Staying antitrust compliant
In 2018, distribution and pricing of goods and services will remain a hot antitrust topic, throwing up compliance challenges but also bringing more clarity to the rules. Although the US continues mostly to exhibit a light touch on distribution issues, Europe and Asia are experiencing waves of enforcement.
We expect cases in 2018 to apply existing principles to new practices and to shed light on lesser-explored corners, such as how antitrust law can tackle potential concerns arising from pricing algorithms. As European Commissioner Vestager put it: ‘it’s not easy to know exactly how those algorithms work’ but ‘companies can’t escape responsibility for collusion by hiding behind a computer program’.
However, internet distribution is by no means the whole story, with practices such as resale price maintenance (RPM) attracting plenty of attention and more enforcement against excessive pricing, so far mainly in pharmaceutical and technology markets.
The issue of rebates and other commercial terms used by dominant companies is also at the fore in Europe and Asia – in the former case with the EU Court of Justice at last endorsing the need for an analysis of effects before exclusivity rebates can be considered to be anti-competitive.
The European Commission’s 2017 e-commerce sector report found that pricing restrictions or recommendations were by far the most common types of restrictive clauses reported by retailers, with 42 per cent of those surveyed saying they were subject to these clauses. But other restrictions are prevalent too: 18 per cent were restricted in their use of online market places, and a surprisingly high 11 per cent cited territorial restrictions.
As the internet grows in importance and online sales methods become ever more sophisticated, authorities, courts and lawmakers are racing to monitor and control business practices. Globally there is much similarity of approach across jurisdictions, though the US remains generally more permissive of most distribution arrangements provided they are not made between competitors. But, even in the case of jurisdictions with broadly similar rules, there can be significant differences in enforcement.
Markets subject to recent enforcement action in Europe have included, among many examples, golf clubs and mobility scooters in the UK and food supplements in Germany. The European Commission’s ongoing post e-commerce sector inquiry investigations into films, fashion, brand licensing, hotels, video games and consumer electronics may provide guidance on a variety of issues. Several of these cases involve online pricing restrictions, on which enforcers are especially vigilant. These restrictions often originate in physical outlets seeking protection from the lower prices that internet sellers are able to charge. Suppliers wanting to maintain both types of sales channel face a challenge.
Selective distribution – a model where goods may only be sold to authorised resellers that comply with specified quality criteria, or to end users – provides some room for manoeuvre. Even here, the long-established approach that these systems could exclude pure internet resellers was coming under sustained assault by the enforcement authority and courts in Germany. However, in 2017 the tables turned back in favour of manufacturers. Early in the year, an EU Advocate General opined that manufacturers do not have to allow distributors to sell through third-party platforms. This was followed in the latter half of 2017 by a Dutch court upholding Nike’s restrictions on the use of certain third-party platforms on the basis that they served to protect the brand image of a luxury product, and Caudalie winning a similar case on its skincare products in France. Finally, in December the EU Court of Justice ruled firmly in the Coty case to uphold certain restrictions on distributors’ use of third-party platforms to sell luxury goods.
Alex Potter, Antitrust Partner, London
For many companies Asia and especially China are important growth areas for their products. Given that they cannot be directly present in each jurisdiction, companies will often work with independent distributors and agents, and so face pricing issues. As volumes of online sales continue to grow (a 2017 PwC report found that 52 per cent of Chinese consumers shop daily or weekly by phone), the enforcement focus, and the tensions this causes between traditional bricks-and-mortar retailers and online sellers, is bound to increase.
Asia is a particularly challenging region in which to ensure compliance because of the widely varying approaches to RPM and other vertical restrictions found in the different jurisdictions:
Faced with such a variety of laws in Asia, companies are often best advised to adopt a high standard across the board, providing for limited exceptions where that is feasible.
Ninette Dodoo, Antitrust Counsel, Beijing
In 2018, we are likely to see a continued trend towards more enforcement against companies that are pricing ‘excessively’ and demand for more guidance as to exactly what ‘excessive’ means. Although the law is not new, the appetite for bringing cases is, so far focusing on the pharmaceutical industry and technology sector:
This renewed enthusiasm for excessive pricing cases is part of a broader interest in the fairness of commercial dealings, a concept that has so far not been satisfactorily linked to the normal theories of competitive harm deployed by enforcement authorities.
In Europe, the Intel case on the legality of exclusivity rebates granted by dominant companies continues on its way through the EU courts. A recent Court of Justice judgment introduced flexibility in this area, which had previously been subject to a more or less absolute prohibition. The case was sent back to the General Court, whose next judgment should bring further insight. More generally, this case is expected to spur European authorities into a more economic approach to other types of conduct by dominant companies.
But while Intel certainly moves the law away from knee-jerk illegality for exclusivity rebates, dominant companies are directed instead towards the murky waters of effects analysis. Murky not because of an absence of economic tools – there are well-understood techniques to deploy. However, the fact that both Intel and the European Commission undertook detailed economic analysis on the same rebate scheme and reached diametrically opposed conclusions illustrates the challenge facing those who seek to use this greater freedom.
Finally, China’s case against Tetra Pak – a virtual replay of 1992 proceedings brought against the same company in Europe – sheds light on how rife the question of rebates is in some parts of Asia.
Thomas Ensign, Antitrust Partner, Washington DC
Looking ahead in 2018