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December 21, 2023

Restrictions On Internet Sales Applied In Selective Distribution Systems

A. INTRODUCTION

With the rapid realisation of digitalisation in today’s world, the e-commerce sector has started to occupy an important place in our daily life. Especially with the widespread use of the internet, consumers can now encounter various products regardless of place and time, and easily compare them based on various criteria, especially on price. For these reasons, it is observed that manufacturers, while increasing their focus on sales through the cost and time saving internet environment, also impose certain limitations on distribution agreements to address issues such as damage to brand image, consumer perception, struggle against free riding and counterfeiting. The rationale behind their implementation of these measures is distribution being one of the most important stages of the chain that enables the product to meet the consumer.

B. SELECTIVE DISTRIBUTION SYSTEM 

The selective distribution system, which finds application as an exception to the prohibition of restrictions on passive sales in inter-enterprise vertical relationships is defined in the Block Exemption on Vertical Agreements Communiqué No: 2002/2 (“Communiqué No. 2002/2”) as “a distribution system whereby the provider undertakes to sell directly or indirectly, the goods or services which are the subject of the agreement, only to distributors selected by it, based on designated criteria, and whereby such distributors undertake not to sell the goods or services in question to unauthorized distributors”. As it can be seen, the main elements of selective distribution systems are; (i) limiting the number of distributors selected by the provider based on certain criteria and (ii) limiting the sale of products or services by distributors selected by the provider to other distributors who are not authorised. The reasons why manufacturers prefer selective distribution systems and choose to deliver their goods and services to consumers only by authorised distributors can be considered as the purpose of protecting their brand image, preventing counterfeiting, and the positive effect of reaching consumers through distributors and locations with certain qualifications and technical competencies on the brand. 

C. EVALUATION OF INTERNET SALES RESTRICTIONS IN SELECTIVE DISTRIBUTION SYSTEMS IN TERMS OF INFRINGEMENT OF COMPETITION

Firstly, it should be stated that within the framework of Article 4 of the Act No. 4054 on the Protection of Competition (“Act”), agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited. However, pursuant to Communiqué No. 2002/2, vertical agreements meeting certain conditions are exempted from the application of Article 4 of the Act. In this context, the conditions that bring vertical agreements under the exemption scope are; (i) the market share of the supplier in the relevant market where the supplier provides the goods or services subject to the vertical agreement does not exceed 30% and (ii) they do not contain the restrictions listed in Article 4 of Communiqué No. 2002/2 which exclude the agreements from the scope of group exemption.

One of the limitations listed in Article 4 of Communiqué No. 2002/2, which excludes vertical agreements from the scope of group exemption is the restriction of active or passive sales to final customers by system members operating at the retail level. In paragraph 24 of the Guidelines for Vertical Agreements regarding the implementation of Communiqué No. 2002/2, it states that sales made through the internet are considered as passive sales methods. Thus, pursuant to the aforementioned regulations, the prohibition of authorised distributors to make sales over the internet constitutes a restriction that excludes the relevant agreement from the scope of the group exemption.

When the Court of Justice of the European Union (“CJEU”)’s practices regarding internet sales restrictions in selective distribution systems are examined, it is observed that in the specific case of the decision dated December 6, 2017, numbered C-230/16, Coty Germany GmbH (“Coty”) allows only the authorised store, which is a reseller of the product, to make internet sales on its website, which is designed to maintain the luxury status of the product, and does not allow the products to be sold using a different trade name or to be sold online on third-party sales platforms (e.g. Amazon, eBay, etc.). As a result of the assessments made, it was firstly stated that this prohibition gives the supplier the guarantee that its products are sold only by authorised resellers. The CJEU concluded that this prohibition on the internet enabled the supplier to check the reseller’s compliance with the criteria of the selective distribution system when selling on the internet and this prohibition on the internet ensured the protection of the luxury image of the product. The prohibition was found to be proportionate to its purpose, as it did not relate to all internet sales of the reseller, but only to sales made through third-party platforms or under a different trade name. The conditions required for reaching this assessment are that the prohibition provision is formulated with the aim of preserving the luxury character of the product, is not applied in a discriminatory manner, and is in accordance with the principle of proportionality in terms of its aim. As a matter of fact, this restriction can be implemented through obligations to take measures to protect the brand image, but it also allows suppliers to restrict the sale of their products by unauthorised distributors on online marketplaces.

When the decisions of the Competition Board (“Board”) regarding restrictions on online sales in selective distribution systems are analysed, the Board stated that In the Yatsan decision, in which the sale of Tempur branded products over the internet was completely banned and the reason for this practice was explained as protecting the image of the product, training the sales staff to provide information to the consumers about the product, and ensuring that other products in the store are preferred in other purchases by increasing the entrance of the consumer to the store, the Board concluded that the sale over the internet was completely prevented by the relevant restriction and therefore, there was one of the restrictions that excluded the agreement from the scope of group exemption within the framework of Communiqué No. 2002/2.

Pursuant to the Guidelines for Vertical Agreements regarding the implementation of Communiqué No. 2002/2, it is emphasized that the purpose of this restriction should not be to hinder the distributor’s online sales and price competition and stated that the conditions stipulated within the selective distribution system should not, directly or indirectly, obstruct online sales in a manner contrary to the principle of equivalence.

In the BSH decision, the Board evaluated the request to prohibit the sale of online marketplaces to its dealers on the grounds that it damages the brand image and leads to free riding.  BSH, the manufacturer of brands such as Bosch, Siemens, and Profilo, envisages a complete prohibition on its authorized dealers selling on online marketplaces which referred to as platforms, and the imposition of various sanctions on authorized dealers who do not comply with the related prohibition.  The Board referred to the Coty decision and made a proportionality assessment in the concrete case in parallel with the relevant decision. Based on the researches conducted by the commission and the consumer survey conducted, it is concluded that 56% of the consumers purchased household appliances from online marketplaces. Therefore, considering that the complete restriction of such a sales channel could negatively impact competition beyond what is necessary, a violation decision has been made on the grounds that the related restriction does not comply with the proportionality condition. However, this decision has been rendered regarding the complete and initial restriction of the right of dealers to engage in online sales, and according to the prevailing view in the doctrine and as indicated in the Coty decision, restrictions on sales by selective distribution members on online platforms can be constrained in accordance with the relevant legislation.

D. CONCLUSION

With the widespread use of the internet among producers, distributors and consumers, it has become important to evaluate the restrictions on sales on the internet in terms of breach of competition Although the practice of selective distribution systems includes the mechanism of prohibiting authorised distributors from selling to other unauthorised distributors as a restriction in essence, it is not considered as a violation of competition as it is exempted from the application of Article 4 of the Act within the scope of Communiqué No. 2002/2. However, the passive sales of selective distributors to consumers on the internet cannot be restricted as a rule, and if restricted, they are excluded from the exemption scope. When examining the decisions of the Board and the case law of the European Union, the complete restriction of passive sales by selective distributors on the internet is considered as a reason that eliminates the exemption; however, it is stated that proportionate restrictions, taking into account criteria such as the preservation of brand image within the framework of the proportionality criterion, non-discriminatory application of restrictions, will not constitute a violation of competition.

Att. Gökçe ERGÜN

Att. Kağan KARADUMAN

 

Authors

Gökçe Ergün

Gökçe Ergün

Lawyer

Kağan Karaduman

Kağan Karaduman

Lawyer