Maintaining competition in online advertising: the US FTC’s 1-800 Contacts decision

In an important case on the intersection of IP and antitrust, the US Federal Trade Commission (FTC) has held that 1-800 Contacts, the largest online retailer of contact lenses in the US, unlawfully entered into a series of anti-competitive settlement agreements with its online rivals.  Issued on 7 November, the Commission’s Opinion provides useful insight into the mechanics of keyword search advertising and emphasises that such advertising is fundamental to competition between retailers in an e-commerce context.  The case also serves as a reminder – if any were needed – that companies cannot rely on IP settlements to shield their conduct from competition law scrutiny.

Background

Internet search engines such as Google typically generate two types of results in response to search queries: ‘organic’ results and ‘sponsored’ links.  The latter are advertisements, which are often displayed above or beside the organic results. As the name suggests, advertisers have to pay to have their sponsored links appear on a search engine results page.  To determine which ads appear (and in which order), search engines use auctions to sell advertising positions.  Advertisers bid on ‘keywords’ – words or phrases that trigger the display of ads when they are deemed to match a user’s search.  Advertisers can also specify ‘negative’ keywords. For instance, a retailer of eye-glasses might bid on ‘glasses’ but list ‘wine’ as a negative keyword to prevent its ad from appearing in response to a query for wine glasses.

Between 2004 and 2013, 1-800 Contacts sent cease and desist letters alleging trade mark infringement to a number of its competitors whose online search advertising displayed in response to queries involving ‘1-800 Contacts’ and similar terms.  It subsequently filed suit against a number of these online retailers (even if the retailers had not been bidding on the keyword ‘1-800 Contacts’ but on more generic terms such as ‘contacts’).  Rather than litigating the trade mark disputes to conclusion, 1-800 Contacts entered into settlement agreements with each of the competitors.  The agreements prevented the competitors from bidding for search advertising involving ‘1-800 Contacts’ and similar terms. The agreements also required the competitors to employ negative keywords to prevent their ads appearing whenever a search included the ‘1-800 Contacts’ trade mark (even in situations where the advertiser did not bid on the actual trade mark and the ad would appear due to the search engine’s determination that the ad was relevant and useful to the consumer). The settlement agreements were reciprocal: 1-800 Contracts agreed to the same bidding restrictions and negative keyword requirements in respect of its rivals’ trade marks.

The FTC’s decision

Anti-competitive restraints 

The FTC held that the settlement agreements prevented online contact lens retailers from bidding for online search ads that would inform consumers about the availability of identical products at lower prices.  According to the FTC, the agreements:

  • harmed competition in bidding for search engine key words, artificially reducing the prices that 1-800 Contracts paid for search advertising, as well as reducing the quality of search engine result ads delivered to consumers; and
  • resulted in price-conscious consumers paying more for contact lenses that they would have absent the restrictions.  
Whilst the FTC did not suggest that all advertising restrictions are necessarily anti-competitive, it emphasised that the restrictions in this case prevented the display of ads that would enable consumers to learn about alternative sellers of contact lenses and to make price comparisons at a time when they would be considering a purchase.  Significantly, the restrictions in the settlement agreements were not merely “limitations on the content of an advertisement a consumer would otherwise see”; they were restrictions on a “consumer’s opportunity to see a competitor’s ad in the first place”.  The restrictions were particularly harmful to retail price competition because the suppressed ads “often emphasise[d] lower prices”.

1-800 Contacts’ efficiency justifications

1-800 Contacts put forward two efficiency justifications for the restrictions: (i) avoidance of litigation costs though settlement and (ii) trade mark protection.  The FTC found that whilst these justifications were plausible, they were insufficient to outweigh the restrictions’ anti-competitive effects.  Further, the claimed pro-competitive benefits could have been achieved through less restrictive means.  In the agency’s analysis, “when an agreement limits truthful price advertising on the basis of trade mark protection, it must be narrowly tailored to protecting the asserted trade mark right”.  The settlement agreements in this case were not: they restricted advertising regardless of whether the ads were likely to cause consumer confusion (a key element of the test for trade mark infringement) and regardless of whether competitors actually used the trade mark term.

