Platform bans under competition law – a German perspective

Digital transformations in commerce steadily increase the variety and availability of products and give consumers access to retail offers beyond geographic boundaries on a 24/7 basis. While the increase of e-commerce might enhance inter- and intra-brand competition, it heavily impacts the traditional retail landscape. Brand manufacturers suffer from less price stability and retailers find it increasingly difficult to profitably sell branded goods through their brick and mortar sales channels, which may even lead to a delisting in certain circumstances. These challenges place brand manufacturers and the brick and mortar retail sector in the same boat.

The dilemma

The German Federal Cartel Office (FCO) has traditionally followed a restrictive competition policy in relation to online sales restrictions, in effect leaving the interplay between online and offline distribution channels to consumers’ shopping preferences. In particular, the FCO has so far refused to accept that a profitable distribution of branded goods via brick and mortar outlets requires the effective support of these sales through a pricing structure capable of competing with often cheaper online prices. The support proposed by the FCO to remedy the dilemma came in the form of a flat fee paid by suppliers for retailers’ additional infrastructure costs for their physical outlets. However, this proved to be too out of touch with the economic realities, and therefore unattractive to most brand manufacturers, and so it has rarely been applied. At the same time, the FCO made it very clear on several occasions (in particular when dealing with the distribution strategies of Dornbracht, Gardena and Bosch Siemens Hausgeräte a few years ago) that it is unwilling to accept suppliers’ support of brick and mortar sales to reflect actual sales volumes. The FCO considers that the granting of rebates or bonus schemes to retailers which ultimately privilege sales via physical stores amounts to a severe competition infringement unless the same rebate or bonus is also available for online sales. Needless to say, granting equivalent advantages for both online and brick and mortar sales will not work to make brick and mortar prices more competitive.

Resale price maintenance won’t fix the problem

The lack of remedies effectively supporting brick and mortar sales has created the need for brand manufacturers to challenge price erosion in alternative and more indirect ways. Recent enforcement action by the European Commission and the FCO clearly demonstrates that resale price maintenance (RPM) is more than ever subject to a “no tolerance policy” at both the EU and German level, in particular where RPM serves the purpose of restricting online sales activity.

The European Commission recently imposed fines totaling approximately €111 million on a number of electronics manufacturers that made use of software to monitor retailers’ prices for the manufacturers’ products and, in case of non-compliance with their price recommendations, urged the retailers to observe them. The FCO has an impressive track record when it comes to enforcing and sanctioning RPM activities (whether in the context of online sales restrictions or otherwise) and RPM will most likely remain a strong focus of the German regulator’s enforcement policy.

What about banning third-party platforms?

With the long-awaited court decisions in the landmark Coty and ASICS cases, one would have expected a clear answer to this question, at least in relation to selective distribution systems. The compatibility of marketplace bans with German and EU competition rules was the subject of the Coty case whereas bans on price comparison sites and keyword advertising was dealt with in ASICS. In particular, in Germany (the home jurisdiction in the Coty and ASICS cases) there is greater than ever uncertainty as to whether or not third-party platforms can lawfully be banned. This uncertainty mainly stems from a clear tension between the more liberal approach toward marketplace bans within selective distribution systems found in the competition policy of the European Commission and the still far stricter approach adopted by the FCO.

Marketplace bans in the light of Coty

In the Coty proceedings both the European Court of Justice (ECJ), in its preliminary ruling of December 6, 2017, and the Higher Regional Court of Frankfurt am Main, with its decision of July 12, 2018, found that a prohibition of sales via online marketplaces under a selective distribution system does not in itself constitute a hardcore restriction of competition under European and German competition rules, at least where a brand manufacturer succeeds in establishing that the ban serves the purpose of protecting the brand’s luxury image. The main argument was that marketplace bans do not prevent, or severely restrict, online sales – the retailer is still free to sell the products via its own website or market them through other online platforms. Accordingly, following Coty, marketplace bans are block exempted under the Vertical Block Exemption Regulation (VBER) where the relevant parties’ market shares do not exceed 30% each.

