Ercüment Erdem Att. Can Yildiz

Restriction of Online Advertisement and Sales: European Commission’s Guess Decision

March 2019

Introduction

Restrictions imposed by suppliers on their resellers have become a hot topic of competition law practice in recent years, particularly in Europe. The European Court of Justice’s (“ECJ”) Coty ruling[1], which confirmed that a supplier of luxury goods may prohibit authorized retailers from selling its products on third party platforms, such as Amazon and eBay, has recently brought attention to vertical constraints concerning online sales.

Furthermore, pursuant to its Digital Single Market Strategy for Europe[2] plan, the European Commission (“Commission”) conducted an e-commerce sector inquiry, the final report of which was published in May, 2017[3].

Since then, the Commission has initiated a number of investigations to scrutinize the e-commerce sector, such as the recent investigations regarding online resale price maintenance by consumer electronics manufacturers[4], geo-blocking practices in the sale of video games[5], hotel price discrimination[6], cross-border and online sales restrictions of licensed merchandising products[7], and airline ticket distribution services[8].

Most recently, on 17 December 2018, the Commission fined the US-based clothing company Guess EUR 39.8 million for anti-competitive practices in its European selective distribution system. The Commission found that Guess had imposed various restrictions, including restrictions on cross-border sales and online advertising, which enabled the company to maintain artificially high retail prices, particularly in Central and Eastern Europe. The Commission concluded that Guess’ practices, which the company engaged in until 31 October 2017, deprived European consumers of one of the core benefits of the European Single Market, namely, the possibility to shop cross-borders for more choices and for better deals[9]. By cooperating with the investigation and acknowledging that its conduct was anti-competitive, Guess obtained a 50% reduction in the fine.

This decision is yet another demonstration of the increased scrutiny of distribution arrangements in the e-commerce sector, and is another warning for retailers to ensure that all of their commercial agreements are compliant with competition law. The decision also shows the practical implementation of the Commission’s focus as set out in the final report of its e-commerce inquiry.

Moreover, the determinations of the Commission in the decision sets forth a valuable frame for companies to pay attention to. Accordingly, it would be beneficial to examine the Guess decision of the Commission in detail.

Background

Guess designs, distributes, and licenses clothing and accessories under numerous trademarks, including “GUESS?” and “MARCIANO”. Guess operates a qualitative selective distribution system in the European Economic Area, where authorized retailers are chosen on the basis of quality criteria.

As confirmed in the Coty ruling, suppliers in the EEA may operate distribution systems that best serve their commercial interests, including selective distribution systems. In a selective distribution context, it is required that end-consumers must be able to purchase from any authorized reseller, including across national borders. As is also known, authorized resellers must also be able to independently offer the relevant products online and across borders, and to set their own resale prices. This is further supplemented by the recent Geo-Blocking regulation[10].

The Commission’s Findings

According to the decision[11], Guess’ distribution arrangements restricted the authorized retailers in its selective distribution system from:

  • Using the Guess brand names and trademarks for the purposes of online search advertising;
  • Selling online without prior and specific authorization by Guess. Guess had full discretion for this authorization, which was not based on any specified quality criteria;
  • Selling to customers located outside the authorized retailers' allocated territories;
  • Cross-selling among authorized wholesalers and retailers; and
  • Setting retail prices of Guess products independently (resale price maintenance).

Each of these restrictions will be examined in detail, below, in light of the Commission decision.

Online Search Advertising Restrictions

The Commission determined that a key instrument used by Guess to implement its e-commerce strategy and to control the expansion of online sales by its independent distributors was to restrict the use of the Guess brand names and trademarks and, in particular, in Google AdWords[12].

According to the Commission, Guess systematically banned its retailers from using or bidding on Guess brand names and trademarks as keywords in Google AdWords in the EEA. It is further assessed that although Guess operated a selective distribution system in order to preserve the brand image of its products, it pursued different objectives when it came to its Google AdWords policy.

It is emphasized that Guess sought to maximize traffic to its own website at the expense of the independent Guess distributors and, therefore, it sought to reduce competitive pressure from authorized retailers on Guess’ own online retail activities, by curtailing the ability of authorized retailers to use this advertising tool effectively, and to keep down its own advertisement costs.

The Commission concluded that banning the use of the Guess brand names and trademarks in Google AdWords restricted the “findability” and, ultimately, the viability of authorized online retailers within Guess’ selective distribution system[13]. The Commission pointed out that the restriction had the objective to restrict competition within the meaning of Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”)[14].

Online Sales Restrictions

As it has been previously established, restriction of online sales is a hardcore restriction within Article 4(c) of the Vertical Agreement Block Exemption Regulation[15], according to the ECJ in Pierre Fabre[16].

According to the Commission, another part of Guess’ e-commerce strategy that favored its own website was to have a “limited number of independent operators selling Guess products online.” The Commission emphasized that this was achieved through a contractual term making online sales by authorized retailers conditional on the retailer first obtaining explicit authorization from Guess to conduct online sales. Additionally, no quality criteria was specified for deciding whether or not to grant authorization, and Guess had full discretion to decide whether or not to allow authorized retailers to sell online[17].