The FTC was also unimpressed by 1-800 Contacts’ argument that a trade mark settlement requiring non-use is immune from antitrust review because a prohibition on use is within a trade mark’s exclusionary potential.  Citing the US Supreme Court’s 2013 ruling in Actavis, the FTC emphasised the importance of considering “both antitrust and intellectual property policies”.  According to the agency, the “crux” of the Actavis decision was that there could be antitrust liability for settlement of litigation, regardless of whether the agreement’s anti-competitive effects fall within the scope of the exclusionary potential of the IP right in question.  1-800 Contacts’ argument “look[ed] only to half of the equation, i.e. trade mark policies, and did not withstand a thorough understanding of Actavis”.

Comment 

The decision sends a clear signal that the FTC takes a dim view of agreements between competitors that restrict online search advertising to the detriment of consumers.  Whilst agreements to limit advertising are not per se illegal in the US, it seems that such agreements will likely fall foul of the antitrust rules unless the parties can establish robust pro-competitive justifications for the restrictions.  The FTC’s position is clear: online search advertising plays a crucial role in the effective functioning of retail competition in the modern internet economy.

Competition authorities on this side of the Atlantic have also shown an interest in the links between online advertising and competition in recent years. The European Commission’s Final Report in the E-Commerce Sector Inquiry noted that almost one in ten retailers were contractually restricted from advertising online. The French competition authority published a report on the functioning of the online advertising sector in March this year.  And in the German Asics case, the Bundeskartellamt found that the sports equipment manufacturer’s prohibitions on the use of price comparison websites and Asics brand names in online advertisements amounted to a hardcore restriction of competition under the Vertical Agreements Block Exemption.  That decision was ultimately upheld by Germany’s highest court, the Federal Court of Justice.  Given the continuing growth of e-commerce, it would hardly be surprising to see further cases in this area in the future.

CLIP of the month: Strengthening Buyer Power as a Solution to Platform Market Power?

Each month we publish a ‘CLIP of the month’, a publication that we have found to be controversial or thought provoking (if you haven’t noticed this feature before, see above, look to the right of your screen, just below the header!).

This month’s CLIP (available here) comes from two of the CMA’s economists, writing on the dynamics of platform-to-business relationships, and the options for market solutions in the face of calls for greater regulation.  According to the authors, the key is finding a market-based counter-balance to the power held by platforms. The authors theorise that this could come from the collective bargaining power of the platform’s users. 

It is welcome to see individuals from within the competition authorities considering the alternatives to regulation, which could prove difficult in such a fast moving area.  It is also notable that the UK may seek to move in a different direction from many of the EU member states which appear to favour greater regulation.  However, such market-based alternatives may themselves face competition law challenges, given the risks that exist around collective bargaining and exchange of information between competitors.  At least some of these risks are recognised by the authors (and it is worth reading an economist’s perspective on this from David Parker of Frontier Economics, here).   However, without some kind of safe harbour for such discussion across all relevant territories, the competition law risks are likely to remain a significant disincentive to such collective action.  There may also be a problem of timing.  In the case of existing businesses, the incentive and ability to challenge platform market power may be at their highest before true platform market power emerges.  

The role and (potentially) regulation of platforms is likely to remain a key area of debate in competition policy for the foreseeable future.

Amazon Marketplace seems to be the Commission’s next big data antitrust target

Following up on our recent post about the big data concerns assessed by the Commission in the Apple/Shazam merger (here), the news that the Commission has opened a preliminary investigation into Amazon’s use of third-party merchant data on its Marketplace platform is another sign of the Commission’s continued focus on data in all its guises.

