European Commission Fines US Clothing Company € 40 million For Online Advertising And Sales Restrictions Imposed on Authorized Resellers (Case AT.40428)

On December 17, 2018, the European Commission imposed a € 40 million fine on the US-based clothing company Guess for enacting contractual provisions and practices in its selective network of authorized wholesalers, monobrand and multi-brand retailers, contrary to Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). According to the Commission’s decision, the contested conduct amounted to a restriction of intra-brand competition capable of partitioning the Single Market along national lines. The non-confidential text of the decision was published on January 25, 2019 (available here).

The case is part of a new series of investigations by the European Commission targeting restrictive “vertical agreements”, particularly in the online environment, following the e-commerce sector inquiry concluded in May 2017 (see our previous articles herehere and here. In particular, the Commission found that the wholesale and retail agreements stipulated by Guess with the members of its selective distribution system constituted restrictions of competition by object (i.e. having an anti-competitive object and thus presumed prohibited by Article 101 without evidence of anti-competitive effects being required), as they prevented the distributors from (paragraph 2 of the decision)

(i) using the Guess brand names and trademarks for the purposes of online search advertising;

(ii) selling online without first obtaining a specific authorization from Guess, which Guess had full discretion to either grant or refuse and where no quality criteria had been specified for deciding whether or not to grant an authorization;

(iii) selling to end users located outside the authorized distributors’ allocated territory;

(iv) cross-selling among authorized wholesalers and retailers;

(v) determining resale prices independently”.

This article briefly outlines the Commission’s reasoning for each of these contestations. Notably, the fine has been discounted by 50% because Guess cooperated with the Commission beyond its duties, providing valuable evidence and information on its practices and admitting to the contested conduct contained in the decision.

Online search advertising restrictions

The most innovative aspect of the decision relates to the assessment conducted by the Commission on online search advertising restrictions. Guess systematically, albeit not contractually, prohibited its retailers from using or bidding Guess’ brand names and trademarks as keywords in Google AdWords within the European Economic Area (EEA). The Commission addressed this conduct in light of the criteria set out in the Coty judgment (see more here) to assess the lawfulness of a specific contractual clause within a selective distribution agreement: i) pursuit of a legitimate objective; ii) uniformity for all potential resellers; iii) application in a non-discriminatory manner; iv) do not go beyond what is necessary.

First, the Commission found that, given the objectives pursued by Guess in imposing such restrictions (namely, maximizing traffic to its websites and minimizing advertising costs), “the online search advertising restrictions cannot be said to serve the legitimate objective of Guess’ selective distribution system claimed by Guess, namely to protect the brand image” (paragraph 119). Secondly, the Commission outlined the consequential restrictive effects of limiting the access to online search advertising on intra-brand competition. Pursuant to the Commission’s reasoning, “By severely curtailing the use of online search advertising by its authorised retailers, Guess limited the ‘findability’ and ultimately the viability of retailers selling its products online” (paragraph 120).

In light of the above, the Commission concluded that such a restriction to online search advertising, in this specific context, constitutes a restriction of competition “by object” because it does not serve a legitimate purpose to protect the brand image or trademark functions.

Online Sales Restrictions

As part of the Guess’ e-commerce strategy to favor its own website, the company decided to limit the number of independent operators selling Guess products online. This objective was pursued by imposing a contractual clause on retailers which only allowed them to sell online if they obtained a prior written authorization from Guess. However, the criteria used to evaluate the request and grant the authorization were undefined.

In addressing this conduct, the Commission relied on the position adopted by the Court of Justice of the European Union (CJEU) in the Pierre Fabre case. Pursuant to the Luxembourg Court, a contractual provision which de facto prohibits tout court the use of the internet to market one’s products is considered a restriction of competition “by object”, unless justified by objective reasons pertaining to the nature of the product concerned. Furthermore, the CJEU also noted that, given the absence of criteria used to evaluate the requests for authorization, the contractual provisions lacked uniformity and were applied in a discriminatory fashion, thus violating, once again, the “Coty criteria”.

