People shop online more often. Not only because it’s more comfortable but also (or mainly) because online it’s easier to find the best price for the specific product. For the same reason, for the suppliers, online sales may be a nightmare. Consequently, they often ask: “what can I do about it?” To be honest, not much. And be careful trying.
1. Price restrictions
Jack is new in the sales team of a company producing bamboo toothbrushes. His boss complains about the low prices of these toothbrushes on the Internet, much below the prices in the ‘brick-and-mortar’ locations. His boss has a problem because some of the clients (distributors) complain about the competitive prices online. Jack, who wants to show his boss a positive attitude, has a brilliant idea: ‘let’s impose the minimum resale price on all our distributors! In this way, there won’t be competition between them and they will all stay calm!’ Yes, you guessed it: Jack’s solution is a definite no-no, severely prohibited by the EU law.
The suppliers must not limit sales online by imposing the minimum (or fixed) resale prices on their products. It’s one of the principal rules of the EU competition law, set forth in art. 101 (1) TFUE and in art. 4 point a) of the Regulation EU 330/2010. In fact, restricting prices is so bad it was excluded from the exemption provided in the above-mentioned Regulation EU 330/2010 for vertical agreements (like those between the supplier and distributor) which are supposed to be normally less harmful for the competition than horizontal agreements (for example those between two suppliers).
What is allowed? You may recommend a price or impose a maximum sales price (when the market share of each of the parties do not exceed a 30% threshold): as it is believed to favour the consumers. Of course, the shops, including the online shops (distributors) must remain free to sell below such prices. It’s worth noting you can’t get around these provisions by encouraging the distributors to sell on or above a certain price through related discounts, other profits or penalties. The choice of the distributor to sell at lower prices must remain unrestricted in any way.
2. Territory restrictions
When his boss explained to Jack the problem of price-fixing, Jack wasn’t going to give up. After a while he came up with a new solution: ‘why don’t we tell our distributors they can sell only in one country, for example only in Germany or only in Spain etc.? It would at least limit the complaints of distributors in other countries and maybe it would even make such sales online impossible as today it’s difficult to sell online only within one country’.
Unfortunately, Jack was wrong once again. His idea, if executed, could have cost the company high penalties. You can’t limit sales online by restricting the territory in which a distributor may resell your products within the European Economic Area. Such a restriction is considered highly harmful to the competition (see art. 4 point b) of the Regulation EU 330/2010).
Restricting the territory is allowed only in the following cases, as indicated in art. 4 point b) of the Regulation EU 330/2010:
- the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer. This restriction concerns cases when the supplier assigns certain territories exclusively to certain distributors. For example, the company of Jack may assign sales of toothbrushes within the territory of Poland exclusively to Rossmann SDP. Sp. z o.o. and within the territory of Italy exclusively to Tigotà (and precisely its owner Gottardo s.p.a.). In such a case, the company of Jack is entitled to prohibit sales of their toothbrushes by other distributors within the territory of Poland and Italy. In fact, the right of all distributors to sell everywhere in the European Economic Area (EEA) would erase the possibility of granting exclusive territories to some distributors, hindering commercial relations.
However, there’s a catch! It is never possible to restrict so-called “passive” sales within other territories, which, in contrast to “active” sales, means selling to unsolicited customers (when customers want to buy from a distributor without that distributor having sent any e-mails or other publicity within the restricted territory). Accordingly, for example, preventing customers located in one territory from accessing a distributor’s website in the restricted territory or automatically displaying another distributor’s website in the ‘right’ territory may be considered as restricting competition;
- the restriction of sales to end users by a buyer operating at the wholesale level of trade;
- the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system. The selective distribution system is applied when a supplier requires that its distributors fulfil certain requirements to adequately represent the products: specifically trained staff, particular exclusive look (maybe even constructed with or following the specific instructions of the supplier) and other service requirements. The supplier may thus choose to sell the products only to such distributors and prohibit selling them to other distributors that do not meet the required criteria. In this case, the passive sales prohibition seems to be allowed.
