Notes of a conference co-hosted by Mayer Brown in Brussels in November 2008, addressing the intersects of brand owners, retailers and Internet players in relations to the EC’s review of vertical restraints.

Keynote Speaker
Andrei Gurin, European Commission, DG Competition

Panel 1
Andres Font Galarza - Moderator, Partner, Mayer Brown
Benoît Durand, Partner, RBB Economics
Richard Nash, Senior Manager EU Public Affairs, eBay
René Plank, Special Counsel, bpv Hügel Rechtsanwälte
Lou Schapiro, Deputy General Counsel, The Estée Lauder Companies Inc.
David Stalibrass, Senior Economist, OFT, UK
Gregg Svingen, Advisor, The Centre

Panel 2
Kiran Desai - Moderator, Partner, Mayer Brown
Juan Briones, Partner, e-Konomica
Dr. Salome Cisnal de Ugarte, Director European & Regulatory Affairs, Whirlpool Europe
Juan Espinosa, Deputy Director, Comisión Nacional de la Competencia, Spain
Catriona Hatton, Partner, Hogan & Hartson
Paul Lugard, Antitrust Counsel, Philips International B.V.
Anita Lukaschek, Federal Competition Authority, Austria

Panel 1 – Brand Owners and the Internet

The first panel dealt with the proposed revision of the EC Vertical Agreements Block Exemption Regulation (VBER)1 by the European Commission (EC). The members of the panel presented their views on this issue.

From the perspective of the online retailers, reference was made to how online retailing had given individuals the opportunity to set up small businesses with little expenditure, and how this has become an ongoing and increasing trend. The Internet also provides advantages to the consumers, by giving them access to lower prices, to more information and to real cross-border trading.

Additionally, new products coming into the market had particularly benefited from the Internet by finding suitable online distribution channels. However, it was noted that the development of these distribution systems could be hampered by a restrictive interpretation of the current set of legal rules, such as those included in the VBER. It was further noted, though, that the VBER should not be interpreted as being against selective distribution systems.

From the brands manufacturers perspective, the importance of brands was stressed and reference was made to what actually constitutes the “brand’s DNA.” Also stressed was the importance of luxury brands manufacturers to be able to preserve the value of their brands, which, essentially, meant having a say on how their products are distributed. On this point, it was noted that certain products, such as cosmetics or para-medical products, by their very nature required selective distribution systems, and that selective distribution systems empower consumers by increasing their choice.

Nevertheless, most brands owners do not oppose Internet retailing as long as certain conditions and quality standards are met in a way comparable to that required in physical points of sale. It was felt that as long as the Internet players can preserve and protect the brand identity the Internet can be a “brand-enhancing” tool.
It was acknowledged that many luxury products were already being sold online and that Internet sales have increased materially during the last several years. Reference was further made to the fact that the Internet is still evolving and that, at present, brand manufacturers’ and authorized selective distributors’ web sites are best positioned to provide online shoppers the expected level of service and personal touch, similar to that of physical points of sale within a selective distribution network.

Finally it was mentioned that to preserve the already working distribution systems, and thereby guarantee innovation, the current rules needed to be maintained and further clarified. From this perspective, a note of caution was expressed with regard to the risks of an un-regulated “wild west” on the Internet.
From the perspective of an EU national competition authority, reference was made to the Internet’s benefits to consumers. A survey undertaken by a national competition authority in the European Union demonstrated that consumers considered the convenience of online shopping as the greatest advantage to the Internet, followed by the wider range of choice, lower prices and greater availability of product information.

At the same time, it was noted that there are still factors that impede a wider use of the Internet by consumers. For instance, consumers seem to be concerned about the security of online transactions, about privacy issues, the delivery of the purchased goods and the quality of the purchasing process. All these issues come down to the question of trust. In the United Kingdom alone for example, it is estimated that the lack of trust by consumers in online shopping may cost retailers a potential £200 million sales turnover per year.

Furthermore, other benefits stemming from the disruptive forces of the Internet were also mentioned, including a “democratization” and selective “anonymization” of the purchasing process, and changes to the cost bases of firms. Nonetheless, it was admitted that these benefits may have a particular impact on luxury products. As a final note, it was suggested that in terms of preferred policy objective, the best way forward would be to maximize the competition in business models rather than in products, as it is from business model innovation that the greatest productivity benefits are likely to arise. Of course costs also need to be taken into account, both in terms of errors and the public and private costs of enforcement. It was recommended, though expressed as a personal view and not as that of the competition authority, that a “wait-and-see” approach is adopted before taking any action..