In light of the above, the Commission held that, “The written authorisation requirement which was not linked to any specified quality criteria constitutes a restriction of competition by object within the meaning of Article 101 (1) of the Treaty”.

Cross-selling restrictions within the Network

As previously mentioned, Guess operates within the EEA through a selective distribution system of wholesalers and authorized retailers. However, a series of contractual provisions regulating the relationship between the former and the latter amounted to restrictions on active and passive sales within the selective distribution network, which were identified as “hardcore” by the Vertical Block Exemption Regulation (Regulation N. 330/2010 or “VBER”). More specifically, Guess limited the possibility for wholesalers and authorized retailers to promote and sell Guess products to other wholesalers and authorized retailers forming part of the same selective distribution network. Unsurprisingly, the Commission confirmed that “provisions […] which restrict cross-supplies between members of a selective distributions system, restrict competition by object with the meaning of Article 101 (1) of the Treaty” (paragraph 134).

Restrictions on cross-border sales to end users

Part of Guess’ selective distribution system is composed of monobrand retailers with whom Guess has stipulated Retail Store Sublicense Agreements (paragraph 29 of the decision). Several clauses in these agreements limited retailers’ sales and advertising practices to a certain allocated territory, thus causing an artificial fragmentation of the EU Single Market along national lines. Apparently, Guess’ internal documents have confirmed that the clothing company’s policy was aimed at restricting the retailers’ active and passive sales within the network, with a view to combine selective distribution with territorial exclusivity, which is also listed as a hardcore restriction in the VBER. Consequently, the Commission found that such contractual provisions “restrict active and passive sales by members of a selective distributions system […] and, therefore, are capable of creating, maintaining or restoring national divisions in trade between Member States so as to frustrate the Treaty’s objective of achieving the integration of national markets” (paragraph 135).

Resale Price Maintenance (RPMs)

Within its EEA selective distribution system, Guess also stipulated contracts with multi-brand retailers through General Sales Terms (paragraph 32 of the decision). In order to provide a uniform image of the Guess products on the market, the company “monitored pricing of third-party retailers and tried to influence them to correct resale prices ‘misaligned’ with Guess Europe’s ‘recommended’ resale prices” (paragraph 87). However, pursuant to the VBER, as well to the consolidated case law of the CJEU, while recommending resale prices is permitted, agreements that impose minimum or fixed retail prices on retailers disguised as recommended prices constitute a competition restriction by object within the meaning of Article 101(1) of the TFEU.

Enforcement trends

While cross-selling restrictions within distribution networks, intra-EU cross-border restrictions combined with selective distribution, and RPMs are clearly identified in the VBER as hardcore restrictions, this decision addresses a new type of by object restriction, i.e. restrictions on online search advertising. In fact, the Commission announced, in its e-commerce sector inquiry, that future enforcement actions could address restrictions imposed on retailers for advertising on the internet, particularly through bans on using certain brand names or other key words as general search terms (so called non-brand bidding practices). Moreover, the French, UK ans Spanish competition authorities have carried out or initiated their own market studies on online advertising restrictions (see examples here and here), prompting new investigations in the sector under those jurisdictions. In Italy, some clues on the Italian Competition Authority’s (AGCM) approach and priorities regarding e-commerce restrictions might be contained in the results of the on-going Big Data sector inquiry (see our previous article here), which reportedly will be released within the year.

From a procedural standpoint, this decision is also interesting since it sees the Commission consolidating a new informal “cooperation procedure” for non-cartel cases (a middle ground between the statutorily provided “settlement procedure” and the leniency program). Guess provided the Commission with information that enabled it to extend the scope of the case to include more conduct than that initially identified by the Commission. Guess also expressly acknowledged the facts and infringements in question, and as a result, it was granted a 50% reduction in the fine, which is well above the 10% granted under formal settlement procedures.

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