An appeal court in Frankfurt has asked the European Court of Justice to clarify the application of the competition rules to online sales. The Frankfurt court made its request in the context of a dispute between a leader in beauty products with an extensive portfolio of beauty brands and its German distributor. The supplier of beauty products operates a selective distribution system in Germany to manage how its products are sold and has taken its distributor to court for selling products over online platforms, such as Amazon.com and eBay. The Frankfurt court is seeking guidance from the European Court of Justice on whether a supplier can prohibit its distributor from selling its goods on online marketplaces, regardless of whether the distributor has met the criteria of the selective distribution system. This question is highly topical in the EU and particularly in Germany, where the German competition authority and the courts have recently taken divergent positions. The German competition authority has issued rulings prohibiting suppliers of branded goods from restricting internet sales by retailers and, in particular, over third party platforms such as eBay and Amazon.com. These rulings have been in contradiction with the stance taken by the German courts, such as the Higher Regional Court of Frankfurt, which recently decided that a branded manufacturer acted lawfully when banning its authorized retailers within its selective distribution system from selling its products on online marketplaces. According to the Higher Regional Court, a manufacturer has a legitimate interest in ensuring that its branded products are perceived as high-quality products sold with the requisite level of sales advice and a manufacturer is, therefore, free in principle to decide under which conditions its products are sold, provided that these conditions are necessary to meet its quality standards. It is expected that the European Court of Justice will issue its ruling on this issue within the next 15 months or so.
Detailed guidance on the use of third-party online platforms is also expected in the forthcoming months from the European Commission once it has had a chance to fully analyze the results of its pending e-commerce sector inquiry, launched in May 2015. This sector inquiry was launched for the purpose of gathering market information to enable the Commission to better understand, if and to what extent, any barriers erected by companies affect European e-commerce markets. The Commission recently published some of its initial findings, focusing on the specific use of geo-blocking, a practice whereby retailers prevent online shoppers from purchasing consumer goods on the basis of the shopper“s location or country of residence. The initial findings of the sector inquiry also show that retailers that sell via marketplaces as well as via their own websites are more likely to sell cross-border compared to those who only sell via their own website. The sector inquiry has found that a significant proportion of retailers selling consumer goods, including clothes, shoes and sports articles, as well as beauty products and cosmetics, engage in geo-blocking practices. For these products, geo-blocking mainly takes the form of a refusal to deliver abroad, but also refusal to accept payment methods, re-routing and website access blocks. Where geo-blocking is the result of contractual cross-border sales restrictions imposed by the supplier, the Commission will likely take the view that such restrictions are illegal and unenforceable. Contractual cross-border sales restrictions include outright bans to sell outside one or more EU Member States as well as less straightforward restrictions, such as requiring approval by the manufacturer before sales into other Member States are permitted. A more detailed analysis of all findings from the on-going e-commerce sector inquiry will be presented in a ”Preliminary Report“ due to be published by the Commission within the next few months, followed by a Final Report in the course of 2017. The Commission”s analysis will cover not only geo-blocking, but also other potential competition concerns affecting European e-commerce markets.
In the interest of legal certainty and consistency, it will be helpful to have the European Court of Justice give a clear position on the legality of third party platform bans in selective distributive systems. Together with the results of the Commission's sector inquiry, it is hoped that suppliers will have a better sense of how far they can go in controlling the online sales of their goods without breaking the European competition rules. In the meanwhile, suppliers that do impose contractual restrictions on the online sales of their retailers, would be well advised to take preventive action by checking their distribution contracts and avoiding an outright ban on online sales, as well as other geo-blocking practices, as the Commission is likely to go on the war path against such restrictions after its inquiry is finished.