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Luxury brands welcome EU law to restrict online sales

Manufacturers get bigger say in distribution

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Manufacturers will be allowed to require their distributors to have 'brick and mortar' shops as well as an online presence under a Regulation published today that will change competition law across the EU from next month.

Current laws have been criticised for lacking clarity over what manufacturers can and cannot do to control the supply of their goods to online sellers. The rules have now been clarified and they appear to give manufacturers greater control over the sale of their goods.

The just-published Regulation on vertical agreements and concerted practices was welcomed immediately by the European Alliance, a consortium of trade bodies that represents about 75 per cent of the worldwide luxury market. But the rules have upset trade bodies that represent e-commerce businesses.

The European Commission has adopted a Regulation that 'block exempts' agreements between manufacturers and distributors for the sale of products and services.

"The basic principle remains that companies are free to decide how their products are distributed, provided their agreements do not contain price-fixing or other hardcore restrictions, and both manufacturer and distributor do not have more than a 30% market share," said the Commission in a statement. "Approved distributors are free to sell on the Internet without limitation on quantities, customers' location and restrictions on prices."

Competition Commissioner Joaquín Almunia said the rules are essential to the competitiveness of the EU economy and for consumer welfare.

"Distributors should be free to satisfy consumer demand, whether in brick and mortar shops or on the Internet," he said. "The rules adopted today will ensure that consumers can buy goods and services at the best available prices wherever they are located in the EU while leaving companies without market power essentially free to organise their sales network as they see best."

The Commission has today adopted a new Regulation that block exempts distribution and supply agreements at different levels of the production and distribution chain. There are hundreds of thousands of such 'vertical' agreements and the existing Vertical Restraints Block Exemption Regulation (VRBER) and accompanying Guidelines are 10 years old.

Manufacturers remain free to decide how to distribute their products. But in order to benefit from the block exemption, they cannot have a market share in excess of 30 per cent and their distribution or supply agreements must not contain any hardcore restrictions of competition, such as fixing the resale price or re-creating barriers to the European Union's single market.

The new rules introduce the same 30 per cent market share threshold for distributors and retailers to take into account the fact that some buyers may also have market power with potentially negative effects on competition.

"This change is beneficial for small and medium-sized enterprises (SME's), whether manufacturers or retailers, which could otherwise be excluded from the distribution market," said the Commission.

This does not mean agreements between companies with higher market shares are illegal. Only that they must assess whether their agreements contain restrictive clauses and whether they would be justified.

The new rules also specifically address the question of online sales.

"Once authorised, distributors must be free to sell on their websites as they do in their traditional shops and physical points of sale," said the Commission. "For selective distribution, this means that manufacturers cannot limit the quantities sold over the Internet or charge higher prices for products to be sold online."

The rules allow manufacturers to sell only to dealers that have one or more 'brick and mortar' shops, so that consumers can physically see and try or test their products. However, in this regard, the Commission said it will be particularly attentive to concentrated markets to which price-discounters either online only or traditional may not have access.

Commission Guidelines that accompany the Regulation state:

Notwithstanding what has been said before, under the block exemption the supplier may require quality standards for the use of the internet site to resell his goods, just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general. This may be relevant in particular for selective distribution.

Under the block exemption the supplier may for instance require its distributors to have one or more brick and mortar shops or showrooms as a condition for becoming a member of its distribution system.

Guy Salter, a spokesman for the European Alliance, said the new framework shows the Commission's recognition of the importance of the luxury goods industry to Europe.

"A key element of the luxury goods business is a distribution model which supports and preserves the image of products, provides a prestigious and high quality selling environment and fulfils the expectations of the consumer with regard to purchasing a luxury product," said Salter. "The new regulatory framework ensures that there is not a disconnect between the rules that govern online and offline commerce."

A consortium of e-commerce trade bodies has criticised the rules.

"Europe’s desire to include electronic commerce in its guidelines should not in fact achieve the opposite effect from that intended, by de facto excluding 'Pure-Players'," said a joint statement issued shortly before the Regulation's publication by IMRG, the UK's e-retailing body and other trade bodies across France, Belgium and Holland. "This would inevitably result in a significant restriction in competition, to the detriment of consumers’ best interests and of the development of online retailing."

The new rules will come into force in June and will be valid until 2022, with a one-year transitional phase.

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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