Parallel trade and export restrictions are back in the spotlight

Enforcement against parallel trade restrictions and export bans is back in the spotlight in the EU. In this note, we review some recent decisions by the European Commission, focusing on the types of cross-border restrictions that have attracted the Commission’s attention, and offer tips to avoid breaking the law in this respect.

This renewed interest appears to be related to two policy initiatives:

• The Commission’s 2017 e-Commerce inquiry, which led the Commission to open a number of investigations into Nike, Guess, Sanrio and Universal Studios.
• The European Parliament in its Report on Competition Policy 2018, urged the Commission to focus on effective competition throughout the food chain, leading the Commission to pursue FMCG companies such as Ab InBev, and more recently, Mondelez.

1 Recent parallel trade enforcement: 5 decisions in 8 months and fines reaching €200 million

The Commission has adopted five decisions in the space of eight months between December 2018 and July 2019, and imposed fines of up to €200 million. These decisions span a number of sectors and distribution systems, including selective distribution and licensing arrangements. Also of interest is that the cases concern both Article 101 (agreements) and Article 102 TFEU (unilateral conduct).

Three of the decisions concern territorial restrictions in the context of non-exclusive licences, in breach of Article 101 TFEU. In particular, Nike was fined €12 million for banning licensees from making out-of-territory sales of licensed branded merchandise. The Commission also imposed a fine of €14.3 million on NBCUniversal for restricting licensees from making out-of-territory sales of branded merchandise. Licensees were also required to pass on these restrictions to their own customers and were prohibited from supplying to customers who could sell outside the licensee’s allocated territories. Sanrio received the smallest fine of €6.2 million for including cross-border sales restrictions in licensing agreements for branded merchandise, including Hello Kitty and Mister Men products, and enforcing compliance by means of audit rights and the non-renewal of contracts.

Guess received a fine of €40 million for flouting the rules on selective distribution by restricting authorised wholesalers from selling outside their allocated territories, as well as restricting authorised retailers from making cross-border sales to end users, or cross-selling to other members of the selective distribution network within the EEA. Additionally, Guess was fined for resale price maintenance alongside restrictions on cross-border sales, which meant that it was able to maintain higher retail prices in Eastern Europe than Western Europe.

The biggest fine, €200 million, was imposed on Ab InBev for abusing its dominance under Article 102 TFEU by implementing measures that prevented supermarkets and drinks wholesalers from procuring beer in the Netherlands and importing it into Belgium, where some beer brands are more expensive. Infringing measures included using different packaging and labelling for different countries, reducing volumes sold to Dutch wholesalers in order to limit imports to Belgium, refusing to sell to Dutch retailers without agreement that they would not import to Belgium, and making promotions conditional on retailers not offering promotions in Belgium. This fine was awarded under Article 102 TFEU and not Article 101 TFEU, which meant the Commission did not need to establish an agreement or concerted practice between Ab InBev and others in its supply chain.

In February 2020, the Commission indicated that it is investigating Mondelez on suspicion that the company restricted cross-border sales of its products in the EU under Articles 101 and 102 TFEU.

2 Recent cross-border measures under scrutiny

Based on these recent cases, we have collated a summary of the types of measures and practices that have been investigated by the Commission and may therefore pose a risk under EU competition law.

At the outset, two notes of caution are in order. First, context will often be important. Case law suggests that the enforcer often looks at the broader context of a body of evidence and in particular, on the objectives pursued by the measures and practices. Second, the Commission may sanction direct and indirect measures - indirect measures refer to actions to reinforce and encourage compliance with cross-border restrictions.

Most of the measures included below have been considered “agreements” caught by Article 101 TFEU. Purely unilateral conduct on the part of the supplier could, in principle, only be problematic if the supplier is dominant (under Article 102 TFEU). We have indicated in the table below where the measure in question is only (potentially) problematic if the supplier is dominant. In the context of these recent cases, this related only to unilateral changes of product packaging to make it harder to sell the products in particular jurisdictions.

3 Other takeaways from recent cases

Some of the practices listed above can be competition law compliant (on a stand-alone basis), for example supply termination, changes to packaging or minimum purchase requirements, provided they have legitimate underlying reasons that are not related to restricting cross-border trade. In most of the recent cases referred to above, infringements were found because the restrictions were set out in a distribution contract and/or the Commission found multiple measures which hindered cross-border sales without a legitimate alternative rationale. Indeed, the European Commission will closely investigate the underlying rationale (as evidenced by internal documents throughout the supply chain) in the specific broader market context. In Ab InBev, the Commission found an overall strategy evidenced by internal documents, and it specifically noted that Ab InBev’s practices could not “be justified by any objective other than to counter cross-border trade”.

Firms should therefore take care when instituting measures that have an effect on cross border trade in the EEA, since:

• The Commission is looking beyond contractual measures and takes into account informal engagements and agreements with customers (Sanrio).
• Internal documents, including email exchanges and strategy documents, play a particularly key role in uncovering conduct and establishing anti-competitive aims to restrict cross-border sales (Ab InBev).
• It does not matter whether the restrictions are infrequently or inconsistently enforced - these can still contravene competition law (Guess).
• The Commission will look at actions which are not in themselves problematic, such as distributor audits and monitoring of the financial impact of cross border trade, or measures which are only considered but not implemented, as part of a broader body of evidence to establish an anti-competitive aim (Ab InBev, Sanrio).

4 Tips

Since the Commission’s appetite to pursue parallel trade cases is not waning, we set out a number of tips below:

• Conduct compliance training with the relevant businesses to ensure that they understand the specific EEA position (which may be different from the position outside the EEA) and can spot and address issues, in both formal and informal settings, including in exchanges with distributors who may complain about cross border competition;
• Have the supply, distribution and/or licensing contracts vetted by the legal team to ensure that they do not contain problematic restrictions;
• Ensure that all practices limiting parallel trade or cross border sales have a well-documented and proper rationale, in line with EU law; and
• Audit business communications, if appropriate, on a regular basis inside the company and with resellers, and take appropriate action where needed.