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Guess fined €39m: A warning for businesses franchising or distributing products in the European Union

Posted on 09 January 2019

Guess fined €39m: A warning for businesses franchising or distributing products in the European Union

On 25 January 2019, the European Commission published its Decision of 17 December 2018 fining clothing brand Guess €39.8 million (following a 50% reduction) for breaches of competition law, because its distribution arrangements unlawfully prevented distributors from:

  1. using the Guess brand names and trade marks for online search advertising;
  2. selling online without first obtaining specific authorisation from Guess, which Guess had full discretion to either grant or refuse, with no specified quality criteria for deciding whether or not to grant an authorisation;
  3. selling to end users located outside the authorised distributors’ allocated territory;
  4. cross-selling among authorised wholesalers and retailers; and
  5. determining their resale prices independently.

The infringement lasted from 1 January 2014 until 31 October 2017.

A key instrument used by Guess to implement its e-commerce strategy, and to control the expansion of online sales by its independent distributors, was to restrict the use of the Guess brand names and trade marks, in particular in Google AdWords.  Guess sought to maximise traffic to its own website at the expense of distributors by systematically banning its authorised retailers, both mono-brand and multi-brand retailers, from using or bidding on Guess brand names and trade marks as keywords in Google AdWords in the EEA (the only exception appears to have been in the UK with respect to official resellers).  Interestingly, the Commission found that the restriction preventing authorised distributors from using the Guess brand names and trade marks for the purposes of online search advertising was a restriction of competition 'by object' such that it did not have to identify the specific effect of this restriction.

The distribution arrangements included restrictive provisions prohibiting, amongst other things, the solicitation of customers outside the allocated territory (active sales restrictions) and preventing, or providing disincentives to, purchases from other network members (passive sales restrictions). Such restriction of sales between authorised distributors within a selective distribution network will constitute a breach of competition law as a restriction of competition by object.

The Commission determined that Guess' activities allowed it to partition European national markets, observing that retail prices of Guess products were on average 5-10% higher in Central and Eastern European countries than in Western Europe. Guess' agreements restricted or distorted competition within the EU single market because they deprived European consumers of a key benefit - the opportunity to shop across borders for better deals and more choice.

Throughout its Decision, the Commission referred to Guess' internal documents and emails, which it found clearly stated its objectives and strategy. This demonstrates that internal documents will be closely scrutinised when assessing potentially anticompetitive conduct.

Guess obtained a 50% reduction in the fine for co-operating with the investigation. In particular, it notified the Commission of a further restriction of competition, provided additional evidence representing 'significant added value' over the evidence the Commission had gathered, and expressly acknowledged the infringement, all of which resulted in administrative efficiencies.

The huge fine, even taking into account the reduction, is a timely reminder for all businesses that appoint distributors or franchisees in the EU that their agreements and practices must comply with EU competition law. The Commission's 2017 report into the e-commerce sector uncovered that more than one in ten surveyed retailers experienced cross-border sales restrictions in their distribution agreements, so these practices are not uncommon. Franchisors and suppliers should review their EU agreements and practices for compliance and, in particular, should not restrict distributors or franchisees from:

  • Selling online without their prior authorisation without demonstrating a justification for doing so, which the Commission has set out will be difficult to do. We continue to see franchise and distribution agreements which give to the supplier/franchisor full discretion to authorise online sales. The Commission has sent a clear message that all suppliers/franchisors should have specific quality criteria on which any such decisions are based (and should not require higher standards than those employed on the website of the franchisor/supplier) and should not arbitrarily refuse to permit EU franchisees/distributors' websites.
  • Responding and selling to unsolicited requests/orders from consumers outside their allocated territory. EU law has been clear on this issue for some time; suppliers/franchisors cannot restrict authorised retailers from fulfilling passive (unsolicited) orders from outside their territory or, in a selective distribution system, from supplying to other retailers/wholesalers within the system. These rules have been further strengthened by the Geo-blocking Regulation which became effective on 3 December 2018 and prohibits geo-blocking or any other geographically-based restriction which inhibits cross-border sales and online shopping. The Regulation does not prohibit restrictions on active sales outside an authorised distributor/franchisee/retailer's territory but such restrictions still need to comply with EU competition rules, and the Commission determined that Guess' restrictions did not do so.
  • Using trade marks for online search advertising. Such activities can be restricted, for example, through brand guidelines but any restrictions must be compliant with EU competition rules.
  • Deciding the retail price at which they sell their products. Other than in exceptional circumstances, such as a short discount campaign across a franchise network or to facilitate authorised retailers promoting a new product, resale price maintenance is outlawed.

Resale price maintenance takes many forms such as fixing prices, setting minimum prices, controlling discounts that can be given or the margins that retailers can make. The fine against Guess follows hot on the heels of fines ranging from €7.7m to €63.5m imposed by the Commission in July 2018 on Asus, Denon & Marantz, Philips and Pioneer who had engaged in resale price maintenance practices. These practices typically involved the suppliers using software tools to monitor online resale prices or being informed about discounting retailers by non-discounting retailers and the suppliers then asking the discounting retailers to raise their price and threatening or sanctioning those that would not do so.

Threatening, refusing to supply or using other sanctions against distributors or franchisees that do not follow resale price recommendations or which discount can all be forms of resale price maintenance. Sales/account management teams should be trained to avoid these types of activities and resale price monitoring should also be handled and used with great caution.

In addition to facing fines from the Commission, any business infringing competition rules also runs the risk of a damages claim from any person or company affected by their anticompetitive behaviours. There is a continuing rise in the number of such actions being taken against those that breach competition law.

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