Distribution Agreements and Restrictions on Online Sales

A typical distribution agreement may include restrictions for sales to specific vertical or horizontal markets, but agreements that restrict competition are prohibited by Article 101 of the Treaty of the European Union.  Thus, distribution agreements containing strict sales prohibitions are often carefully scrutinized.  With the advance in technology, this prohibition on anti-competitive agreements is experiencing inconsistent application among the member states.  Specifically, in its application to online sales.  The EU Commission’s position is that every distributor must be allowed to use the internet to sell products.

With the rise of third party internet sales platforms, for example, Amazon’s Marketplace, which allows sellers to sell new and used products alongside Amazon, the EU Commission is continually looking at how and whether the prohibitions should be applied. Most restrictions that prohibit sales on these third party platforms will run afoul of the prohibition against anti-competitive agreements.

While the EU Commission seems to accept that sales may be banned on third party platforms if customers are required to navigate to the distributor’s website without using the platform.  The German Federal Cartel Office (“FCO”), however, does not allow such broad leeway.  Sennheiser, a company renowned for making high quality headphones, was forced to remove the restrictive provisions of its distribution agreement that prevented its distributors from selling on third party platforms, specifically, Amazon’s Marketplace.  The FCO could not find any objective reason for the restriction.

Likewise, a cosmetic company located in France, that prohibited all online sales, claiming that the restrictions were to maintain the luxury brand image.  The European Court of Justice and the Paris Court of Appeals both concluded that a total ban on online sales was unlawful.

So what can you do to ensure your company’s distribution agreement won’t run afoul of Article 101 of the Treaty?  First, before including restrictions on sales, consider the antitrust risks.  Does the restriction have an effect on the setting of the resale price?  The EU Commission will be looking for instances where prices have harmonized to see whether the alignment of prices is due to anticompetitive restrictions.  For example, a pricing parity or most favoured nation provision is included in a distribution agreement.  The difficulty is that such a provision may create significant market power and price coordination among distributors.

Avoid scrutiny and by avoiding suspect restrictions in your distribution agreements.  If you need assistance please contact us.