The Internet and Competition Law
A Lexis PSL document produced in partnership with
Neil Baylis of K&L Gates LLP
®
• ‘Passive’ and ‘active’ sales
• ‘Passive’ sales using the internet
• ‘Active’ sales using the internet
• Selective distribution systems and the internet
The internet is a powerful commercial tool which brings many customer benefits. References: EU vertical restraints
guidelines, paras 51 to 54
It allows suppliers and distributors to reach an increased number and a wider
variety of customers compared with traditional sales and distribution methods
(such as sales from ‘bricks and mortar’ outlets). Restricting the pro-competitive
benefits of using the internet is viewed as an unreasonable resale restriction.
The European Commission’s Vertical Block Exemption and Guidelines provide
specific rules and guidance on the use, and any restrictions placed upon such
use of the internet in the context of a vertical distribution agreement (see
practice note: ‘The vertical agreements block exemption’).
A vertical agreement may fall within the Block Exemption if it meets specified
criteria, including criteria on the use of the internet.
A pragmatic approach is taken and the overriding concepts in the Block
Exemption are as follows:
• distributors should be free to have a website and engage in internet sales
• certain restrictions are allowed to:
- preserve the quality of distribution
- prevent free riding (ie where one distributor takes advantage
of the promotion efforts which have been made by another
distributor), and
- restrict active sales via unsolicited emails and targeted online
advertisements.
‘Passive’ and ‘active’ sales
The internet allows a distributor to reach customers outside of its usual or allocated
territory. This has the potential to affect the efficient functioning of a supplier’s
distribution system (see practice note: ‘The vertical agreements block exemption’).
An assessment of whether a restriction relating to distribution via the internet
will be permitted by competition law needs to take account of the distinction
between ‘active’ and ‘passive’ sales.
References: EU vertical restraints
guidelines, para 51
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
‘Passive’ sales are where a distributor responds to unsolicited requests from
individual customers about the product.
‘Active’ sales are where the distributor carries out targeted marketing to
customers outside its territory.
In general, a supplier may restrict active sales by its distributors but it cannot
restrict passive sales.
‘Passive’ sales using the internet
References: EU vertical restraints
In relation to internet sales where a distributor uses a website to sell products,
this is generally considered to represent a form of passive selling on the basis that guidelines, para 52
it represents a reasonable way of allowing customers to reach that distributor.
However, the use of a website may have effects that extend beyond the
distributor’s own territory and customer group. It’s recognised that such
effects result directly from the technology which itself allows easy access from
everywhere.
For instance, a customer may easily use a web browser to search for a specific
product, and as a result, visit the website of a particular distributor, and directly
contact that distributor. Where such contact leads to a sale, even where delivery
is included, it is regarded as passive selling.
Similarly where a customer opts to be kept (automatically) informed by the
distributor, which in turn leads to a sale, this is also considered passive selling.
In terms of sales to customers located in different Member States, obviously the
language used on the website is important in order to attract customers from
different countries. However, offering different language options on the website
does not change the passive character of such website sales on its own.
Unacceptable restrictions on online ‘passive’ sales
As restrictions on passive sales can limit the distributor’s access to an increased
number and variety of customers, there are various examples of unacceptable
agreements involving restrictions of passive sales online, also known as
‘hardcore’ restrictions.
References: EU vertical restraints
guidelines, para 52
If an agreement contains any of these hardcore restrictions, the agreement
will not be able to benefit from the Block Exemption. It is recommended that
any hardcore restrictions are removed so that the agreement may meet the
conditions in the Block Exemption.
The hardcore restrictions relating to online passive sales are:
• preventing customers from viewing a distributor’s website (although it is
not problematic to have an agreement in place requiring the distributor
to link to the websites of other distributors of the supplier or to the
supplier’s website)
• automatically rerouting customers located in another territory, or
exclusive territory, to other distributors’ or the producer’s websites
• terminating transactions made by customers over the internet because
the customer’s credit card details reveal an address which is not within
the distributor’s or the exclusive distributor’s own territory
• limiting the proportion of overall sales the distributor may make online
(although this does not prevent the supplier requiring that the distributor
sells a certain amount of products offline, and that the distributor
remains consistent with the supplier’s distribution model), and
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
• applying dual pricing (ie two prices), meaning that the distributor must
pay a higher price for products intended to be sold via the internet than
for products intended to be sold offline (although dual pricing may be
justified if online sales lead to substantially higher costs for the supplier,
for instance as a result of increased complaints or guarantee claims as a
result of the online sales).
Note—a fixed fee may be agreed (which does not vary based on volume or value
sold via the internet or traditional methods) to support the distributor’s offline or
online sales efforts.
‘Active’ sales using the internet
Online advertising specifically addressed to certain customers represents a form of
active sales to those customers. For example, territory-based banners on third party
websites are considered to represent active selling where the banners are shown.
References: EU vertical restraints
Generally speaking, any efforts which are specifically targeted at a certain
guidelines, paras 51, 53
territory or customer group are considered to be active selling. For example,
paying a search engine or online advertiser to display adverts specifically to users
in a particular territory is actively selling into that territory.
Acceptable restrictions on online ‘active’ sales
There are also a number of acceptable restrictions on active sales under the
Block Exemption.
References: EU vertical restraints
guidelines, paras 52-54.
