Restrictions on online sales in distribution agreements
Manufacturers like to exert an influence over the manner in which their products are sold by distributors. But excessive interference in online sales by a distributor may be found to be an illegal anti-competitive arrangement.
In our practice we more and more often encounter clauses limiting the distributor’s right to make sales via internet. If the manufacturer interferes too closely in e-commerce, it may be found guilty of an anti-competitive practice, exposing the participants to the risk of a fine as high as 10% of one year’s revenue, which may be imposed by Poland’s competition authority, the President of the Office of Competition and Consumer Protection.
It is thus worthwhile to consider which restrictions are generally permitted and which are generally prohibited. Based on the case law from EU courts and the legal literature, the following breakdown may be adopted:
|Restrictions generally prohibited||Restrictions generally permitted|
|A total ban on online sales||Limiting use of the internet to active sales (if use of the internet would lead to active sales in the territory or to a group of customers reserved to other exclusive distributors)|
|Requiring the distributor to prevent customers in a territory reserved for another distributor from using the distributor’s website||An obligation to meet specific requirements laid down by the manufacturer with respect to the appearance and functionality of the distributor’s website|
|Agreeing that the distributor will automatically direct customers from outside the territory assigned to the distributor to the website of the manufacturer or another distributor||A ban on sales of brand-name products via auction sites such as eBay (case-by-case legal assessment required)|
|Agreeing that the distributor must abandon an online transaction when the credit card data reveal that the customer’s address is in a territory assigned to a different distributor||A duty to maintain a brick-and-mortar point of sale meeting specified criteria|
|Requiring the distributor to limit the quantity or value of online sales||A requirement that the distributor sell a certain absolute amount of product (by value or volume, but not excessive) at its brick-and-mortar location|
|Requiring the distributor to pay a higher price for products intended for sale online than for products intended for sale offline||Discretion on the part of the manufacturer in the rules for its support in the case of product returns and the use of secure payment systems|
|Prohibiting a distributor from operating a website in different language versions||The manufacturer’s right to establish fixed financing (or fees) for the distributor to support online or offline sales (which cannot increase due to an increase in online sales)|
|A ban on the distributor’s public release of retail prices, providing retail prices only at the customer’s request||Requiring distributors operating within a selective distribution system to comply with a maximum quantity of goods that may be sold online to an individual customer (consumer)|
|Imposing an obligation that the customer must pick up the goods in person||Requiring a distributor to maintain a certain (reasonable) inventory of goods at its brick-and-mortar location, relative to the range offered online|
|A ban on the distributor’s shipment of goods abroad||Imposition by the manufacturer of specific terms for delivery to the customer|
|Requiring that interactive consultation be offered to customers in real time and that customers’ email inquiries be answered within a specific time (during hours comparable to the operating hours of the distributor’s brick-and-mortar location)|
|An obligation to create dedicated web pages for specific product lines|
|A ban on online sales of dangerous products|
The situations identified in the table as generally permissible may be found to be anti-competitive (i.e. prohibited) only in exceptional circumstances. This could happen more particularly when the market share of the manufacturer or distributor exceeds 30% and at the same time, under the circumstances of the case, the restrictions on online sales actually and materially block this sales channel, reducing the selection available to consumers and price competition between distributors. They could also be held to be anti-competitive if the parameters agreed for particular restrictions—viewed as a whole—are clearly excessive and disproportionate, and their main purpose or effect is a material limitation on internet sales (and the related selection and price competition).
The situations identified in the table as generally prohibited may nonetheless be found to be permissible if:
- The business demonstrates that the arrangement only appears to have an anti-competitive purpose, because it is justified by the broader economic and business environment of the arrangement and therefore the limitation is objectively justified
- The business demonstrates that the arrangement had no anti-competitive purpose and also can have no anti-competitive effects, or
- The business proves fulfilment of the four conditions for an individual exemption under Art. 8 of the Act on Competition and Consumer Protection; that is, it demonstrates that in the overall balance, the pro-competitive effects of the arrangement outweigh the anti-competitive effects.
In most instances, a vertical arrangement containing a clause restricting a distributor’s right to unfettered online sales will be treated as a prohibited arrangement because of the anti-competitive purpose. A ban due to the anti-competitive effect will be applied in exceptional circumstances.
In most cases, a vertical arrangement containing a clause restricting a distributor’s right to unfettered online sales will be treated as:
- An arrangement on division of the market (excluding the risk that the distributor will sell goods online in the territory reserved to its competitors)
- A quota arrangement (intended to limit online sales), or
- A price arrangement (intended to eliminate the price competition typical for e-commerce).
In consequence, in the overwhelming majority of cases, an arrangement of this type will not enjoy a de minimis exemption.
A guarantee of a high degree of legal security for the foregoing restrictions may be found through a manufacturer’s selection of an agency model (“true” agency) instead of a distribution model. But this means that the manufacturer must bear nearly all of the risk and costs of the agent’s activity connected with sale of its products.
Dr Antoni Bolecki, Competition Law Practice, Wardyński & Partners