EU competition regulator 'may investigate' online distribution restrictions, manufacturers warned

The European Commission said it "may investigate possible anti-competitive clauses in selective distribution agreements restricting online sales" in a preliminary report (291-page / 4.59MB PDF) it has issued as part of its e-commerce sector inquiry. A final report is due early next year.

The Commission said it "gathered evidence from nearly 1,800 companies operating in e-commerce of consumer goods and digital content and has analysed around 8,000 distribution contracts" as part of its inquiry.

According to its report, the rise of e-commerce prompted almost a fifth of manufacturers to introduce "selective distribution systems" over the last 10 years. The Commission said that two thirds of manufacturers that already had such distribution controls in place "introduced new criteria in their distribution agreements in relation to how retailers should sell or advertise their products online".

Almost a fifth of retailers that responded to the Commission's inquiry (18%) said distribution agreements they have with manufacturers put "marketplace restrictions" on them. This was one example of the "vertical restraints" the Commission identified that manufacturers have been placing on the distribution of their products.

"Depending on their business models and priorities, vertical restraints may take various forms, such as pricing restrictions, and restrictions to sell or advertise through certain online channels or to sell cross-border," the Commission said.

The Commission said that some of the selective distribution systems it had seen in its inquiry "may require closer scrutiny". One such example might be arrangements where manufacturers require prospective retail distributors to operate a bricks and mortar store to sell certain types of products that "pure online retailers might be equally qualified to sell", it said.

Some retailers complained to the Commission that they do not have access to the criteria some manufacturers apply when selecting distribution partners, according to its report. Discount retailers complained that even if they met the "quality criteria" set by manufacturers they would still sometimes be excluded from manufacturers' distribution networks on the basis that they sold their goods at "low retail prices", it said.

The Commission said that manufacturers can legitimately set up selective distribution networks that comply with EU competition rules.

"According to established case-law the organisation of a selective distribution network is not prohibited by [EU competition rules], to the extent that 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 manner, 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 Commission said in its report.

The Vertical Block Exemption Regulation provides protection against competition law breach claims for manufacturers that use selective distribution agreements in some circumstances, the Commission said.

"Qualitative and quantitative selective distribution agreements are exempted by the Vertical Block Exemption Regulation as long as the market share of both supplier and buyer each do not exceed 30%," it said. "The Vertical Block Exemption Regulation exempts selective distribution regardless of the nature of the product concerned and regardless of the nature of the selection criteria as long as none of the hardcore restrictions listed in [the Regulation] are present."

"However, where the characteristics of the product do not require selective distribution or do not require the applied criteria, such as for instance the requirement for distributors to have one or more brick and mortar shops or to provide specific services, such a distribution system may not generally bring about sufficient efficiency enhancing effects to counterbalance a significant reduction in intra-brand competition. Where appreciable anti-competitive effects occur, the benefit of the Block Exemption Regulation is likely to be withdrawn," the Commission said.

Earlier this year a court in Germany asked the Court of Justice of the EU whether luxury brands are entitled, under competition rules, to operate selective distribution systems for the primary purpose of maintaining a luxury brand image for their goods.

In June the UK's Competition and Markets Authority (CMA) said that it was its provisional view that major golf equipment manufacturer Ping had breached UK and EU competition rules by preventing retailers from selling Ping golf clubs over the internet.

The CMA has also this year highlighted concerns about retail price maintenance (RPM) practices after imposing a fine of £2.3 million on a fridge supplier over conditions the company placed on the resale price of its products for internet sales. Germany's Federal Cartel Office (FCO) has also taken enforcement action in relation to RPM.

EU competition commissioner Margrethe Vestager said: "Businesses should have the freedom to determine their sales strategies online. At the same time, antitrust authorities must ensure that they do not engage in anti-competitive business practices. These practices can prevent European consumers from reaping the full benefits of e-commerce in terms of greater choice and lower prices."