HOKA shoes ruling can help brand owners avoid running into trouble

Alex Stratakis, Giles Warrington, and Tadeusz Gielas of Pinsent Masons were commenting after the court determined that restrictions imposed by manufacturer Deckers UK Limited (Deckers) over the sale of its HOKA branded running shoes were not anti-competitive ‘by object’ – which is where certain conduct by its very nature is deemed to be anticompetitive without the need to demonstrate its actual anticompetitive effects on a market.

Section 2 of the UK’s Competition Act 1998 places a general prohibition on agreements between businesses that have as their object or effect the prevention, restriction or distortion of competition.

Stratakis, Warrington, and Gielas said that the clarification provided by the Court of Appeal, on the test for determining whether a ‘by object’ infringement has occurred, means the ruling is one of the most significant competition law judgments in years for brand owners and their distribution networks. In upholding Deckers’ appeal, the court overturned a 2024 decision of the Competition Appeal Tribunal (CAT).

The dispute at issue in this case arose when Up & Running, a specialist running retailer in Deckers' UK distribution network, sought to sell excess stock accumulated during the Covid-19 pandemic through a separate new anonymised website at a discount. Deckers refused to allow this arrangement for selling the discounted stock online and ultimately terminated supply. Up & Running claimed damages before the CAT.

The CAT found that the Metro safe harbour, established under longstanding EU case law, did not apply in this case. Under the Metro safe harbour, a selective distribution agreement falls outside the competition law prohibition if specific criteria are met, namely that resellers are selected by “objective criteria of a qualitative nature”, applied uniformly and non-discriminatorily, the product’s characteristics necessitate such a network, and the criteria go no further than necessary.  Because the Metro criteria did not apply, restrictions in the agreement fell to be considered under competition law.

The CAT upheld the retailer’s claim, finding Deckers responsible for a ‘by object’ infringement of Section 2 of the Competition Act. However, the CAT did not undertake a wider economic assessment before reaching its finding. This prompted the UK’s lead competition authority, the Competition and Markets Authority (CMA), to intervene on Deckers’ side in the appeal proceedings. The CMA argued that a ‘by object’ infringement can only be determined if a full analysis of the circumstances in which the restriction was imposed, including of the economic context, is undertaken.

The Court of Appeal has allowed Deckers' appeal in full. It was accepted that the Metro safe harbour did not apply on the facts and the agreement was subject to competition law. However, the court clarified that the objective or purpose of an agreement is just one component of a settled four-part test for determining whether there has been a ‘by object’ infringement of competition law. That four-part test requires the assessment of an agreement's content, objectives, legal context and economic context. However, the Court of Appeal found that the CAT had treated the objective or purpose as determinative, without considering the other three elements. This was wrong in law, according to the Court of Appeal.

In reaching its original judgment, the CAT had concluded that Deckers' selective distribution arrangements for its HOKA running shoes constituted unlawful resale price maintenance (RPM). RPM is a form of 'vertical' price-fixing involving parties at different levels of the supply chain, as opposed to price-fixing involving direct competitors. Now, however, the Court of Appeal has confirmed that RPM is not automatically a ‘by object’ restriction of competition. It drew on a 2023 ruling by the EU’s highest court, the Court of Justice of the EU (CJEU), in the so-called ‘Super Bock’ case, in reaching that conclusion.

The Court of Appeal further clarified that even though RPM is classed as a ‘hardcore’ restriction of competition under the EU’s Vertical Block Exemption Regulation (VBER), it does not automatically follow that RPM will constitute a ‘by object’ infringement of competition law in all circumstances.

The EU VBER, and its UK equivalent the Vertical Agreement Block Exemption Order 2022 (VABEO), set out special competition rules to govern vertical agreements between businesses at different levels of a supply chain. Broadly, the frameworks provide some exemptions to the general prohibition on anticompetitive agreements, recognising that some vertical agreements can reduce transaction costs and promote beneficial investment, but they also generally exclude some restrictions within vertical agreements from benefiting from the safe harbour of an exemption because of the harm they are considered to cause to competition. Those restrictions are categorised as ‘hardcore’ restrictions.

This case concerns the interpretation and application of the EU VBER that came into force in 2010 and expired on 31 May 2022, because the restrictions Up & Running complained about were put in place pre-Brexit, when the 2010 VBER had direct effect in the UK. From June 2022, a new VBER has replaced the 2010 VBER in the EU; whilst the new VABEO came into force at the same time in the UK. Stratakis, Warrington, and Gielas said that because the concepts considered in the Court of Appeal judgment remain in the new EU and UK regimes, the ruling provides important judicial guidance for current and future distribution agreements.

The Court of Appeal also applied case law established by the CJEU in the European Superleague v FIFA case to support its finding that wide contractual discretion allowing Deckers to terminate its selective distribution arrangements with Up & Running was not a ‘by object’ infringement simply because there was scope for the contractual provision to be used in an unlawful or restrictive manner.

On the facts, the Court of Appeal found Deckers' conduct could not constitute a ‘by object’ infringement, as it did not present a sufficient degree of harm to competition. The arrangement was vertical, Deckers held a modest sixth-place market share in a competitive market, and the restriction affected only a single tranche of clearance stock through a single anonymised website – accounting for a marginal share of the relevant product market. The court also held that the arrangement benefited from the 2010 VBER because retailers remained free to set prices through physical stores and branded websites, and consumers faced no meaningful barrier to accessing HOKA products. It found that neither the RPM hardcore restriction nor the passive sales exclusions in the VBER were engaged.

Notably, the Court of Appeal found that “[c]ompetition law should not interfere unless there is a need to interfere”; and that “[i]t is not the function of competition law to save parties from bad bargains, or deals they come to regret” – such as restrictions in selective distribution agreements.

According to Stratakis, Warrington, and Gielas, the practical implications of the judgment are considerable.

Stratakis said: "This is a very important Court of Appeal competition law ruling which provides much anticipated clarity to brand owners understandably wishing to exercise tight control over the nature of customer experience.”

“The Court of Appeal has made it clear that: selective distribution agreements afford material degree of control to brand owners and should not be treated with scepticism even when the Metro safe harbour and VBER safe harbours are not available; and the relevant analysis should be done on the basis of substance and context, including the level of inter-brand competition, not mere form. It suffices that retailers can resell products online, and determine the relevant discount, if desired. Restrictions imposed on the way retailers present products online and, more generally, operate their websites can be lawful,” he said.

“It is also encouraging to see that UK Competition and Markets Authority intervene in support of Deckers’ position” he added.

Warrington said: "The judgment is particularly significant for fashion, footwear, consumer electronics and luxury goods sectors, where selective distribution is widely used and where the tension between brand integrity and discounting pressure is a daily commercial reality."

Gielas added: "For clients with distribution networks in competitive sectors where inter-brand competition is robust, this judgment provides a firmer legal foundation and should encourage a more proportionate response from advisers, businesses, and enforcement authorities alike."

"For businesses operating across both UK and EU markets, the alignment between this judgment and the direction of EU jurisprudence – including the CJEU's decisions in Super Bock, Generics (UK) v CMA, and European Superleague v FIFA – is reassuring,” he said.

“Under section 60A of the Competition Act 1998, UK courts must seek to avoid inconsistency with pre-Brexit EU case law, which remains presumptively binding in the UK. Meanwhile, under section 6 of the European Union (Withdrawal) Act 2018, UK courts may have regard to post-Brexit CJEU decisions but are not bound by them. The Court of Appeal's thorough engagement with EU case law should give multinational businesses reasonable confidence that the substantive framework for analysing selective distribution remains broadly consistent across both jurisdictions,” said Gielas.