Have you considered cooperating with the European Commission on non-cartel/Vertical Agreements?

Tripti MalhotraPosted by

Two recent European Commission decisions – Nike[1] and Guess[2]are of great significance on the issue of cross-border sales restrictions in the form of geo-blocking – technology that restricts web content based on geographical location.

In both cases, the allegations centred on ‘vertical restraint’ allegations – competition restrictions contractually applied at different levels of the production and distribution process.

In the Nike case, the US apparel giant was found to have restricted out-of-territory sales by licensees; enforced indirect measures to implement the out-of-territory restrictions; imposed direct and indirect measures on master licensees and obliged licensees to pass on these restrictions in their contracts.

The Commission’s anti-trust investigation of Guess, a US-headquartered fashion group, found its distribution agreements restricted authorised retailers from using its brands and trademarks in online search advertising; selling online without prior authorisaton; selling to consumers located outside allocated territories; and cross-selling among authorised wholesalers and retailers. Retailers were also restricted from independently deciding on the retail price at which they could sell Guess products.

The Nike and Guess cases also shared another important commonality: a reduction in fines under the Commission’s ‘cooperation model’ – an incentive designed to encourage admission of infringements, cooperation with the Commission’s investigators, and provide additional evidence.

At present, there is a specific procedure contained within the Commission’s Leniency Guidelines to encourage those participating in cartel behaviour to own up to their participation. Settlement is also a possibility for cartel cases. However, there is no similar formal procedure for non-cartel infringements that achieves the same relatively streamlined investigation and decision process, and this has led to a wide remedy and procedural gap between cartel and non-cartel infringements.

Cooperation on non-cartel infringements is a novel but increasingly important procedure, which has so far been applied by the Commission in nine non-cartel cases – eight of which were vertical restraint cases, including the Nike and Guess decisions.

The Commission applied the cooperation model for the first time in 2016 in the case of Austrian company Altstoff Recycling Austria Aktiengesellschaft (ARA), resulting in a 30% reduction in the fine. The same cooperation model was applied in the eight subsequent cases, including those brought against Nike and Guess.

The cooperation procedure has not yet been codified, though, following the Guess decision, the Commission published a Fact Sheet explaining how companies can choose to cooperate once an investigation has been initiated. There is neither a right, however, nor an obligation for companies to pursue the cooperation path, and the Commission will ultimately assess every case on its own facts and consider whether it is suitable for cooperation.

Also worth noting is a major distinction between the cartel leniency process and cooperation model for non-cartel arrangements. In leniency cases, once an entity has acknowledged its participation in a cartel a prohibition/penalty decision is the only possible outcome (at least with respect to the applicants acknowledging their participation). By contrast, in non-cartel arrangements the Commission may arrive at a positive conclusion during the investigation process, despite cooperation from the concerned entities, if it finds enough efficiency gains in favour of the alleged agreement. The Commission can then conclude the investigation without making a penalty order, allowing some potential relief to the entities concerned.

Analysis of the Commission’s reductions in fines levied in non-cartel cases show the discount was significantly higher (between 40-50%) in cases where cooperation was provided before it issued a formal Statement of Objections (SO), compared with discounts ranging from 10-30% after an SO was issued. The disparity makes logical sense, given one of the Commission’s key aims is to achieve procedural efficiencies.

At present the Commission seems to be testing this fairly novel procedure by applying it on a case-by-case basis. However the lack of formalisation does not mean it should be disregarded, and the Commission may, in the near future, be pushed to codify the procedure more formally to provide legal certainty across a growing number of complex vertical online selling arrangements.

[1]Nike also imposed a number of direct measures restricting out-of-territory sales by licensees; enforced indirect measures to implement the out-of-territory restrictions; imposed direct and indirect measures on master licensees and obliged licensees to pass on these restrictions in their contracts  – http://europa.eu/rapid/press-release_IP-19-1828_en.htm

[2]Investigation found that Guess’ distribution agreements restricted authorised retailers from doing the following: using Guess’ brand names and trademarks for the purposes of online search advertising; selling online without a prior specific authorisation by Guess; selling to consumers located outside allocated territories; cross-selling among authorised wholesalers and retailers. The retailers were also restricted from independently deciding on the retail price at which they sell Guess products – http://ec.europa.eu/competition/antitrust/cases/dec_docs/40428/40428_1205_3.pdf

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