Over the past decade, the growth of online sales has been significant. This has made it easier for customers to shop around for the best deals. Online sales also significantly increase price transparency and – in certain circumstances – can lead to decreased services. In recent years, brand owners have sought to protect their brand image by restricting the ability of resellers to sell their products online. However, the European Commission has made clear that not every online restriction is permissible under EU law.

In reaction to this change in market dynamics, the EC conducted a sector inquiry into e-commerce, which was concluded in 2017. A resurgence in vertical restraints enforcement ensued and brand owners such as Nike, Guess and Sanrio have recently met with enforcement action, resulting in fines of €12.5 million, €40 million, and €6.2 million, respectively.

Businesses need to take account of the fact that these decisions confirm the EC’s continued view that outright restrictions on online sales are serious and the single market imperative is a key enforcement objective.

Current Competition Commissioner Vestager’s recent nomination for a second term at the helm of DG COMP and, importantly, her additional “hat” of Executive VP for digital strongly indicate continuity in this area. The EC will also take into account market responses to its recent consultation on the functioning of the Verticals Block Exemption Regulation as its enforcement priorities for the next five years take shape.

Can brand owners prevent retailers from reselling their goods online?

Brand owners cannot prevent retailers from reselling online, for example, through an exclusive distribution arrangement. Doing so has long been considered by the EC and the EU Courts as a restriction of competition by object, in breach of Article 101(1) TFEU.

Brand owners can restrict how and where retailers resell goods online, as long as those restrictions meet certain criteria. These principles were re-affirmed in the recent Guess case and are explored further below.

Why is an outright ban on online sales anti-competitive?

Online sales are considered “passive sales”. Restricting passive sales to other territories amounts to an export ban, which is a “hardcore” restriction of competition. In particular, an outright ban on online sales is at odds with the single market imperative, one of the key aims of EU competition law. This refers to the idea that a single market with no internal EU trade barriers promotes efficient allocation of resources for the benefit of consumers. 

What sort of restrictions on online sales are allowed?

Legitimate restrictions of online sales via third-party platforms in order to protect quality are allowed in the context of selective distribution agreements or under the Vertical Block Exemption Regulations when the market share of participants is less than 30%. However, the restriction must not go further than is necessary to protect the quality of the product in question. The restriction must be an “overall equivalent” to the restrictions that could be applied to a brick and mortar store. For example:

• As part of a selective distribution agreement, a producer could require a retailer or dealer only use a website that meets quality standards consistent with the brand image.
• A producer might be able to require that retailers also maintain a brick and mortar outlet with suitably trained staff to provide customer care or assist customers with purchasing complex products.

These sorts of restrictions are found in selective distribution agreements and are appropriate where they enable a producer to protect the brand image of its products, thereby strengthening inter-brand competition. Key things for businesses to keep in mind when imposing these sorts of restrictions are:

• The product must be of a type that justifies restricting the type of outlets where a product can be sold. This generally means products which are technically complex (cars, electronic equipment) or where the brand image requires a restriction (luxury products).
• The criteria must be qualitative in nature, uniform for all potential resellers, and applied in a non-discriminatory manner. Qualitative criteria include requiring that goods only be sold to a retail outlet with trained staff, with premises in an appropriate area, or that provide after-sales services. The criteria must not discriminate or prevent online sales in total. Quantitative criteria are not allowed. These include limiting the number of independent operators who are allowed to sell goods online. In Guess, requiring that a retailer receive written approval from a brand-owner to sell online, instead of having a list of objective quality criteria that retailers need to meet, was found to be not permissible.
• The restriction must go no further than objectively necessary to protect the quality of the product.

Dual pricing

Dual pricing of online versus offline products is another area where businesses must tread carefully. The Vertical Guidelines state that charging a higher price to one buyer for goods that the buyer intends to sell online compared to those it intends to sell offline is a hardcore restriction. However, this does not prevent a producer from being able to charge a different wholesale price to different categories of buyers. For example, online only buyers versus buyers with an online and offline presence, aimed at preventing free-riding by pure online sellers. Notably, this behaviour may not necessarily be allowed in respect of dominant producers, and there is also the possibility that an NCA might take a different approach to dual pricing than that taken by the EC. This was the case in the Bundeskartellamt’s decision in respect of Lego.