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New EU Commission Digital Single Market Initiative May Well Have Substantial Impacts on the Distribution Policies of U.S. Sports Brands in Europe and Beyond

Date: 6/10/15

Within the last 10-15 years, everybody directly or indirectly involved in the sales of consumer products had to expand his or her vocabulary by adding a legion of new terms and denominations to the business dictionary such as hybrid sellers, pure players, SEO and SEA techniques, price search engines, multi-channel approach or social media, to quote only a few. All this can be attributed to a small character, which is named @. The Internet and the digital cyberspace age has changed and continues to dramatically alter consumer behaviors, sales patterns and whole businesses in supersonic speed at global level. Geographic boundaries, territories or other market segmentations have either already been swept away by the ‘Internet tsunami’ or are constantly under severe pressure.

In Europe, and here in particular in Germany, within the last few years we have been experiencing numerous attempts made by politicians, cartel authorities and consumer associations to enable consumers to purchase branded goods from whomever they want at the cheapest possible price, wherever they want. MAP advertising policies as applied in the U.S. by the brands at retail level are in our part of the world considered to violate national and European anti-trust laws  and selective distribution schemes introduced by diverse strong and leading sports brands  (in a number of cases by clients of mine) came under fire of the German Federal Cartel Office (FCO).  

The most recent development in this area, which may have even much bigger consequences and impacts on sales and distribution policies of branded goods within Europe (at least from a mid- and long-term perspective’s point of view), is the EU Commission’s Digital Single Market Initiative (“DSMI) as announced in its press release of May 06, 2015 (see http://europa.eu/rapid/press-release_IP-15-4921_en.htm).

Main Contents of the DSMI

Under the Commission’s new head of DG Competition, Commissioner Margarethe Vestager (a former deputy prime minister within the Danish government and leader of the Danish Social Liberal Party), it has launched on May 06 an antitrust competition inquiry into the e-commerce sector in the European Union. Its purpose is to generate information and evidence for the European cartel authorities “to identify possible competition concerns affecting European e-commerce markets….. The sector inquiry will focus particularly on potential barriers erected by companies to cross-border online trade in goods and services where e-commerce is most widespread such as electronics, clothing and shoes, as well as digital content. Knowledge gained through the sector inquiry will contribute to better enforcement of competition law in the e-commerce sector.” (Source: Press Release of May 06, 2015).

The EU Commissioner is quoted therein by pointing out  "European citizens face too many barriers to accessing goods and services online across borders. Some of these barriers are put in place by companies themselves. With this sector inquiry my aim is to determine how widespread these barriers are and what effects they have on competition and consumers. If they are anti-competitive we will not hesitate to take enforcement action under EU antitrust rules."

This clearly implies that the EU Commission may well start individual case investigations if this new sector inquiry revealed specific competition concerns and undue restrictive business restrictions and/or abuses of dominant market positions on the grounds of Articles 101 and 102 of the Treaty on the Functioning of the European Union - TFEU).

 

The Commission’s View of  the E-Commerce Sector

It has been somewhat revealing, when the EU’s Commissioner DG Trade, Margarethe Vestager gave a speech on March 26 in Berlin in the context of an international conference on Competition of the German FCO and I may only quote a few of the statements she made on this occasion:

Ø  A well-functioning Digital Single Market could add about €340 billion to the GDP of the Union;

Ø  European consumers should be able to access goods, content, and other services no matter where they live and travel in Europe;

Ø  Competing in a Single Market without internal barriers prepares companies to take on their rivals around the world. Because you need to be able to compete at home if you want to compete abroad;

Ø  Open and fair digital markets can bring benefits to both consumers and businesses. To consumers, they give a wider choice and they give better prices;

Ø  But often it is the companies themselves that undermine cross-border trade by erecting technical barriers such as geo-blocking. Geo-blocking prevents consumers from accessing certain websites on the basis of their residence, or credit-card details;

Ø  Think of a French tourist who buys a pair of Italian shoes in Rome. Why is she re-routed to a French website when she tries to buy them online from home? It is very difficult to explain this to the people and, at the same time, make the point that we are all residents of the EU and consumers in the same internal market. Restrictions like these are often the result of arrangements that are included in contracts between manufacturers and content owners on one side and their distributors on the other.

