Supplier terms and issues under EU law

Introduction What is the basic position under Following a period of limited enforcement of EU regarding vertical restraints at EU level over the last resale price maintenance (RPM)? decade the EU Commission is increasingly RPM is one of the main vertical restrictions that focusing its attention on vertical agreements. qualify as a hardcore restriction and therefore This is to some extent triggered by the rapid as a restriction by object under EU competition growth in e-commerce, which has led to old law. The main competition concerns with RPM issues re-emerging in a new guise, but focus are that it may facilitate between has not solely been on the online sector. suppliers by enhancing transparency, reduce Rebate schemes operated by suppliers with a price competition between resellers and result dominant position have also been under the in higher prices for consumers. There may be spotlight, with the recent Intel ruling by the limited circumstances where RPM can be Court of Justice of the EU (CJEU) providing justified under Article 101(3) TFEU and will helpful guidance in this area. benefit from an exemption, for example where it is used in order to prevent free-riding, to allow for the introduction of new products or to support short term price campaigns. These arguments will however not be accepted lightly and the Commission's guidelines on vertical agreements (vertical guidelines) make it clear that the parties will have to "convincingly demonstrate" that the RPM agreement will benefit consumers. 02 HERBERT SMITH FREEHILLS

Recommended prices (RRP) and higher prices for kitchen appliances, hair dryers, What about online pricing maximum resale prices will generally be notebook computers, headphones and many other restrictions? permitted provided they do not amount to a products. This is illegal under EU antitrust rules. Under EU competition law a supplier is not minimum or fixed resale price as a result of Our decisions today show that EU competition permitted to operate a dual pricing regime pressures or incentives offered by any of the rules serve to protect consumers where companies under which the distributor is for example parties. The vertical guidelines do flag the risk stand in the way of more price competition and charged a higher price for the product when that a recommended or maximum price will better choice." sold online than when the same product or work as a focal point for the resellers and service is sold in its physical store. The same might be followed by most or all of them, and applies to indirect dual pricing measures which that this risk will be higher the stronger the How are online sales restrictions would have a similar effect such as a discount market position of the supplier. Recommended treated? system in which a lower discount is given if the and maximum resale prices, although Are Platform restrictions permitted? products or services are sold via an online potentially permitted under competition law, store. The supplier is however permitted to will therefore nevertheless need to be No, the starting point under EU competition agree with the distributor a fixed fee to support considered very carefully. law, (which is set out in paragraph 52 of the vertical guidelines), is that every distributor its offline or online efforts. must be permitted to use the internet to sell What do recent cases and the products supplied for distribution. This This approach to dual pricing was criticised by investigations tell us about the was confirmed by the CJEU in the Pierre Fabre a number of respondents in the Commission's Commission's position on RPM? case where a requirement that cosmetic recent e-commerce sector inquiry who argued brands be sold only in a physical space with a that dual pricing may be necessary to ensure The Commission's e-commerce sector inquiry qualified pharmacist present to advise on the there is a level playing field between online and report highlights that RPM is becoming use of the products, was held to be an absolute offline trade, by taking into account the increasingly common in the online sector. ban on online sales and thereby a restriction different cost structures of these channels. Increased price transparency and easier price by object. The Commission does recognise that there monitoring (including the use of automatic may be efficiency justifications for dual pricing, software programmes) has made it easier for Online sales are generally considered a form of and paragraph 64 of the vertical guidelines suppliers to monitor and enforce price passive selling, which cannot be restricted. To considers the possibility for dual pricing to restrictions imposed on their retailers. The the extent that certain online activity is meet the conditions of Article 101(3) TFEU for Commission saw evidence of widespread equivalent to active selling (such as targeted example where sales via one of the sales monitoring of retail pricing by manufacturers advertising specifically addressed to specific channels lead to substantially higher costs for and of adherence by retailers to recommended customers) this can be restricted in the the manufacturer than sales via the other retail prices. Some retailers reported context of exclusive distribution agreements. channel. In its final report in the e-commerce manufacturers applying pressure to maintain A supplier is also entitled to impose quality sector inquiry the Commission clarifies that recommended resale pricing, which included standards on the use of the distributor's this is not the only example and that it remains threats to remove discounts, delay or cease internet site (in the same way it may require open to consider efficiency justifications under supply. Such conduct amounts to indirect RPM quality standards for a physical store, for Article 101(3) TFEU in individual cases. This which is in breach of competition law. catalogue sales or for advertising and may be the case where it can be shown that promotion in general). the dual pricing arrangement is necessary to In July 2018 the Commission imposed total address free-riding between offline and online fines of €111 million, in four separate A supplier may also require that its distributors sales channels in the case of hybrid retailers. decisions, on consumer electronics use third party platforms to distribute the manufacturers Asus, Denon & Marantz, contract goods only in accordance with the What is the approach to Philips and Pioneer for imposing fixed or standards and conditions agreed between the minimum resale prices on their online supplier and its distributors. For example, discounts and rebates under retailers in breach of Article 101 TFEU. where the distributor's website is hosted by a EU competition law? third party platform, the supplier may require Suppliers with a dominant position in the The four manufacturers engaged in so called that customers do not visit the distributor's need to take care how they "fixed or minimum resale price maintenance website through a site carrying the name or structure any discount or rebate schemes to (RPM)" by restricting the ability of their online logo of the third party platform. This provision avoid a breach of Article 102 TFEU on abuse of retailers to set their own retail prices for widely in the guidance has been relied on by suppliers dominance. This has traditionally been a used consumer electronics products such as in the context of a selective distribution controversial area under EU competition law. kitchen appliances, notebooks and hi-fi agreement to restrict the resale of their goods Whereas it is acknowledged that discounts may products. The use of sophisticated monitoring on certain third party platforms such and be part of legitimate price competition and lead tools allowed the manufacturers to effectively Amazon marketplace and eBay. The CJEU in to lower prices for consumers, there is also track resale price setting in the distribution its recent Coty ruling confirmed this approach concern that they may be used by a dominant network and to intervene swiftly in case of and held that this type of restriction can be company as part of a strategy to exclude price decreases. justified in the context of a selective competitors and ultimately exploit consumers. distribution system. This is the case in particular in respect of loyalty Announcing the infringement decisions, inducing rebates, which are seen as a financial Competition Commissioner Vestager said: inducement to customers to obtain all or most "As a result of the actions taken by these four of their requirements exclusively from the companies, millions of European consumers faced SUPPLIER TERMS AND PRICING ISSUES UNDER EU COMPETITION LAW 03

