Who: Deuter Sport GmbH
Where: Higher Regional Court Frankfurt am Main, Germany Frankfurt am Main, Germany
When: 22 December 2015
Law stated as at: 08 February 2016
What happened:
Summary
The Higher Regional Court Frankfurt am Main, Germany has ruled that manufacturers may be eligible to prohibit the distribution of their goods via intermediaries like the Amazon Marketplace if the affected goods warrant a special form of presentation and sales advice by the vendor, whereas a general prohibition with regard to distribution via price comparison platforms, e.g. Idealo, would violate German and European antitrust law.
Statement of Facts
Deuter Sport GmbH (“Deuter”), a leading German manufacturer of functional backpacks, demanded that an online distributor of its goods enter into a selective distribution agreement prohibiting the sale of Deuter’s goods via the Amazon Marketplace as well as price comparison platforms if Deuter had not consented in each individual case. In case of non-compliance by the distributor, Deuter threatened to suspend any further supply.
From Deuter’s standpoint, distribution via such channels would not satisfy its expected high quality standards with regard to the distribution of its specialised goods.
After Deuter denied 12 requests by the distributor to allow the sale of backpacks via different price comparison platforms, the latter refused to enter into the abovementioned agreement.
Moreover, the distributor took Deuter to court citing that the restrictions Deuter stipulated would violate German as well as European antitrust law.
Legal Background
Art. 101 of Treaty on the Functioning of the European Union (“TFEU”) and respective national antitrust laws of member states generally prohibit any anticompetitive agreements.
With regard to vertical agreements like the present selective distribution system, according to the European Regulation on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (“Vertical Regulation”) such agreement is in violation of Art. 101 TFEU if either:
- the market share held by the supplier exceeds 30 % of the relevant market in which it sells the contract goods (Art. 3(1)), or
- the supplier pursues the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade, for instance by prohibiting a member of the system from operating out of an unauthorised place of establishment (Art. 4(c)).
On the face of it, these rules seemed fatal to Deuter;’s case. This was because the Court assessed its market share as approximately 50% (see Art. 3(1) above) and Deuter was indeed seeking to operate a selective distribution system of a kind which was prima facie caught by Art 4 (c).
However the Court was asked to decide whether a landmark ruling of the Court of Justice of the European Union (“CJEU”) in the case Pierre Fabre Dermo / Cosmetique SAS (C-439/09) came to its rescue.
This ruling laid down that even if vertical agreements ostensibly fell foul of Art 101 TFEU, they might survive if:
- the character of the goods in question, bearing in mind their high quality, technical sophistication or other special attributes, warranted a certain manner of distribution,
- manufacturers stipulate objective and just quality standards with regard to the distribution of their goods and subsequently apply them in a consistent and non-discriminating manner, and
- the defined standards are necessary in order to properly cater for the special character of the goods in question..
The Courts’ rulings
Initially the court of first instance, the Regional Court Frankfurt am Main, Germany had comprehensively ruled in favour of the distributor stating that a general prohibition of any intermediaries, whether this be Amazon or price comparison platforms, would not be necessary in order to safeguard a proper distribution or particular trademark image with regard to the affected goods’ character.
The appellate Higher Regional Court, however, took a partially different view. Although it agreed with the court below that a general prohibition of distribution via price comparison platforms was anticompetitive and thus in breach of German and European antitrust law, it did find that Deuter was eligible to be able to prohibit the sales of its goods via the Amazon Marketplace.
According to its interpretation of European antitrust legislation as well as the aforementioned CJEU ruling, the appellate court ruled that Deuter’s goods were of sufficient high quality and technical sophistication for potential customers to be likely to expect high level sales advice and appropriate service from vendors. Against this background Deuter had a legitimate interest in stipulating certain minimal standards with regard to the further distribution of its goods as well as the respective vendor.
Amazon’s site design could lead consumer to regard it as the distributor
In the appellate court’s opinion, a distribution of such goods via the Amazon Marketplace would not meet those minimal standards as, due to its design, the average customer would acknowledge Amazon as the vendor and not the respective actual distributor of the offered item.
Therefore the manufacturer – at least in the customers’ perception – is being confronted with another distributor in Amazon to whom it has no contractual connection and thus no influence relating to the particular distribution form with regard to its goods.
Moreover, the generalised and cursory presentation of items on the Amazon Marketplace would not satisfy Deuter’s legitimate requirements with regard to the quality of its backpacks and the required consultation of the customer pertaining to each item’s relevant specifications.
Price comparison platforms are different
This would not necessarily be the case, however, with most price comparison platforms.
First and foremost, due to the structure of price comparison platforms the average customer would usually regard the actual distributor as the vendor and not the provider of the respective platform. The customer would utilise such platforms merely as a searching tool in order to find the cheapest vendor of a certain item.
Moreover, the potential customer would usually be required to be redirected to the vendor’s online store in order to procure the purchase. This would allow the vendor to properly inform and consult the customer on the specifics of a certain product via its website. Against this background a comprehensive or unfounded prohibition of the advertising of goods via price comparison platforms would in the court’s view violate European antitrust law.
Why this matters:
With regard to its European legislative background as well as the recently presented European Union’s Single Market Strategy, the German court’s ruling (which can still be challenged by both parties before the German Federal Court) has not only national but also EU-wide implications.
The distribution of goods throughout the European Union via intermediaries like Amazon or price comparison platforms has become a very popular avenue to procure sales for small and medium size online vendors lacking the required notoriety in certain markets. Due to the comprehensive price transparency provided by the internet, this development is further catalysed as online vendors insofar, more so than stationary vendors, mainly compete on price.
Brand owners fear damage to perceived quality and image of brands and products
This however, is a thorn in the eye of many brand manufacturers as they feel that such distribution platforms would diminish the perceived quality of their products as well as the image of their respective brands. Against this background several brand manufacturers in Germany and throughout the European Union have recently been trying to impose similar selective distribution agreements on their distributors denying them the involvement of intermediary platforms.
The appeal judgment sheds light on the compliance with EU antitrust laws of such distribution limitations in the context of online sales via intermediary platforms. It also indicates what parameters need to be observed in order to lawfully establish any such selective distribution systems.
In a nutshell, blanket and comprehensive prohibitions of third party platforms will most certainly not withstand any judicial scrutiny, whereas differentiated and substantiated limitations applied in an objective and non-discriminating manner are less likely to violate antitrust law.
