Online retail in the new VRBE State of play and perspectives

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1 FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Online retail in the new VRBE State of play and perspectives Mélanie Thill-Tayara Partner Norton Rose LLP Paris 1 July 2011

2 INTRODUCTION

3 Introduction New legal framework EU New VBER since 2 April 2010 New Vertical Guidelines Switzerland Communication of 28 June 2010: vastly similar to EU rules Result of a disputed review process Lobbying forces of all sides were unleashed Active campaign by ebay ("Call for action") Brands responded with strong positions manufacturers entrenched in 20th Century business models [ ] undermine access to the 21st Century Market

4 Introduction Two main reasons for criticism/1 Lack of clarity Unclear drafting of certain provisions Previous case law rare: EU Commission comfort letter of 24 June 2002, B&W Loudspeakers Commission comfort letter of , Yves Saint Laurent Parfums ECJ judgment of 11 December 2003, Deutscher Apothekerverband Pending request for preliminary ruling to the ECJ, Pierre Fabre Dermocosmétique France: probably the most complete guidance Cases in which parties accepted to modify their distribution contracts: Festina, Cosmetic products, Hi-fi equipment Ongoing fight on online sales ban: Pierre Fabre Dermocosmétique Switzerland: Pending Weco investigation in home furniture goods case

5 Introduction Two main reasons for criticism/2 Resolute pro-internet approach not always justified by economic reasoning Long recognized efficiency rationale for restricting sales through a channel Reward retailers' effort, protect in-store investment from free-riders Strong specificity of certain sectors (luxury brands) Brand image point-of-sale shopping experience is essential to how consumers perceive and experience the products Online sales risk jeopardising: Brand image and POS experience Underlying selective networks Very existence of the market for luxury goods

6 VBER PROVISIONS ON ONLINE SALES

7 Resolute "Pro-Internet" approach Restrictions to online sales are in principle "hardcore restrictions" Online sales normally considered "passive sales" Extensive definition of "passive sales" Ex: Offering different language options does not result in an "active sale" Restrictions of passive sales considered "hardcore restrictions" even if exclusive distribution Restrictions of online sales not exempted and most likely considered anticompetitive

8 Resolute "Pro-Internet" approach Examples of "hardcore" restrictions Obligation to redirect customers from other territories or prevent their purchases (However, possible to oblige the distributor to include links to other distributors' websites) Obligation to limit the proportion of online sales "Dual pricing" clauses except if online sales represent an extra cost for the supplier Question: what about different rebate levels, reflecting different levels of services?

9 Allowed restrictions to online sales: All forms of distribution "Exceptional circumstances" such as public ban on selling dangerous substances to certain customers for reasons of safety or health (Guidelines 60) Protection of substantial investments by the distributor necessary to start up and/or develop a new market (Guidelines 61) Restrictions of passive sales by other distributors into such a territory allowed if necessary for the distributor to recoup investments generally fall outside the scope of Article 101(1) (Limited to the first two years)

10 Allowed restrictions: Exclusive distribution Prohibition of active sales allowed "Targeted marketing" may be prohibited Approaching individual customers by for instance direct mail, including the sending of unsolicited s, or visits Actively approaching a specific customer group or customers in a specific territory throughh advertisement t in media, on the internet or other promotions specifically targeted at that customer group or targeted at customers in that territory Key criterion: Is the advertisement or promotion only attractive for the distributor if it (also) reaches a specific group of customers or customers in a specific territory exclusively allocated to another distributor? Case by case analysis

11 FOCUS ON SELECTIVE DISTRIBUTION

12 Allowed restrictions in selective distribution Quality standards for online sales: applicable principle Qualititative criteria for online sales allowed if "overall equivalent" to brick&mortar criteria (Guidelines 56) Differences must be justified by the different nature of these two distribution models In practice: comparison exercise needed equivalence might not be easy to appreciate

13 Allowed restrictions in selective distribution "Brick & click" principle Distributors may be obliged to have one or more B&M points of sales "Proportionality" or "ancillarity" clauses prohibited But absolute amount of required offline sales can be fixed. May be the same for all buyers, or determined individually for each buyer on the basis of objective criteria, such as the buyer's size in the network or its geographic location 52 of the Guidelines: "This does not exclude the supplier requiring, without limiting the online sales of the distributor, that the buyer sells at least a certain absolute amount (in value or volume) of the products off-line to ensure an efficient operation of its brickand-mortar shop" One of the most polemic points of the Guidelines which may give rise to litigation

14 Allowed restrictions in selective distribution Limitations on use of "third-party" platforms Problem: brand-image devaluation Manufacturers can impose that such platforms be used only in accordance with the standards and conditions agreed by the distributor Where the distributor's website is hosted by a third party platform, the supplier may require that customers do not visit the distributor's website through a site carrying the name or logo of the third party platform (Guidelines 54) Quantitative limits it on end users Guidelines 56 : "a supplier may restrict distributors from selling more than a given quantity of contract products to an individual end user such a requirement may be stricter for online sales, if it is easier for an unauthorised dealer to obtain goods online"

15 Inefficient approach to prevent free riding "Brick&click" clause does not prevent strategy of "sham" POS by pure players Does not solve cases where the service element cannot be provided online More effective solutions to the problem are deemed hardcore restrictions" Limit on proportion of sales made online ("ancillarity clause") "Price coherence clause" Alternative solutions possible but not tested yet "Establishment" clauses Coherence with business model

16 Inefficient approach to prevent free riding Allowed restrictions to online sales often too vague and imprecise Not clear how far a supplier can go to "make sure that the online activity of the distributor remains consistent with [its] distribution model" (Guidelines 52) Not clear when it is "easier for an unauthorised dealer to obtain goods online" (so that a supplier can impose stricter restrictions from selling more than a given quantity of contract products to an individual end user for online sales) No certainty with respect to "overall equivalence" between qualitative restrictions imposed on brick&mortar and online shops How to prove that subsequent changes to number of physical POS "except where those changes have as their object to directly or indirectly limit the online sales by the distributors"? Consequences Heavy legal uncertainty and litigation risk Risks of diverging application of the Guidelines across Europe However: margin for "creative drafting"

17 CONCLUSIONS

18 Conclusions Economic analysis strongly suggests presumption in favour of VRs irrespective of sales technology and even by a dominant player Potential for anti-competitive effects exists i.e. foreclosure, raising rivals costs or promoting collusion though these are the exception Burden should not be on parties to vertical agreement to explain exactly how it is efficient, and whether there any so-called less restrictive alternatives To preserve retailers incentives to invest/offer services, another approach is needed In these sense, Guidelines miss an opportunity for setting out a clearer and more efficient reference framework

19 Our international practice

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