High street and 'bricks and mortar' retailers face increasing pressure due to consumers shopping online anytime and anywhere. Seeking to restrict online sales may be tempting.
However, the competition law rules relating to restrictions on internet sales are not straightforward, particularly within the context of selective distribution systems, and the risks of getting this wrong are significant (e.g. fines of up to 10% of turnover). This article attempts to cut through some of the confusion in this area.
Selective distribution systems
Despite the fact that selective distribution systems restrict the number of retailers who can sell a distributor’s products, these are generally not considered anti-competitive provided that the following criteria are met:
- the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use
- these criteria are laid down uniformly for all potential resellers (and not applied in a discriminatory fashion)
- resellers are chosen on the basis of objective criteria of a qualitative nature
- the criteria do not go beyond what is necessary.
The importance of the internet to competition
Generally competition authorities view the internet as a powerful competitive tool. Restrictions on internet sales are viewed with suspicion. For example:
- the European Commission’s guidelines on Vertical Restraints state that: “The internet is a powerful tool to reach a greater number and variety of customers than by more traditional sales methods”
- the UK Competition and Markets Authority’s press release in its recent decision fining Ping for restrictions on sales on the internet said: "The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted.”
Recent internet sales restrictions cases
In Pierre Fabre the European Court of Justice (ECJ) ruled that (in relation to the cosmetic and body hygiene products concerned) a de facto ban on the use of internet sales was not objectively justified despite the fact the clause aimed to maintain the prestigious image of the products concerned.
In Ping, the CMA found that a prohibition on the sale of golf clubs online, justified by Ping on the basis that it wanted retailers to provide 'custom fitting' for all ultimate purchasers of its clubs to ensure that they got the right products for them which could not be done online, was anti-competitive. The CMA's view was that Ping could have achieved its legitimate commercial aim of increasing custom fitting by other, less restrictive, measures.
However, more recently, in Coty the ECJ has ruled that the legitimate protection of a luxury product image could include a prohibition on retailers from using third party internet sales platforms (such as Amazon and eBay) to sell the products in question. Within the Coty judgment the ECJ made the point that the implication in Pierre Fabre that maintaining a prestigious image is not a legitimate aim for restricting online sales was limited to the particular products concerned in Pierre Fabre and not a generally applicable rule.
Conclusions
- A general prohibition on internet sales would require strong qualitative (or other, e.g. health and safety) reasons to avoid being considered anti-competitive.
- A restriction on sales via online third party marketplaces seems to require less compelling reasons than a total restriction on internet sales.
- It is difficult to envisage many circumstances outside a selective distribution system where any sort of ban on internet sales would not be considered anti-competitive.
A particular issue here is in deciding what products require what different levels of qualitative protection. This seems to be an area which is going to continue to have to be looked at on a case by case basis.
At the time of writing, the Ping case is under appeal to the Competition Appeal Tribunal, so we will have to wait and see whether the judgment in that case provides any additional clarity in this area.