Bans on price comparison sites and keyword advertising pursuant to ASICS

The view that Coty might also apply to the competition assessment of suppliers’ bans of sales on platforms other than online marketplaces, does not stand up to scrutiny. It was only a week after the Coty judgment was handed down that the German Federal Supreme Court (Bundesgerichtshof) adopted its decision in ASICS. ASICS, a sports clothing and footwear manufacturer, had not only prohibited its retailers from advertising ASICS sports shoes via price comparison sites, but also from using the brand for keyword advertising. In ASICS, the German Federal Supreme Court confirmed in full the FCO’s prohibition against ASICS, in that these restrictions were considered a hardcore restriction of competition under the relevant provision of the VBER, Article 4(c). In contrast to Coty, it was found in ASICS that the relevant bans in effect excluded retailers from such a substantial portion of online sales and marketing activities so that the bans imposed by ASICS were to be treated as an unlawful general ban of online sales.

So does the competitive assessment depend on the platform type?

In the view of the FCO, the answer seems to be a “no,” although Coty and ASICS suggest otherwise. The FCO also considers Coty to be of very limited relevance in cases where the ban relates to online marketplaces (as in Coty). The FCO points to the results of the European Commission’s sector inquiry into e-commerce in justifying why the marketplace bans should be scrutinized more closely in Germany than in other parts of the EU or than at EU level. According to the European Commission’s final report, in 2016, Germany’s retail market was worth €500 billion and 62 percent of German retailers said they used online marketplaces. At the same time, with a share of 32 percent, Germany was reported to be the EU member state in which the highest proportion of retailers experienced marketplace restrictions. In the view of the FCO, it follows from this data that the effect on competition is more severe in Germany than elsewhere in the EU; in other words, the same law renders different results due to differing market conditions. The FCO continues to emphasize that Coty has only “limited effects” on its ongoing investigations into brand owners’ restrictions on retailers’ marketplace sales, in particular where these restrictions apply to small and medium-sized retailers.

Outlook for Germany

Today, brand manufacturers in Germany still face a situation where there is a very low degree of legal certainty in relation to marketplace bans. The president of the FCO, Andreas Mundt, recently expressed concern that allowing brand manufacturers to ban sales of small and medium-sized retailers via online marketplaces is likely to result in an online retail landscape dominated by three groups of players: (1) the big platforms, (2) large retailers and (3) brand manufacturers engaging in direct sales. Indeed, these concerns, together with the FCO’s recent announcement that e-commerce will be subject to an even more targeted enforcement in Germany in the coming years, underscore the FCO’s restrictive competition policy in the area of online sales restrictions.

By contrast, Advocate General Wahl, who provided the opinion to the ECJ for in its preliminary ruling in Coty, re-emphasized at a conference in September 2018 that the legal assessment underlying Coty might also be applied to branded goods outside the luxury space, a view shared by the European Commission (see, for example, its Competition Policy Brief of April 2018).

How Reed Smith can help

Despite the fact that both the Coty and ASICS judgments provide guidance on specific questions of applicable competition law, there remains a significant degree of legal uncertainty when it comes to a risk assessment of platform bans in Germany. In light of the diverging views adopted by the FCO and the European Commission, it cannot be certain that a uniform European approach toward these issues will be reached in the near future.

Reed Smith’s Competition & Regulatory team will gladly provide you with legal advice on how to adopt distribution strategies that effectively solve the dilemma outlined above in a way that is compliant with competition rules, while ensuring that you can take full advantage of your legal options in matters relating to distribution.

Updates to China’s anti-corruption regime

The first half of 2018 saw a number of significant changes to the Chinese anti-corruption regime, including amendments to the Anti-Unfair Competition Law and formation of new anti-corruption regulatory bodies. Amidst an anti-corruption campaign in China that continues to gain traction, companies operating in the country should continually evaluate whether current business models run afoul of the latest regulations. Read here for our summary of the key changes to the anti-corruption landscape and the implications for multinational corporations operating in China.

