European Commission fines Guess almost 40 million euros in new crusade against online distribution restrictions

Brussels – On 17 December 2018, the European Commission fined the clothing company
Guess 39.8 million euros for infringing EU antitrust rules by imposing
restrictions on retailers’ ability to compete online. Concerns included
‘geo-blocking’ (i.e., restrictions on the EU territories into which
retailers were allowed to sell Guess products), resale price restrictions,
and restrictions on online advertising based on the Guess brand.

This action is part of a much wider trend of increased Commission
enforcement action in relation to online distribution. In the last half of
2018, the Commission imposed fines totalling over 150 million euros on
suppliers of consumer goods in relation to their online distribution
practices. And further investigations into Nike, Sanrio (owner of the
‘Hello Kitty’ brand) and others are ongoing.

Renewed enforcement in relation to online vertical restraints

For the last twenty years or more, the Commission has taken little or no
enforcement action against restrictions in distribution arrangements
(so-called vertical restrictions). However, the recent fines on Guess and
others mark a dramatic change of policy with vertical restrictions in
online distribution becoming a major focus.

This change can be traced back to the Commission’s “e-commerce” sector
inquiry, launched in 2015. The results of that inquiry were published in
May 2017 and identified a range of potentially problematic distribution
strategies adopted by producers and brand owners in order to increase their
control over online distribution. In particular, the Commission identified
concerns in relation to:

online retail price controls;

restrictions on online advertising;

restriction on the use of online marketplaces; and

geo-blocking.

The Commission now appears to have moved on to imposing individual fines
on undertakings engaging in these practices. In July 2018, the Commission
imposed fines of between 8 million euros and 64 million euros on four
manufacturers of consumer electronics – including Denon & Marantz – for
resale price maintenance (imposing fixed or minimum resale prices). That
was followed, in December, by the fine on Guess, which was the first in
relation to geo-blocking. Further fines in this area now seem likely as
the Commission is pursuing at least three further investigations in
relation to geo-blocking activities.

Guess’ infringing behaviour

Guess operates a so-called “selective” distribution system, meaning that
it distributes Guess products only through authorized retailers that are
selected on the basis of specified criteria. Provided that the selection
criteria are objectively based and fairly applied, such distribution
systems generally do not raise antitrust concerns.

However, the Commission found that Guess had imposed a number of
additional restrictions that rendered its selective distribution system
anticompetitive. Among others, Guess:

prohibited retailers based in one EU Member State from making online
sales to consumers based in other EU states – for example prohibiting a
Belgian retailer from selling to consumers located in the Netherlands
(geo-blocking);

restricted retailers’ ability to set their prices for Guess products
independently (resale price maintenance); and

restricted retailers from engaging in online advertising based on the
Guess brand – for example by prohibiting retailers from bidding for online
search ads linked to the ‘Guess’ trademark.

According to the Commission, Guess’ behaviour:

“deprived European consumers of one of the core benefits of the
European Single Market namely the possibility to shop cross-borders for
more choice and a better deal”.

More specifically, the Commission found that Guess’s practices allowed
it to maintain artificially high retail prices in Eastern European
countries and to protect sales from its own web portal by limiting the loss
of traffic to other online retailers.

What to expect next?

Whether or not the Commission will continue, once its current wave of
investigations is completed, to actively pursue online distribution issues
in this way is an open question. However, the risk for undertakings
engaged in activities of this type is likely to remain high as national
competition authorities in the EU can be expected to follow the
Commission’s enforcement lead even if the Commission decides to focus its
attention elsewhere going forward.

Written by and , attorneys
of Crowell & Moring. Crowell & Moring LLP is an international law firm with
an antitrust/competition law practice representing clients across the
United States as well as in Europe. Our European competition (antitrust)
practice covers the full spectrum of European competition law matters,
including compliance, distribution agreements, cartel investigations, abuse
of dominance, damages litigation, IP/antitrust and mergers.

Photo credit: Artem Bali, Pexels