One of our most common competition law queries comes from clients looking to protect their offline distribution model from low cost online operators. While clients are often aware of recent cases in which companies have been fined for unlawfully restricting online sales, there is typically confusion as to what restrictions suppliers can lawfully imposed on distributors. This article aims to provide some clarity as to what restrictions on online sales are – and are not – permitted under competition law.
Online sales – what is not allowed?
1. You cannot ban your distributors from selling online. Bans on online selling are considered a hardcore restriction of competition. In August 2017, the Competition and Markets Authority (“CMA”) fined a golf club manufacturer, Ping, £1.45 million for restricting its authorised retailers from selling its products online. While the CMA acknowledged that Ping was pursuing a genuine commercial aim of promoting in-store custom fitting, it concluded (as did the Competition Appeals Tribunal appeal) that Ping could have achieved this through less restrictive means.
2. You cannot restrict the prices at which your distributors or resellers sell online. This constitutes resale price maintenance, a hardcore restriction of competition that will almost certainly result in substantial fines if discovered by a competition authority. For example, in 2017, the CMA fined National Lighting Company £2.7m for limiting resellers to offering a maximum 20 per cent discount off the trade price on online sales.
3. You cannot charge higher prices for products to be resold online than you charge for products to be sold offline. Although you can pay a fixed fee to support the buyer’s offline or online sales efforts.
4. You cannot require a distributor to limit the proportion of sales made online. However, you can require a distributor to sell a given amount of product offline (see below).What online sales restrictions are allowed?
5. You can require resellers to make a minimum amount (in value or volume) of offline sales. The amount can be the same for all resellers or determined individually for each buyer on the basis of objective criteria (e.g. relative size, location etc).
6. You can recommend resale prices. However, these must be non-binding and should not be combined with any kind of incentives or threats that could prevent your distributors from reducing their prices below the recommended level. For example, in 2016 the CMA fined bathroom supplier Ultra Finishing Limited almost £800,000 for threatening its resellers with loss of supply or higher wholesale prices if they failed to adhere to its recommended price levels for products sold online.
7. You can specify quality standards for distributors’ use of the internet to resell your goods. Just as you may require quality standards for brick-and-mortar stores or showrooms, you are entitled ensure that your distributors’ websites are consistent with your distribution model.
8. You can also require that distributors’ use of third party platforms adheres to those standards. For instance, if the distributor’s website is hosted by a third party platform, you can require that customers do not visit the distributor’s website through a site carrying the name or logo of the third party platform. Provided, that is, that such measures are not used to limit online sales.
9. You can ban the use of online marketplaces. According to the European Commission’s April 2018 policy brief (which sought to clarify the meaning of the ECJ’s judgment in the Coty case), online platform sales bans may be used in both exclusive and selective distribution arrangements irrespective of the nature of the goods supplied, provided that both parties’ market shares are below 30% (and the other ‘Vertical Block Exemption Regulation’ (VBER) conditions apply).