Internet is a strong commercial platform, which suppliers, distributors and customers benefit. Undertakings who prefer online sales to traditional sales can reach wide customer groups, increase sale opportunities and make savings in operational costs. Advantages undertakings benefit from online sales allow them to lower recommended prices, which create beneficial outcomes for customers. As a result, customers start to use brick and mortar shops for informative and practical purposes such as product try-out and purchase the products via Internet.
Differences between prices among undertakings create extensive competition pressure, which leads to anti-competitive attempts such as executing distribution agreements with limitations for online sales.
The European Commission's Vertical Block Exemption Regulation ("VBER")1 and European Union Vertical Restraints Guidelines ("Guidelines")2 provide rules on the use and restrictions of internet in terms of vertical distribution agreements. VBER does not regulate specific rules in terms of internet sales however the Guideline provides reference to selective distribution systems which shows Commission's view on internet sales.
It is important to understand the distinction between active and passive sales in terms of Internet sales within the context of distribution agreements. However it is sometimes difficult to make such distinction. Legal scholars proposed to enact specific regulations on Internet sales, whereas European Commission preferred to address this distinction within the context of the Guidelines.
Active sales mean reaching out to individual customers through direct mail, unsolicited e-mails, visits or approaching a group of customers through advertisements on Internet and media, which will target specific or a group customers. Promotions or advertisements should aim to influence and attract only the group it target.
Active sales can be restricted by prohibiting unsolicited emails and advertisement. These kinds of prohibitions will secure exclusive distribution. Active sales are also prohibited to protect the quality of the product and to prevent free riding which appears where a distributors advertisement or promotion efforts benefit another distributor.
There are certain restrictions which are allowed for online active sales such as, limiting the use of internet by distributors if such use or advertisement creates active selling in another distributors territory, enforcing quality requirements for the distributors websites, agreeing on certain conditions for becoming a member of the distribution chain especially in a selective distribution system and also enforcing conditions for offline sales such as quantity of sales in order to preserve brick and mortar shops. Besides suppliers can require its distributors to use third party platforms in terms of the quality standards. Agreements including above mentioned provisions and restrictions can be exempted in cases where they meet the foreseen thresholds and requirements of Block Exemption.
On the other hand pursuant to the Guidelines paragraph 51, "passive sales are defined as responding to unsolicited requests from individual customers including delivery of goods or services to such customers". Internet sales are considered as passive selling since the activity is not addressed to a specific customer but aims to fulfill the demands made by the customers. A passive sale is where a customer visits a website of a distributor and contacts that distributor which results as a sale with delivery. In cases where customers prefer to be automatically updated which results as sales are also considered as passive sales. In terms of capturing wider customer groups, websites use different language options, the language preferences provided to customers creates passive character of the sales.
In general it is accepted that passive sales cannot be restricted whereas suppliers can put restrictions on active sales by the distributors.
The Commission regulates hardcore restrictions with regard to passive sales which are considered as unacceptable restrictions limiting distributors' accessibility to variety of customers. In order for the agreements to benefit from Block Exemption they should exclude such hardcore restrictions. Pursuant to Guidelines paragraph 52, restrictions with regard to passive sales include;
- preventing customers to view another distributors website or providing automatic rerouting of customers to other distributors, though it is allowed when a distributor's website offers links to other distributor or supplier websites,
- terminating a customer's credit card data once it appears within an other exclusive distributors exclusive territory,
- limiting a distributors proportion of sales over internet. Although this does not prevent that the supplier requires certain amount of sales to be made offline in order to provide efficiency in brick and mortar shops or a supplier can make sure that the online sales is in line with the suppliers distribution model.
- Agreements of dual pricing, suppliers cannot determine that distributors pay different prices (higher) for online sales compared to offline sales. However the supplier can agree a fixed fee with the buyer.
The Commission regards abovementioned restrictions as limitations addressed to the access of the distributors to wide and various customers.
