As a Distributor, Can You Sell Over the Internet Outside the Territory of Distribution?
Can The Manufacturer Forbid Any Type Of Online Selling?
What Are “Passive” Sales?
“Passive” sales is any form of sales over the Internet. The concept can be found in article 4 of the Commission Regulation (EU) No 330/2010, which establish that “In general, where a distributor uses a website to sell products that is considered a form of passive selling” in Paragraph 51 of the Guidelines on Vertical Restraints.
What Restrictive Practices Regarding Online Sales Can Harm Cross-Border Trade Within The EU?
Companies dedicated to selling of consumer goods for their resale with the EU, as distributors, licensors or merchandising resellers, can be affected by the contractual restrictions imposed by manufacturer or trademark owners.
Among the specific restrictions or obstacles that are typically imposed by those are:
- Changing the packaging for products sold at a higher price in a EU country in order to make it harder to sell them in other EU country in which their price is lower. In this way, by altering the information of the goods offered to the consumer and their visual identity, it becomes harder for he or she to automatically associate them with the brand, thus creating confusion regarding their origin, affecting consumer decision to buy.
- Readjusting and reducing the amounts of goods sold in a country in order to limit the capacity of the distributor to make cross-border sales.
- Conditioning supply of goods deemed to be “essentials” in the marketplace of an EU country to imposing of restraints or discontinuing imports of other goods from the manufacturer that are purchased at a lower price from another EU country.
- Restraining the online promotion of certain goods only to national consumers.
- Total prohibition of cross-border selling – online and offline – through clauses containing territorial limitation (banning sales “outside the national boundaries”).
- Restraining the online sales of merchandising in websites that are accessible in territories not granted to the distributor or licensee.
- Redirecting all online orders for goods coming from outside the territory granted to the distributor or licensee.
- Implementation of measures against distributors or licensees which were not complying with territorial limitation imposed by manufacturer such as claw back clauses and double impositions of royalties.
The limits on passive sales are deemed to be «hardcore restrictions» and are prohibited according to the Commission Regulation (EU) No 330/2010, and under the umbrella of article 101.1 of the Treaty on the Functioning of the European Union (“TFEU”), when their purpose is to control the territory where distributors, licensees or sublicensees can sell the goods, or, under the umbrella of article 102 TFUE regarding abuse of a dominant position. Consequently, according to the European regulations, it is forbidden to restrict online sales.
Online Sales Restrictions Are Illimited?
According to current EU regulations, passive sales cannot be restricted. However, the growth of ecommerce sales and its impact on the EU single market and globally, has determined the need for an update and to waive the total absence of limits under certain conditions. EU policymakers were fully aware of this future need, since in fact Regulation (EU) No 330/2010 was scheduled to naturally end in 2022, being therefore required its renewal.
The principal shortcomings of the EU regulations in force are its complexity, lack of predictability, and the more permissive treatment given to selective distribution. These issues will be addressed in the proposed revision, together with the review of the so-called 'Most Favored Nation' (MFN) clauses under the General Agreement on Tariffs and Trade of 1994 (GATT), resale prices and certain aspects of selective distribution which may not be performing as expected.
In fact, it is regarding the selective distribution agreements that recent case-law of the Court of Justice of the European Union (“CJEU"), the court at the top of the EU judicial system, has admitted that under certain circumstances passive sales can indeed be restricted.
Such restrictions, however, cannot be based merely on the maintenance of a prestigious image or based on the notoriety of the brand. For sales restrictions within a selective distribution network not to be considered as being against the Competition rules (paragraph 46), they need to meet the following criteria (see judgements Pierre Fabre’s case (C-439/09) & Coty’s case (C-230/16):
- For luxury goods, in order to guarantee their quality and protect the brand image.
- Alternative online sales channels shall exist, since complete absence of sales over the Internet is not allowed.
What Companies Have Been Fined?
Some of the most recent cases see fines imposed on:
- AB InBeva Belgium brewer which is the largest in the world, received a fine of 200 million euros for restricting cross-border sales between Belgium and the Netherlands between years 2009 to 2016;
- Nikeand some of its EU subsidiaries, were fined with approximately 12,5 million euros for limiting online sales of merchandising among several EU countries (specifically, from French Football Federation , and soccer clubs C. Barcelona, Inter Milan, Manchester United, AS Roma and Juventus).
- The multinational clothing company Guess, to which the EC imposed a 39,8 million euros fine for limiting use by retailers of the brand for online advertising, restricting cross-border sales to the national territory through "geo-blocking" mechanisms (see Commission Decision of 12.17.2018).
- Manufacturers or suppliers cannot impose restrictions on the distributors and retailers’ use of the Internet -- they cannot stop a distributor from marketing or advertising the goods in their web site using even languages other than local ones, or reaching customers through e-mails or other marketing strategies, unless those limitations are objectively justified.
- Manufacturers or suppliers cannot prevent distributors and retailers from using brand names and trademarks in respect of which they have been authorized to sell offline.
- Manufacturers or suppliers cannot condition the online selling to a prior specific authorization by them.
- Distributors and retailers can sell online to consumers located outside the allocated territories.
- Cross-selling in the EU among authorized wholesalers and retailers shall be permitted.
- Distributors and retailers shall be able to independently decide on the retail price at which they sell the goods.
How Can We Help You?
At Gowper, we are committed to helping our clients expand their business and grow internationally, that’s why we take steps to ensure that their aspirations are faithfully reflected, and their interests are adequately protected. Our help consists, among other things, in:
- Negotiating and drafting of any kind of distribution agreements: for manufacturers dealing with their exclusive or non-exclusive distributors, trademarks licensees, or merchandising resellers; and a variety of industries: luxury and fashion, retail, cosmetics, sporting goods and merchandising, or any type of consumer goods, commodities, or technology, etc.
- Out-of-court negotiation and litigation concerning breach of distribution agreements and claim for damages in the EU and elsewhere.