Legal Aspects of Omni-Channel Distribution of Branded Bicycle Products
DOETINCHEM, The Netherlands – The internet has been a game changer in many industries which turned the analog ‘old world’ nearly upside down. In the European bicycle industry manufacturers and distributors were still used to and felt quite comfortable to control their distribution channels. But that’s going to change with the market entrance of omni-channel distribution.
In Europe especially the Netherlands and UK are seen as forerunners for what’s to happen in all EU markets. It’s no longer a question ‘if’ the websites of all major brands will feature virtual shopping carts for online sales but rather ‘when’ they will start.
Suitable distribution schemes
In the ‘old’ situation market dominating and market strong companies faced certain restrictions. Like in terms of freedom to contract, the obligation to act in a nondiscriminatory style and the strict prohibition on the grounds of applicable antitrust laws to interfere with the autonomy of their customers to calculate and determine their pricing of the products they resold to end consumers and other purchasers.
Thanks to internet, digitalization and omni-channel distribution became the magic keywords and terms such as pure and hybrid players, social media, conversion rates and native immigrants became part of our daily vocabulary. Hundreds of new players at retail level considerably changed the rules of the game, first and foremost the such developments have been to my observation not as disruptive as they have already occurred in the ‘classic’ sporting goods field which includes primarily athletic footwear and sports apparel. This may have to do with the fact that bicycles of their very nature are less apt to be sold over the Internet than e.g. a pair of sneakers. This might also explain why quite a number of branded bicycle and bicycle component manufacturers are just about to discover distribution schemes such as selective distribution as a suitable and also attractive option for them to regain control over their sales of branded goods to the extent permitted under applicable European national laws, foremost competition laws.
Where limitations are
Brand owners appear insecure quite frequently, which distribution policies they are permitted to adopt and where the limitations are. For example can they restrict their retail customers not to sell their goods on online portals such as Amazon Marketplace, or should they incentivize their retailers if they undertake special efforts to promote the respective brand in their brick and mortar shop and/or online stores.
Questions are frequently asked how brands can control the flow of their products and the distribution channels, wherein they subsequently or finally may show up. However when brand raise these question to their legal advisors, they may get some quite unspecific or ambiguous responses, unless they are highly specialized in the respective field of law paired with sufficient practical experience at operational level. This set of basis rules will explain manufacturers and brands about their playing field.
Freedom to contract
From a European Community law point of view (the national situation may differ in some European countries), smaller to medium-sized companies, which are neither in strong in their market nor dominating in their specific product category do enjoy the freedom to contract with any customer they want and to refrain from supplying accounts with their products they dislike. Contrary to widespread stereotypes, that once a customer relationship has been created at vertical level, it cannot be terminated, or at least cannot not be terminated without certain complications such as obligatory compensation payments to such retailer, it is within the scope of the entrepreneurial freedom guaranteed by the European Treaties (same as in several national constitutions within the European Economic Area) that a company is basically free to change its distribution policy. This may change of course if contractual arrangements were in place, or mandatory laws in a certain country would prevent a swift termination, respectively may require to observe certain deadlines until such a termination will come into effect.
In this context it can be very tricky however, how to define the specific relevant market for a certain product category, in order to determine whether a certain brand reaches or surpasses the applicable thresholds for being market dominating or market strong player, which would then considerably limit the freedom to contract principle. Obviously cartel authorities throughout Europe tend to narrow product categories as much as possible. The more product segmentation takes place, the higher the brands’ market shares. When the German Federal Cartel Office, reviewed the selective distribution system of Adidas, it did not base its considerations and deliberations on the ‘sporting goods’ market as such, but stated that the market of football jerseys would be the relevant one, since such category has its own characteristics and sales policies, if one thinks e.g. of the sale of replica jerseys of champions league clubs. Consequently, Adidas’ market shares in Europe in this specific field surpassed the 30% threshold limit easily and Adidas was classified as market dominating company.
Exhaustion of rights doctrine
It is very common and most understandable that brand owners want to exercise maximum control over the sales of their products. Yet, it is a widely recognized principle, that once a certain product has been put legitimately on the European market, the rights of the manufacturer/EU importer will in principle be deemed exhausted. This implies that in general a brand owner does not have any control over such products anymore for example to which third parties these are resold (the so-called European wide ‘Doctrine of Exhaustion’).
Non-discrimination of online retail channel
Regardless of how big or how small the company is, it constitutes a severe violation of EU competition laws (same as of national antitrust laws in numerous EU member states) to discriminate or even to forbid online sales per se at retail level. Such conduct would fall into the same category of so-called hard-core restrictions (i.e. most severe violations of competition laws) like for instance the interference with the autonomous pricing policy of a retailer.
Yet there are exceptions to such rule and this is important to bear in mind, if e.g. a manufacturer/importer of bicycles or bicycle parts intends to exercise a higher amount of control of its distribution channels in Europe than others. There are legally valid reasons to establish a selective distribution system which may, initially, cover either one or several key markets only, or Europe as a whole. Some examples to apply a selective distribution system are when its required by safety-related characteristics of a product, its comprehensiveness or the need to thoroughly explain the functions to consumers or its character as luxury good. It is certainly not a one fits all tool for each and every brand: manufacturers and sellers of common products, which can be substituted easily, will find it hard to convince their retail customers to accept such a scheme.
Selective distribution: not one way street only
Selective distribution means; to define certain objective qualitative criteria how a brand owner or other rights holder, such as a licensee, wants to see its products presented offline and online in the vertical supply chain at retail level, but should in turn also ensure that authorized retailers being part of such system enjoy special marketing and sales support by the brand owner. Selective distribution is not a one-way street only, where brands impose contractual obligations on their customers in terms of ‘you shall/have to/must not’, but will only work if devised as a two-way street according to my experiences and observations, when counseling clients within and beyond the sporting goods industry sector.
