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 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.