Chillin'Competition

I was really pleased that Denis Waelbroeck invited me to speak in the context of the legendary mardis du droit de la concurrence. I was there last week. It was a wonderful occasion to share my thoughts on Coty, the future of selective distribution and, more generally, of enforcement in the area of e-commerce.

Chaired by Denis himself and by Jean-François Bellis, the seminar was great. You can find my slides here  (they are in English, don’t feel intimidated by the French used in the series!).

I felt it is the right time to discuss the online aspects of selective distribution. On the one hand, a consensus seems to be emerging about what was held in Coty. On the other hand, there are still some open issues that will have to be addressed (and will no doubt give rise to further legal frictions).

The consensus around Coty (and the recent Commission brief)

The issue of online selective distribution was, understandably, controversial before Coty. There is now a core set of principles around which a consensus seems to have emerged:

• The protection of the luxury image of a product can justify the setting up of a selective distribution system that complies with the principles set out in Metro I.
• Accordingly, a selective distribution system that aims at protecting the luxury image of a product is, under certain conditions, presumptively lawful under Article 101(1) TFEU.
• In Coty, a ban on the use of online marketplaces was deemed to be appropriate and proportionate within the meaning of Metro I.
• An online marketplace ban is not a ‘hardcore restraint’ within the meaning of Article 4 of the Vertical Block Exemption Regulation. According to the Court, such a ban does not restrict the territory into which, or the customers to which, retailers may sell their products.
• As a logical consequence of the above, an online marketplace ban can benefit from the Block Exemption Regulation irrespective of the nature of the product (luxury or non-luxury). The Commission has unambiguously endorsed the consensus on this point in a recent brief specifically devoted to Coty.

E-commerce after Coty: what to expect?

Brand image beyond luxury

An important pending issue, which I addressed at length during the seminar, concerns the legal treatment of selective distribution systems that are aimed at protecting the brand image of a non-luxury product. Are such systems restrictive of competition by object?

I do not think they are, for the simple reason that the object – the purpose, the rationale – of such systems is identical to the object of distribution networks relating to luxury products. In other words: the preservation of an aura of luxury is not the only reason why a manufacturer may be interested in preserving its brand image.

It is reasonable to say that Asics or Mizuno shoes are not luxury products. This fact does not mean that brand image is not important for a manufacturer of running shoes. Amateur athletes are keen to buy products that are safe, reliable and – above all – that prevent injury. How can one argue that a system that seeks to convey this information to end-users has as its object the restriction of competition?

It is useful also to think of Apple products – I often use the example of Apple premium resellers in class.

Apple’s immense success (and the resulting benefit for consumers and competition) is to a large extent due to its ability to ensure that end-users associate its brand with reliability, innovation and user-friendliness. Can one reasonably argue that a distribution system aimed at ensuring that this image is preserved is restrictive by object?

I emphasised in the seminar that none of the above is new. In fact, the Court of Justice has long understood the importance of preserving intangible property in the context of Article 101(1) TFEU. In Pronuptia, the Court held that clauses aimed at preserving the reputation and uniformity of a distribution network are not contrary to Article 101(1) TFEU. I fail to see how it can come to a different conclusion in relation to selective distribution.

In this regard, I also provided an economic perspective – it sometimes helps!

Many miss the fundamental point in this regard: by restricting the use of online marketplaces, manufacturers do something that looks prima facie irrational.

Why would a supplier reduce the exposure of its resellers and thus the possibility of selling more? Experience shows that, whenever we see a firm doing something that appears to go against its interests, the practice most probably has a pro-competitive object. Selective distribution is not different in this sense. As in other areas, the Court’s intuitions are aligned with mainstream economics.

Next steps

The developments that have followed Coty suggest that, again, a divide has emerged between Germany and other Member States. While courts in France and the Netherlands have embraced consensus positions in relation to the judgment and its implications, German courts (and the Bundeskartellamt) are clearly less inclined to read anything in Coty that goes beyond its narrow factual circumstances.

Ongoing disagreements relate, inter alia, to two points: one relates to the application of Coty beyond luxury products, already discussed, and the second to the treatment of other clauses having a similar object and effect – such as a ban on the use of price comparison websites. I explained that the disagreement may very well reach the Court again.

Keeping perspective

There is something fascinating about the application of competition law in online markets. I often have the impression that, for some reason, principles that have been with us for decades tend to be forgotten when things ‘get digital’. As I said, we keep ‘rediscovering mediterraneans’ these days.

I ended my lecture identifying a few guiding principles when thinking about competition law in the online world:

• Price is not the only important parameter of competition. A practice may significantly limit price competition and still be presumptively legal under Article 101(1) TFEU. This principle has been with us since the late 1970s. The Court made it explicit in Metro I and Metro II (in particular the latter). Competition in many digital and high-tech markets is not about prices anymore – think again about Apple’s immense success!
• These are the best of times for intra-brand competition: when we read about online distribution, we sometimes get the impression that it is in crisis, or in need of a boost. The reality is that independent retailers have never had it so good.
• Competition policy should be consistent: I struggle to see how a competition authority can simultaneously warn against the power of online platforms and at the same time develop policies subsidising these same platforms (such as a policy favouring the use of online marketplaces). Consistency, and thinking about the unintended consequences of some measures, could take us a long way.