close
EU

EU: The Guess Decision of the EU Commission: a first analysis.

The approach followed by the EU Commission in the Guess decision may have a disruptive impact on many selective distribution networks, including franchise systems across Europe.

Fabio BORTOLOTTI - 18.02.19
Country expert

In order to better understand the seriousness of the consequence of a possible application of the principles established on territorial restrictions and cross selling, we should first of all analyse the distribution system implemented by Guess in the EEA countries.

1. The Guess distribution system in the EEA

From the text of the decision, the distribution system of Guess across the EEA countries appears as a mixed distribution network, that we have tried to summarize in the chart below:

Such complex distribution network, which covers (i) different EEA countries and (ii) different levels of distribution, includes:

- Exclusive (wholesale) distributors, appointed for one or more EEA countries, in charge of:

   - promoting sales in the territory;

   - maintaining a show-room;

   - supplying products to the retailers of the territory;

   - selecting potential members of the selective distribution system (to be approved by Guess).

 

- Mono-brand retailers, selected by Guess, on the basis of specific criteria and appointed for one or more EEA countries by Guess.

 

- Multi-brand retailers, which are part of Guess selective distribution system, but are not bound by a long-term selective distribution agreement, being only subject to Guess's general terms and conditions of sale applicable to each individual supply. These retailers are selected by the distributor responsible for a territory, acting as wholesaler, and approved by Guess.

2.    The role of exclusive distributors operating at the wholesale level           

The main problem which arises from the Guess decision is that the Commission expressly confirms a position already developed in the Guidelines, according to which the exclusive distributor, appointed for a specific territory (normally an EU country), who selects, in agreement with Guess, the retailers of his territory and supplies them, is subject as well to the rules on selective distribution.

Consequently, according to the Commission, the wholesaler, acting as exclusive distributor for a given territory, should be free to sell to other members of the network (cross-selling), at all levels, without limitations.

This means that the obligation imposed upon the exclusive distributor, not to sell actively to retailers of the territory of other distributors would be prohibited and would even amount to a restriction of competition "by object".

If this view is accepted, it would become almost impossible for a supplier to organize a selective distribution network, managed though exclusive distributors in different EU countries, which is at present the scheme adopted by a great number of SMEs. In fact, no distributor would have the courage to establish a selective distribution network in his country, if he knows that his colleagues of other countries are free to make active sales to the members of his network. In other words, this approach would prevent access to the market of selective distribution to SMEs who need to haver recourse to an exclusive local wholesaler.

This problem does not only arise for the typical selective distribution network, but also for franchising, at least with respect to franchises where the franchisees are not free to sell outside the franchising network. In this case (which actually is the most common) the principles developed above would also apply to master franchisees appointed for territories within the EU, who would be free to sell actively in the territories of other master franchisees.

All this shows that the decision to consider the exclusive distributors operating at the wholesale level as subject to the rules on selective distribution would prevent the establishment of two-level selective distribution systems and may cause a substantial prejudice to SMEs which need to establish a selective distribution system throughout the EU, and which may not be in the position to establish a subsidiary in each EU Member state.

But, there is also a further evaluation.

Selective distribution is defined in Regulation 330/2010 as “a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system”. Now, the exclusive distributor who supplies the products to a selective distribution network is not selected on the basis of specified criteria, which apply only to the retailers.

To conclude, the exclusive wholesaler –where he is in charge of creating and supplying a selective distribution network in his country- should be regarded as any exclusive distributor responsible for one or more EU countries, who – pursuant to regulation 330/2010 - can be prevented by the supplier from making active sales to the territory of his colleagues. In other words, it is only reasonable that the exclusive distributor for Germany will not actively promote sales to the retailers of Italy and France, provided passive sales remain possible. One may object that the exclusive distributor must sell only to selected retailers, which implies an additional restriction of competition (which is exempted by the BER only for members of a selective distribution network), but this limitation is the natural consequence of the establishment of a selective distribution system and should be admitted, provided cross sales throughout the EU between retailers of the network and active sales of all retailers to consumers of the EU are warranted, as it happens when the manufacturer is managing the network itself. 


3.    Clauses which are undoubtedly restrictive

The Guess distribution system contains many provisions which obviously imply a restriction of competition, together which others which are not necessarily restrictive.

There can be no doubt that clauses prohibiting retailers to sell to end users outside a certain territory constitute a violation of the freedom granted to the selective distributors to sell to end users anywhere in the EU. When there are parallel selective networks in different countries, managed by different wholesalers, it is reasonable to consider them as one global network, which means that also the right of selective retailers to sell to end user should extend to the whole EU.