Ø  These arrangements fall under EU competition law. Specifically, they are covered by the Block Exemption Regulation and the Guidelines on Vertical Restraints – also called Vertical Guidelines.The Commission updated these rules in 2010. The review made clear that, in principle, every distributor must be allowed to use the internet to sell its products.

Ø  Conversely, consumers must be allowed to look for the best deals online wherever they want. Contractual bans of so-called passive online sales are therefore considered hard-core restrictions of competition.

Ø  These rules are there to give legal certainty to companies and make sure that the law is applied in the same way throughout Europe. This is crucial if we want companies to benefit from the scale of a genuine Digital Single Market.”

Possible Implications of the Above

Within a mid- or long-term perspective, the DSMI could make traditional ways of distribution policies and rules obsolete or at least restrict those much further under applicable future EU and/or national competition laws as it is currently the case. If European consumers were entitled to purchase branded products from each and every source within the European Economic Area, how can a brand then still grant an exclusivity status to its marketing partners such as distributors, agents and the like?? Will we then see European wide price search engines and apps popping up, where e.g. a French consumer will get the information in real time that the pair of sneakers he or she wants to buy are available in Ireland at a retail store in the right size and at the cheapest price?? Or will such consumer in a few years then be able to press a button on its 3D printer and ‘manufacture’ these shoes him- or herself ?? These are only few of the possible impacts the new DSMI MAY have (I am talking about a mid- or even long-term perspective, since all this may well require a modification of the existing laws and rules at EU and national level .Such new laws must then pass the law-making instances of the EU such as the EU Parliament and the Council with a participation of the 28 national EU Member States. All this will take time, if any such bills will be approved or be modified subsequently).

Very Next Steps

The EU Commission will send out a questionnaire to the various stakeholders, which is expected to take place in June/July of this year. Within the first phase of such inquiry, major online and brick & mortar retailers will be addressed.

In Mid-July at the earliest, the Commission will then contact the brands/manufacturers and request corresponding information from them.

It is expected that the analysis of the results will take a few months and that the Commission’s liminary report will then be open for consultation in mid 2016. The final report may then be published in the first quarter of 2017, IF AND PROVIDED no major delays are encountered. Concrete actions and measures can then be expected to be taken by the Commission and/or other EU and national authorities from 2017 onward, which may then affect current distribution and sales schemes and policies. In spite of the fact that the Commission talks only about clothing and shoes in a general manner, based on the very latest information I received from the European Federation of Sporting Goods FESI), sports apparel and the athletic footwear category will most likely be included too as a specific part of the E-commerce sector inquiry – and this comes as no surprise to me, given the prominent role our industry plays in the sales of branded consumer goods.

Role of the Sporting Goods Industry

The DSMI topic will be an important agenda point of the forthcoming Board meeting of FESI in Milan on June 24, which I will attend. Its IPR Committee is already working in this area. For future lobbying efforts, FESI by nature of its constituency and role may well take the lead.

In addition hereto the World Federation of the Sporting Goods Industry/WFSGI will monitor and deal with this issue at the level of its Legal Committee, which I am chairing and will closely coordinate its activities with FESI.

It is obvious that this new DSMI of the Commission does not only affect the sporting goods sector, but multiple other categories of branded products (same as services). Consequently, the Sporting Goods Industry Federations are well-advised to also reach out to other national or regional bodies and institutions in particular in the lobbying area to liaise with them or even join forces to the maximum extent possible and permitted under applicable laws.

Finally, at individual company/brand level, I do recommend SFIA member companies to have their current European distribution and other sales arrangements reviewed, whether they are still in compliance with the applicable EU and national competition laws and rules being currently in force. The information, the EU  Commission may obtain from retailers in particular within the next few months may lead to individual case investigations, if facts surface, which raise concerns in this area that contractual arrangements or practices applied could violate applicable laws. Fines of the EU Commission (same as those imposed by national cartel authorities) can be drastic and should be avoided by adopting a proactive strategy in this sector.

Written by:

Dr. Jochen M. Schaefer*)

Attorney-at-Law (Germany) and Legal Counsel of WFSGI and FESI

 

*) Since numerous years Jochen M. Schaefer provides legal advice to sports brands and accompanies their operational business both at German and international level. Within the last few years selective distribution schemes, retail sales promotional platforms with a special focus on online trading multi-channel policies have been and still are in the core of his legal work for German and foreign clients. E-mail: sj@sjlegal.de; Phone: +49-151-16407932.

 

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