The possibility to restrict active sales protects exclusive distribution, by
prohibiting unsolicited emails and targeted (online) advertisements. Restricting
active sales can also preserve the quality of distribution and prevent free riding
(ie where one distributor takes advantage of the promotion efforts which have
been made by another distributor, which is a common problem at the wholesale
and retail level).
Acceptable restrictions include:
• a restriction on the use of the internet by distributors, where the
promotion on, or use of, the internet would lead to the active selling
into eg other distributors’ exclusive territories or customer groups. (As
explained above, online advertisements specifically targeting certain
customers are a form of active selling, and so may be restricted) (see
practice note: ‘The vertical agreements block exemption’)
• quality or standard requirements for the use of an internet site by the
distributor to sell the goods (similar to when a supplier might require
standards for a ‘bricks and mortar’ shop, or promotion in general)—eg
requiring the use of a third party platform only in accordance with
certain standards and conditions agreed between the parties, such as
the requirement that customers visiting the site should not be aware or a
third party’s platform site in order to access the distributor’s site
• specifically in the context of a selective distribution system (ie where
authorised distributors are chosen on the basis of specific selection
criteria), the requirement to have one or more ‘bricks and mortar’ shops
or showrooms as a condition for becoming a member of the distribution
system (but this cannot be used as a mechanism for punishing
distributors for making online sales), and
• the imposition of a minimum level of sales made offline in order to
protect ‘bricks and mortar’ shops.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
Note—for any agreement containing these restrictions to be exempted, it must
still meet the market share thresholds and other requirements of the Block
Exemption.
Selective distribution systems and the
internet
For products such as luxury goods or branded products, suppliers will often
use criteria to select their distributors. These criteria are commonly based on
the sales environment and sales services of the distributor (see practice note:
‘Selective distribution’).
Within such selective distribution systems, dealers should be able to sell, actively
and passively, to all end users, with the help of the internet.
Any obligation which dissuades selective distribution system dealers from
using the internet to reach customers by imposing specific criteria for online
sales (which is not similarly applied to sales from a ‘bricks and mortar’ shop) is a
hardcore restriction.
References: EU vertical restraints
guidelines, para 56
If the agreement contains any hardcore restrictions, the agreement will not be
able to benefit from the Block Exemption. It is recommended that any hardcore
restrictions are removed so that the agreement may meet the conditions in the
Block Exemption.
The criteria for internet sales don’t have to be identical to the criteria applied to
offline sales, but must:
• pursue the same objectives and achieve comparable results, and
• any difference in criteria must be justified by the difference in distribution
mode.
For example, to prevent sales to unauthorised dealers, a supplier may restrict its
selected dealers from selling more than a set quantity of contract products to an
individual end-user.
A supplier could do this even where this requirement may need to be more
strictly applied to online sales (where it is easier for the unauthorised dealer to
obtain the products over the internet).
Another example is where, in order to ensure the delivery of the goods is on time,
a supplier in a selective distribution arrangement may require that all offline sales
are delivered instantly.
Clearly, an identical requirement cannot be imposed in the case of online
sales of the goods, but the supplier may specify certain delivery times for
such online sales.
It is now clearly established that clauses imposing a general and absolute ban
on internet sales within a ‘selective distribution agreement’ have, as their object,
the restriction of competition. Such online sales bans are therefore presumed
unlawful, unless they can be objectively justified.
A ban on internet sales solely on the basis that it’s necessary to preserve the
image of the products is unlikely to be exempted under the Block Exemption.
References: Case C-439/09 Pierre
Fabre Dermo-Cosmétique SAS v
Autorité de la concurrence and others
[2011]
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
Neil is a partner in the Antitrust and Trade Regulation, and the Telecom, Media
and Technology practice groups. He has experience in advising clients on all
aspects of EU and UK competition law. His work covers merger control; bringing
and defending competition law based complaints before the regulators; drafting
and implementing compliance programs; drafting and advising on commercial
agreements; advising on regulatory issues under EU laws, and advising on
litigating competition law issues before the English courts. He has advised on
major cases in the following industries: automotive; construction materials; fertilisers; subsea cables;
travel; media; sport; betting and gaming; beverages; transport; and oil and gas services.
K&L Gates LLP comprises nearly 2,000 lawyers who practice in 41
offices located on four continents.
K&L Gates represents leading global corporations, growth and middle-market companies, capital
markets participants and entrepreneurs in every major industry group as well as public sector
entities, educational institutions, philanthropic organizations and individuals. Our practice is a
robust full market practice — cutting edge, complex and dynamic, at once regional, national and
international in scope. Over the last three years our revenues exceeded $1 Billion and, as stated in the
July 2010 issue of the UK publication Legal Business, the firm “has further cemented its position as
the Global 100’s fastest growing firm.”
If you would like to contribute to Lexis®PSL Competition please contact:
Hannah Bates
LexisNexis
Halsbury House
35 Chancery Lane
London, WC2A 1EL
hannah.bates@lexisnexis.co.uk
+44 (0) 20 7400 4625
For details of how to access more practice notes like this one,
please visit www.lexislegalintelligence.co.uk/psl
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
A division of Reed Elsevier (UK) Ltd. Registered office 1-3 Strand London WC2N 5JR Registered in England number 2746621 VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge
Burst logo are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2012 1012-059. The information in this document is current as of October 2012 and is subject to change without notice.