The investigation is reportedly based upon complaints received by the Commission, as well as behaviour observed during the e-commerce sector inquiry (see Commissioner Vestager’s announcement here). Although the investigation is still in a preliminary, information-gathering stage, the Commission is examining platforms like Amazon Marketplace where the platform both hosts smaller merchants and acts as a merchant itself. The Commission is considering whether competition concerns arise if the platform is able to collect sensitive data about products sold through a marketplace and then to make use of that data to boost its own sales. As part of the probe, the Commission has issued Requests for Information to online retailers that use Amazon Marketplace (see here).    

Viewed in a broader context, the reason why the UK has set up an independent panel to examine digital competition (which met for the first time recently – here) is to try and get ahead of these sorts of issues that arise as the e-commerce sector continues to grow. The terms of reference for the panel include questions such as ‘what effect can the accumulation and concentration of data within a small number of big firms be expected to have on competition?’.

Whilst it can be appreciated that marketplace platforms offer great exposure for small businesses that might otherwise struggle to gain access to buyers, they typically pay either a listing fee, commission, or monthly fee to the platforms for that privilege. In addition to receiving this compensation, the platform is in the advantageous position of being able to examine the sales of thousands of small businesses to determine which kinds of products sell well, and which don’t. It seems plausible that by using this data, the platform could increase its share of sales for the most profitable or most popular products by developing its own brand business. And if the sales of small business are at risk of being cannibalised by a platform in this manner, then it is clear that competition concerns may arise as small sellers struggle to compete with the platform’s own brand.

Although the use of data by a platform in this manner is a relatively novel concern, it echoes concerns raised by suppliers of brands in the consumer goods sector.  Most supermarkets these days have their own private label ranges, making them competitors to, as well as the retailers for, branded goods. They are similarly in the relatively privileged position of being able to make use of sales data of competitors to support their own offering.  It will be interesting to see whether this so-called ‘gatekeeper’ issue will be something the CMA considers as part of its investigation of the Sainsbury’s/Asda merger, which was referred to a phase II investigation on 19 September 2018 (here).

The Ping judgment – CAT confirms that internet sales ban is restrictive of competition ‘by object’

In a judgment handed down on 7 September, the UK’s Competition Appeal Tribunal (CAT) upheld the CMA’s decision of August 20171 that golf equipment manufacturer Ping’s online sales ban was a restriction of competition ‘by object’ and did not qualify for any exemption.  Although the CAT held that Ping’s aim2 in implementing the policy was a legitimate one, the ban was, by its very nature, liable to harm competition between Ping’s retailers. Whilst the CAT did find that the CMA had erred in law by seeking to carry out a proportionality analysis3 (which was not relevant to the question of whether the policy was caught by the prohibition in Article 101(1)), the CAT held that this had no impact on the overall conclusion.  In a small victory for Ping, the CAT found some minor errors in the CMA’s calculation of the fine, resulting in a small reduction in the penalty. 

The CAT’s response to Ping’s grounds of appeal

By object infringement

Ping’s submission was that the presence or absence of a “plausibly pro-competitive rationale” is the key to identifying an infringement by object. However the CAT stated that this submission did not reflect the law as set out in Cartes Bancaires. The CAT was “of the clear view” that regardless of Ping’s subjective aim in introducing the internet sales ban as a means of promoting custom fitting, the ban may be characterised as an object infringement if it reveals a sufficient degree of harm to competition.4  In the CAT’s analysis, the existence of a pro-competitive objective does not per se preclude a finding of infringement by object. This accords with the Court of Justice’s holding in Pierre Fabre that, by excluding a method of distance selling, the internet ban was liable to restrict competition even if that was not its purpose. 

In the current case the Tribunal found that “the potential impact of the ban on consumers and retailers [was] real and material”. In its view, the ban restricts intra-brand competition; prevents retailers from attracting consumers located outside their catchment areas by offering better prices/service; and removes the advantages of online sales (in particular, access from any location 24 hours a day) to the detriment of consumers. The CAT accepted Ping’s submission that objective justification and proportionality are not in themselves relevant to an assessment of whether an agreement is an infringement by object. 

