Guess what? Blocking cross-border sales can be expensive – Commission fines Guess for violating EU competition law

Europe

On 17 December 2018, the European Commission ("Commission") fined US-clothing company GUESS? Inc. and its various subsidiaries ("Guess") EUR 39,821,000 for anticompetitive practices in its selective distribution system (Case AT.40428). The decision is not yet published, but according to the Commission's press release (IP/18/6844) Guess was found to have breached EU competition rules by blocking its authorised retailers from online advertising and from making cross-border sales to consumers within the European Economic Area ("EEA").

The decision is the Commission's second fining decision following the e-commerce sector inquiry. The Commission further stated that Guess's practices would also have infringed the new Regulation (EU) 2018/302 on unjustified geo-blocking, although the Geo-Blocking Regulation has not yet been applicable to this case.

Selective distribution and EU competition law

Guess designs, distributes and licenses clothing and accessories under numerous trademarks, and operates a selective distribution system in the EEA, where authorised retailers are chosen by qualitative criteria. While Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements between companies that prevent, restrict or distort competition, selective distribution systems are, in principle, legal under EU antitrust law with the following caveat.

Either the selective distribution system is necessary to preserve the luxury image or the quality of the products, or is necessary to ensure their correct use (and therefore Article 101(1) TFEU may not apply, according to ECJ Metro case law); or the selective distribution system is exempted under the Vertical Block Exemption Regulation (EU) 330/2010 or VBER.

The exemption applies to vertical agreements (i.e. agreements between undertakings operating at a different level of the production or distribution chain) if the market shares of the parties involved do not exceed 30% of their respective relevant market. The exemption does not apply, however, to certain "hardcore restrictions" exhaustively listed in Article 4 VBER.

The Commission's findings

According to the Commission, Guess's selective distribution system imposed a bundle of forbidden hardcore restrictions on its authorised retailers, allowing Guess to illegally partition European markets and to artificially uphold retail prices. These restrictions included:

Restricting sales to consumers outside the authorised retailers' territories

In preventing sales to consumers located outside the authorised retailers' allocated territories, Guess violated Article 4(c) VBER, which prohibits the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level. Authorised retailers must be free to sell contract goods to any consumer in the EEA where the supplier maintains the selective distribution system, even if the consumer is in another member state. Combining a (qualitative) selection of distributors and an exclusive distribution with territorial protection or customer protection at the retail level is not permissible.

De facto online sales ban

The Commission found that Guess prevented its retailers from selling online without prior specific authorisation. Since Guess had full discretion for this authorisation (i.e. it was not based on any specified quality criteria), such a broad mandate to authorise online sales may be disproportionate and could result in a de facto online sales ban. A total ban of online sales is a hardcore restriction within Article 4(c) VBER, according to the ECJ in Pierre Fabre in 2011 (Case C-439/09) or the French Competition Authority in STIHL (Case 18-D-23) of October 2018. In contrast, authorisation could be in principle dependent on compliance with specified qualitative criteria (e.g. the design of the retailer's website). This would apply the qualitative requirements of "brick-and-mortar" dealers to the online world: the so-called principle of equivalence.

Restricting Guess brand names and trademarks for online search advertising

The Commission also reproved Guess for prohibiting the use of its brand names and trademarks for online search advertising. In this respect, the Commission followed the German Federal Cartel Office's (Bundeskartellamt) Asics decision (Case B2-98/11) of August 2015, which sanctioned Asics' blanket prohibition to use its trademarks on third party websites (in order to direct customers to the website of an authorised Asics dealer) or to permit such use by a third party. In particular, this restriction meant that retailers were prohibited from using the Asics' trademarks as keywords in online search advertising (e.g. Google Adwords). The Bundeskartellamt considered such conduct to be a hardcore restriction within Article 4(c) VBER (i.e. a restriction of end-user Internet sales and thus a restriction of passive sales at the retail level).

Restricting cross-selling among authorised wholesalers and retailers

Furthermore, Guess's selective distribution system restricted cross-selling among authorised wholesalers and retailers, which constitutes a hardcore restriction within Article 4(d) VBER. Distributors in a selective distribution system must be free to supply to other authorised members of the system, including distributors operating at different levels of trade.

Resale Price Maintenance

Lastly, Guess prevented its authorised retailers to independently determine their resale prices for Guess products. Such resale price maintenance is expressly prohibited by Article 4(a) VBER.

Hefty fine

The relatively hefty fine of almost EUR 40 million shows that the Commission takes a hard stance against any form of absolute territorial protection. The Commission, however, reduced the fine by 50% to reward Guess's cooperation. Following the Guess decision, the Commission published a Fact Sheet on how to obtain fine reductions through cooperation in antitrust cases.

E-commerce sector inquiry boosts enforcement, especially for geo-blocking

The Guess decision follows the e-commerce sector inquiry, which evolved into a true enforcement "booster". The Commission published its final report on the sector inquiry on 10 May 2017 and initiated the investigation into Guess's distribution contracts and practices in June 2017. Already in February 2017, the Commission opened three further cases following the sector inquiry, underscoring its determination to turn the results of the investigation into practical cases. One case ended in July 2018 with a EUR 111 million fine for fixing online resale prices in the consumer electronics business. Two more cases involving geo-blocking practices are pending. In the "video games-investigation", the Commission accuses the operator of a games distribution platform and several video game publishers of using activation keys to prevent consumers from purchasing video games at lower prices in other Member States. The "hotel price-investigation" probes alleged practices by tour operators and hotels to discriminate against customers on the basis of nationality or place of residence.

New Geo-Blocking Regulation to be observed

This initiative leads to the Geo-Blocking Regulation, which must be considered in future e-commerce activities as well. The Commission's decision was not derived from the Geo-Blocking Regulation, which took effect on 3 December 2018. In fact, the Commission is not responsible for enforcing the Geo-Blocking Regulation. However, the Commission emphasised that Guess's practices would have infringed this regulation also, which prohibits restrictions on passive cross-border sales to end users on the grounds of nationality, place of residence or place of establishment – see Article 6(2) Geo-Blocking Regulation. In particular, a EU customer must be able to access any country-specific online shop (and any other online user interface within the EU) without being automatically redirected or blocked. Regardless of his nationality, place of residence or place of establishment (verifiable by IP address, GPS coordinates, postal code, etc.), a EU customer must be able to make purchases according to the business, price and delivery conditions of the country-specific online shop. It is permissible, however, for business, price and delivery conditions to vary among country-specific shops (i.e. dealers do not have to deliver to all EU Member States or offer identical prices throughout the entire EU).

E-commerce in the crosshairs of competition watchdogs

E-commerce and online distribution remain in the crosshairs of European and national competition watchdogs. This is not only due to the Geo-Blocking Regulation and the Guess decision. In its latest article in the October 2018 edition of Competition and Consumer Protection in the Digital Economy, the German Bundeskartellamt stated that many competition-law issues remain unsolved despite landmark decisions such as Asics and Coty.

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