Protecting brand value: online sale restrictions and competition law

Luxury brands often attempt to restrict online sales in case their brand investment is tarnished by becoming available on discount websites. This can potentially lead to competition law issues.

19 May 2017

Since cases in the 1980s and 1990s, notably relating to perfume distribution, competition law has recognised – to a degree – that brand owners should be able to protect their brand investments by imposing certain restrictions on their sales channels in relation to the way in which their products are sold (although never the prices at which goods are sold). 

Permitted restrictions

What is permitted is set out in the EU Vertical Agreements Block Exemption (2010), which allows brand owners, provided their market shares are below 30%, to control certain activities of retailers such as restricting:

  • the maximum price at which goods can be sold
  • one retailer from 'active' sales to a customer group or territory allocated exclusively to another retailer (or reserved to the brand owner)
  • members of selective distribution systems from selling to retailers who are not part of the selective distribution system.

Prohibited restrictions

Clearly prohibited restrictions include:

  • fixed or minimum resale prices
  • the restriction of 'passive' sales by members of selective distribution systems
  • exclusive purchasing restrictions lasting over five years.

The view from Europe

The European Commission’s 2010 Guidelines on Vertical Restraints state that online sales should be regarded as 'passive' sales, except where they are as a result of specific online marketing activity.

The European Commission has recently carried out a sector inquiry into e-commerce in general. This has raised some concerns about the restrictions in distribution agreements in general as regards cross-border and online shopping. It has also generated a number of specific investigations into the pricing of certain electronics goods and video games.

Given the expansion in online sales in the last few years, particularly on platforms such as eBay and Amazon, the established case law and guidance is also being continually tested in cases before national competition authorities and courts across the EU. Most recently, in a reference to the European Court of Justice (ECJ) from a court in Germany (Coty Germany v Parfumerie Akzente), the ECJ has been asked to rule on:

  1. whether selective distribution systems which aim to ensure a ‘luxury image’ for goods compatible with competition law at all? And, if so:
  2. can members of such selective distribution systems be prohibited from selling through online internet marketplaces (e.g. Amazon and eBay)?

There has only just been a hearing in this case, so it may be some time before a judgment is handed down. However, these are fundamental questions in this area and so, depending on how the ECJ approaches the case, it may well turn out to be of critical importance in this area.

What does this mean for businesses?

The challenge for brand owners is to protect the value of their brands in such a way that does not infringe competition law and is enforceable. Current competition law rules mean that simple and blunt instruments, like price fixing and unduly limiting competition between resellers or seeking to limit online competition, are not reliable mechanisms for achieving this, and indeed can generate significant legal risks for brand owners. Therefore, brand owners need to be more sophisticated in their distribution strategies to ensure that they make the most from their brand investments, while maximising retailers' abilities to sell their products.

How can Burges Salmon help?

We have significant experience in advising brand owners and retailers (including online retailers) in relation to the competition law implications of restrictions on online distribution. This includes advising companies in relation to the Competition and Markets Authority's recent investigations into both commercial catering products and bathroom fittings. If you would like to find out more, please contact Noel Beale or your usual Burges Salmon contact.

Key contact

Noel Beale

Noel Beale Director, Competition – Regulation

  • Competition
  • Transport
  • Water

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