The human rights ground

According to Ping, its appeal concerned the freedom of a company to pursue a business which involves the sale of a product whose properties are fundamentally inconsistent with internet selling. Ping maintained that it built its brand image as a manufacturer which sells only customised clubs and submitted that the CMA’s decision contravened its human rights under Article 16 by requiring it to sell a product it did not sell and did not wish to sell (i.e. non-fitted clubs). The CAT dismissed this argument, finding that since Ping’s internet policy constitutes an object restriction under Article 101(1), any restriction on the exercise of its rights under Articles 16 and 17 as a result was “proportionate to the legitimate aim of avoiding the distortion of competition within the EU.”  The CAT also accepted the CMA’s submission that the decision does not force Ping to sell a product that it does not already sell –Ping could maintain its policy of promoting custom fitting with or without the ban. 

In relation to the alternative measures proposed by the CMA, Ping’s fundamental objection was that they were likely to lead to customers making uninformed decisions as to which clubs to buy, thereby harming their game and ultimately damaging Ping’s brand. The Tribunal said this was “not compelling”: there is technology that enables an accurate assessment of custom fitting online and other premium golf club brands sell their custom fit golf clubs online.  This suggested that “guessing [custom fit measurements] amongst customers of those brands is not a significant problem”.

The penalty

The CAT considered that the £1.45 million fine imposed by the CMA was “slightly too high” and a further small reduction was therefore appropriate. It found that a fair and proportionate fine, taking into account that it was not an ‘aggravated’ infringement, should be £1.25 million.

The CAT concluded that the CMA erred in treating director involvement as an aggravating factor on the specific facts of the case. If the fact of director-level knowledge alone were treated as an aggravating factor then this infringement could never have been considered as anything other than aggravated. However, Ping restricted competition law through its negligence rather than with intention and so applying an uplift in this case would be “meaningless” and should be “reserved for more reprehensible behaviour”. 

Comment

As we noted in our comment on the CMA’s decision (here), the infringement decision itself was not surprising – outright sales bans have long been considered problematic.  The fact that the CAT has upheld the CMA’s decision is therefore, in itself, equally unsurprising.  Of more interest was the CAT’s consideration of the CMA’s use of an ‘Alternatives Paper’ – this was part of the CMA’s by object case, showing that there were alternative, less restrictive means of satisfying Ping’s legitimate policy aim.  Whilst finding that the CMA had erred in law in its approach, the CAT nevertheless concluded that this was not sufficient to overturn the CMA’s decision.  Rather, the CAT sought to square a particularly tricky circle on the facts of this case – it had sympathy with both the ‘legitimate aim’ behind Ping’s policy and the CMA’s conclusion that an outright internet sales ban is a by object infringement that was “clearly … not objectively justified”.  It seems that the fact that other brands made their custom-fit clubs available online and that Ping itself allowed sales over the internet in the US were decisive here.  

_______________________________________________

1 We commented on the CMA’s decision here

2 Ping contends that the internet ban prevents consumers from making uninformed decisions about their custom fitting specification and so guards against blame being levelled at Ping causing damage to its brand.

3 The CMA previously determined that the internet ban should be prohibited on the basis that the company could have achieved its legitimate aim through less restrictive means. 

4 The Tribunal accepted the CMA’s analysis that if the internet sales ban is so inherently damaging to competition as to amount to an object infringement, it is not necessary to conduct an assessment of the actual effects. 

Online advertising – Government acknowledges challenges ahead for competition law

We reported a few months ago on the House of Lords Communications Select Committee's report on advertising in the digital age.

The Committee’s report set out the challenges currently facing the UK’s advertising industry in light of factors such as Brexit and the ever-expanding digital economy.  Notably, the Committee called on the CMA and other regulatory bodies to adopt robust standards for online advertising and made several recommendations to the Government of ways to help ensure that digital advertising “is working fairly for businesses and consumers”.

Following on from that report, the Government has now published its response.

What was the Government's response?