From the viewpoint of a private practitioner, it was mentioned that while the current rules seemed to be working well, certain clarifications and modifications would be needed especially with regard to the online markets. Most notably, the current rules consider Internet sales to be passive sales, which is something that has become more and more questionable due to technological developments and new business strategies (examples included the use of unsolicited emails and web sites specially targeted for exclusive territories). Nevertheless, it was felt that the internal market goal should still be seen as a valid and central element of the future rules.
With regard to a possible adaptation of the respective Commission guidelines on vertical restraints, it was noted that these changes risked not being efficient because national courts tended to neglect guidelines and turn solely to the legal rules. As a consequence, it was noted that changes should — if needed — also be made to the regulation itself.

From the economist perspective, it was noted that it is very difficult to conduct an economic assessment of competition rules, particularly of vertical restraints and that the current guidelines were rather vague regarding the reason why limiting online sales could be anticompetitive.
In the economists’ view, while limiting online sales can increase prices and reduce choice, higher prices are consistent with increased consumer welfare, for example, in terms of value added services: , though arguably, perhaps not all consumers need those additional services. Yet, according to the economists, it is unclear whether selective distribution systems tend to be beneficial for the consumer or work to the consumers’ detriment. In this respect there are studies supporting both views, which is why economists struggle to adopt a definitive position on this issue.

The new guidelines should clarify which effect online retailing could have and whether online retailing would reduce the economic rent the producers and established distributors share. On the one hand, it may be considered a priori that restricting online sales may be anticompetitive, but the legislator should clarify why. On the other hand, the primary goal for brand owners is to show that restricting online sales is not detrimental for the consumer, mainly in terms of price, and that, in fact, it might be even advantageous. Acknowledging that there are arguments both for and against vertical restraints, it was suggested that the truth could be somewhere in the middle.

Public affairs practitioners provided their broader policy views on the matter. It was noted that the disruptive impact of online commerce can generate opportunities as well as challenges. One issue likely to reappear in the context of vertical restraints is the dichotomy of accessibility, which the Internet provides, and exclusivity, which sellers require when they wish to protect particular aspects of their products, whether reputation, quality or other. It was emphasized that the rules need to be adapted to take into account the quickly changing business world, without de-legitimizing either existing or nascent business models. On balance, the concept of online sales and sales platforms appeared to be beneficial for consumers while it still required policy makers to ensure a fair balance that is acceptable to the greater business community and consumers, during a time of technological and economic change.

Panel 2 – Brand Owners and Retailers

This panel started by examining how potential revisions of the VBER should deal with the concept of buyer power.
An industry representative explained that the EC had already taken a more economics-based approach when the VBER was adopted in 1999. However, it was questioned whether that approach fully reflected current economic insights.

Buyer power can have negative effects for consumers. Particular reference was made to studies by economists that demonstrated that private labels put severe pressure on suppliers that could ultimately lead to less innovation and lower investments by suppliers due, for example, to their low margins and so inability to invest. Therefore, it was concluded that a mere addition of a reference to buyer power to the respective guidelines may not be sufficient, and that changes to the regulation itself were necessary.

The panel then discussed the possible impact of last year’s US Supreme Court ruling in Leegin2 on the concept of hardcore restraints. An industry representative briefly described the judgment that overruled the long standing per se prohibition of resale price maintenance (RPM) in the United States, since economic evidence had shown that in fact the RPM could be pro-competitive, and referred to the additional non-economic reasons that had also contributed to this outcome. It was suggested that the old per se approach was outdated and too formalistic, and that there were already ways to circumvent minimum prices. In addition, the panelists were reminded that restrictions falling outside the exemption of the VBER were only presumed to have anti-competitive effects, although this presumption was rebuttable with substantive arguments. However, a note of caution was struck because the risk of fines remains high as does the overall impression that a prohibition of RPM prevails. This would certainly be something that the EC would need to take into account in its review of the VBER.

It was also noted that the EC now appears more reluctant than before to follow the US Supreme Court, and it was suggested that this was due to the fact that the Leegin judgment failed to address a number of the potential anticompetitive effects likely to arise as a result of resale price maintenance. As a concluding remark, the industry representative expressed that companies, as well as consumers, might benefit from a more flexible approach with regard to RPM.
From the perspective of the EC, it was acknowledged that the EC faces an important choice in its review of the VBER: either following the Leegin ruling or else adapting its current approach to a more economic view. It was nonetheless noted that companies had the opportunity to come before the EC with evidence to rebut competition concerns, although past experience clearly demonstrates that companies did not really try to justify RPM even if, as a result, they had to pay significant fines.

