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EU ruling should help clarify legitimacy of online platform bans, says UK competition regulator

Out-Law News | 17 Nov 2016 | 12:26 pm | 3 min. read

A case before the EU's highest court should help clarify whether online platform bans should automatically be considered as breaching competition laws, a UK competition regulator has said.

In a lecture given at the Competition Law Forum earlier this week, Michael Grenfell, executive director of enforcement at the Competition and Markets Authority (CMA), said there is currently disagreement among different competition authorities across the EU on the issue.

"'Online platform bans’ ... are provisions that prevent distributors from selling through certain specified platforms," Grenfell said. "The European Commission and various national competition authorities see such online platform bans just as a restriction on how a product is sold, but without closing off an outlet – and therefore as not being an ‘object’ restriction, but rather one to be assessed case by case according to its effects."

"The European Commission has recently said that it doesn’t regard them as ‘hardcore’ restrictions which lose the benefit of the block exemption. By contrast, Germany’s competition authority … has viewed an online platform ban as likely to be an ‘object’ restriction in the running shoes case, but German courts have been uncertain on the point; it should be resolved in the context of a case called Coty, concerning the sale of cosmetics on Amazon, which has been the subject of a reference in April this year from a German court to the EU Court of Justice." he said.

Generally EU competition rules, under Article 101 of the Treaty on the Functioning of the EU (TFEU), prohibit businesses from putting in place agreements which have as their object or effect the restriction of competition. However, certain exemptions have been written into EU law to legitimise anti-competitive agreements in some circumstances.

One such exemption from competition law scrutiny applies where vertical agreements satisfy the criteria of the Vertical Agreements Block Exemption (the VABE). Vertical agreements are agreements struck between companies at different stages of a supply chain. Selective distribution systems qualify as one type of vertical agreement that can benefit from the VABE.

Under the VABE Regulation, a selective distribution system is defined as "a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system".

In the Coty case, the German court has asked the Court of Justice of the EU (CJEU) whether selective distribution systems that "have as their aim the distribution of luxury goods and primarily serve to ensure a ‘luxury image’ for the goods constitute an aspect of competition that is compatible with [the TFEU]".

If the answer to that question is yes then it wants the CJEU to determine whether competition rules are still adhered to if "the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case".

In addition, the German court has asked the CJEU to rule on whether agreements that prohibit retailers from using third party distributors to sell goods online either "constitutes a restriction of the retailer’s customer group ‘by object’" or "constitutes a restriction of passive sales to end users ‘by object’".

If the CJEU rules that either restriction applies in that context then those types of vertical agreements would not benefit from the VABE.

In his lecture, Grenfell addressed the topic of online platform bans within the wider context of actions taken by bricks-and-mortar retailers to combat 'free-riding' by online sellers. Free-riding, he said, is where consumers assess products in-store before ordering them online, often at lower cost.

Grenfell said that free-riding is "not sustainable" and that consumers risk losing out on choice if bricks-and-mortar stores are "lost" to competition online. However, he said that only "actual evidence" presented on a case-by-case basis will determine whether physical and online retailers are operating within the same market "at any one time". How a market is defined is important within the consideration by competition authorities of whether there are unfair restrictions on competition in that market.

Free-riding presents "a dilemma" for competition authorities, though, he said.

Grenfell said: "On the one hand, we should facilitate competitive pressure from online sales by taking action against restrictions on online selling that protect traditional bricks-and-mortar sales channels. But on the other hand, as we’ve seen, free-riding by online sellers on the investment made by bricks-and-mortar stores can lead to loss of consumer choice and quality. That said, competition authorities and policymakers need to take an evidence-based approach to that assertion, as to everything else we do; in any situation, we can’t just accept such claims, and allow restrictions on competition, without real evidence that this is likely to happen."

"In any event, as well as the ‘free-riding’ argument, there is an argument that, unless the supplier has market power, restrictions on online selling of the same products – i.e restrictions on intra-brand competition – do not matter if there is sufficient inter-brand competition (which of course won’t always be the case)," he said.

Businesses can deploy "alternative means" beyond online platform or sales restrictions to "influence resale channels" in compliance with competition law, Grenfell said. Exclusive or selection distribution arrangements established in line with competition law requirements are an example, he said.

Retailers that invest in "commercial strategies" that involve "multi-channel propositions" can also alleviate the risk of free-riding, he said.