In light of the foregoing, the Commission pointed out that to contractually obtain great discretion, instead of ensuring compliance with objective criteria of a qualitative nature, constituted a violation of EU competition rules[18]. The Commission referred to the Coty ruling, wherein the ECJ held that a specific contractual clause within a selective distribution agreement, which pursues a legitimate objective, is lawful under Article 101(1) of the TFEU, only if the quality criteria are laid down “uniformly,” and are “not applied in a discriminatory fashion.”[19]

Restrictions on Wholesale and Retail Cross-selling among Selective Distribution Network Members

The Commission determined that a number of provisions in Guess’s distribution agreements limited the ability of wholesalers and authorized retailers to promote and sell Guess products to other wholesalers or authorized retailers within the selective distribution network of Guess, therefore, limiting competition in the EEA[20].

Restrictions on Cross-border Sales to End-users

It was concluded that certain provisions of the distribution agreements prevented retailers from selling Guess products to end-users outside their allocated territory. It was particularly emphasized that the restrictions were aimed at both active and passive sales; in other words, they allowed neither advertising, nor sales, outside the allocated territory[21].

Resale Price Maintenance

Finally, the Commission found that Guess violated Article 101 of the TFEU by way of intervening in the resale prices of its authorized resellers. In particular, it was determined that Guess monitored the pricing of its retailers, and attempted to influence them to correct resale prices that they considered to be “misaligned” with Guess’s “recommended” resale prices[22].

 Implications and Remarks

In the Guess case, the Commission condemned an undertaking with a selective distribution system that practiced several hardcore restrictions. The decision constitutes a considerable benchmark for companies, as it sets forth the Commission’s attitude towards a number of different vertical restrictions.

Most importantly, the decision sheds new light on the Commission’s approach to online search advertising restrictions. In the Commission’s view, Guess’s objectives to reduce competitive pressure on its own online retail activities, and to keep its advertising costs to a minimum, were not legitimate. Therefore, in categorizing Guess’s AdWords restriction as restricting competition ‘by object,’ the decision suggests that it may be difficult for brand owners to justify such restrictions under the EU competition rules.

Furthermore, throughout its reasoned decision, it can be observed that the Commission made extensive reference to Guess’s internal strategy papers, as well as the selective distribution contracts, in reaching its findings. The decision thus serves as a reminder that internal company documents may very well be utilized for the assessment of anti-competitive conduct.

It is safe to say that e-commerce and online distribution remain a priority to the Commission, as evidenced by decisions, such as the Guess decision. The Guess decision, along with decisions that may result from the investigations, which were opened since the launch of the e-commerce inquiry, provide useful insight into the Commission’s priorities going forward. In this respect, since the Vertical Agreement Block Exemption Regulation will expire on 31 May 2022, the Commission will most likely evaluate whether the current vertical rules are still efficient and plausible in the age of e-commerce. Therefore, in relation to new forms of online sales restrictions, the Commission continues its evaluations by way of decisions, such as the Guess decision, and sets the field for the new approach with respect to online markets.

[1] ECJ preliminary ruling in Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH, 6 December 2017.

[2] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions a Digital Single Market Strategy for Europe.

(COM/2015/0192 final) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2015%3A192%3AFIN

[3] Final report on the E-commerce Sector Inquiry (Brussels, 10.5.2017 - COM(2017) 229 final) http://ec.europa.eu/competition/antitrust/sector_inquiry_final_report_en.pdf

[4] http://europa.eu/rapid/press-release_IP-17-201_en.htm,

Investigation closed in July, 2018, with imposition of a fine over EUR 111 million to consumer electronics manufacturers, Asus, Denon & Marantz, Philips and Pioneer, for imposing fixed or minimum resale prices on their online retailers in breach of EU competition rules: http://europa.eu/rapid/press-release_IP-18-4601_en.htm

Case numbers are AT. 40465 (Asus), AT.40469 (Denon & Marantz), AT.40181 (Philips), AT.40182 (Pioneer).

[5] http://europa.eu/rapid/press-release_IP-17-201_en.htm.

[6] http://europa.eu/rapid/press-release_IP-17-201_en.htm.

[7] http://europa.eu/rapid/press-release_IP-17-1646_en.htm.

[8] http://europa.eu/rapid/press-release_IP-18-6538_en.htm.

[9] Press Release - http://europa.eu/rapid/press-release_IP-18-6844_en.htm.

[10] Regulation (EU) 2018/302, which came into force on 22 March 2018, and has applied since 3 December 2018, addresses unjustified on-line sales discrimination based on customers' nationality, place of residence, or place of establishment within the internal markets.

[11] Case AT.40428 of 17.12.2018, para. 2.

[12] Case AT.40428 of 17.12.2018, para. 40.

[13] Case AT.40428 of 17.12.2018, para 45-52.

[14] Case AT.40428 of 17.12.2018, para 126.

[15] Commission Regulation (EU) No. 330/2010, 20 April 2010.

[16] Case C-439/09- 2011.

[17] Case AT.40428 of 17.12.2018, para 53-57.

[18] Case AT.40428 of 17.12.2018, para 63.

[19] Case AT.40428 of 17.12.2018, para 130.

[20] Case AT.40428 of 17.12.2018, para 64-78.

[21] Case AT.40428 of 17.12.2018, para 83.

[22] Case AT.40428 of 17.12.2018, para 87.