on the Internet whenever the credit card of a customer is indicating an address outside the designated area.

The Comco then examined if the ban on online trade could be analyzed as a significant restriction of competition (cf. Article 5 para. 1 ACart), which would not be justified on grounds of economic efficiency pursuant to Article 5 para. 2 ACart. Based upon some recent economic studies, the Comco first pointed out the fairly substantial price differences that can usually be observed between products sold online and those which are sold in physical points of sale. The Comco then indicated that Internet sales significantly increase price transparency, in particular by reducing the costs and the time necessary for a consumer to find a retailer willing to sell him the goods he is looking for ("search cost"). According to the Comco, it is also because of this transparency requirement that the market participants should be forbidden from taking measures that would make the publication on the Internet of online product prices more difficult. Such a transparency, combined with lower prices, has a disciplinary effect on the prices adopted in the physical points of sale and (indirectly) puts pressure on the prices and margins of the manufacturers themselves. The Comco, in consideration of the fact that an outright prohibition (or a restriction) on online sales affects price competition, and after reiterating that a ban on Internet sales shall be construed as a limitation of passive sales pursuant to the Notice on Competition Law Treatment of Vertical Agreements (cf. sections 3 and 12 para. 2 let. c), came to the conclusion that such a ban amounted in this case to a qualitatively significant restriction of competition within the meaning of section 12 (2) of the Notice on Competition Law Treatment of Vertical Agreements. From a quantitative point of view as well, the contemplated ban appeared to be significant: with a cumulated market share of about 50 % of the "large household appliances" market, Electrolux AG and V-Zug AG clearly exceeded the threshold at which restrictions of competition are considered to become significant pursuant to section 13 ( 1 ) of the Notice on Competition Law Treatment of Vertical Agreements (i.e. absence of a significant restriction of competition when none of the undertakings participating in the agreement has a market share in excess of 15%, unless there are several similar parallel vertical distribution networks, in which case the market share threshold is reduced to 5%). Moreover, both companies were envisaging – more or less at the same time – implementing limitations on online sales with a similar object.

After concluding that the contemplated agreement led to a significant restriction of competition, the Comco further examined whether such a restriction could be justified on grounds of economic efficiency according to Article 5 para. 2 ACart. Pursuant to section 16 (4) of the Notice on Competition Law Treatment of Vertical Agreements (which clarifies Article 5 para. 2 ACart), an agreement affecting competition may be justified, inter alia, when it appears necessary to ensure the uniformity and quality of the contractual products or to avoid inefficient levels of sales promotion measures (which can occur when some manufacturers or distributors are able to exploit the sales promotion efforts of other producers or distributors ("free-riding")). In this respect, the Comco considered that the fight against free-riding by online retailers at the expense of the physical points of sale was not a decisive argument. An important part of the customer base of household appliances consists of professional buyers (construction companies, architects, real estate agencies, etc.), who do not need specific advice when placing their orders. Furthermore, the investigation of the Comco revealed that Electrolux AG and V-Zug AG both had about 10 permanent showrooms spread over the Swiss territory, where customers could also obtain information about the products of these manufacturers before placing any order on the Internet. In addition, and most importantly, recent economic studies show that free-riding is not necessarily detrimental to retail shops operators, but rather that retail outlets and online retailing tend to increasingly influence each other to the extent that they appear to be complementary distribution channels. The Comco also pointed out that it seemed doubtful in the case at hand whether an outright ban on online sales would actually be "necessary" in the fight against free-riding since suppliers could for example try to compensate for the additional costs referred to by retailers by paying them a fixed amount. In any event, the Comco left consideration of that issue open since the involved companies made a commitment (in the amicable settlement) to organize their distribution network in such a way as to oblige every approved retailer wishing to trade online to simultaneously run a physical point of sale; such a system ensures that the costs related to the setting up of showrooms and to the provision of expert advice will be borne by all members of the selective distribution network. Finally, the Comco was not convinced by the argument put forward by V-Zug AG according to which the limitation of online retailing helps preventing faulty installation of the concerned household appliances, the former highlighting the fact that retailers doing business exclusively on the Internet may still work with specialised installers in order to guarantee first-class services.

Other guidance on purely qualitative selective distribution

In the course of the investigation, Electrolux AG and V-Zug AG tried to justify the contemplated ban on online sales by submitting that they had actually put in place a "purely qualitative" distribution system, that is to say a distribution system in which the distributors are exclusively selected on the basis of objective and qualitative criteria required by the nature of the product (cf. section 4 (2) of the Notice on the Competition Law Treatment of Vertical Agreements). The Comco took this opportunity to clarify the conditions under which such a distribution system can, in its view, be considered to be a lawful restriction of competition:

  • the selective distribution system must be "required" by the nature of the product (which means that it is necessary in order to safeguard product quality and ensure its correct use);
  • the retailers must be selected on the basis of objective criteria of a qualitative nature, which must be set in a uniform way and applied in a non-discriminatory manner;
  • the set criteria should not go beyond what is necessary;
  • the selective distribution system should neither fall within the definition of a "hardcore restriction" according to Article 5 para. 4 ACart, nor contain a qualitatively significant restriction in the meaning of section 12 (2) of the Notice on the Competition Law Treatment of Vertical Agreements.

Following up on the recent "GABA" case,3 the Comco reiterated that technically complex products – for which advice or assistance are often necessary – are generally well suited for purely selective distribution systems. The Comco however stressed that if a company manufacturing products under different brands wishes to distribute them through different distribution channels and to position them in different price segments, it will then not be possible to justify a selective distribution system only for those products in the highest price segments if the products of the various brands are technically similar and if the way one should use them does not fundamentally differ. The fact for a manufacturer to sell its products in Switzerland through a selective distribution system, contrary to what it does abroad for the same products, will also be considered problematic.

As far as online sales are concerned, following the commitments Electrolux AG and V-Zug AG had made in the amicable settlement, the Comco did not have to address the question of whether or not a retailer selling products on the Internet may be excluded from a purely selective distribution system. Nonetheless, the Comco noted that a manufacturer distributing its products through "discounters" who run physical points of sale (that is retailers whose main selling point is price rather than product display or advice to their clients) would not be lawfully permitted to exclude online retailers from its distribution network. In addition, the Comco specified that an online retailer does not need to personally meet the requirements of the supplier in terms of client advice, delivery, assembly work or customer service, but that these conditions can be fulfilled by setting up collaborations with specialised third parties.

Footnotes

1 Cf. EU Guidelines on Vertical Restraints, 2010/C 130/01.

2 Cf. German Federal Cartel Office, Decision dated 25.9.2009, B 3 – 123/08 – Contact lenses. Eg. French Competition Council n° 08-D-25 of October 29 2008 relating to practices implemented in the sector of cosmetics and personal care products sold under the guidance of a pharmacist.

3 Cf. DPC/RPW 2010/1, p. 65.

Tavernier Tschanz – October 2011

For more information, please contact Silvio Venturi (venturi@taverniertschanz.com) or Pascal G. Favre (favre@taverniertschanz.com), tel. +41 (0) 22 704 37 00.

www.taverniertschanz.com

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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