Landmark judgment on internet sales ban

Last month the Competition Appeal Tribunal (CAT) confirmed that an online ban on sales in the context of selective distribution agreements constituted a restriction of competition by object.

The CAT gave judgment in the appeal by Ping Europe Limited (Ping) against the decision of the UK Competition and Markets Authority (CMA). The CMA's decision was that Ping had breached the Chapter I prohibition of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union by operating an online sales ban that was not objectively justified.

The CAT upheld the CMA's decision that Ping had breached competition law by preventing retailers from selling online, although it reduced the fine imposed by the CMA from £1.45 to £1.25 million.

Background

Ping is a UK based manufacturer of golf clubs and accessories. Ping operates a selective distribution network, supplying only authorised retailers. Ping's stance in relation to golf club sales was that in-store dynamic face-to-face custom fitting ("Custom Fitting") was the best way to optimise the sale of its products and enhance customer choice and quality. Ping's MD described custom fitting as "part of Ping's DNA". As the fitting could not take place over the internet, Ping's policy was to include clauses in its agreements with UK retailers, prohibiting them from selling Ping golf clubs online. Ping claimed that without the ban, customers would buy ill-fitting clubs online, which would not be in their interests - and this would ultimately damage the brand.

CMA decision

The CMA decision acknowledged that the aim of Ping's policy was to promote Custom Fitting, which was, in principle, a legitimate aim. The CMA found, however, that the policy was not necessary to promote Custom Fitting and was not objectively justified. In the CMA's opinion, Ping could have achieved its aim through less restrictive means, for instance requiring retailers to recommend Custom Fitting through online sales channels.

The CMA found that the internet sales ban operated by Ping breached the prohibition in Chapter I of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union and fined Ping £1.45 million. Ping appealed the decision.

CAT judgment

The CAT's approach was to first assess whether the ban fell outside Article 101 (1) TFEU according to the criteria set out in the European Court of Justice's ruling in the Metro case. In that case, conditions in selective distribution systems could fall outside Article 101 (1) altogether if they are: of a qualitative nature; laid down uniformly; not applied in a non-discriminatory fashion; and are necessary for non-price competition to exist.

If the condition satisfies the above criteria then it falls outside Article 101 (1) and no question of an object restriction arises. If it does not, then it will be caught by Article 101 (1) and it is then necessary to assess whether the agreement reveals a sufficient degree of harm to competition to be considered a restriction ‘by object’ within Article 101 (1).

The CAT's finding largely aligned with that of the CMA that – despite pursuing a legitimate aim in principle - Ping's ban on online sales was a restriction by object. The CAT rejected Ping's argument that the presence of a "plausibly pro-competitive rationale" attached to the restriction prevented the finding of a restriction 'by object'.

Contrary to the CMA's approach, however, the CAT's view was that the aims and justification of the restriction were not relevant to the analysis of whether there was a 'by object' restriction.  Instead, the CAT focused on whether a sufficient degree of harm might be deemed to arise from the restriction.  The CAT seemed more persuaded by the principle that it is the absence of a sufficiently credible negative potential effect arising from the nature of the agreement, which militates against a finding of a 'by object' infringement, as opposed to the presence of a credible positive potential effect.^*

As the CAT decided that the online ban was restrictive of competition 'by object', the next question was to ask whether it could be redeemed by an individual exemption under Article 101(3)? This required the CAT to consider whether the restriction on price competition was counterbalanced by its promotion of non-price competition. In other words could the online sales ban be justified by the customer benefits of Custom Fitting?

On balance, the CMA concluded that the benefits of the online sales restriction did not outweigh the detriment. Accordingly, Ping's agreements did not benefit from any exclusion or exemption. Ping was directed to bring the infringements to an end.

The judgment states that CAT was "of the clear view that…the CMA was correct to find that the ban reveals in itself a sufficient degree of harm to competition to constitute an object restriction, notwithstanding Ping’s legitimate aim. The potential impact of the ban on consumers and retailers is real and material. It significantly restricts consumers from accessing Ping golf club retailers outside their local area and from comparing prices and it significantly reduces the ability of, and incentives for, retailers to compete for business using the internet".

Despite rejecting the appeal, the CAT reduced the penalty issued by the CMA from £1.45 to £1.25 million. This was due to the CAT finding that the CMA had erred in treating Ping's managing director's involvement as an aggravating factor on the facts of the case. This kind of uplift should be reserved for the most serious cases of intentional director involvement in the restriction of competition, particularly those involving secret cartels. 

Conclusions/comment

The CMA reported that the judgment from the CAT was a landmark case that "sends an important signal that attempts by manufacturers to impose absolute bans on selling their products online are not permitted by law".

The judgment is in line with recent decisions taking a strict approach to restrictions on retailers selling online.

Having acknowledged that Ping was pursuing a legitimate commercial aim, the judgment shows that the bar is set at a very high level where parties might wish to justify a restriction by object.

The message remains that the internet is an important sales channel, enabling access to a wide customer base and that competition law will operate aggressively to protect customer access to that channel.