Court ruling confirms that online sales restrictions can amount to a serious infringement of competition law.

On 21 January 2020, the UK’s Court of Appeal ruled that the online sales restrictions contained in Ping’s internet sales policy (ISP) constituted a restriction of competition by object. The Court of Appeal dismissed Ping’s appeal against a judgment of the Competition Appeal Tribunal (CAT) that upheld the CMA’s decision that Ping’s online sales ban constituted a restriction of competition by object under Article 101 of the TFEU and therefore under the Chapter I prohibition of the Competition Act 1998, which is itself modelled on Article 101.

Background

Ping is a manufacturer of golf clubs, golf accessories, and clothing. Ping’s custom fitting policy (a key feature of Ping’s distinctive service offering) included a requirement that all golf clubs should only be sold after an in-store  custom fitting. Accompanying this requirement was a concomitant ban on online sales by dealers of Ping golf clubs (the ISP).

In August 2017, the CMA fined Ping £1.45 million for prohibiting its UK authorised dealers from selling golf clubs online. The CMA considered that this restriction amounted to a restriction of competition by object and held that although Ping was pursuing a legitimate commercial aim of promoting in-store custom fitting, in the CMA’s view this objective could have been achieved through less restrictive means than imposing a blanket online sales ban.

Ping brought an appeal before the CAT seeking an annulment of the CMA’s decision or reduction of the fine imposed. The CAT dismissed Ping’s appeal, upholding the CMA’s decision and holding that the online sales prohibition was not objectively justified. The CAT accepted the CMA’s analysis that the prohibition of online sales constituted a restriction of competition by object and that the limitations on the ability of retailers to compete with each other for sales to customers beyond their catchment areas resulted in a diminution in price competition. As regards the level of the fine, the CAT concluded that the CMA erred on the facts of the case in treating director involvement as an aggravating factor; it reduced the fine to £1.25 million accordingly.

Ping appealed the CAT’s ruling on two grounds:

• It claimed that the CAT had erred in characterizing the ISP as a “by object” restriction within the meaning of Article 101(1) TFEU.
• As regards the fine imposed, it challenged the CAT’s finding that the infringement had been committed negligently and that it ought to have known that its conduct was unlawful.

The Court of Appeal Judgment

The Court of Appeal upheld the CAT’s judgment, holding that:

• There was an established body of applicable EU case law and EU decisional practice determining that, for the purposes of Article 101, the imposition by a supplier of a prohibition on internet sales by authorised dealers in a selective distribution network reveals a sufficient degree of harm to competition and so constitutes a restriction by object.
• The ISP went beyond what was adjudged as a necessary and legitimate restriction of intra-brand competition; further, in the Court’s view there was nothing in the assumed economic or legal context in which the ISP operated that undermined the conclusion that the ISP amounted to a by-object restriction of competition.
• Measures which pursue recognized legitimate commercial aims (in this case, Ping argued that the objective of the ISP was to promote dynamic custom fitting of golf clubs, which benefitted consumers) can still amount to by-object infringements of competition law.
• The ISP had been correctly assessed by the CMA and upheld by the CAT as revealing a sufficient degree of harm to competition to justify its characterization as a by-object infringement.
• The CAT was determined to be correct in upholding the imposition of the penalty on the basis that the infringement had been committed negligently. During the period of the infringement, the European Court of Justice’s judgment in Pierre Fabre and the European Commission’s Guidance on Vertical Restraints were available and should have made clear to Ping that a total prohibition of online sales was highly likely to amount to an infringement of competition law.

Key Points

This is the first time UK courts have examined restrictions on online sales and their compatibility with competition law. The Court of Appeal’s judgment relies on the European Commission’s Guidelines on Vertical Restraints and recent European Court of Justice rulings on online sales restrictions in vertical agreements that are informed by these Guidelines.

The Court’s view is that there is now sufficient decisional practice and case law that determines that the imposition of an absolute prohibition on online sales by authorised dealers in the context of a selective distribution network results in a sufficient degree of harm to competition so as to constitute a restriction of a competition by object.

The European Commission’s approach to online sales have largely been driven by the single market imperative; the Commission’s Vertical Agreement Guidelines in 2000 stated that online sales were forms of passive selling and introduced, for the first time, the principle of a prohibition on the outright ban of internet sales by manufacturers and suppliers. This approach has since been enshrined in later iterations of the Vertical Restraints Block Exemption Regulation and accompanying guidelines but has been subject to criticism by many in industry as well as legal practitioners for its outright support of internet sales models at the expense of brick-and-mortar outlets and the commercial flexibility of suppliers even when they face significant inter-brand competition.

The CMA has also adopted two comparatively brief settlement decisions subsequent to the decision in Ping in relation to online pricing practices. On 22 January 2020, the CMA issued a settlement and infringement decision finding that Fender Europe infringed competition law by engaging in online resale price maintenance of its guitars; the CMA imposed a fine of approximately £4.5 million. The CMA’s decision in the case came just months after it issued a settlement and infringement decision finding that Casio had engaged in similar behaviour in relation to digital pianos and keyboards — Casio was fined £3.7 million.

Takeaways

The Court of Appeal’s judgment confirms the approach taken to online sales restrictions under EU and UK competition law. The CMA and the European Commission have the stated aim of allowing consumers to be able to shop around and enjoy the benefits of competition from online shops as well as brick-and-mortar stores; the starting point under this approach to competition law is that distributors must be allowed to sell products supplied for distribution online.

Suppliers should weigh competition law risks when considering applying online sales restrictions on their distributors. Whilst competition law does permit suppliers to impose certain quality standards on distributors (e.g., design of distributor’s websites), if the policy can be characterized as a blanket prohibition of online sales, without adequate justification, it runs the risk of being viewed as a serious restriction of competition. Suppliers should ensure that they have a consistent and defensible pro-competitive rationale in place to defend online sales restrictions.

Enforcement action against online sales restrictions is considered to be necessary in order to promote and preserve the single market imperative in the European Union. It remains to be seen whether the CMA will liberalise its approach to online sales restrictions following the end of the transition period (which is currently set to end on 31 December 2020).