Distribution/Franchising

McDermott’s Annual EU Competition Review summarizes key developments in EU competition rules. During the previous year, several new regulations, notices and guidelines were issued by the European Commission. There were also many interesting cases decided by the General Court and the Court of Justice of the European Union. All these new rules and judicial decisions may be relevant for your company and your day-to-day practice.

In our super-connected age, we can be inundated by information from numerous sources and it is difficult to select what is really relevant to one’s business. The purpose of this review is to help general counsel and their teams to be aware of the essential updates.

This review was prepared by the Firm’s European Competition Team in Brussels, Paris and Germany.

Access the full report.

According to Advocate General Nils Wahl’s opinion, delivered on July 26, in the Court of Justice of the European Union’s (CJEU) case Coty Germany GmbH v Parfümerie Akzente GmbH (case C-230/16), suppliers of luxury goods may prohibit their authorized retailers from selling their goods via third-party internet platforms. Such bans do not necessarily infringe Article 101(1) of the Treaty of Functioning of the European Union (TFEU) (which prohibits anticompetitive agreements).

Background of the Case

On July 16, 2016, the Higher Regional Court of Frankfurt lodged a request for a preliminary ruling with the CJEU asking whether selective distribution systems that serve to ensure a “luxury image” for the goods constitute an aspect of competition that is compatible with Article 101(1) TFEU and, whether bans on sales via third-party internet platforms constitute a restriction “by object” and should be viewed as “hardcore restrictions” under the Commission’s Vertical Agreements Block Exemption Regulation (VBER).

The initial dispute arose when Coty, a supplier of luxury cosmetics in Germany, brought an action against one of its authorized retailers, Parfümerie Akzente, for having infringed a provision in Coty’s selective distribution agreement that prohibited the retailers from distributing the luxury products via third-party platforms, such as Amazon, in order to preserve the brand image. The agreement provided that the authorized retailers could only sell the products online through an “electronic store window,” provided that the luxury character of the products was preserved. Continue Reading Advocate General Wahl Delivers Opinion on Legality of Bans on Online Sales via Third-Party Platforms in Selective Distribution Systems

On 10 May 2017, the European Commission published its final report on the e-commerce sector inquiry. The report is divided into two sections, covering e-commerce issues in relation to consumer goods and digital content. It also identifies business practices that might restrict competition and limit consumer choice. It would be advisable for e-commerce businesses to review their commercial practices and revise them as necessary in light of the Commission’s stated aim of targeting e-commerce business practices that may negatively impact the functioning of the Digital Single Market.

Read the full article. 

In an antitrust case involving bundled discount on sutures, the United States Court of Appeals for the Tenth Circuit affirmed a lower court decision granting summary judgment in favor of defendants Cardinal Health 200, LLC and Owens & Micro Distribution, Inc.  The Tenth Circuit held that Plaintiff-Appellant Suture Express, Inc. could not prove that the defendants individually possessed market power and that it had not demonstrated that defendants caused substantial adverse effects on competition.

WHAT HAPPENED:

  • Suture Express, a distributor focused on the sale of sutures, sued Cardinal Health and Owens & Micro, which are national distributors of a broad array of medical-surgical products, claiming that they had engaged in illegal tying through their practice of bundling sutures with other medical-surgical products in a manner that penalized customers that purchased sutures from other suppliers.
  • The parties filed cross motions for summary judgment and the lower court granted summary judgment to the defendants.  The court held that Suture Express’ claims failed as a matter of law because it could not prove that the defendants individually possessed market power.  The court also held that Suture Express could not meet the antitrust injury requirement because it had not shown that competition had been harmed.
  • The Tenth Circuit affirmed the lower court’s ruling.  On the issue of market power, the appellate court agreed with the lower courts’ findings that the defendants’ market shares on the alleged tying products (medical-surgical products excluding sutures) were relatively low (31 percent and 38 percent), there were many examples of customers switching to other distributors, and the defendants’ declining profit margins on medical-surgical products excluding sutures demonstrated that the defendants did not have the ability to control prices.
  • With respect to antitrust injury, the Tenth Circuit stated that the antitrust laws are meant to protect competition, not individual competitors.  The appellate court noted that despite the fact that roughly half of the market was not constrained by the bundling arrangement at issue, Suture Express accounted for a relatively small portion of this piece of the market.  This raised the question of whether it was just Suture Express that was harmed as opposed to competition generally.

