Background
Turnover from internet sales of products has surged in recent years. For vendors, online selling offers unprecedented possibilities. Online platforms such as eBay and Amazon are booming. Manufacturers meanwhile, particularly at the high end of the market, are trying to counter this by prohibiting their vendors from selling goods through online distribution channels. However, blanket, outright restrictions on internet selling are in violation of German and European antitrust law. Therefore, many branded goods manufacturers and other manufacturers see creating a selective distribution system as the only way to control the sale of their products online. Selective distribution systems enable manufacturers to ensure that all authorised vendors satisfy certain minimum quality standards for offline and online selling. There are, however, legal barriers to restrictions on internet selling as part of a selective distribution system. The multitude of proceedings currently being dealt with by the German Federal Cartel Office against restrictions on online selling is indicative of the high risk involved nowadays in establishing a selective distribution system.
What the law currently allows
In principle, manufacturers must first prove that the products being sold actually are high-quality branded goods or durable and technically sophisticated goods which require a particularly high level of advice and service. In principle, a product’s features only warrant a selective sales system if such a system is genuinely necessary in order to safeguard quality and guarantee proper use.
Moreover, manufacturers of branded goods must establish and maintain their quality standards throughout the distribution system, in a uniform and non-discriminatory manner. The internet-specific quality criteria stipulated by the company do not have to be identical to those applicable to offline selling, but they must pursue the same objectives and achieve comparable results.
Examples
In principle, a manufacturer may require a vendor to sell offline a particular, absolute minimum quantity of the products offered if this is necessary in order to maintain the selective distribution system. Unlike absolute sales targets, the manufacturer cannot limit the relative percentage of online sales (e.g. by contractually requiring that offline sales must make up at least 70% of total sales).
A manufacturer may set requirements for the quality and organisation of the vendor’s online presence if those stipulations are not tantamount to an attempt to circumvent the rules or disguise an attempt to make online selling unattractive.
The manufacturer may require a distributor to have bricks-and-mortar display and business premises in order to meet the requirements for inclusion in the selective distribution system. Therefore, it is possible in principle to preclude pure online distribution in a selective distribution system if quality is genuinely at stake, the same criterion of protecting quality is applied to store-based sales and the requirements for physical points of sale are enforced in a uniform manner in the manufacturer’s distribution system.
Within a selective distribution system, a manufacturer can counteract distribution to unauthorised vendors by stipulating that its vendors may only supply a specified maximum quantity (i.e. only the normal household quantities) to individual end consumers. However, restrictions on quantities must be necessary in order to maintain the selective distribution system.
Manufacturers may also grant bricks-and-mortar vendors a fixed allowance, which is not based on turnover, for exceptionally high levels of advice provided by staff, and so on. However, manufacturers must ensure that these allowances do not, in reality, constitute a prohibited dual pricing system that is detrimental to internet selling.
Possible legal pitfalls
As things currently stand, even in a selective distribution system it is very risky from an antitrust law perspective to implement a blanket ban on internet distribution using open trading platforms such as eBay or Amazon, as is apparent from recent high court rulings and the latest decisions of the Federal Cartel Office in favour of online merchants. In many cases, the manufacturer can apply more lenient and less restrictive measures and requirements in terms of the form of electronic market place distribution to ensure the quality and distribution of branded products. Furthermore, such bans restrict competition to an extent that contravenes antitrust law as they limit official distributor’s access to online distribution and this, in turn, makes it less accessible to customers.
Summary
A whole raft of recent decisions clearly illustrate that companies wishing to use the benefits of a selective distribution system to protect and expand their brand must satisfy very stringent requirements. Those requirements apply to both the structure of selective distribution systems and to possible restrictions on the online sale of goods. What’s more, many aspects have yet to be ruled on by the supreme courts, leaving the legal situation unclear. We can expect numerous landmark decisions in this sphere in the near future.
Susanne Hermsen