FINANCIAL INSTITUTIONSENERGYINFRASTRUCTURE, MINING AND COMMODITIESTRANSPORTTECHNOLOGY AND INNOVATIONPHARMACEUTICALS AND LIFE SCIENCES

Online retail in the new VRBEState of play and perspectivesMélanie Thill-TayaraPartnerNorton Rose LLP ParisNorton Rose LLP Paris1 July 2011

INTRODUCTION

IntroductionNew 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 entrenchedin 20th Century businessmodels [�] undermine

access to the 21st CenturyMarket

Introduction

Two main reasons for criticism/1Lack 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 17 05 2001, Yves Saint Laurent Parfums

ECJ j d f 11 D b 2003 D t h A th k b d– 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

Introduction

Two main reasons for criticism/2Resolute 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 perceiveg p pp g p p

and experience the products– Online sales risk jeopardising:

Brand image and POS experience�

Underlying selective networks�

Very existence of the market for luxury goods

VBER PROVISIONS ON ONLINE SALES

Resolute "Pro-Internet" approachRestrictions 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 exclusivedistribution

�

Restrictions of online sales not exempted and most likely consideredanticompetitive

Resolute "Pro-Internet" approach

Examples of "hardcore" restrictions

Obligation to redirect customers from other territories or prevent theirpurchases (However, possible to oblige the distributor to include links toother distributors' websites)

Obligation to limit the proportion of online sales

"Dual pricing" clauses – except if online sales represent an extra costfor the supplier

Question: what about different rebate levels, reflecting different levelsof services?

Allowed restrictions to online sales: All forms of distribution

�"Exceptional circumstances" such as public ban on selling dangeroussubstances to certain customers for reasons of safety or health (Guidelines §60)

�Protection of substantial investments by the distributor necessary to start upand/or develop a new market (Guidelines §61)

��

Restrictions of passive sales by other distributors into such a territory allowed ifnecessary for the distributor to recoup investments generally fall outside the scope of

Article 101(1)(Limited to the first two years)

Allowed restrictions: Exclusive distribution

Prohibition of active sales allowed

�

"Targeted marketing" may be prohibited

Approaching individualcustomers by for instance

Actively approaching a specificcustomer group or customers in a

ifi t it th h d ti t

�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 exclusivelyallocated to another distributor?

�Case by case analysis

customers by for instancedirect mail, including the

sending of unsolicited e-mails,or visits

specific territory through advertisementin media, on the internet or other

promotions specifically targeted at thatcustomer group or targeted at

customers in that territory

FOCUS ON SELECTIVE DISTRIBUTION

Allowed restrictions in selective distribution

Quality standards for online sales: applicable principle

• Qualititative criteria for online sales allowed if "overall equivalent" to brick&mortarcriteria (Guidelines §56)

• Differences must be justified by the different nature of these two distributionmodels

• In practice: comparison exercise needed – equivalence might not be easy toappreciate

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 objectivecriteria, such as the buyer's size in the network or its geographic location

§52 of the Guidelines: "This does not exclude thesupplier requiring, without limiting the online sales ofthe distributor, that the buyer sells at least a certainabsolute amount (in value or volume) of the productsoff-line to ensure an efficient operation of its brick-and-mortar shop"

One of the most polemic points of the Guidelineswhich may give rise to litigation

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 asite carrying the name or logo of the third party platform (Guidelines §54)

Q tit ti li it dQuantitative limits on end users

Guidelines §56 : "a supplier mayrestrict distributors from sellingmore than a given quantity ofcontract products to an individualend user – such a requirement maybe stricter for online sales, if it iseasier for an unauthorised dealer toobtain goods online"

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

Inefficient approach to prevent free ridingAllowed 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 thedistributor 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 givenquantity of contract products to an individual end user for online sales)

No certainty with respect to "overall equivalence" between qualitativerestrictions imposed on brick&mortar and online shops

How to prove that subsequent changes to number of physical POS "exceptwhere those changes have as their object to directly or indirectly limit the onlinesales by the distributors"?

Consequences• Heavy legal uncertainty and litigation risk• Risks of diverging application of the Guidelines across Europe• However: margin for "creative drafting"

CONCLUSIONS

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 itis efficient, and whether there any so-called “less restrictive” alternatives

• To preserve retailers’ incentives to invest/offer services, another approach isneeded

• In these sense, Guidelines miss an opportunity for setting out a clearer andmore efficient reference framework

Our international practice

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