EU Commission eyes revamp of vertical restraints regulations for the digital marketplace
In May 2019, the European Commission closed its consultation on the Vertical Restraints Block Exemption Regulations (“the VBER”), which govern the assessment of supply and distribution arrangements and the restrictions that these may contain (e.g. exclusivity provisions, territorial restrictions, pricing, and the operation of selective distribution systems) under EU competition law. The VBER provides a safe harbour from competition law restrictions where certain criteria are met.
The current VBER date from 2010 and are due to expire in 2022. The development and expansion of online market places since 2010 means that the VBER (and their accompanying Guidelines) frequently have little to say on certain issues and challenges that brands now face. It has been left to case law and action by national competition authorities to plug the gaps, which is cumbersome and has led to divergence of application of EU law across the Member States.
The Commission stated that it will seek to address such issues when reviewing the VBER. Notably, it intends to address the use of most favoured nation clauses and the operation of selective distribution systems, particularly in the context of online sales and market places (i.e. eBay, Amazon).
Public consultation on the Vertical Block Exemption Regulation: brand battle lines are drawn
The Commission published responses to its consultation which had targeted a variety of stakeholders, including brands, industry associations, distributors, online marketplaces and law firms. Although more luxury brands and associations engaged in the consultation than online marketplaces and distributors, the responses highlight the tensions between brands and the online marketplaces.
The key concerns raised by the brands can be broadly broken into four themes:
- The necessity of the VBER and guidelines: Brands broadly agreed that the VBER and guidelines are valuable and should be renewed rather than removed.
- Online sales restrictions: A number of the responses highlight a divergence in the approach of national competition authorities to restrictions on the on-sale of luxury goods following the CJEU’s Coty decision. Some of the respondents suggested that the clarifications provided in Coty should be integrated into the VBER and guidelines in the form of an exemption for selective distribution systems for luxury goods in appropriate circumstances, and an express acknowledgment that contractual clauses which prohibit distributors from using third-party digital sales platforms should not be considered a restriction by effect.
- Modification of the Resale Price Maintenance (RPM) and dual-pricing guidelines: Brands also highlighted the importance of investment in bricks and mortar and the difficulties they face with incentivising such investment without an option to dual-price, and called for clarification on when dual-pricing may be appropriate (currently it is a hardcore restriction).
- More flexibility around selective distribution use and criteria: Again with reference to Coty, brands asked for more clarity and flexibility regarding the qualitative criteria which can be used as part of a selective distribution network. Distributors and online market places, meanwhile, called for clarification around what is meant by “luxury”.
A staff working document is planned for Q2/2020, which will provide the Commission’s view and assessment of the current framework and any proposed changes.
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 implementing distribution arrangements which, between 1 January 2014 until 31 October 2017, unlawfully prevented distributors from:
- using the Guess brand names and trade marks for online search advertising;
- selling online without first obtaining specific authorisation from Guess, which Guess had full discretion to either grant or refuse;
- selling outside the authorised distributors’ allocated territory;
- cross-selling among authorised wholesalers and retailers; and
- determining their resale prices independently.
A key part of Guess’ e-commerce strategy was restricting 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).
The Commission found that these terms created a restriction of competition ‘by object’, meaning that the Commission did not have to identify the specific effect of them on the market to find them unlawful. However, the Commission did determine 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.
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.
Brand owners beware: agreements restricting bidding on search terms may be anticompetitive
Following the Commission’s Guess decision, it has made it clear that such practices are likely to face increased scrutiny. Thomas Kramler, the head of a Commission unit responsible for e-commerce, told an antitrust conference in Washington DC in March 2019 that restricting bidding for online advertising was becoming a ‘space to watch’ and ‘something that antitrust authorities will have to grapple with going forward’.
In the Guess case, the Commission did not accept Guess’ argument that the need to protect their brand image provided a legitimate objective for the restrictions, as Guess themselves had entered into the agreements with distributors and therefore had accepted that the distributors would sell their products.
I-800 Contacts: restriction between rivals
A decision by the US Federal Trade Commission (the “FTC”) against online contact lens retailer 1-800 Contacts, in November 2018, revealed that brand owners may also be sanctioned for entering into agreements which restrict bidding on search terms amongst competitors. 1-800 Contacts had entered into settlement agreements with its rivals whereby the companies agreed not to bid on keyword search ads related to their rivals’ trade mark terms. Such practices were deemed by the FTC to be ‘restrictions on a consumer’s opportunity to see a competitor’s ad in the first place.’
The FTC did not accept 1-800 Contacts’ argument that the agreements were entered into with the object of preventing future trade mark litigation and so provided a legitimate justification for their anticompetitive behaviour, as they saw no reason why 1-800 Contacts could not have explained, in a brief statement placed beside the advertisement, that the ad sponsor was in no way affiliated with the company.
How to protect your brand
Although 1-800 Contacts has appealed, so it remains to be seen if the FTC’s decision will stand, the Guess and 1-800 Contacts decisions, combined with Thomas Kramler’s comments, display an appetite amongst competition authorities to clamp down on anticompetitive agreements which restrict bidding for search terms. This is part of a wider initiative by the Commission and national competition authorities to challenge any provisions which appear to restrict online selling by distributors and retailers.