Iran sanctions: United States reimposes sanctions and the EU responds

In the early hours of Tuesday, 7 August 2018, and as foreshadowed by President Trump’s announcement on 8 May 2018, the United States reimposed certain secondary sanctions on Iran, being those which apply to non-U.S. persons. The imposition of these sanctions follows the conclusion of a 90-day wind-down period and, as mentioned in our previous blog post, will impact (among other things) trade in graphite, raw or semi-finished metals and the Iranian automotive sector. Importantly, the new Iran sanctions permit the U.S. government to impose sanctions on non-U.S. persons who provide significant support to those acting in violation of the sanctions. Note that a second wind-down period expires in early November, at which time further secondary sanctions will be reimposed, affecting, among other things, shipping, the petroleum and petrochemical industry, and insurance.

The new Executive Order signed by the President, however, makes clear that the sanctions do not apply to any person conducting or facilitating a transaction for the provision or sale of agricultural commodities, food, medicine, or medical devices to Iran. Additionally, the Frequently Asked Questions published by the Office of Foreign Assets Control reiterate that the sale of agricultural commodities, food, medicine and medical devices is not sanctionable provided no designated parties are involved.

Just hours after the sanctions came into effect, President Trump tweeted that “[a]nyone doing business with Iran will NOT be doing business with United States.” We therefore expect the United States to actively enforce violations of these sanctions.

In response, the EU has now activated its so called ‘blocking’ Regulation, with a view to supporting the continuation of the Joint Comprehensive Plan of Action. The EU is seeking to ensure that Iran adheres to its nuclear-related obligations under that agreement and to encourage EU companies to continue to do business in Iran. One of the key aspects of this legislation is that it makes it a breach of EU law to stop doing business with Iran if you take that step in order to comply with the U.S. secondary sanctions.

The potential result is that EU companies, including shipping companies, banks, trading houses and others, may be faced with a choice of continuing to do certain business in Iran at the risk of breaching U.S. law, or refraining from doing such business at the risk of breaching EU law.

The Reed Smith sanctions team, with lawyers experienced in advising on both the U.S. and EU positions, are on hand to help you navigate these potentially mutually exclusive obligations.

Iran Sanctions Update: August implementation deadline is approaching, are you ready?

President Trump announced that the United States would withdraw from the Joint Comprehensive Plan of Action (JCPOA) on 8 May 2018. In conjunction with that announcement, the president issued a National Security Presidential Memorandum directing the re-imposition of certain secondary sanctions, being those that apply to non-U.S. persons even where there is no U.S. nexus. Depending on the economic sector targeted, the particular sanction will be imposed either 90 or 180 days after the president’s announcement (and so, on 6 August or 5 November 2018).

Implementation of the first batch of sanctions is rapidly approaching. On 6 August, the United States will re-impose the following secondary sanctions that were lifted as part of the JCPOA:

  • Sanctions on the purchase or acquisition of U.S. dollar banknotes by the government of Iran
  • Sanctions on Iran’s trade in gold or precious metals
  • Sanctions on the direct and indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminium and steel, and software for integrating industrial processes
  • Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in Iranian rials
  • Sanctions on the purchase of, subscription to, or facilitation of the issuance of, sovereign debt
  • Sanctions on Iran’s automotive sector

Note, however, that the sanctions will also apply to the provision of associated services. By way of example, a person or entity providing indirect financing or transportation to Iran’s automotive sector would also face potential exposure to secondary sanctions. Shipping companies, therefore, need to be mindful of these changes.

To the extent that you are a non-U.S. person involved in activities falling into any of the above categories, you should urgently seek advice as to how the secondary sanctions may impact your business, as failure to wind down any such activity by 6 August 2018 may be a breach of the secondary sanctions. To the extent that you are an EU person, your position may be further complicated by the EU’s so-called Blocking Regulation, which is anticipated to take effect in early August in order to meet the 6 August 2018 deadline. Be sure you understand your obligations pursuant to this legislation, as well.