Further, it is not a ‘copy and paste’ tool. Brands have different priorities, their customer structure might be different; moreover their product portfolio and their concepts how their brands should be treated and presented both at off-line and online level by a retail partner may substantially differ.
Once established, one of the major benefits will be that, brand owners will be lawfully entitled in a kind of closed shop system to prevent their retail customers from selling the respective branded products to any outsiders, which are not part of the system. This does also apply for market dominating and market strong companies as long as they act in a transparent and nondiscriminatory fashion e.g. whom to accept to become an authorized retailer or not.
Recent legal development
Positive recent signals sent by the EU Commission and the European Court of Justice. Related of its Single Digital Market Project the EU Commission had started in May 2015 a comprehensive sector investigation comprising several industries including sporting goods with a specific focus on the online marketing and distribution of branded products. The aim was to find out how manufacturers/importers and retailers dealt with these topics and whether the restraints imposed on their customers were compliant with EU competition laws. The investigation provided the European Commission access to the detailed terms of more than 6,000 sales and distribution contracts including numerous selective distribution schemes.
In May 2017, the Commission published its Single Digital Market Project final report, where it conceded that the ever-increasing price transparency led to quite frequent conducts of consumers to obtain qualified advice in brick-and-mortar retail stores, but to buy the products online, the so-called free rider symptom. This caused the Brussels authorities to emphasize that stationary retailers require special incentives to be able to catch up with the online trade to ensure that consumers would continue to get high quality products for their money and that also the brand image and the innovativeness of the brand owners would not suffer.
The Commission also observed that an increasing number of brands tend to establish selective distribution systems to exercise a better control over their distribution channels, which also has an indirect effect on the pricing of these products. In this context it is quite comfortable to realize that Brussels does not see a need to intervene, at least not for the time being.
In the very same report, the Commission also pointed out that under normal circumstances it is legitimate for a brand to exclude its retail customers from being represented on online marketplaces such Amazon Marketplace or eBay. Yet that there could be exceptions to the rule, where competition is unduly restrained by these kind of contractual terms. The indication of noncommittal recommended retail prices is explicitly positively mentioned as a tool to signify the quality and the market position of branded goods.
Moreover the Commission made clear that it is, under normal circumstances, legitimate for a brand to grant different sales terms and conditions to its retailer customer base, as long as it does not charge to the very same retailer different prices, if products are e.g. sold online or offline.
Positive signals were also sent by the European Court of Justice (ECJ) in the Coty Cosmetics Case C 230/16 in July of this year, when the much-awaited opinion of the Attorney General Wahl had been published. This court case had first been dealt with by the Appeal Court in Frankfurt, Germany and the German judges had referred the case to the ECJ by raising two key questions: The first had been whether the protection of the brand image of a product is a legitimate requirement that justifies the setting up of a selective distribution system and the second one, whether an online marketplace ban amounts to a restriction of competition by object within the meaning of Art. 101 (1) of the TFEU (Treaty on the Functioning of the European Union) and within the same context would constitute a forbidden hard-core restriction within the meaning of the 2010 EU Vertical Block Exemption Regulation.
Attorney General Wahl answered the first question in his detailed opinion positively and also said that an online marketplace ban is a sort of restraint, which is acceptable in the context of a selective distribution agreement, and consequently not restrictive by object.
The final judgment of the ECJ in the Coty Case is expected to be published by the end of this year and it can be hoped that it will be equally positive for brand owners, since in most cases the ECJ judges follow in their verdicts the opinion voiced by the Attorney General.
Just to complement this information: In Germany where the cartel authorities are stricter than in other countries, ruled that marketplace bans constitute a hard-core restriction of European and German competition laws, German courts in their majority disapproved such opinion. The recent final judgment in favor of a brand owner is in line with the ruling by the Appeal Court in Frankfurt in the Deuter case last December 2015. Deuter is the German high quality backpacks brand.
It is noteworthy to mention that Amazon Luxembourg had joined the case after the demanding retailer had made the attempt to challenge such judgment by submitting it to the German Federal Court. Surprisingly both withdrew their appeal just few days before the first oral hearing. Amazon might have been concerned that a German (landmark) court judgment
at the highest level could have had a quite negative impact on its whole business model of Amazon marketplace. Yet this is of course is a speculation only, since the reasons causing the retailer and the U.S. online giant to take this step were never disclosed.
To conclude: the bicycle industry has a number of legitimate tools at hand to better control its sales of branded products in Europe. Manufacturers and importers are encouraged to take a closer look into these topics by following the footsteps of numerous athletic footwear, sports apparel and outdoor brands, which opted for such distribution schemes.
This article is written in a more general manner by focusing on legal aspects and new trends and developments at a European level within the legal and regulatory framework at European Community level. Specific national law regulations and the case law of national courts, like other than certain German recent developments have not been taken into consideration. It is therefore recommended to seek individual legal advice, whenever required.
About the author:
Dr Jochen M. Schaefer is a German practicing attorney based in the Munich area. Since numerous years he represents both the World Federation of the Sporting Goods Industry (WFSGI) and the European Federation of the Sporting Goods Industry (FESI) as their Legal Counsel while he is also chairing the WFSGI’s Legal Committee. In court he represents brands within and beyond the sporting goods sector, including the bicycle industry. He is a specialist in national and international distribution topics, intellectual property (IP) and risk management issues and in the drafting and negotiation of comprehensive contracts at operational level. In case of any questions about this report (and in general) he can be reached at firstname.lastname@example.org and +49-151-(0)16407932.