Selective Distribution Systems5
Selective distribution agreements are generally executed where a supplier wishes to have strong control over its product. Products such as luxury goods and complex or technical products are generally subject to selective distribution agreements. There are also motivational reasons behind executing selective distribution agreements. These reasons can be categorized under three divisions; prevention of free-riding, brand image, creation of incentives.
Suppliers can provide certain conditions and minimum criteria for their distributors in order to preserve their brand image and benefit the expertise of qualified distributors. In cases where the conditions set forth aims to preserve such brand image these conditions will not be regarded as anti- competitive restrictions and will not constitute competition violations. These agreements are covered under VBER and the Guidelines.
Prohibition of online sales is regarded as a hardcore restriction under the Guidelines with only two exceptions. The Commission is in the view that safety and health reasons can be the exceptions where hardcore restrictions can be necessary.
Pursuant to paragraph 56 of the Guidelines, "restriction of active or passive sales to end users, whether professional end users or final consumers, by members of a selective distribution network, without prejudice to the possibility of prohibiting a member of the network from operating out of an unauthorized place of establishment" is not regarded as a hardcore restriction.6 In other words, in a selective distribution system with the exception to protect an exclusive distribution system7 operated elsewhere users or purchasing agents acting on behalf of these users to whom they may sell cannot be restricted.
It should be noted that active and passive sales through internet should be allowed in such selective distribution systems.
It is commonly advised to execute agreements free from hardcore restrictions in order to benefit from the Block Exemption.
Obligations preventing dealers to reach wider and different customers by way of internet by providing conditions which are not equivalent with the conditions set forth for the brick and mortar shops are regarded as hardcore restrictions. This means, in cases where criteria for online and offline sales are equivalent certain conditions for internet sales can be provided. This regulation does not mean that the conditions imposed for online sales and off-line sales must be the same however, they should bear the same purpose and differentiate only in terms of the nature of online and offline sales. The agreements, which impose the above, mentioned hardcore restriction can not benefit from Block Exemption.
Suppliers can put conditions on minimum time limits for delivery, customer services, design of the website such as using high quality or three dimensional pictures of the product. Quality conditions for internet sales should be in line with the characteristic of the product. Moreover the conditions provided by the suppliers should not interfere with the criteria of other suppliers. The Guidelines provides that in cases where it is easier for unauthorized dealers to obtain the products in question over the internet it is possible to have stricter rules8. A supplier may request instant delivery for products sold offline whereas this requirement will not be possible for online sales; suppliers can impose certain delivery times for such sales. Moreover, there can be differences for the costs of costumers in terms of online sales where a customer wishes to return the product and also for secure payment systems9.
VBER and the Guidelines show the Commission's view on online sales within the context of selective distribution systems. The Guidelines defines the terms active and passive selling and emphasize that "in principle, every distributor must be allowed to use the Internet to sell products"10. Active sales are when sellers use advertisements and promotions to attract customers whereas in a passive sale the seller does not try to attract the customer but the customer finds the seller and purchases the product. Online sales are considered as passive sales. It should be noted that passive sales cannot be restricted whereas suppliers can put restrictions on active sales by the distributors.
VBER Article 4(c) regulates that in a selective distribution system members cannot be limited in terms of customers. Therefore pursuant to the Guidelines, preventing customers to view and visit a distributor in another territory and purchase such distributors products is a hardcore restriction.
It is considered that agreements enforcing a general prohibition on Internet sales in a selective distribution agreement will not be regarded as lawful in terms of competition law unless they can be justified objectively.
3 See: Guidelines, paragraphs 51,53.
4 See: Guidelines, paragraphs 51,52,54.
5 Case Law: Pierre Fabre Dermo-Cosmétique SAS v Président de l'Autorité de la concurrence and Ministre de l'Économie, de l'Industrie et de l'Emploi (Case C-439/09)  O.J. C 355/04.
6 See: Article 4(c) of the Block Exemption Regulation.
7 See: Guidelines, paragraphs 51,56.
8 See: Guidelines, paragraphs 56.
9 See: Guidelines, paragraphs 56.
10 See: Guidelines, paragraphs 52.
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.