supplier, thereby denying other suppliers the Key contacts opportunity to supply that customer. The Commission and the European courts have Susan Black traditionally taken a hardline approach to Partner exclusivity rebates, which are presumed to be a T +44 20 7466 2055 restriction on competition under Article 102 M +44 7785 255 009 TFEU without the need for further assessment [email protected] of their effects on competition. Kyriakos Fountoukakos Have there been any recent Partner developments in this area of T +32 2 518 1840 M +44 792 045 5155 competition law? kyriakos.fountoukakos@ The recent ruling by the CJEU in the Intel case hsf.com in September 2017 confirmed the existing position on exclusivity rebate. Importantly, André Pretorius however, the ruling also makes it clear that it is T +44 20 7466 2738 possible for a dominant company to rebut the M +44 7809 200 532 presumption of breach of Article 102 TFEU for [email protected] these rebate schemes. Where a dominant company submits supporting evidence that its conduct is not restricting competition, the Commission is required to consider these arguments and should take into account factors such as:

••the extent of the company's dominant position on the relevant market and the portion of the market covered by the practices concerned

••characteristics of the rebates such as their duration and the amounts

••whether the company operated a strategy aimed at excluding 'as efficient' competitors from the market.

This should give companies with strong more flexibility with their rebate schemes, although it will be important to consider the possible impact of those rebates on competitors and to establish the rational for the rebate scheme upfront, in order to shore up a defence strategy if needed. HERBERTSMITHFREEHILLS.COM

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