Germany: German Federal Cartel Office Declares Outlet Center's Radius Clauses Invalid

Last Updated: 24 August 2015
Article by Jörg Karenfort, Dr. Fabian Stancke and Josef Hainz

The German Federal Cartel Office ("FCO") – Bundeskartellamt – recently published its decision regarding so-called Radius Clauses used by a factory outlet center ("Outlet Center") in all its contracts with the tenants (Case No. B 1 - 62/13).

A Radius Clause keeps tenants, in the case at hand mostly shops for branded clothing, from opening another store in a different center, thereby enhancing or maintaining the exclusivity and attractiveness of a shopping facility. The Clause underlying the FCO's decision prohibited all tenants from opening further stores in a radius of 150 km of the Outlet Center. The complainant was a company that planned to create an Outlet Center in a distance of 147 km.

The Radius Clause was found to being too broad and, therefore, null and void. The FCO considered a distance of 50 km as sufficient to meet justified business interests without hindering competition unnecessarily. Furthermore, extending the duration of the clause to more than five years after the initial conclusion of the contract was deemed disproportionate. The FCO's decision could become relevant throughout the EU, as the applicable antitrust laws are harmonized with respect to the vertical agreements at hand. It is therefore likely that other European National Competition Authorities as well as the European Commission evaluate Radius Clauses similarly.

Case Facts

Definition of the relevant market: The FCO evaluated the relevant product market and limited it to the rental of store facilities in Outlet Centers. According to the decision, there is no general market for all sorts of distributing branded clothing. Outlet stores do not compete with regular stores, because their products differ significantly inter alia by price, quality and presentation. Further, an Outlet Center, where customers often spend the whole day, is considered to offer a more integrated shopping experience than a regular store. An important factor for this is – apart from their larger size – their often remote location. The location is also a key aspect for defining the relevant geographic market. According to the FCO's decision, an Outlet Center competes with all other centers within a radius of 100 km or a 90 minutes' drive. This is the distance a customer is willing to cover in order to benefit from an Outlet Center's special offers.

The Radius Clause: A Radius Clause prohibits a tenant to open up another store with the same products in a competing shopping center within a certain radius. It usually has a time limitation, which in the case at hand often lasted as long as ten years. Radius Clauses give the center using it a monopolist position regarding a certain brand, as it will be the only one selling it within a specified radius. This hinders competition among the clothing brands, but also among different shopping centers. It makes the opening of a second Outlet Center within the radius economically less attractive, if the first one already combines a broad range of popular brands.

Legal Evaluation

Infringement of § 1 ARC: The Radius Clause as used by the Outlet Center in the case at hand is in breach of Section 1 ARC (German Act against Restraints of Competition), which corresponds to Article 101 TFEU.

Using such a clause illegally restricts competition by prohibiting clothing brands from opening up new stores. The specific Radius Clause was not justified by the user's legitimate business interests. In the end, competing Outlet Centers, the direct customers (tenants) and the end consumer are disadvantaged.

Restriction of Competition: According to the FCO's research, there are 69 key brands represented in the majority of Outlet Centers, because they are the ones most likely to attract customers. Keeping other Outlet Centers from contracting with these brands disproportionately obstructs their chances of entering the market, even if there are plenty of other brands to feature.

Not eligible for Exemption: The FCO does not contest that an Outlet Center might have a legitimate business interest in restricting competition especially during the first year of opening the center, as such an opening is a highly risky investment. However, it considers the scope of the Radius Clause (150 km radius and ten years duration) as too extensive to benefit from the block exemption for vertical agreements. In opposition to the defendant's pleading, the FCO further held that an individual exemption pursuant to Section 2(1) ARC (corresponds to Article 101(3) TFEU) is not applicable either. The shops/clothing brands are disadvantaged by the Radius Clause as they will not be able to open new stores within a very broad district, even though a survey showed that there is great demand for more outlet sale channels in Germany. The end consumers have to undertake extensive journeys in order to be able to shop for certain brands at outlet prices. Besides, less competition raises the price levels without an appropriate justification. Finally, other (prospective) Outlet Centers are disadvantaged, as extensive Radius Clauses make it financially difficult if not impossible to open a new center.

General Relevance of the Decision

The Outlet Center Market: The decision is likely to have a significant impact on the Outlet Center market in Germany. First of all, all Radius Clauses used in any contract between an Outlet Center and its tenants that exceed the limits of 50 km and a five year duration will most likely have to be considered invalid. This may also have an indirect effect on potential business plans for new Outlet Centers in Germany. The FCO already stated in its decision that there is great demand in Germany for outlet distribution channels. The ban on Radius Clauses with an unjustified broad scope could, thus, lead to the elimination of existing barriers for certain business opportunities.

Other Markets: The decision cannot be easily applied to other markets like regular shopping malls etc. within city centers. The FCO describes the relevant outlet market with great accuracy and detail. The situation on the regular retail market differs significantly. Competition is much more vital, there are a lot more suppliers on a much smaller space. Hence, should the use of a Radius Clause be at all possible, the distance would have to be much smaller than 50 km.

The situation in the case at hand should further not be confused with an anchor tenant situation. In such cases it is the store that dictates its rules to the shopping center, usually prohibiting it from renting out store space to a direct competitor (so called Anchor Tenant-Clauses). Although currently under legal review by the European Court of Justice (Case C-345/14), those clauses seem still legal within a certain proportionate scope. The further developments in the pending proceeding before the European Court of Justice should, however, be closely monitored.

In any case, the issue of Radius Clauses and Anchor Tenant Clauses must always be kept in mind during a due-diligence before certain real estate investments. If existing, the clauses and their scope should be questioned critically and when in doubt, an antitrust lawyer should get involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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