The following aspects will be of interest to competition lawyers:

  • The Government acknowledged that the regulatory challenges posed by the online advertising industry are extensive. The Government encourages continued self-regulation of online advertising, but may consider legislating in this area. A White Paper that focuses on online harms will be published later this year, which may shed light on any planned legislation relating to online advertising. 
  • In relation to the lack of transparency in the digital media advertising market, the Government stated that it is keen to gather more evidence on the business models in this market. This will hopefully form part of the Digital Charter's work programme and will be included in the Carincross review into the sustainability of the press (expected early 2019). However, it noted that because the CMA is an independent authority, the Government‘s powers to direct the CMA to undertake an investigation or study are extremely limited. 
  • Despite receiving an increase in funding, it remains unlikely that the CMA will have sufficient resources to fund a wide-ranging market study into digital advertising. This is because the additional £23.6 million funds allocated to the CMA by the Treasury will be going towards preparation for Brexit.  Market studies are cost intensive for the regulator, and many have speculated that they may be a likely casualty of the CMA’s increased enforcement responsibilities. 
  • The Government is to conduct an overall consumer markets review, to be completed by April 2019. As part of this review, the Government will consider how best to ensure the UK's competition framework is effective in responding to challenges presented by digital services.

The response to the Committee’s report indicates that the Government acknowledges the need to gather more evidence and to develop better tools in order to be able to deal with potentially complex competition issues arising in digital ad markets.  It also notes the overall preference for self-regulation (which should allow markets to self-correct), rather than introducing a rigid regulatory framework. However, with the CMA about to take on the burden of cases that would normally be dealt with by the European Commission, it remains to be seen whether the UK will be able to adapt quickly to the particular challenges posed by rapidly evolving digital markets. 

Commission considers pricing algorithms in fining consumer electronics manufacturers for RPM

Last year, we speculated whether the European Commission might target pricing algorithms (here) and noted that the Final Report of the Commission’s E-Commerce Sector Inquiry had identified the wide-scale use of pricing software as an issue that might raise competition concerns (here).

On 24 July 2018, the Commission announced that four consumer electronics manufacturers, including Asus and Pioneer, have been fined a total of over €111 million for imposing fixed or minimum resale prices on their online retailers (here). If the online retailers tried to set lower prices than those requested by the manufacturers, they were threatened with actions such as the withdrawal of supplies of the product in question.  

Interestingly, the Commission noted that the use of pricing algorithms by the online retailers exacerbated the impact of the manufacturers’ conduct. Many retailers were using pricing algorithms to automatically adapt their prices to those of their competitors. So where manufacturers were able to force some online retailers to adopt higher prices than they wished to, this had a broad impact across overall online prices.  It meant that other online retailers would match those higher prices, rather than the lower prices that might otherwise have been introduced.  In essence, this is rather akin to the umbrella price effects arising from many cartel-type agreements between competitors, but is not something that would – in the pre-pricing-algorithm era – have been so possible in the world of distribution agreements.

This isn’t an example of the Commission taking issue with the use of pricing algorithms in their own right. It hasn’t accused the online retailers of using pricing software as a means of coordinating on prices. Nor has it taken aim at the companies producing such software. The Commission did flag the manufacturers’ use of “sophisticated monitoring tools” to track resale prices, which enabled them to intervene quickly if a retailer attempted to decrease its prices, but otherwise pricing algorithms/software were part of the background to the decisions rather than the focus.

This may have been because there is nothing novel in the underlying competition law infringements committed in these cases; they appear to be classic cases of resale price maintenance contrary to Article 101 TFEU – although it is true that the Commission has not enforced against such agreements for a number of years before this announcement. In any event, there is nothing here to alarm companies making use of pricing algorithms or monitoring software, as long as they aren’t using such tools to implement an unlawful strategy.

