The growing consumer acceptance of online only sellers means that more goods can now be sold by sellers with very low overheads. These online only sellers, particularly those who operate through third party platforms such as Amazon and eBay, have the ability to sell their goods at a lower price without affecting their profit margin.
Although this ability brings a greater level of competition to the market as to price, which arguably is ultimately beneficial to the consumer, in-store retailers and suppliers are struggling to find ways to manage the changing market, which is increasingly leading to some suppliers seeking to control the market to protect their traditional retailers from being undercut.
The general rule
The current legal position, within the EU, protects online retailers who have purchased goods under “standard” terms and conditions of sale (for sales through distribution agreements and selective distribution agreements see below), allowing them to sell as cheaply as they wish. The general principle is that the buyer of goods should be free to determine how and where they resell such goods.
In-store retailers are therefore left with limited options and are often forced into taking one of four steps: reduce their prices and margins; encourage the supplier to forbid the reselling of its goods online (or more specifically on third party websites – see comments below); encourage the supplier to stop selling to the offending online retailers; or to stop carrying the goods in question altogether.
If a supplier stops selling to a retailer on the basis that the retailer is selling the product at too low a price, whether online or in-store, the supplier is clearly restricting the price at which the retailer can sell the product and such restrictions are always against the law.
Although a less direct method of price control, forbidding a retailer from selling only online because the online retailer is able to undercut the supplier’s other customers, is also against the law.
Methods of control
There are, of course, circumstances where restrictions on use of a website are not linked to a desire to fix the price. For example, where the goods being sold are of a particularly technical nature and knowledge of the goods and the ability to provide pre and post-sales care is essential, or where goods are sold by a luxury brand that relies on maintaining that status.
In certain, very limited circumstances, through a selective distribution system, suppliers are able to control website sales by relying on such justifications.
Selective distribution systems
Selective distribution systems can be used by suppliers as a way to maintain a greater level of control over its products. Ultimately, if correctly established, a selective distribution system can enable the supplier to exclude online only distributors and can also exclude its distributors from using sites such as Amazon and eBay. Establishing the system can, however, be time consuming and complex and is not suitable for all goods.
Under a selective distribution system, a supplier only supplies to distributors who meet its minimum standards. Those distributors will in turn only be able to supply to other distributors who meet the same standards, or to end users.
In order to be compatible with competition law, the selective distribution agreement must meet certain conditions. The conditions, established by case law, are as follows:
- The system is legitimately required due to the nature of the goods, for example that the premises are suitable for selling the goods or that the goods require a certain level of technical expertise;
- The selection criteria is non-discriminatory, quality based i.e. set by reference to the technical ability of employees rather than by the need to have only five distributors in the UK and is applied consistently to all those who apply to become a distributor (failure to accept a distributor who met the criteria, even if he were, for example, in the premises next door to another distributor, would not be permitted);
- That the criteria do not go beyond what is necessary to achieve what is required; and
- The overall aim of the system is to enhance competition outside of the price sphere, for example requiring the distributors to compete on customer service ability.
The reason for choosing to implement a selective distribution system is also a deciding factor in whether the system is legitimate. The reasons should be based on the following:
- The need to maintain a brand image;
- A desire to create competition outside of price, for example to encourage retailers to focus on providing a high level of customer care;
- Preventing exploitation of retailer investment, so that where a retailer is required (often at a cost to the retailer) to meet certain minimum criteria i.e. to provide a high level of customer service, a retailer who does not make the same level of investment (and as such cannot be a member of the system) cannot exploit its potential ability to sell the goods at a lower price.
Examples of products that may be suitable for selective distribution systems would include complex electronic products, such as mobile phones and luxury products sold using a premium brand image, such as perfumes and watches.
If, as a supplier, you meet the requirements for establishing a selective distribution system, you can control online sales but cannot enforce a ban by implementing such a system carefully. Recent EU guidance has confirmed that legitimate methods of control include:
- Requiring your distributors to have at least one “bricks and mortar” premises, enabling you to prevent online only distributors; and
- Requiring that website meet the a set minimum level of criteria; and
- Requiring that, where third party platforms are used, those platforms also meet the requisite criteria. These criteria can state that end users must not reach the distributor’s website through a third party platform, which carries its own third party name and logo.