DOJ and State AGs clash in Emoluments Clause arguments

On June 11, 2018, arguments were held in Maryland District Court in the challenge brought by the D.C. and Maryland attorneys general over the president’s alleged violation of the Emoluments Clause of the Constitution.
In Maryland v. Trump, D.C. Attorney General Karl Racine and Maryland Attorney General Brian Frosh have challenged President Donald Trump’s continued operation of and profit from his downtown Washington hotel, which they say violates the constitutional prohibition against the president receiving emoluments from foreign governments. The Justice Department filed a motion to dismiss the case, which was the subject of the day’s arguments.

At issue was the definition of an emolument, with the Justice Department arguing that only favors given in return for the initial benefit count, and the members of the AG offices arguing that any profit, gain or advantage given to the president by a foreign government would violate the clause.

Following each party’s conclusion, U.S. District Judge Peter J. Messitte told the courtroom that he expected to issue a decision on the motion by the end of July, and that he appreciated the opportunity to address a constitutional issue of first impression.

Deferred prosecution agreements introduced in Singapore

Following the much-publicized US$422 million trilateral Keppel Offshore & Marine resolution, Singapore has introduced a DPA framework. The resolution was reached in late 2017 to settle anti-corruption charges posed by regulators in the United States, Brazil and Singapore. As part of the resolution, KOM entered into a deferred prosecution agreement with the United States’ Department of Justice, while Singapore’s Corrupt Practices Investigation Bureau (CPIB) issued a conditional warning in lieu of prosecution. Consequently, this resolution triggered a landmark change in Singapore’s anti-corruption legislative framework. Click here to read our summary of the new framework.

Malaysia has introduced “corporate liability” bill

The lower house of the Malaysian parliament has recently passed amendments to Malaysia’s anti-corruption law. The most high profile of these amendments is the introduction of corporate liability into Malaysian anti-corruption laws. Before this amendment, the Malaysian Anti-Corruption Commission Act (MACCA), which is the primary anti-corruption legislation in Malaysia and was enacted in 2009, was confined to individual liability for corruption offenses. Read our practical summary of the Malaysian Anti-Corruption Commission (Amendment) Bill 2018 and the next steps that your business should take here.

ALJ Upholds FTC Judgement of Antitrust Violations for Ad Tech Agreements Against 1-800 Contacts

With the holiday marketing season upon us, marketers launch the month-long, relentless scramble for consumer visibility and coveted advertising space on high-traffic inventory. One matter likely not on marketers’ radars? Antitrust violations. A recent ruling on a case brought by the Federal Trade Commission (“FTC”) against 1-800 Contacts scrutinizes the brand’s ad tech playbook through an antitrust lens, calling into question the legality of certain private agreements.

The crux of the FTC’s unfair competition case against 1-800 Contacts lays in the brand’s online search engine optimization (“SEO”) bidding agreements with its competitors. By way of context, in 2004, Google modified its proprietary online advertising service, AdWords, to allow advertisers to link their ads to other brands’ trademarks. In the online lens market, this means 1 800 Contacts’ competitors could bid on search terms like “1-800 Contacts” for the chance that their advertisement could show up alongside the retail giant’s search results.

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Blockchain Technology and Securities Markets are the Focus of Recent SEC Investor Advisory Committee Meeting

On October 12, 2017, the U.S. Securities and Exchange Committee (“SEC”) held an Investor Advisory Committee (“IAC”) meeting which largely focused on blockchain technology and the implications for securities markets.  Based on the discussion at this meeting, the SEC is currently considering both the merits and risks linked to blockchain technology. Several IAC members in attendance expressed concern about the risk of fraud and abuse. To learn more about the presenters and topics discussed click here.

Released CFIUS Annual Report Shows Heightened Scrutiny

CFIUS recently published a summary of their 2015 CFIUS Annual Report to Congress.  CFIUS is charged with reviewing foreign investments and advising the President on appropriate actions that may be necessary to suspend or prohibit foreign acquisitions, mergers, or takeovers which threaten to impair the national security of the United States. The Annual Report reflects a trend over the last two years that CFIUS is closely scrutinizing more foreign investment transactions and increasingly taking action. To learn the key points from the 2015 CFIUS Annual Report and other recent developments click here.