Can a supplier prohibit retailers of its products using online marketplaces?

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This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

On 26 January 2017, the European Commission confirmed its position that suppliers prohibiting retailers of their goods from using online marketplaces will not necessarily infringe competition law. The Commission stated that there is a need to "strike the right balance" when reviewing this type of restraint, as there may be legitimate reasons for imposing such bans.

The statement was made following the Commission's submissions to the European Court of Justice in relation to an important upcoming ruling on this issue after a request by a German court hearing a dispute between cosmetics supplier, Coty Germany GmbH, and distributor, Parfümerie Akzente GmbH.

What does this mean for suppliers of branded goods who wish to include such restrictions in their distribution agreements?

Online marketplaces have established themselves as important sales channels for online retailers, particularly for smaller businesses who may depend on well-known online marketplaces (or "platforms") to gain visibility and attract online consumers across the EU.

In response to the growth of e-commerce and presence of online marketplaces, such as Amazon and eBay, the Commission noted, in its e-commerce inquiry preliminary report (September, 2016), that a large number of manufacturers have introduced conditions into their distribution agreements which limit or prohibit the use of online marketplaces by retailers.

While blanket restrictions on selling goods online are likely to constitute serious infringements of competition law, the current enforcement position, as confirmed by the Commission, is that restrictions on retailers relating to their use of online marketplaces do not constitute hardcore restrictions of competition. Accordingly, such restrictions may benefit from automatic exemption under the General Block Exemption Regulation (the "Block Exemption") where the relevant conditions are met.

Even where the Block Exemption does not apply, a case-by-case assessment is necessary in order to assess the risk of non-compliance. This would take into account the justification for the ban on using online marketplaces, the nature of the product or service, and the characteristics of the market. Where a marketplace ban amounts to a de facto prohibition of online trade, as consumers and retailers in that market rely heavily on marketplaces, there is a greater risk of an infringement.

There are three important caveats to the above for businesses to bear in mind:

  1. As noted above, the issue of whether marketplace prohibitions are hardcore restrictions of competition (and therefore likely to infringe competition law) has been referred to the European Court of Justice. Given that this will represent a hugely important ruling with game-changing consequences, businesses need to be aware that the legal position may change. The Advocate General's opinion, which will precede the Court's ruling and probably be delivered later this year, may provide insights into the eventual outcome.
  2. Pending the Court's ruling, a stricter approach may be adopted by authorities in some EU Member States. Indeed, the German competition authority has taken such a position (for example, in the Adidas and ASICS footwear cases in 2014 and 2015, respectively). Four member states, France, Italy, Austria, and the Netherlands are understood to have supported the Commission's position that a case-by-case assessment is appropriate.
  3. The benefit of the Block Exemption may be either (i) withdrawn in respect of particular agreements where an authority believes that the restriction is unlikely to deliver efficiency benefits to consumers, or (ii) disapplied generally across a given market where the cumulative effect of several such restrictions has a detrimental effect on competition. While such withdrawals or market-wide declarations are expected to be rare, the Commission highlighted the possibility in the future in its e-commerce sector inquiry preliminary report.

In addition to watching out for this upcoming legal development, businesses that have incorporated online marketplace restrictions in their distribution arrangements should consider:

  • Whether their agreements currently benefit from the Block Exemption.
  • The risk of withdrawal of the Block Exemption.
  • If the Block Exemption does not apply (because the conditions are not met), the likelihood of their distribution arrangements infringing UK / EU competition law, taking into account the economic and legal context.