Vertical restraints in e-commerce – The European Commission’s Guess decision

30.01.2019

On 17 December 2018, the European Commission (Commission) announced its decision to fine US clothing company Guess €39.8 million for anti-competitive practices in its European selective distribution system (the full decision is available here). The Commission found that Guess had imposed various restrictions on its authorised retailers, including restrictions on cross-border sales and online advertising, which enabled the company to maintain artificially high retail prices, particularly in Central and Eastern Europe.

Coming hot on the heels of the Commission’s July 2018 decisions against four consumer electronics manufacturers for resale price maintenance, the Guess decision provides a further reminder that the Commission takes a dim view of vertical restraints that prevent EU consumers from shopping around for the best deal online. In the current enforcement climate, manufacturers and brand owners need to tread carefully when devising strategies to optimise their European distribution networks.

Background

Guess designs, distributes and licenses clothing and accessories under various trademarks, including ‘GUESS?’ and ‘MARCIANO’. It distributes its products in the EEA through a selective distribution network of authorised retailers, who are required to meet certain quality criteria. As the European Court of Justice confirmed in its December 2017 Coty ruling, suppliers in the EEA are generally free to operate distribution systems that best serve their commercial interests, including selective distribution systems, provided that such systems comply with the EU competition rules. In a selective distribution context, end-consumers must be free to purchase from any authorised reseller, including across national borders. By the same token, authorised resellers must generally be free to offer the relevant products online and across borders, and to set their own resale prices.

The Commission’s findings

Having opened its formal investigation in June 2017 as a follow-up to the e-commerce sector inquiry, the Commission concluded that Guess imposed a range of anti-competitive restrictions on its authorised retailers. In the Commission’s view, Guess’s distribution agreements prevented authorised retailers from:

  • selling to customers located outside the authorised retailers’ allocated territories
  • cross-selling among authorised wholesalers and retailers
  • independently determining the retail prices of Guess products
  • selling online without a prior specific authorisation from Guess. Guess retained full discretion for this authorisation, which was not based on any specified quality criteria
  • using Guess brand names and trademarks for the purposes of online search advertising (particularly in Google AdWords)

The decision sheds new light on the Commission’s approach to online search advertising restrictions in particular. The Commission found that the objective of Guess’s online search advertising restriction was to reduce competitive pressure on Guess’s own online retail activities and to keep its advertising costs to a minimum. As the Commission saw it, settled EU trademark law could not be relied on to justify a restriction on authorised retailers’ ability to bid on Guess’s brand names and trademarks, as in this case there was no risk of confusion as to the origin of the products. The Commission followed the approach taken by the Bundeskartellamt in Asics, concluding that prohibitions on the use of brand names in online advertisements amount to a hardcore restriction of competition under Article 4(c) of the Vertical Agreements Block Exemption.

As noted above, the Commission also established that Guess’s requirement for authorisation of online sales was not linked to any specified quality criteria. According to the Commission, the main object of this requirement was to restrict sales on authorised retailers’ websites. It protected Guess’s own online sales activities from intra-brand competition and facilitated market partitioning by limiting retailers’ ability to sell to customers in other EU Member States. Relying on the Court of Justice’s judgment in Pierre Fabre, the decision confirms that a de facto prohibition on the use of the internet as a method of marketing constitutes a restriction of competition ‘by object’ under Article 101(1) TFEU.

Geo-blocking

The Commission also took the opportunity to draw a link between the Guess decision and the EU Geo-Blocking Regulation, which entered into force in December 2018 and prohibits various geographic-based restrictions that limit a consumer’s ability to benefit from the advantages of e-commerce. Guess’s practices that prevented cross-border passive sales to consumers are now also prohibited by the Geo-Blocking Regulation. As Commissioner Margrethe Vestager put it on the day the decision was announced: “Our case complements the geo-blocking rules that [recently] entered into force […] – both address the issue of sales restrictions that are at odds with the Single Market.”

It is worth noting that two other Commission cases involving alleged geo-blocking practices are pending. In its video games investigation, the Commission is examining whether agreements between a games distribution platform and five video game publishers breach EU competition rules by preventing consumers from buying video games at lower prices in other Member States. In the hotel price discrimination case, the Commission is investigating whether agreements between tour operators and hotels prevent customers from booking hotel accommodation on better terms offered in other Member States simply because of the customers’ nationality or place of residence.

What next?

The Guess decision sends a clear signal that vertical restraints in e-commerce markets remain high on the Commission’s enforcement agenda. Together with the Commission’s final report on the e-commerce sector inquiry, it also sheds light on the Commission’s likely direction of travel as it begins to assess whether its rules on vertical agreements are still fit for purpose in the age of e-commerce.[1] National competition authorities are also likely to be keeping a close eye on online sales and advertising restrictions. In fact, in a world where e-commerce puts increased competitive pressure on manufacturers and retailers alike, future competition investigations into businesses’ online sales practices are almost inevitable.

Stephen Smith

Author

Edwin Bond

Author