When Can Protecting The "Customer Experience" Infringe Competition Law?

If a brand owner prevents its authorised resellers from using the internet to make sales, this type of restriction will generally infringe UK or EU competition law.¹

Despite this, competition authorities continue to identify online sales bans, with these types of restriction exposing companies to risks including financial penalties of up to 10% of group worldwide turnover, as well as actions for damages. Under the UK competition law regime, individuals are also exposed to the risk of director disqualification for a period of up to 15 years.

In this article, we take a look at two recent cases where the French competition authority (the "ADLC") fined luxury brand owners for infringing both EU and national competition law by preventing authorised resellers from making online sales. In doing so, the ADLC rejected arguments that these restrictions were necessary to protect the customer experience, as well as the substantial investments made in the brands in question.

These decisions follow an earlier decision by the UK competition authority (the "CMA") in which an absolute ban upon authorised resellers making online sales was also found to infringe UK and EU competition law.

This article considers these cases, together with the customer experience and brand protection arguments that were rejected by the national competition authorities in concluding that the relevant online sales bans infringed competition law.

Rolex France: Luxury watches

In December 2023, the ADLC imposed a fine of more than €91 million after finding that Rolex France's distribution arrangements infringed EU and national competition law.

The infringement resulted from an outright ban that prevented Rolex France's authorised resellers from selling Rolex watches online. This online sales ban was included in Rolex France's authorised reseller agreement, expressed as a prohibition upon sales being made by the authorised reseller either outside of its place of establishment, or by mail order.

In the course of its investigation, the ADLC obtained correspondence sent by Rolex France to an authorised reseller, which confirmed that authorised resellers were not permitted to make sales of Rolex watches by mail order, or via the internet.

While Rolex France disputed that it had in fact imposed an online sales ban, it argued that even if there was such a ban in place this would not restrict competition, particularly as:

• luxury watch brands compete on the basis of their prestige, rather than upon price; and
• consequently, the online sales channel was not appropriate for luxury watches, with only marginal volumes being sold online.

Rolex France also argued that an online sales ban would fulfil a number of legitimate objectives,² including:

• guaranteeing an appropriate level of customer experience – an online sales ban would ensure that the customer experience associated with purchasing a luxury watch was not compromised, particularly given the importance for customers of trying on a luxury watch in an appropriate environment, and the fact that the in-store customer experience cannot be replicated online;
• combatting counterfeiting – given the sophistication of counterfeit products, purchasing a luxury watch in-store from an authorised reseller would guarantee the authenticity of the product;³ and
• protecting the Rolex brand and providing security for consumers – an online sales ban would avoid potential problems that could be detrimental to the Rolex brand, as well as possible security issues when sending luxury watches to consumers.

While the ADLC did not dispute that these could be legitimate objectives, it concluded that an online sales ban was not necessary to achieve these outcomes.

In relation to Rolex France's customer experience arguments, the ADLC noted that Rolex France had already developed a digital strategy to improve its visibility online, and was in the process of developing a certified online pre-owned luxury watch sales programme in collaboration with one of its authorised resellers.⁴

The ADLC considered this approach demonstrated that it was possible for authorised resellers to present Rolex watches online while providing an appropriate level of customer experience.

In addition, while Rolex France did not permit its authorised resellers to make online sales, it had provided its authorised resellers with tools and standards to enable them to create an "e-corner" on their websites that satisfied Rolex France's brand requirements.

The ADLC observed that competing brands offered similar tools to their authorised resellers, and did permit them to make sales of luxury watches online.

As regards combatting counterfeiting, the ADLC noted that luxury products may be accompanied by digital certificates (including those incorporating blockchain technology) to ensure authenticity and traceability, even where those products are sold online.⁵ The ADLC considered that these types of certificates could prevent customers from unknowingly purchasing counterfeit products.

Finally, in relation to protecting the Rolex brand and providing security for consumers, the ADLC considered that Rolex France could have explored various solutions including:

• the use of carriers guaranteeing the security of shipments;
• the use of appropriate insurance; and/or
• the possibility of enabling the in-store collection of products purchased online where customers had concerns regarding security.

De Neuville: Fine chocolates

In February 2024, the ADLC imposed a €2.3 million fine upon De Neuville in respect of an online sales ban that infringed EU and national competition law.

The ADLC held that De Neuville had prevented its authorised resellers in France from freely selling its chocolates online, at both a national and local level, between 2006 and 2019.

The ADLC found that:

• between March 2006 and September 2014, the restriction was included within De Neuville's standard franchise contract and operating manual, which confirmed that:
• De Neuville had exclusivity over mail order and online sales, with De Neuville's prior approval being required for any online posting by an authorised reseller; and
• an authorised reseller could not actively approach a potential customer outside of its allocated territory, and was required to cross-refer any "outside of territory" approach by a potential customer to the authorised reseller "local" to the potential customer; and
• from September 2014 to June 2019, these provisions were removed from De Neuville's standard franchise contract, but De Neuville controlled the ability of its authorised resellers to create websites via the franchisee code of ethics, which referred to De Neuville's exclusivity in relation to online sales. In addition, authorised resellers' websites were subject to De Neuville's prior approval, and any authorisation to sell online was limited to an authorised reseller making sales to customers located within its allocated territory, with a cross-referral system continuing to apply.⁶

The ADLC concluded that these arrangements restricted authorised resellers from making online sales at a national level, and limited their ability to market and sell products online at a local level.⁷

De Neuville argued that customers purchasing its products tended not to compare prices between different resellers, meaning that the online sales restrictions did not have an effect on competition. De Neuville also argued that:

• the restrictions were necessary and proportionate because they were a requisite part of maintaining a franchise network;⁸ and
• the restrictions were justified on the basis that De Neuville had made significant investments in creating its own website, and the restrictions were aimed at maintaining De Neuville's brand image online.⁹

The ADLC rejected these arguments, noting in particular that:

• there was nothing in the nature of a franchise network that required the use of online sale restrictions; and
• the restrictions were not necessary and proportionate to maintaining De Neuville's brand image online.¹⁰

Ping: Golf clubs

In August 2017, the CMA concluded that Ping had imposed an absolute ban upon its authorised resellers in the UK, preventing them from selling Ping's golf clubs online.

