Out-Law / Your Daily Need-To-Know

Clothing brand fined €40m over online sales restrictions

Out-Law News | 19 Dec 2018 | 11:52 am | 3 min. read

A company has been fined for the first time by the European Commission for prohibiting retailers authorised to sell its goods over the internet from using its brand names and trade marks for the purposes of online search advertising.

The restriction, imposed by clothing company Guess, was deemed to be anti-competitive by the Commission. The regulator also took issue with other restrictions Guess imposed in its distribution agreements with authorised retailers, and fined Guess nearly €40 million in total for breaching EU competition rules.

Alan Davis, competition law specialist at Pinsent Masons, the law firm behind Out-Law.com, said: "Operating a selective distribution system is permitted under EU competition law and, in some circumstances, businesses are entitled to impose restrictions on the retailers they choose to partner with. However, the Commission found that the restrictions imposed by Guess had gone too far in a number of respects."

"It is well established that these types of restrictions are likely to breach competition law – restrictions which have the effect of limiting a retailer’s ability to sell online across the EU are strictly prohibited except in limited circumstances," he said.

"It is particularly interesting to note that the Commission also made clear that a restriction on using the Guess brand names and trademarks for the purposes of online search advertising was not acceptable on the basis that it had the effect of restricting the retailer’s ability to freely sell the products online. Similarly, in 2014, the UK competition authority issued a decision in the mobility scooters case that the advertising of online prices below the manufacturer’s recommended retail price (RRP) breached UK competition law. The Office of Fair Trading found that these practices limited consumers' ability to compare prices and get value for money,” Davis said.

Intellectual property law expert Iain Connor of Pinsent Masons said: "The guidance as to the advertising restrictions which can be imposed by those seeking to operate a selective distribution network provides a helpful insight into navigating this challenging area."

"It is especially relevant in a retail environment which has seen deep discounting hurt online players such as Asos given that as a result of this case any attempt to restrict customers’ access to the cheapest goods available will not be tolerated by the competition authorities," he said.

According to the Commission, Guess operates a selective distribution system through which it partners with chosen retailers to sell its goods, which include those sold under the 'Guess?' and 'Marciano' trade-marked brands. The authorised retailers are "chosen on the basis of quality criteria", the Commission said.

Last year, the EU's highest court ruled that EU competition law does not stop luxury goods manufacturers from banning retailers that are part of their selective distribution network from using third-party online marketplaces to sell their goods to the public where that ban is aimed at preserving the brand's luxury image. In its ruling, however, the Court of Justice of the EU (CJEU) outlined conditions that luxury brand owners must meet to ensure their restrictions are compatible with EU competition rules.

Luxury goods manufacturers must ensure that their selected resellers "are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, that the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally, that the criteria laid down do not go beyond what is necessary," the CJEU said.

In a statement, the Commission said the restrictions Guess imposed through the terms of its agreements with its authorised retailers were not justified.

In addition to the restrictions on online search advertising, the agreements required authorised retailers to obtain "prior specific authorisation" from Guess before selling its goods online. This online sales restriction was "not based on any specified quality criteria", the Commission said.

Guess also restricted the countries in which authorised retailers could sell to consumers, cross-selling among authorised wholesalers and retailers, and did not permit the retailers on their own to determine the retail price at which to sell Guess products, the regulator said.

The Commission said these infringements of EU competition rules, which occurred between 1 January 2014 and 31 October 2017, served to "partition European markets" for Guess products and led to higher prices on average for consumers in some parts of the EU compared to others.

The fine imposed on Guess, which exceeded €39.8m, was 50% less than it would have faced had the Commission not applied the discount to recognise the company's cooperation with its investigation.

EU competition commissioner Margrethe Vestager said: "Guess' distribution agreements tried to prevent EU consumers from shopping in other member states by blocking retailers from advertising and selling cross-border. This allowed the company to maintain artificially high retail prices, in particular in Central and Eastern European countries. As a result, we have … sanctioned Guess for this behaviour."

The Commission said its decision in the case "complements" new EU rules on 'geo-blocking' which took effect earlier this month.