The EC established a “hard core” prohibition approach to RPM because the effects of RPM were often negative. While arguments were seen both for and against, the EC representative pointed out that the EC needed to be convinced of the pro-competitive effects of RPM and that the EC would remain skeptical that RPM was essential to achieve claimed benefits, given that the alleged efficiencies could in principle be obtained by using other less restrictive means, in terms of price competition. Finally, it was acknowledged that a clarification to the VBER was possible that would refer to instances where RPM had positive effects, such as preventing loss leading or when entering a new market.

From the point of view of a national competition authority, it was confirmed that though the power of retailers was under assessment, so far, there had been no proof of harm to consumers with regard to buyer power. The VBER would not be the right forum to address this question. National competition authorities noted that relaxing the regulation to the advantage of the retailers would be worrying, and it was suggested that perhaps an increase of the 30 percent market share threshold could be an option. Alternatively, it was suggested that taking into account both the buyer’s and the seller’s market share as regards the 30 percent threshold could be a more effective option.

Another national competition authority representative noted that while RPM are not that common in the EU countries, there have been decisions on this issue, for instance, in France and in the Czech Republic. Moreover, because the application of EC competition law is now also a responsibility of the national competition authorities, there is an increased need for a coherent policy, further convergence and efficient enforcement in the European Union. However, it was noted that too many differing approaches were observed on this issue on a national level.

From an economist’s perspective it was pointed out that the evolution of the academic discourse until today demonstrated that there was no prevailing view on whether vertical restraints had pro- or anti-competitive effects. Empirical studies, however, had revealed that vertical restraints could have positive effects, which ultimately depended on the functioning of the respective market.

By way of example, it was mentioned that the exclusive distribution of beer in France had shown positive efficiency effects in the sense that when exclusivity was prohibited the sales of beer actually fell. However, in the case of Levi’s jeans, the opposite had been the case: the termination of exclusivity and RPM had led to expanded sales. Therefore, further research was needed for a more definitively conclusion. Nonetheless, it was suggested that the per se prohibitions should be abandoned and be replaced with a set of framework rules.

With regard to the amendment of the VBER and the exemptions applicable to selective distribution, a private practitioner emphasized the legal uncertainty produced by the current guidelines. Reference was made to the fact that an exemption is assumed if, for example, a new or complex product is concerned or if the product’s quality is difficult to assess before consumption. In any event, it was urged that the new guidelines should be clearer to avoid a difficult case-by-case assessment.
An industry representative observed that territorial protection and parallel trade restrictions were slightly less problematic than RPM, especially if new products were concerned. There is no doubt that companies and authorities need more clarity to identify cases of concern. It was also mentioned that the rationale for the hard core prohibitions of the VBER was the Single Market, and in this respect attention was drawn to the GlaxoSmithKline ruling of the ECJ. An economist added that there were sometimes conflicting interests and that the VBER might not be the right tool for achieving an integrated market. Finally, the private practice lawyer concluded that it would be positive to mention in the guidelines that RPM could be allowed in certain cases.

The moderator enquired whether there was any need for the 30 percent market share threshold of the VBER to be swapped for a type of HHI test. A national competition authority representative pointed out that the threshold had proven to be useful, although the market share was difficult to assess. It was suggested that the threshold should be brought in line with other rules such as the de minimis Notice, but it could not be excluded that there could be a more sophisticated test.
The HHI test, however, would arguably be more useful in the case of mergers than it would be in vertical restraints cases. An official from another EU national competition authority agreed to that and added that the current VBER “black lists” ought to be reconsidered. This view was also shared by legal experts and economists, while an official from a national competition authority voted for keeping the current scheme since it still offered the possibility for companies to rebut competition concerns.

A comment from the audience pointed out that the VBER was actually a concession for large companies and that the question came finally down to the burden of proof. A panel member added that if the EC decided to soften the exemption provided in the VBER, it had to show at the same time that it did have the intention to “withdraw” the exemption in certain cases if appropriate. The panelist said that this possibility is provided by the VBER but, according to his knowledge, it had never been used.

Finally, a representative of the EU institutions suggested that the current guidelines were detailed enough, although there was room to improve their presentation.
What was clear, based on the statements from the panelists and attendees was that national authorities and particularly stakeholders preferred more detailed guidelines for the purposes of the required self-assessment of their agreements.

Commission Regulation (EC) No. 2790 of 22 December 1999 on the application of Article 83(3) of the Treaty to categories of vertical agreements and concerted practices, OJ L336 of 29.12.1999, p. 21-25.
Leegin Creative Leather Products Inc v PSKS Inc., 551 US, 127 S. Ct. 2705 (July 28, 2007).