It may also be reasonable to grant the right of selective retailers to cross selling between them, without territorial limitations, if the manufacturer has developed the selective network within the whole territory of the EU, or has reserved such territory to such network.

As regards internet sales, the Guess agreements provided for an obligation of the retailers not to sell any products through the Internet or any other electronic or computer-based system, without GUESS’s prior written consent. According to the Commission this is a restriction of competition since Guess used the authorization as a means to prevent any access to internet without having recourse to any specific criteria. In other words, the way of managing the authorization amounted to a de facto prohibition of sales through the internet.

As regards resale price maintenance, the General Sales Terms used for Guess’ multi-brand retailers provide their obligation to respect the recommended pricelist issues by Guess. This is without doubt a hardcore restriction.

4.    Clauses considered in the Guess case which are not necessarily unlawful

Together with a number of provisions which are undoubtedly restrictive, the Commission has condemned a number of clauses which were restrictive in the specific context of the Guess distribution system, but would not necessarily imply a violation of the rules on competition and which may benefit of the block exemption, when included in an agreement which does not contain one or more hardcore restrictions.

We have already seen that this applies to the exclusive distribution agreements with suppliers of a domestic selective network in which the prohibition to actively sell in the territory of other wholesale distributors should be permitted. Also a possible obligation of a wholesale distributor to purchase the products only from the supplier should be lawful, if the wholesaler is not to be considered subject to the rules on selective distribution, and would be exempted under the BER.

Another doubtful issue regards the prohibition to make on-line advertising through AdWords. According to the Commission, although there was no contractual clause expressly mentioning Google AdWords, Guess systematically rejected all requests of its mono-brand and multi-brand resellers, to use Guess brand names or trademarks as keywords in Google AdWords for their online advertising. The Commission regarded such behaviour as a restriction of competition “by object”, stating that the clear purpose of the manufacturer was to guarantee visibility on the Internet only to its own website and to prevent the increase Google advertising costs that would arise if its distributors would have recourse to this advertising means. The Commission quoted, in support of its position, the Interflora judgment of the Court of Justice, which stated that the proprietor of a trademark can prevent a competitor from advertising his trademark through AdWords when it may create confusion, but not when it has only the effect of increasing the advertising costs.

Now, the Interflora judgment deals with the issue whether the use of AdWords by a competitor can cause a violation of the exclusive right of the proprietor of a trademark, without touching the problem if preventing the use of AdWords constitutes a restriction of competition. Moreover, the Interflora judgment regards the relations between competitors, while in the present case Guess prohibits the use of AdWords to its own distributors. The prohibition to use AdWords cannot be considered in general terms as a restriction by object, since it does not prevent the distributor from advertising on the internet, but it only precludes one of the possible means to get visibility on the internet. Finally, such prohibition does not fall under the hardcore restrictions of article 4 of the BER (i.e. it does not prevent in itself passive sales), which means that it should be exempted under the BER in the absence of additional hardcore restrictions.

5. Conclusions

In the Guess case, the Commission has condemned a selective distribution system which contained several hardcore restrictions together with a number of restrictions which might be considered lawful in a different context, e.g. in case of agreements which could otherwise benefit of the block exemption under regulation 330/2010.

Let us take for instance the de facto prohibition imposed on the distributor not to advertise through AdWords. The commission considered it as a restriction by object, mainly because, in the context of the Guess network, the final purpose of preventing access to internet was evident. However, this does not mean that an AdWords prohibition must be considered as a restriction "by object" irrespective of the circumstances of the specific case, since there remain several other means to access the internet market. We believe that, in the context of an agreement which conforms for the rest to the BER, such restriction should be admissible, as not falling under the hardcore restrictions listed article 4.

Another very critical point regards, as we have seen, the Commission's position which considers that the exclusive wholesale distributors who supply the members of selective distribution networks are subject to the rules on selective distribution, which may have a disruptive impact in both distribution and franchise networks across the EU, specially for SMEs.

Considering all this, it is time to open a realistic discussion debate about the destiny of selective distribution networks, also in view of the future revision of the BER.

IDI will discuss all the above mentioned issues in its 2019 Annual Conference, that will take place in Cernobbio (Como lake, Italy) on 14-15 June, 2019.

 

Fabio Bortolotti, Chair IDI, IDI Country Expert for Italy

Silvia Bortolotti, Secretary General IDI, IDI Country Expert for Italy

RELATED