The CMA found that this online sales ban infringed UK and EU competition law, and imposed a fine of £1.45 million (subsequently reduced to £1.25 million on appeal by the Competition Appeal Tribunal, with this reduced fine confirmed on appeal by the Court of Appeal).

For Ping, the online sales ban was intended to ensure that customers received in-person custom fittings of its golf clubs prior to making a purchase. Ping argued that if the online sales ban was removed, then fewer customers would receive in-person custom fittings, which would mean that customers would not play their best golf, and they would not be "happy with their clubs or with Ping" as a result.¹¹

Ping argued that the online sales ban was necessary for achieving certain commercial goals, including:

• promoting custom fitting – Ping asserted that it was focused on customisation, with the ban being "a fundamental part of the goods that Ping sells", given that custom fitting improved quality and choice;
• protecting Ping's brand image – Ping argued that protecting its reputation as a manufacturer of customised golf clubs was a legitimate aim, suggesting there was a significant risk to its brand if customers received incorrectly fitted clubs when purchasing online; and
• preventing free-riding – Ping emphasised the investments made by its authorised resellers in custom fitting, and argued that the online sales ban was required to ensure that authorised resellers were adequately incentivised to make these investments. In this context, Ping suggested that in the absence of the online sales ban, it would be possible for customers to obtain a custom fitting in-store, and then proceed to order Ping's golf clubs online, which would make investing in custom fitting commercially unsustainable for its authorised resellers.¹²

The CMA considered that, in principle, the promotion of in-person custom fitting services was a legitimate goal. However, the CMA found that this goal could be achieved using less restrictive measures, and the online sales ban was therefore necessary to pursue this.

The CMA noted that Ping could permit authorised resellers to make sales online where they were able to demonstrate their ability to promote in-person custom fitting services online, which was the approach that Ping had adopted in the United States.¹³

In this context, the CMA provided illustrative examples of the types of requirements that Ping could lawfully impose upon authorised resellers when permitting them to make sales online. These included:

• a requirement for authorised resellers to promote in-person custom fitting services online by displaying a prominent and clear advisory notice strongly recommending that customers take advantage of in-person custom fitting services before making their purchases;
• a requirement for authorised resellers' websites to display a certain range of custom fit golf club options to customers (e.g. in "drop-down" boxes), with Ping's authorised resellers then being able to decide whether to make this level of investment so as to be able to make sales online;
• a requirement for authorised resellers' websites to have interactive features that provide an opportunity for personal advice, with authorised resellers required to promote custom fitting prior to any purchase – this could include an obligation for authorised resellers to promote custom fitting using 'live-chat' technologies, with authorised resellers required to ensure that customers can have a personal conversation online and obtain advice before making an online purchase; and
• a requirement for authorised resellers' websites to have a mandatory "tick box" for customers to confirm that they understand: (i) the importance of custom fitting; and (ii) the risks of purchasing Ping's golf clubs without having a custom fitting, before being able to purchase online.¹⁴

Customer experience and brand protection arguments are very unlikely to justify online sale bans

These cases serve to emphasise the significant competition law compliance risks associated with online sales bans, and the considerable challenges businesses face in attempting to justify such bans by reference to customer experience and/or brand protection arguments - even where the products are luxury products, or products that it may be preferable for customers to "try before they buy".

Businesses should therefore carefully assess their existing arrangements with resellers to ensure that:

• these do not impose the types of restrictions that may be expected to infringe UK or EU competition law, having in mind the difficulties in seeking to rely upon customer experience and/or brand protection arguments to defend direct or indirect bans on resellers using the internet to make sales; and
• any restrictions included within these arrangements are compatible with UK and EU competition law, having regard to the case law, decisional practice, and guidance addressing the application of UK and EU competition law to specific restrictions intended to enable the effective functioning of brand owners' distribution networks.

If you have any questions or concerns about how UK or EU competition law applies to your commercial arrangements, please contact Gowling WLG's EU, Trade & Competition team.

Footnotes

1 If such a restriction is objectively necessary to implement a specific distribution agreement (e.g. to ensure compliance with a defined legal requirement that prevents certain sales being made online for reasons of safety or health), then such an agreement may exceptionally fall outside the scope of UK and EU competition law.

2 ADLC Decision No. 23-D-13 of 19 December 2023 relating to practices implemented in the luxury watch distribution sector (the "Rolex Decision"), paragraph 279.

3 The Rolex Decision, paragraph 285.

4 The Rolex Decision, paragraph 308.

5 The Rolex Decision, paragraph 304.

6 ADLC Decision No. 24-D-02 of 6 February 2024 relating to practices implemented in the chocolate distribution sector (the "De Neuville Decision"), paragraph 235.

7 The De Neuville Decision, paragraph 86.

8 The De Neuville Decision, paragraph 238.

9 The De Neuville Decision, paragraph 239.

10 The De Neuville Decision, paragraph 239.

11 Online sales ban in the golf equipment sector, Case 50230, 24 August 2017 (the "Ping Infringement Decision"), paragraphs 4.114 to 4.135.

12 The Ping Infringement Decision, paragraphs 4.84 to 4.92.

13 The Ping Infringement Decision, paragraph 4.118.

14 The Ping Infringement Decision, paragraphs 4.120 to 4.135.

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