However, these decisions do show that the Commission is alive to the potential for pricing algorithms and other software tools to be utilised as part of anti-competitive conduct, and such tools may feature more heavily in future Commission decisions. The Commission launched a number of other investigations following the E-Commerce Sector Inquiry (see here and here) into issues such as the licensing and distribution of merchandising products, the geo-blocking of PC video games, and hotel price discrimination on the basis of customer location.  Any decisions adopted following the conclusion of those investigations may offer some further guidance on the use of pricing algorithms.

Pharma stock management - nothing extraordinary in limiting parallel trade?

Pharmaceutical stock management – the brand-owner practice of limiting quantities sold to levels required for the local market in a bid to limit parallel exports – has been a feature of European markets for at least much of the past two decades. 

It was the 2004 Bayer (Adalat) decision of the Court of Justice, coupled with the continued supply obligations in Article 81 of Directive 2001/83 (as amended) which opened up a route for brand owners to effectively limit exports from lower price Member States without risking engaging the prohibition on anti-competitive agreements for limiting parallel trade.  That route essentially rested on unilateral conduct by the brand owner – but as such left open the risk of abuse of dominance rules applying.  As pharma markets are often narrowly drawn by competition regulators, this remained a significant concern.

It was another year before the first case raising the question of how Article 102 applied to stock management came before the Courts (Syfait, 2005).  That case was a referral to the CJEU from the Greek Competition Commission – but the request was stymied by a procedural point, and the Court declined to respond to the request for a preliminary ruling.  It was another few years before the same case came back before the CJEU.  This time the CJEU endorsed the benefits to consumers from parallel trade, and clarified that it may be an abuse of a dominant position for a pharmaceutical manufacturer to refuse to meet ‘ordinary orders’ from existing customers (Lelos, 2008).

Surprisingly, it took 10 years before the next development in the saga, when the Hellenic Competition Commission (“HCC”) found that GlaxoSmithKline (“GSK”) had abused a position of dominance in the market for migraine medicines in Greece by refusing to fulfil any orders in their entirety of Imigran and by refusing to meet ‘ordinary orders’ from wholesalers.  As a result, the HCC fined GSK a total of just over €4 million.  In reaching that decision, the HCC clarified that orders from wholesalers which were out of all proportion to a previous order history, could legitimately be refused as being of an ‘extraordinary’ character.  Assessing whether an order was ‘ordinary’ within the meaning set out in Lelos required a review against the annual size of previous orders and supplies per wholesaler, total national consumption per year and the pattern of previous business relations between the pharmaceutical manufacturer and the wholesaler in question.  Despite its findings on abuse, the HCC indicated that orders of significant quantities of products intended primarily for the parallel export market are likely to qualify as ‘extraordinary’, and rejected other parts of the complaints against GSK on that basis.

It seems that stock management issues in general may once again be an area of particular focus for regulators – it is interesting to note that in its case opening report initiating formal antitrust proceedings against Aspen Pharmacare, the Commission cites stock management alongside unfair and excessive prices.  Whatever the outcome of that case, it is clear that even a dominant firm can legitimately refuse orders that are ‘extraordinary’, but in doing so, the manufacturer must be able to justify this decision by reference to national market requirements and previous business relations with the wholesaler in question.

Coty gets green light for online platform ban

The Higher Regional Court of Frankfurt ruled last Thursday that Coty Germany’s ban on distributors selling products over the Amazon.de platform is a justifiable restriction of online sales. The full judgment has not yet been released, but the court has published a statement (in German) summarising the decision. 

This ruling follows the decision of the Court of Justice of the European Union (‘CJEU’) at the end of last year in a preliminary reference arising from the dispute (see here). The CJEU ruled the restriction of sales through third party platforms such as Amazon is not a hardcore restriction of competition, and may be justified where it has the objective of preserving an ‘aura of luxury’ that is linked to the quality of the goods. However, the CJEU stated that it was for the national courts to decide whether such restrictions are justifiable and proportionate, on a case-by-case basis.

