Can a brand control distribution and remain compliant with EU competition law?
Amazon represents both a great opportunity for a brand as well as a significant risk. Control the antagonistic relationship between the opportunity and the risk and significant growth can be achieved in quite a short space of time. Underestimate the risk to your brand of uncontrolled selling on Amazon and you could end up with an unpredictable and uncontrollable sales channel that damages the value of the brand in the eyes of the consumer.
But the challenge does not end there. EU Competition law is incredibly stringent and applies both to horizontal and vertical relationships within the chain. Whilst it is obvious that price fixing horizontally between competing brands or competing suppliers would be illegal, implementation of the law is somewhat less obvious when considering the impact of vertical relationships such as that between a brand or manufacturer and its supplier.
Price fixing, under any guise, is illegal under EU law and this can cause problems for non-EU brands expanding in to the EU market. Take US brands, for example, who are used to employing Minimum Advertised Price (MAP) policies that their sellers have to adhere to. Under EU Competition law, brands may not apply pressure – in any form – that forces a seller to increase its price. This includes setting MAP or Retail Price Maintenance (RPM) policies and enforcing them by threatening transgressors with retaliatory actions.
So all of that begs the question, “what can I do to uphold the value of my brand?”
Fortunately, there is an answer that allows a brand to maintain valuable control of their products’ distribution while not contravening EU Anti Competition law. The answer is to make distribution decisions based on brand value and consumer experience which should take you to the right place without breaching any rules.
Support for this view comes from two landmark cases that recently went before the European Court of Justice (ECJ). The first related to a case brought against Pierre Fabre, a cosmetics brand that imposed a blanket ban on resellers offering their products online. They achieved this by insisting that they would only sell to resellers with brick-and-mortar stores with a pharmacist present, thereby preventing any sales via the internet. The ECJ ruled that this was a hardcore restriction of competition and therefore illegal.
Whilst this sounds like imposing any distribution restrictions on online sales is illegal, it is important to note a vital characteristic of this case. Pierre Fabre were actively preventing ANY online sales of its goods, which is illegal. The brand attempted to argue against the ruling on the basis that it was protecting its “luxury image” but this was rejected on the basis that “protecting a luxury brand image was insufficient to justify a blanket internet sales ban”; however, arguments about brand value could be sufficient to justify third party internet platform restrictions, through the application of criteria for a selective distribution system.
What this means is that the door is open for brands to selectively choose who is allowed to sell their products on specific internet platforms such as Amazon or Ebay as long as they do not place a blanket block on internet sales. Fortunately for us, this model was recently tested in Germany by a brand called Coty. Coty were trying to impose a restriction on one of their distributors from selling on Amazon.de. Their distributor refused to sign the agreement and Coty took them to court to enforce the restriction. In this case, the German court referred the question of breach of EU Competition to the ECJ which ruled in the brand’s favour.
The restriction was for a specific online sales channel (Amazon.de) and therefore was not seen as overly restrictive. The supplier was still allowed to sell via its own website and make use of online marketing and search engine services to drive sales traffic to the products in the same was as Amazon. So whilst a restriction had been imposed, it was seen as proportionate to the goal of maintaining brand value.
Therefore, as long as the stated aim of the restriction is legitimate (e.g. to improve consumer experience or maintain brand value) and the restrictive action is proportionate to that goal and allows sellers to make use of any other online channels such as their own online shops, then the EU Competition law, specifically Article 101(1) TFEU, is not triggered and does not require justification.
Naturally every situation should be judged on on its own specific details and brands need to ensure that they consider the impact of any restrictions on the ability of consumers in the EU to access goods from a competitive market place. This blog post is not intended as legal advice and the best approach is always to have a your legal team review any agreements or actions to ensure that you have conducted due diligence with respect to EU law.