Following an 18 month investigation into the distribution agreements and practices of clothing manufacturer and retailer Guess, on 17th December 2018 the European Commission (the "Commission") fined Guess EUR 39,821,000 for anti-competitive practices which included prohibitions on online selling and advertising.
The case serves as an important reminder on the principles of selective distribution networks in the European Union ("EU") and the conditions that must be met to enable a supplier to take advantage of some of the restrictions that can be imposed within such a network.
What is a selective distribution network?
A selective distribution network is one means by which a supplier can control how its distributors sell its products within the EU, without infringing EU competition laws.
Suppliers of technically complex products (such as electrical products requiring demonstration) or luxury products (such as designer handbags and high end cosmetics) can adopt a selective distribution network to restrict the resale of their products only to approved dealers. The rationale for using such a network is that these types of products can only properly be resold to consumers by retailers with specific knowledge and expertise using appropriately trained staff, or that the sale must be from premises that are in keeping with the luxury nature of the products.
A key element of a selective distribution network is that the supplier may prevent its distributors from reselling the products to other dealers outside the network, on the basis that their knowledge or retail environment does not meet the supplier's criteria.
Therefore within a selective distribution network, the supplier may decide to supply its products only to those distributors that meet its selective criteria and those distributors themselves might agree to re-sell the products only to end users and other authorised dealers.
The Guess case
As early as June 2017, the Commission had initiated a procedure to examine the distribution agreements and practices used by Guess under EU competition law as a result of the sector inquiry into e-commerce.
The Commission found a number of arrangements which enabled Guess to carve up the European markets for its own financial benefit. In particular:
- The prohibition on retailers from using Guess brand names and trademarks for advertising on online search engines.
- No online sale without the prior express consent of Guess, with Guess having unrestricted discretion not based on objective quality criteria.
- The prohibition to sell to consumers outside the allocated territories.
- The prohibition of cross border sales between authorised wholesalers and retailers.
- The prohibition to set independent retail prices for Guess products.
The Commission observed that the retail prices of Guess products was, on average, 5-10% higher in Central and Eastern European countries than in Western Europe.
Due to its extensive cooperation with the Commission in this procedure, Guess was granted a reduction of fines of 50%. Other factors that were taken into account were the value of sales relating to the infringement, the seriousness of the infringement and its duration (1 January 2014 to 31 October 2017).
The Commission stated that this case complements the introduction of the recent Geo-Blocking Regulation (Regulation (EU) 2018/302). Indeed, Guess' conduct with regard to the restriction of passive sales is also indefensible under the Geo-Blocking Regulation.
This case illustrates that the Commission is willing to take action against suppliers for anti-competitive practices. Guess' brand image will likely be hurt as a result of the Commission's findings and the amount of the fine (whilst small compared to those dished out to the likes of Google) shows that the Commission's punishments have "clout". Guess reported a Q3 loss for 2018 and its profit calculations have been hit hard by the expected fine. This will serve as a warning to other suppliers engaging or thinking of engaging in similar anti-competitive behaviour.
Suppliers operating in the EU should, meanwhile, review their existing distribution agreements to ensure that they do not contain anti-competitive restrictions of the kind listed above. If they do, suppliers would be well advised to vary the terms of the offending agreements to ensure they do not attract the attention of the Commission. The penalties, as this case shows, can be severe.
For more information on this topic, please contact Gordon Drakes or your usual contact within Fieldfisher's Brand Development Team.
Co-authored by Dominic Tyler.