WHAT THIS MEANS:

  • Establishing market power when defendants have relatively low market shares is difficult.  While market shares in and of themselves are not determinative of whether market power exists, the courts give market shares significant weight and when evidence of low market shares is combined with the other factors the Tenth Circuit found here, it is difficult for a plaintiff to meet its burden.
  • Vertical pricing arrangements that offer discounts to customers, even if associated with a bundling arrangement, are often viewed as procompetitive.  A plaintiff has the difficult burden of showing that a defendant’s bundle creates anticompetitive effects that outweigh its procompetitive effects.  The plaintiff must demonstrate that the arrangement caused harm not only to the plaintiff, but to competition as a whole.  Even if a plaintiff finds it difficult to compete against a defendant’s bundle, if customers have shown that they are willing and able to switch from the defendant’s bundle, establishing harm to competition will be a challenge.

On 9 June 2016, the UK’s Competition and Markets Authority (CMA) issued a statement of objections (SO) to Ping Europe Limited (Ping), a golf equipment manufacturer, alleging that Ping had breached EU and UK competition law by banning the sale of its golf clubs online.

Continue Reading Online Sales Restrictions Remain a Hot Topic: UK CMA Issues Statement of Objections

On 18 March, the European Commission (Commission) published its initial findings on geo-blocking in the framework of its ongoing antitrust sector inquiry into e-commerce.

The findings are based on responses to questionnaires sent to more than 1400 retailers and digital content providers from all 28 EU Member States in 2015.

The questionnaires focused on geo-blocking practices in the sales of goods (clothing, shoes and accessories, consumer electronics, household appliances, computer games and software, toys and childcare articles, books, media carriers, cosmetic and healthcare products, sports, outdoor, house and garden equipment), and in the provision of digital content services (films, sports, TV programmes, music).

The findings suggest that geo-blocking is a widespread practice. Where the sale of tangible goods is concerned, in most cases the decision to have geo-blocking in place is made unilaterally by the retailer.  In only 12 percent of the cases, retailers were forced by contract to put restrictions in place on cross-border sales.

On the other hand, geo-blocking in digital content is for the most part a contractual requirement imposed by suppliers (for 59 percent of the respondents).

The data on geo-blocking now published by the Commission seem to strengthen the Commission’s suspicions that geo-blocking practices are widespread and may significantly impact intra-EU cross-border trade. The Commission said that geo-blocking may be in breach of competition law, particularly when it results from agreements between businesses or if practised by a dominant market player.

However, the Commission also recognized that retailers and service providers may have valid reasons to put geo-blocking in place to restrict cross-border sales. In light of this, the Commission may decide to address the conditions under which geo-blocking is justified in further legislation or guidance to businesses first, rather than take  immediate enforcement measures on the back of the sector inquiry.

Any ensuing enforcement action would have to take place on a case-by-case basis, separately from the overall sector inquiry.

It is expected that the Commission will present its final report on the present inquiry by the middle of 2016.

On February 29, 2016, the Attorney General of Maryland filed a complaint alleging that Johnson & Johnson Vision Care, Inc. (Johnson & Johnson) violated the Maryland state antitrust law by entering into an agreement with a retailer regarding a resale price maintenance (RPM) policy.

The complaint alleged that Johnson & Johnson initially instituted an RPM policy in response to objections from eye care professionals that they were losing business to discount retail stores, including Costco Wholesale Corporation (Costco), who were charging less than the eye care professionals to fill prescriptions for Johnson & Johnson’s contact lenses.  Once Johnson & Johnson implemented its RPM policy, which fixed minimum retail prices for all retailer sellers of its contact lenses, Costco complained to Johnson & Johnson that the policy prevented Costco from offering discounted pricing on the lenses that its customers had come to expect.  In response to Costco’s complaint, Johnson & Johnson entered into negotiations with Costco regarding the terms of its RPM policy.  Ultimately, Johnson & Johnson agreed with Costco to amend its RPM policy to permit Costco to provide gift cards and other discounts to Costco customers who purchased Johnson & Johnson’s contact lenses from Costco.  Johnson & Johnson then entered into similar RPM policy amendments with certain other retailers.  Continue Reading Maryland AG Challenges Resale Price Maintenance Agreement

On May 14, 2015, the Southern District of New York issued two opinions in Laumann v. Nat’l Hockey League, No. 12-cv-1817, excluding plaintiffs’ damages expert under Daubert and denying plaintiffs’ motion to certify a damages class. The court did, however, certify a class under Federal Rule of Civil Procedure 23(b)(2) for the purpose of pursuing injunctive relief. The case is part of a growing body of case law in which courts have considered Daubert motions at the class certification stage. The plaintiffs had sought to certify two classes of individuals who purchased “out-of-market” baseball or hockey packages, either online or through a television service provider.

