The UK Competition Appeal Tribunal (CAT) has re-affirmed the well-established principle that online sales bans are liable to be found anti-competitive. Businesses which seek to ban distributors or retailers from selling online face a high risk of substantial fines.
On 7 September 2018, golf-club maker Ping Europe lost its appeal against an antitrust fine in the UK imposed for the company's policy to block online sales of its clubs. Ping Europe is the European arm of American golf equipment manufacturer Ping, based in Phoenix Arizona, which specialises in high-end, custom-fitted, golf clubs.
On 24 August 2017, Ping was fined £1.45 million pounds by the Competition and Markets Authority (CMA) for breaching competition law by preventing its retailers from selling its branded golf clubs online. This was however reduced to £1.25 million on appeal.
Whilst the CAT's conclusion was undoubtedly predictable, the Ping ruling has a number of interesting features which will strengthen the hand of competition regulators even further when attacking online sales restrictions.
1. A legitimate aim is not enough to save an online sales ban
Ping's rationale for banning its retailers from selling online was that it had built its business around a model of custom-fitting of golf clubs, an activity in which it was a pioneer. Custom-fitting necessarily involves face-to-face contact between the customer and Ping-trained fitters which cannot take place if a sale is made online.
Ping therefore argued that its ban online sales did not have the object of restricting competition because it was intended to pursue a legitimate, pro-competitive, aim (ie custom-fitting).
The CMA, in its decision, agreed that Ping's aim was legitimate but contended that that the online ban was disproportionate to that aim and hence the ban had the object of restricting competition. The CMA relied on:
- Evidence that the ban was not particularly effective as a means of promoting custom-fitting (other manufacturers which offered custom-fitting but which did not have an online sales ban had similar rates of custom-fitting to Ping);
- Evidence that there was demand for online sales of Ping clubs from certain categories of customer, for example professional golfers who knew their own fittings or customers who had previously purchased custom-fitted clubs;
- The possibility of alternative, less restrictive, measures being used. These included:
- A requirement on retailers that they should be able to demonstrate an ability to promote custom-fitting online
- A contractual requirement that retailers must promote custom-fitting online by displaying a clear and prominent recommendation that customers take advantage of custom-fitting
- A contractual requirement that retailers' websites provide customers with all custom-fitting options
- A contractual requirement that retailers' websites provide "live-chat" technology to provide personal advice on fitting
- A contractual requirement that websites have a mandatory tick-box for customers to confirm that they understand the importance of custom-fitting and the risks of purchasing without a fitting
Ping argued, on various grounds, that these measures were not practical or would be ineffective. However, the CAT upheld the CMA's analysis.
2. The CMA does not need to consider the proportionality of the ban
In one important respect, the CAT's ruling goes further than the CMA's decision and, in fact, overturned part of the CMA's reasoning (this did not affect the overall outcome).
The CMA had taken the approach that, for the purpose of determining whether Ping's online sales ban had the object of restricting competition, it was necessary to consider whether the ban pursued a legitimate objective and was proportionate to that objective.
The CAT held that this approach was wrong in the light of EU case law: the fact that an agreement may have another legitimate objective is not relevant to the question whether it has the object of restricting competition and no proportionality assessment is therefore required for this purpose.
This, on its own, does not make clear how to identify whether an agreement has the object of restricting competition in the first place. However, it is clear from this ruling and previous rulings of the Court of Justice of European Union (CJEU) that an outright ban on online sales has, arguably as a matter of law, the object of restricting competition. That conclusion cannot, according to the CAT, be affected by the fact that there may also be a legitimate pro-competitive rationale.
The only circumstance in which an online sales ban might not have the object of restricting competition is if it would be impossible to carry out a legitimate operation without the ban (the ancillary restraints doctrine). In Ping, there was no evidence that it would be impossible for Ping to offer custom-fitting without an online sales ban and so this line of argument failed as well.
The CAT found, in effect, that the CMA had done too much work. It had unnecessarily carried out a proportionality assessment at the initial stage of determining whether the ban had the object of restricting competition. The implication is that the CMA could (and should) simply have concluded, based on previous cases, that Ping's online sales ban had the object of restricting competition and left it to Ping to argue that the ban was either:
- An objectively necessary ancillary restraint (the impossibility test mentioned above), or
- Exempt under Article 101(3).
Exemption under Article 101(3) requires a similar proportionality analysis to the one undertaken by the CMA when considering whether Ping's online sales ban had the object of restricting competition: assessing whether the ban was necessary to achieve a pro-competitive aim and whether there were any less restrictive alternative measures that could have been used, as well as consideration of consumer benefits and the overall impact on competition.
Crucially, though, the burden of showing that a particular agreement or restriction is either objectively necessary or exempt rests largely with the undertaking under investigation rather than the CMA, increasing the burden on the undertaking and reducing it on the regulator.
3. When it comes to an absolute ban, there is no special treatment for luxury or high-end products
In an important recent ruling (Coty), the CJEU held that a restriction imposed on retailers by a supplier of luxury goods preventing them from making sales through online marketplaces (Amazon, eBay etc) did not have the object of restricting competition.
If it was thought that this might open the door to a more lenient regime for luxury goods, the CAT has kept it firmly shut. The marketplace restriction in Coty was not an absolute ban on online sales; it was just a ban on retailers using a certain type of online sales channel where that was incompatible with the luxury image of its products. By contrast, an absolute ban, which was in issue in Ping, will be very hard if not impossible to justify on this basis.
The CAT's ruling in Ping is hardly a surprise. It re-emphasises the high risk faced by any company that implements an online sales ban and will likely embolden the CMA's enforcement activity. In a statement welcoming the ruling the CMA said that the "judgment sends a clear message to companies that try to stop customers shopping online for their products [that] they could be breaking the law".
The ruling does not, however, preclude companies from taking proportionate and non-discriminatory steps to regulate the online sales activities of their retailers, provided that such sales are not banned outright. However, great care is needed to stay the right side of the line.