EU Competition Rules for Distribution Agreements #3: Online sales restrictions

Why is competition law important in the distribution context?

Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’) prohibits anticompetitive agreements or concerted practices. Agreements infringing Article 101(1) are void and may expose your company to fines and/or damages before national courts and/or competition authorities. This is particularly important in the context of distribution agreements where private parties (i.e., your companies’ customers and competitors) are often the most likely to go to court or file complaints with competition authorities.

This note is part of a blog series in which we seek to provide guidance on the most relevant topics of EU competition law for distribution agreements. In this third blog we discuss the competition law regime for online sales restrictions.

Online sales restrictions, hardcore restriction and relaxation

The European Commission considers the internet as a crucial and important tool to stimulate the creation of one single European market. Under European (and most national systems of) competition law distributors must therefore be free to use the internet to advertise or to sell products.

This principle has been anchored in the latest Vertical Block Exemption Regulation (‘VBER’) with the introduction of a new hardcore restriction that pertains to online sales (Article 4(e)). In short, restrictions on online sales or online advertising imposed on buyers to prevent them from effectively using the internet to sell the goods or services cannot benefit from the safe harbor provided by the VBER.

Outside the scope of this new hardcore restriction, the new VBER and accompanying guidelines contain a considerable relaxation on restrictions to online sales compared to the old VBER. Imposing restrictions on distributors, such as limitations on online advertising or sales, are generally permitted, provided that they do not indirectly have the object of preventing the effective use of the internet to sell the contract goods or services. Online sales restrictions generally do not have such an object where the buyer remains free to operate its own online store and to advertise online. In such cases, the buyer is not prevented from making effective use of the internet to sell the contract goods or services.

Under the new VBER suppliers are no longer required to impose equivalent criteria on online stores as they do on brick-and-mortar stores, as long as they comply with the new Article 4(e). This includes dual pricing strategies, where a supplier charges a higher wholesale price for products intended to be sold online than for products to be sold offline. However, the difference in the wholesale price must be reasonably related to differences in the investments and costs incurred by the buyer to make sales in each channel.

In addition, the following online sales restrictions can in principle benefit from the safe harbor under the VBER:

(a)   requirements intended to ensure the quality or a particular appearance of the buyer’s online store;

(b)   requirements regarding the display of the contract goods or services in the online store (such as the minimum number of items displayed, the way the supplier’s trademarks or brands are displayed);

(c)   a direct or indirect ban on the use of online marketplaces;

(d)   a requirement that the buyer operates one or more brick and mortar shops or showrooms, for instance as a condition for becoming a member of the supplier’s selective distribution system;

(e)   a requirement that the buyer sells a minimum amount of the contract goods or services offline (in value or volume, but not as a proportion of its total sales) to ensure the efficient operation of its brick-and-mortar shop. This requirement can be the same for all buyers, or it can be set at a different level for each buyer, based on objective criteria, such as the buyer’s size relative to other buyers, or its geographic location (cf. Vertical Guidelines, par. 208).

Key rules

• Every distributor must be free to use the internet to advertise or sell products.
• An outright ban on internet selling is not possible.
• Suppliers cannot reserve online sales to itself.
• The VBER permits suppliers to set different trading conditions (including prices) for online and offline sales by the same distributor, provided that the differentiation does not prevent the distributor from effectively using the internet to sell the goods or services.

FAQ’s

Are suppliers under an obligation to supply internet shops?
A supplier is generally free to decide who it wishes to sell its products to (situations of dominance aside). If internet shops are not a target customer, a supplier is not obliged to sell to these customers. However, it is not permitted for a supplier to prevent or try to prevent (whether directly or indirectly) the on-sale of products by its customers over the internet or to internet shops.

Can suppliers prohibit existing distributors to sell over the internet?
No, all distributors should be allowed to sell or advertise products and services over the internet.

Can suppliers reserve online sales to themselves?
No, in any case a supplier cannot reserve sales and advertising over the internet to itself.

Can suppliers charge different prices for online shops and brick-and-mortar shops?
Yes, within the scope of the VBER, suppliers can charge different wholesale prices for online sales, as long as it aims to encourage or acknowledge suitable investment levels and corresponds to the expenses associated with each distribution channel.

Can suppliers use different trading conditions and prices for online shops and brick-and-mortar shops?
Yes, on the grounds that online and offline channels have different characteristics, the trading conditions imposed by suppliers in relation to online sales do not have to be overall equivalent to the criteria imposed on brick-and-mortar shops. However, the differentiation may not prevent the effective use of the internet by the distributor to sell the contract goods or services.

If you have any questions about the contents of this note, please contact Minos van Joolingen, Martijn Jongmans or Sophia Wittkämper of Banning’s Competition & Regulatory Team, telephone number +31 73 692 77 52.