The plaintiffs in Laumann alleged that agreements between the defendants—sports leagues, regional television networks that produce each team’s games, and television service providers—violated Section 1. The challenged restraint was “territorial exclusivity,” the restriction on regional networks from selling content to consumers who live outside the network’s geographic market. Instead, a Yankees fan who lives in Iowa, for example, could only watch Yankees games by purchasing an “out-of-market package,” a bundle that includes all games except games involving teams from the Iowa region. The agreements required “blackouts” of games in class members’ home team areas, thereby requiring out-of-market package subscribers to also subscribe to a local cable package in order to watch their favorite teams. Plaintiffs’ theory of damage was that, without the challenged restraint, regional sports networks would sell content directly to out-of-market fans, and therefore consumers would have a second option, which would put downward pressure on the price of the all-inclusive out-of-market package. The court held that having fewer options and paying higher prices were distinct forms of injury that were both recognizable. Laumann, 2015 WL 2330107 (class certification opinion), at *8.

The court decided to exclude the opinion of plaintiffs’ damages expert because his model was “largely untethered from the actual facts of th[e] case.”  Laumann, 2015 WL 2330036 (Daubert opinion), at *11.  Therefore, the model was not a “scientifically-reliable way to predict with some precision the prices of [out-of-market] telecasts,” and it had to be excluded. Id. at *10. The expert, Dr. Noll, used the defendants’ viewership data to create a model with variables estimated by statistical techniques. The court noted that “many pages of Dr. Noll’s declarations consist[ed] almost entirely of complex equations beyond the comprehension of the Court or the lawyers in this case.” Id. At *5. Defendants’ economist called the model “junk science” that “relie[d] too heavily on mathematical assumptions and random error, and too little on actual data about consumers and their preferences,” and in effect the court agreed. Id. at *7, *14.

Regarding class certification, the court held that, with Dr. Noll’s opinion excluded, a class could not be certified under Rule 23(b)(3). The court noted that Rule 23(b)(3) requires plaintiffs to “show that they can prove, through common evidence, that all class members were . . . injured by the alleged conspiracy.” Laumann, 2015 WL 2330107 (class certification opinion), at *9 (internal quotation marks omitted) (quoting Sykes v. Mel S. Harris & Assoc., 780 F.3d 70, 82 (2d Cir. 2015)). “Here, Dr. Noll’s model was the common evidence—and the model [was] excluded.  Therefore, no (b)(3) class [could] be certified.” Id. The court went on to hold that “every class member has suffered an injury, because every class member, as a consumer in the market for baseball or hockey broadcasting, has been deprived of an option— à la carte channels—that would have been available absent the territorial restraints,” and this injury “unite[d] the class.” Id. at *11. It therefore allowed the plaintiffs to proceed as a class to pursue injunctive relief under Rule 23(b)(2).

 

On August 14, the U.S. District Court for the Southern District of Mississippi issued an opinion finding that state regulations bolstered one antitrust claim and hindered another in an ongoing dispute between a northern Mississippi convenience store chain, Major Mart, and an Anheuser-Busch InBev (ABI, a/k/a “Red Network”) distributor, Mitchell Distributing Company.

In Mississippi, by statute, like those of many other states, beer manufacturers must designate exclusive sales territories for each brand.  Mitchell holds the exclusive right to sell ABI brands to retailers in the counties in which Major Mart operates its 11 convenience stores.

The relationship between Mitchell and Major Mart started to break down in 2010, when Major Mart claimed that it was receiving inaccurate and confusing price information from Mitchell.  Major Mart asked Mitchell for compensation of lost profits due to the incorrect pricing information.  Mitchell denied the request, and Major Mart decided later to remove ABI displays and signs, lower the prices of competitors’ products, and reduce the cooler space allocated to ABI in some of its stores.  According to Major Mart’s complaint, Mitchell retaliated by (1) demanding shelving allocation that represented ABI’s market share of approximately 70 percent, (2) demanding price parity with competing products of ABI, (3) changing its deliveries to Major Mart stores to once a week so as to fill up Major Mart’s coolers and storerooms, leaving no room for competitor products and (4) delivering on Fridays so that Major Mart stores would not have cold beer on the “best selling day of the week.”

