What lessons can retailers learn from the European Commission's investigation into Guess' distribution arrangements?

Background

As part of its Digital Single Market-Strategy for Europe the Commission conducted an e-commerce sector inquiry which culminated in a final report published in May 2017. You can find our summary of the findings here. Since then, the Commission has initiated the following competition law investigations:

• 2 February 2017
  • Alleged online resale price maintenance by consumer electronics manufacturers;
  • Alleged geo-blocking practices in the sale of video games;
  • Alleged hotel price discrimination;
• 6 June 2017
  • Investigation into the distribution practices of the clothing company Guess;
• 14 June 2017
  • Alleged cross-border and online sales restrictions of licensed merchandising products;
• 23 November 2018
  • Investigation into airline ticket distribution services;

The first investigation closed in July 2018 and resulted in the imposition of EUR 111 million in fines on consumer electronics manufacturers for restricting the ability of their online retailers to set their own retail prices for products such as kitchen appliances, notebooks and hi-fi products. The fine was ultimately reduced by 40-50% as a result of the manufacturers' cooperation with the Commission. This case marks the first prohibition decision in which the Commission actually imposed a fine on the basis of resale price maintenance, and makes clear the Commission's view with respect to the illegality of these practices.

The recent announcement of a EUR 40 million penalty on Guess completes a second investigation. Guess designs, distributes and licenses clothing and accessories. It operates a selective distribution system across the EEA and owns numerous trademarks including "GUESS?" and "MARCIANO". According to the Commission's press release, Guess' distribution arrangements restricted authorised retailers from:

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

While it has long been established that most of these restrictions (particularly on pricing and online sales) qualify as hard-core restrictions and fall foul of Article 101 TFEU, the decision can be expected to shed new light on advertising restrictions.

The EU Geo-Blocking Regulation, which came into force on 3 December 2018, closes a loophole which existed in relation to unilateral geo-blocking and is part of this renewed scrutiny of the e-commerce sector.

Advertising restrictions

In its final report of the e-commerce sector inquiry, the Commission discussed online advertising restrictions in some detail. Given the growing importance of search engines for attracting customers to retailers' websites, the Commission was of the view that restrictions on the use of brand names and trademarks could raise concerns under Article 101 TFEU if they restricted the effective use of the internet as a sales channel. They would need to be assessed individually for possible application of the exceptions criteria under Article 101(3) TFEU. The Commission's statement allowed for the possibility that while brand owners could justify reserving the first place in Google AdWords, distributors should be allowed to bid for the second and third places. The full extent of the Commission's rationale and position on advertising restrictions will be clear once the full decision concerning Guess is made available.

The fine

It is also worth noting that Guess was granted a 50% reduction in its fine due to its cooperation during the investigation, including an acknowledgement that its behaviour infringed EU competition rules, providing evidence with significant added value and revealing infringements which had not been unearthed by the Commission. This exemplifies the benefits of cooperation in certain circumstances and is most likely the result of extensive dialogue between the Commission and Guess' legal advisers.

This decision is one of the few cases in which the Commission has applied a fine reduction as a result of cooperation in a vertical case, where formal settlement and leniency procedures do not apply. Of course, it remains to be seen whether this procedure will become more commonly used by the Commission and national competition authorities in future vertical cases. If it does, further guidance from the Commission should be made available to companies and their legal advisers on the conditions for settlement in vertical cases.

Geo-blocking

Geo-blocking is a general term used for any commercial practice that restricts a customer's access to or use of a website based on geo factors such as nationality or location. It includes denying a customer access to a website based on their location as well as re-routing a customer to a local website with different content, offering and/or prices.

Contractual geo-blocking is contrary to competition rules as Article 101(1) TFEU prohibits agreements which may affect trade and which have as their object or effect the restriction of competition within the internal market. In the case at hand, Guess allegedly restricted authorised retailers from selling to customers located outside their allocated territories - this was a textbook contractual territorial restriction. However, in its announcement, the Commission has taken the opportunity to draw a link between the Guess decision and the EU Geo-blocking Regulation that entered into force on 3 December 2018, stating that the decision complements the Regulation.

Without an agreement between two commercial entities, however, unilateral geo-blocking fell outside of Article 101 TFEU and could previously be lawfully implemented by brand owners selling directly through their own websites in the EU.

As discussed above, the EU Geo-Blocking Regulation addresses the loophole of unilateral geo-blocking. Now in force, this Regulation applies to most companies carrying out business in the EU.

In short, the EU Geo-Blocking Regulation prohibits unilateral geo-blocking and any form of discrimination such as:

• the blocking of access or automatically re-directing customers to another website;
• the application of different general conditions of access to goods or services, and
• the application of different conditions for payment transactions,

based on a customer's nationality, place of residence or place of establishment. Our briefing note on the EU Geo-Blocking Regulation and practical guidelines for compliance can be found here.

The Commission's priorities going forward and public consultation VABER

The Guess decision, along with the decisions which may result from the investigations that were opened since the launch of the e-commerce inquiry, will provide useful insight into the Commission's priorities going forward.

It is also worth noting that the VABER, the bedrock of competition law in vertical arrangements, is due to expire on 31 May 2022. The Commission has begun to assess whether these rules are still effective in the age of e-commerce. Competition law practitioners are expecting significant updates following the extensive work carried out by the Commission during the sector inquiry. The Commission will need to look beyond 2022 as regards how it anticipates the retail industry evolving, especially in relation to new forms of online sales restrictions, the increasing market power of marketplaces and online advertising.

Stakeholders will have the opportunity to participate in the public consultation of the VABER in the first quarter of 2019 and we will make sure to keep you updated on all the relevant developments.