To understand better the selective distribution systems, take into account they are typically used to ensure an ‘aura of luxury’ at the point of sale. Indeed, according to CJEU selective distribution systems must satisfy four conditions: ‘first, that the characteristics of the product in question necessitate a selective distribution system, in the sense that such a system constitutes a legitimate requirement having regard to the nature of the product concerned, in particular its high quality or technical sophistication, in order to preserve its quality and ensure its proper use […]; secondly, that resellers are chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion […]; thirdly, that the system in question seeks to achieve a result which enhances competition and thus counterbalances the restriction of competition inherent in selective distribution systems, in particular as regards price […]; and, fourthly, that the criteria laid down do not go beyond what is necessary […]’;
- the restriction of the buyer’s ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier.
3. Ban on selling online in general
In his last desperate attempt to find a solution, Jack proposed to the boss that, ‘if the previous restrictions are prohibited, maybe they could simply prohibit selling their products online, either through the distributor’s own website or on online platforms and marketplaces such as Amazon and eBay. It should be possible, right? RIGHT?’
Ehhh Jack this one is tricky. In fact, the CJEU has not ruled clearly on the possibility to ban online selling in general nor does it emerge clearly from the EU provisions in force. However, the risk the national competition authorities impose fines on companies prohibiting sales online is high.
For example, in the UK the Court of Appeal confirmed the unlawfulness of the ban on online sales in its fairly recent judgement. In particular, it upheld earlier decisions from the UK’s Competition and Markets Authority (CMA) and Competition Appeal Tribunal (CAT) in the Ping case. The latter’s policy prohibited Ping’s authorised dealers from selling the golf clubs it manufactured online. Ping operates a selective distribution network of 1,200 authorised dealers throughout the United Kingdom some with premises located on golf courses and some on the high street. It argued that it regarded online sales as anathema to its focus on custom fitting. However, the Court of Appeal said that such a policy breached competition laws as it constituted ‘a restriction of competition by object’ which was not ‘objectively justified’. In particular, according to the Court of Appeal ‘as anyone who has ever played a round of golf will be able to attest, the clubs that are used can hugely affect the quality of the game played. As Ping’s ISP states, it believes that it is fundamental to the process of selling its clubs that the consumer is “custom-fitted to ensure they receive clubs that are custom-built to their own specifications”. It does not, however, follow in my view that that desirable objective requires the imposition of a complete ban on internet sales. Some customers may, for example, already know their personal specifications after a recent dynamic custom fitting and wish to buy a second or third set of clubs online. Others may wish to buy a set of Ping clubs as a gift for someone whose essential data are known. There are many ways in which Ping’s objective can be substantially fulfilled without imposing a blanket ban on internet sales’.
In the context of the above judgement, it must be noted that in 2017 CJEU issued a judgement according to which ‘Article 101(1) TFEU must be interpreted as not precluding a contractual clause, such as that at issue in the main proceedings, which prohibits authorised distributors in a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for the internet sale of the contract goods, on condition that that clause has the objective of preserving the luxury image of those goods, that it is laid down uniformly and not applied in a discriminatory fashion, and that it is proportionate in the light of the objective pursued, these being matters to be determined by the referring court’ (see Coty v. German business Parfümerie Akzente).
Therefore, it is possible to limit sales online on third-party platforms (such as Amazon or eBay) in case of the selective distribution system, where it is necessary to preserve the luxury image of the products. This is because ‘the internet sale of luxury goods via platforms which do not belong to the selective distribution system for those goods, in the context of which the supplier is unable to check the conditions in which those goods are sold, involves a risk of deterioration of the online presentation of those goods which is liable to harm their luxury image and thus their very character’. In that context, it seems (and was interpreted in this way also by the English Court cited above) that such a restriction is not allowed in case of online sales directly on the websites of the selected distributors.
4. Penalties
Violating competition laws in the EU may cost a lot, even up to 10% of the overall annual turnover of the infringing company. Note also that the 10% limit may be based on the turnover of the group to which the company belongs if the parent of that group exercised decisive influence over the operations of the subsidiary during the infringement period. Click here to read more on fines’ calculation.