After litigation was first initiated, the parties reached a settlement in 2011, agreeing that Mitchell would increase its deliveries to at least twice per week and Major Mart would reconsider shelf space allocation and increase prices on competing brands of beers to the same price as ABI products.  This temporary resolution, however, failed when Major Mart did not reallocate its shelf space.  In response, Mitchell once again cut deliveries to one day per week and thereafter began to provide sales coupons and promotional giveaways exclusively to Major Mart’s competitors.  Major Mart also claimed that Mitchell delivered beer that was close to the end of its shelf-life, replaced fresher beer Major Mart had with older beer and missed deliveries during key dates, including July 4 and just as students were returning to college.  Eventually, Major Mart sued.

Major Mart alleged that Mitchell engaged in monopolization and attempted monopolization in violation of the Sherman Act and price discrimination in violation of the Robinson-Patman Act.  In response, Mitchell filed a motion for summary judgment asserting that the Sherman Act did not apply, as (1) Mitchell’s actions were immunized by the State Action Doctrine—the principle that the Sherman Act does not apply to states acting in their capacities as sovereigns—and (2) Mitchell’s actions, which occurred solely in Mississippi, did not affect interstate commerce—as required for Sherman Act jurisdiction.

Quickly discarding the State Action Doctrine assertion, the court noted that to qualify as a state’s action, conduct must be “undertaken pursuant to a clearly articulated an affirmatively expressed state policy to displace competition.”  And, while Mississippi’s statutory scheme clearly prevents intra-brand competition by requiring exclusive territories, it does nothing to restrict competition between brands, which was the subject of Major Mart’s claims.  Further, no state statute or regulation expressly or impliedly allowed any of Mitchell’s actions.

The court also found that Major Mart had met the interstate commerce requirement because the beer sold by Mitchell had been acquired from breweries outside the state and the restrictions on beer sales affected sales of other products in interstate commerce, such as the tobacco, food and gasoline sold at Major Mart stores.

Regarding Major Mart’s monopolization claim, the court analyzed the elements of that claim under the Sherman Act: that the defendant (1) possesses monopoly power in the relevant market, and (2) has willfully acquired, maintained or enhanced that monopoly power through exclusionary conduct.  Mitchell argued that no evidence showed that it had effectively wielded any monopoly power and that Major Mart had not demonstrated that other wholesalers are so “capacity constrained” as to prevent them from effectively competing with Mitchell. The court disagreed, pointing to Mitchell’s 70-75 percent market share of wholesale beer sales as sufficient evidence to raise a question of fact as to Mitchell’s monopoly power.

On the issue of Mitchell’s exclusionary conduct, Major Mart argued that Mitchell was using its market power to punish Major Mart for selling other brands of beer by slowing or ceasing deliveries, delivering damaged product, and taking other retaliatory actions when Major Mart lowered prices or refused to reconsider allocation of shelf space.  The court ultimately denied Mitchell’s summary judgment motion, finding that the issues presented in Mitchell’s motion required the evaluation of testimony to resolve.

Major Mart’s price discrimination claims centered on Mitchell’s practice of “granting discounts, promotions, special services and rebates to other retailers, but not to Major Mart.” Sections 2(d) and 2(e) of the Robinson-Patman Act protect against suppliers granting promotional benefits in connection with sales to favored customers.  A supplier violates 2(d) if it discriminates by compensating only selected customers for customer-performed promotion and violates 2(e) if it discriminates in performing promotional services for selected buyers.

The court never evaluated these claims, however, as Mitchell successfully contended that Major Mart did not satisfy the “in commerce” requirement for jurisdiction under the Fifth Circuit’s interpretation of the Robinson-Patman Act.  This “in commerce” requirement is interpreted more narrowly than the interstate commerce requirement of the Sherman Act.  Under Fifth Circuit precedent, the “in commerce” requirement “is not satisfied unless the sales actually cross a state line,” which may be met if the goods are sold or resold in interstate commerce or the goods were sold to those who compete in interstate commerce.  Because Major Mart did not buy the beer or resell the beer in interstate commerce—just in Mississippi—nor compete in interstate commerce, since “those who received rebates and coupons from Mitchell are located in Mississippi,” the “in commerce” requirement of Robinson-Patman was not met.  So, while Major Mart satisfied the Sherman Act interstate commerce requirement because its purchase of beer from a wholesaler affected interstate commerce, it could not satisfy the Robinson-Patman Act “in commerce” requirement because its sales of beer did not take place across state lines.

