Internet Sales How to Regulate Your Distribution Network

1. Internet SalesHow to Regulate Your Distribution Network Edward Miller emiller@reedsmith.com +44 20 3116 3470

2. Pierre Fabre ECJ Decision C-439/09 - 3.10.11 Key Legal Sources Vertical Restraints Block Exemption 330/2010/EU European Commission Guidelines 2010/C 130/01 Internet Distribution Strategy

3. Regulating the Distributor’s Use of the Internet Required bricks & mortar sales Restricting “active” and “passive” sales Required quality standards Non Uniform Pricing? Use of maximum order requirements Use of Supplier’s IP

7. “Active” and “Passive” Sales • May restrict active sales made into the territory of another exclusively distributor or reserved exclusively to the supplier (VRBE, art 4(b)(i)) • “In principle, every distributor must be allowed to use the internet to sell products. In general, where a distributor uses a website to sell products that is considered a form of passive selling …” (Guidelines, para 52)

8. Bricks and Mortar • “… supplier [may] requir[e], without limiting the online sales of the distributor, that the buyer sells at least a certain absolute amount (in value or volume) of the products offline to ensure an efficient operation of its brick and mortar shop …” (Guidelines, para 52(c)) • But – cannot restrict proportion of on-line sales • Not only selective distribution

9. Quality standards • “… the supplier may require quality standards for the use of the internet site to resell its goods, just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general.” (Guidelines, para 54) • Can restrict use of “third party platforms” • Seemingly not only selective distribution

10. Maximum Order Requirements • “… in order to prevent sales to unauthorised dealers, a supplier can restrict its selected dealers from selling more than a given quantity of contract products to an individual end user. Such a requirement may have to be stricter for online sales if it is easier for an unauthorised dealer to obtain those products by using the internet.” (Guidelines, para 56)” • Selective distribution only

11. Non-uniform Pricing • Supplier may agree a fixed fee to support offline sales (Guidelines, para 52(d)) • Variable fee considered to amount “indirectly to dual pricing”

12. Supplier’s IP • Obligation to licence images etc for on-line sales?? • Imposition of a royalty – variable or fixed??

13. Outside the VRBE – Pierre Fabre • European Court of Justice does leave open the possibility that an individual exemption under Article 101(3) might be available for an absolute ban on internet sales in a selective distribution agreement. • Court gives no indication of the circumstances in which such an exemption might be available. • Such an exemption is not given under Article 4(c) of the Vertical Restraints Block Exemption (exemption for ban on selling contract products in a selective distribution agreement from an unauthorised location) • Maintenance of a prestigious brand image cannot constitute a legitimate reason for restricting competition. • Need to provide advice to the consumer has not been accepted as justification for a ban on Internet sales in the context of non-prescription drugs and contact lenses.

14. Important to maintain integrity of selective distribution networks Leclerc (YSL) T-19/92 Non-dominant suppliers can refuse to supply – but take care! Bayer (C-2/01P C-3/01P 6.1.04) Consequences Difficult to maintain pricing differentials