Online sales, selective distribution and geo-blocking: lessons from the Guess decision

The European Commission has announced a €40m fine for Guess for imposing a range of online sales restrictions, which the Commission found had kept prices artificially high. Coming out of the Commission's e-commerce sector inquiry, this decision reflects many of the concerns identified in that review, including geo-blocking, restrictions on selling online and bidding on search advertising.

Competition authorities across Europe are aggressively closing down illegal restrictions of competition law and this case emphasises that brand owners must find legitimate ways to exercise a degree of control over their retail network. This underlines the need to put in place a robust distribution strategy within the confines of competition law, rather than trying to rely on ad hoc or informal "restrictions" on retail partners.

Selective distribution

Guess operated a selective distribution system, which allows it to lawfully restrict sales to its 'authorised distributors', in order to give it a greater degree of control over its distribution. However, it appears from the Commission's press release that Guess had manifestly exceeded the boundaries of the protection offered by selective distribution. In finding this, the Commission reiterated in particular that:

• consumers must be free to purchase from any retailer authorised by a manufacturer, including across national borders; and
• authorised retailers must be free to offer the products covered by the distribution contract online, to advertise and sell them across borders, and to set their resale prices.

Restriction on selling online without authorisation

It is well-established that outright restrictions on online sales are 'hardcore' breaches of competition law, with the UK courts recently upholding the CMA's fine on golf equipment manufacturer, Ping (read more here). However, within selective distribution, brand owners can set criteria for online sales, ensuring that, when distributors sell online, the brand is protected in an equivalent way to offline.

Here, it seems that Guess had not set such criteria and had complete discretion to refuse online sales. The Commission found this to be a breach of competition law and going forwards, Guess will be required to set criteria to allow its distributors to sell online.

Geo-blocking

The Commission's press release suggests that Guess was also prohibiting its distributors from selling to consumers based outside their allocated territories. The Commission notes that the restrictions on responding to passive sales would now be prohibited by the Geo-blocking Regulation, which came into force on 3 December 2018 (read more here).

The Commission also found that Guess stopped its distributors from making active sales outside their allocated territory, which is prohibited within a selective distribution system.

This is the first EU competition case on territorial restrictions since the Geo-blocking Regulation came into force and is an important reminder of the interaction between the two regimes. While the new Regulation applies to stop companies from making their own decision to lock consumers out of local versions of the website, competition law will apply, and regulators will continue to intervene, when companies agree to geo-block, including where this requirement is imposed by the brand owner.

Online search advertising

Guess was also penalised for restricting distributors from bidding on adwords, something we are increasingly seeing in distribution agreements. Guess had restricted authorised retailers within its selective distribution agreements from bidding for the Guess brand names and trademarks for the purposes of online search advertising. This was aimed, it is understood, at preventing Guess from losing traffic to other online retailers, and also could have prevented Guess from facing competition for rival bidders of search terms.

This is the first time that case law has examined this type of restriction within an authorised distribution system. However, these types of restrictions have been on the Commission's radar for some time. As part of the e-commerce sector enquiry, the Commission considered that these restrictions were being used as a tool to allow manufacturers to obtain a preferential listing and potentially keep bidding prices down. It is likely that as the growth of online sales continues and the importance of preferential listings rise, further case law will follow examining this issue. For now, it is clear that within a selective distribution system, such a clause is likely to be penalised: given the restrictions that are being applied to authorised resellers, a brand protection argument does not hold.

The Commission still cares about 'traditional' restrictions

While this case marks two firsts for competition law – the first time a cross-border sales issue has been examined since the geo-blocking regulations came into force, and the first time adword bidding restrictions have been examined within a selective distribution – it is not the case that the Commission is moving away from targeting 'traditional restrictions'. As part of the investigation, the Commission also found that Guess's distribution agreements restricted authorised retailers from cross-selling to authorised wholesalers and prevented retailers independently deciding on the retail price at which they sold Guess's products. Both resale price maintenance and restrictions on sales between distributors have long been challenged by the Commission, and this case is a reminder that while the Commission may be seeking to tackle new types of online sales restrictions, it is doing so alongside, and not at the expense of, tackling these traditional restrictions.

The importance of cooperation

The E-commerce sector inquiry put companies like Guess under the spotlight and kicked off a series of investigations. In some good news for companies that are under this spotlight, the Commission reiterated in this case that cooperation can result in a substantial reduction in the level of a fine. The Commission noted that Guess cooperated to a greater extent than it was legally required to do by bringing to the Commission's attention its restriction on authorised retailers of the use of Guess brand names and trademarks, a restriction which the Commission was not previously aware of. As a result, the total fine imposed upon Guess included a reduction of 50%.

This is not an isolated incident: it is a similar level of reduction to that allowed to the four manufacturing companies that were found to have engaged in resale price maintenance over the summer, showing a consistent message from the Commission that cooperation can greatly benefit infringing companies.
However, the fine imposed by the Commission may not be the end of the story for Guess in terms of the financial impact it may suffer as result of these findings: the Commission's press release also reminds businesses of the power to bring follow-on damages actions. Guess may therefore also be liable to further financial cost if distributors, or other parties affected by the restrictions, bring claims.

Key takeaways

Selective distribution can be a powerful tool to protect a brand but this case highlights that competition law risk must still be managed within a robust and compliant framework. It is not enough just to create the "façade" of a compliant distribution system. If a brand owner wishes to take advantage of the significant benefits that selective distribution offers in terms of enabling it to "cherry-pick" retail partners, that brand owner must still accept as a quid pro quo that it cannot absolutely control online, cross-border or intra-network sales. If you would like to discuss how to maximise brand protection and minimise compliance risk, please contact one of the experts listed below, or your usual Osborne Clarke contact.