This case serves as a reminder of how regulation can affect the antitrust treatment of beer and other beverage distributors.  Regulation of licensing procedures or territorial restrictions, for example, can erect barriers to entry that practically insulate wholesalers from competition within a brand, but cannot shield a wholesaler from antitrust claims of misuse of market power bestowed by that state-sanctioned “monopoly.”  While distributors of dominant brands who have exclusive rights within a geographic area do not have to worry about losing those rights to competing firms absent rare circumstances, they must be on guard against antitrust claims arising from their dealings.  Conduct toward retailers, manufacturers or other distributors that would otherwise be considered merely “rough dealing” can rise to the level of a federal antitrust violation or invite state and federal regulatory antitrust scrutiny because of that exclusive distribution relationship.

This case also reminds us that state regulatory schemes and franchise laws cannot insulate wholesalers from antitrust scrutiny under state action immunity, even though a wholesaler’s exclusive right to distribute the brands it carries often is conferred by state law.  For a private actor to obtain state action immunity, the state must clearly articulate a policy to displace competition and actively supervise the private actor’s conduct under the statutory scheme.  These types of regulations and laws typically make no such articulation, and in this case, the alleged exclusionary conduct of the wholesaler bore no relation to the regulatory scheme that permitted its exclusive distribution relationship.

Finally, as illustrated by this case, despite the risk of federal antitrust violations for wholesalers of dominant brands articulated above, wholesalers of any brands typically face no risk of violating federal price discrimination laws related to the pricing of beer to retailers because those transactions do not cross state lines.  Perhaps that is small comfort, however, given the existence of state price discrimination laws and the potential for certain pricing schemes by wholesalers of dominant brands to constitute exclusionary conduct in violation of the Sherman Act.

On July 11, 2014, the Northern District of California dismissed one of two federal antitrust claims brought against Chrysler Group LLC under the Robinson-Patman Act, 15 U.S. C. § 13, as well as several state statutory and common law claims.  Matthew Enterprise, Inc. v. Chrysler Group LLC, No. 13-cv-04236-BLF (N.D. Cal. July 11, 2014).  The plaintiff, a franchise car dealer and direct customer of the defendant, alleged that Chrysler committed anticompetitive price discrimination by offering volume discounts to new dealers on more favorable terms than those offered to established dealers like the plaintiff and by selectively offering the plaintiff’s competitors disguised price discounts in the form of below-market rent.  The court allowed the former claim to go forward but dismissed the latter for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

The court began by recounting the purposes behind the Robinson-Patman Act, as described by the Supreme Court in FTC v. Sun Oil Co., 371 U.S. 505, 520 (1963): “to curb the use by financially powerful corporations of localized price-cutting tactics which had gravely impaired the competitive position of other sellers . . . and to ensure that businessmen at the same functional level . . . start out on equal competitive footing so far as price is concerned.”  Matthew Enterprise, slip op. at 6 (internal quotation marks omitted).  It explained that in order to state a “secondary-line case” involving competition among customers of a common seller, a plaintiff must plead facts showing that “(1) the relevant sales were made in interstate commerce; (2) the products were of like grade and quality; (3) the seller discriminated in price between the Plaintiff and another purchaser of the same products; and (4) that the effect of that price discrimination was to injure, destroy, or prevent competition to the advantage of a favored purchaser.”  Id., slip op. at 7.

The plaintiff in Matthew Enterprise alleged that Chrysler offered volume discounts to established car dealers based on a formula that took into account the dealer’s prior year sales.  Because new dealers, by definition, did not have prior  year sales, Chrysler used different criteria to determine the volume at which new dealers would receive a discount, which the plaintiff alleged was substantially lower than the volume the plaintiff needed to sell in order to qualify for the discount.  For example, the plaintiff alleged that “this inequality of treatment led to [one new competitor] receiving vehicle subsidies during July 2012, despite selling only sixty vehicles, while Plaintiff failed to receive incentives, despite selling 130 vehicles.”  Id., slip op. at 8.  These allegations, taken as true for purposes of the motion to dismiss, allowed the court ultimately to conclude “that Chrysler ha[d] set up its newly opened dealers as a class of ‘favored purchasers’” in violation of the Robinson-Patman Act.  Id., slip op. at 9.

Regarding the second price discrimination claim, the court noted that it was not aware of any Ninth Circuit case law holding that the Robinson-Patman Act applies to real estate transactions.  The plaintiff tried to salvage its claim by arguing that the rental agreement was actually a disguised price discount.  But “in order for the Court to find sufficient its ‘disguised discount’ claims,” the court stated that the “Plaintiff would need to plead facts that permit the Court to infer that the rental agreement is in some way tied to the volume of cars sold,” which it failed to do.  Id., slip op. at 13-14.  The court therefore dismissed the plaintiff’s Robinson-Patman Act claim under this theory of liability.