The third method set out above would clearly allow suppliers working within a selective distribution system to prevent sales through third party websites such as Amazon and eBay. Such a system is only available to those suppliers who can meet the relevant conditions. The system also requires substantial commitment, both financially and in time, on the part of the supplier to establish and maintain.
It is important to appreciate that it is not possible to implement these restrictions outside of a selective distribution system.
There is one caveat to the above position, which is that a series of German cases over the past few months has challenged the official guidance and suggested that it will not always be possible, even in a selective distribution system, to prohibit sales through third party platforms. This is a developing area of law across the EU and we can expect to see more cases in the future, which will hopefully clarify the position.
While under an ordinary distribution agreement there is no way to prohibit online only sellers (it is only under a selective distribution agreement that a “bricks and mortar” premises requirement can be enforced), it is still possible to maintain some level of control over the use of the internet to make sales but only where the distributor is limited as to which territories it can sell into. Even then, it is not a matter of restricting specific sites but rather of enforcing territory requirements. So if, for example, your UK distributor could not actively advertise its products on a German website to target German buyers, only your German distributor would be permitted to advertise as such. The UK distributor could, however, still supply German buyers but only where the buyers have come to the UK distributor of their own accord.
Terms and conditions
When goods are supplied under a supplier’s standard terms and conditions of sale, they are supplied on a per order basis and so the supplier maintains his right to refuse to accept an order as he sees fit. If a retailer could demonstrate that such a refusal was based on a desire to stop the retailer from selling too cheaply, or is otherwise seeking to control the market unlawfully, such refusal would amount to anti-competitive behaviour. Of course, in practice it is very difficult for the retailer to prove the reason for refusal if this is not volunteered by the supplier.
Aside from refusing to supply, there is no other proven method of restricting internet sales, whether for brand protection reasons or otherwise, using a supplier’s terms and conditions. To ensure that such a restriction on internet sales is enforceable, a supplier needs to create and enforce a selective distribution system, if this is appropriate for the products.
There are, however, various untested methods, which we are regularly seeing employed to attempt to control how goods are marketed, both online and in-store. Often the supplier is seeking to maintain a brand status but is unable or unwilling to establish a selective distribution system.
Examples of such methods include imposing quality levels on websites used by the retailer, or a requirement that consumers must not reach the retailer’s website through a third party platform, which carries its own third party name and logo. Others more explicitly seek to prohibit sales through specific third party sites. These provisions are sometimes included in separate documents to the terms of sale, such as “brand guidelines” or “fair retailing policies”.
While these methods of control may potentially be dissuasive to retailers, they are very unlikely to be enforceable in the courts. More often than not, however, we are seeing that when terms and conditions are challenged by retailers, or prohibitions on online sales are breached, the supplier does not seek to enforce the terms but instead it chooses to stop supplying to the particular retailer in the future. While this action in itself could be a breach of competition law, taking legal action is difficult and expensive. Often, the suppliers are much larger and retailers do not wish to be seen as trouble makers and will either accept the terms or move on to another brand. However, there are a growing number of retailers who are willing to challenge such practices and it is likely that more court cases will be seen over the next few years. In an attempt to avoid such claims, many suppliers are simply refusing to supply, without making any attempt to restrict online sales channels in their contracts and not giving any reasons for the refusal to supply. Clearly this approach is not without risk if the supplier is in fact acting in an anti-competitive manner.
In conclusion, if a supplier wishes to place a greater level of control over the conduct of its retailers, whether in online sales or otherwise, then the only means to do this is through a selective distribution system. Such a system has to be carefully introduced, with well drawn agreements and some training on the use of these to ensure that the system will withstand scrutiny. However, with the recent German cases, even these limited abilities to control internet sales may be coming to an end, so it is essential to keep any such restrictions under review with the developing legal position.
If you wish to discuss any of the issues raised in this article, please contact Richard Bailey on 01603 598000 or firstname.lastname@example.org.