Following the CJEU’s reasoning, the Frankfurt court found that the selective distribution system implemented by perfume supplier Coty, including the ban on sales over third party platforms such as Amazon.de, was compatible with competition law because it was based on objective qualitative criteria applied uniformly and without discrimination, and because it did not go beyond what was necessary to preserve the luxury image of the goods. It also confirmed that the specific clause banning the advertising and selling of Coty products via Amazon.de was proportionate to the objective of preserving the quality of these luxury products. The Frankfurt court therefore concluded that Coty’s selective distribution did not infringe EU competition law. 

The findings of the Frankfurt court are not surprising given the strong steer given by the CJEU in the reference proceedings. However, we will be reading the full judgment closely when it’s available, to see if there is any indication that the German courts support the view of the German Competition Authority, the Bundeskartellamt, that the CJEU’s decision should be limited to genuinely prestigious products or whether it can be applied more widely...

Advertising in the digital age – the future role for competition law

The House of Lords Select Committee on Communications has published its final report following a wide-ranging investigation into the UK digital ad market.  Its headline finding is that a lack of transparency hinders the ability of advertisers to ascertain whether they receive value for money for ads.

Of particular note for those who follow competition law is the Committee’s recommendation that the CMA conduct a market study into digital advertising to investigate whether the market is working fairly.  The Government has also been encouraged to undertake a review of whether current competition law is adequate to regulate the 21st century digital economy, potentially as part of its work on the UK’s Digital Charter (see here). 

Context for the review 

At its origin, the House of Lords’ inquiry had something of a Brexit flavour, focussing on the competitiveness of the UK advertising industry in the global economy.  The role of digital advertising was seen as signalling a potential need for the analogue industry to adapt to change.  The high value of advertising in the UK economy was also noted.

What were the Committee’s findings? 

The final report unsurprisingly notes the increasing role played by online advertising, the complexity of the business models involved and the increasing possibilities for individually targeted ads.  Concerns are expressed that online advertising is not held to the same standards as print advertising, which may lead to a decline in trust and thus value.  At the same time, the proportion of overall spend is rapidly switching to online ads.

Turning to the part of the report focussing on digital advertising, the Committee found that despite the proliferation of adtech models, the digital ad market in the UK is currently dominated by a small number of tech firms. 

Acknowledging that dominance is not illegal in itself, the Committee nevertheless noted the evidence given by Prof. Barwise on the economic impacts of increased market concentration and network effects: “once you achieve a dominant market share in this kind of market, it is almost impossible to be displaced … The most you can hope for is that they get eclipsed by someone dominating a new market that becomes bigger,” and “Most of the new technology is being developed by startups and the big tech players. When a startup is looking successful, it tends to get bought by one of the big tech players.

What are the prospects of regulatory intervention? 

Investigations into digital markets by competition authorities is something of a global trend, and the French authorities in particular have already carried out a specific study on digital ad markets (here).  The prevalence of these studies reflect wider political and public concerns about the perceived power and reach of some online players, as well as the concern to ensure the continuation of an open internet (the alternative to extensive advertising may be increasing use of paywalls). 

The Committee specifically calls upon the CMA to undertake a market study into the online ad industry “to investigate whether the market is working fairly for businesses and consumers”.  

However, it remains to be seen whether the CMA will pick up the Committee’s gauntlet.  Michael Grenfell (Executive Director for Enforcement, CMA) told the Committee that “the CMA had already been asked to conduct a market study into online advertising but declined to do so because they had not found any detriment to consumers on preliminary consideration”.  

Mr Grenfell appears to be referring to the CMA’s report on "The commercial use of consumer data", June 2015, which did not identify a specific competition issue in relation to online advertising and concluded that “we see no reason, at present, why our existing competition and markets tools would not be effective at tackling conduct that gave rise to competition concerns in these markets”. 

The CMA also pointed to its limited resources.  While it has received a cash boost since that date, the demands of Brexit may make such wide-ranging studies unlikely for now.

Nevertheless, the current Department of Business and Industry Strategy’s consultation on ‘modernising consumer markets’ (see here – the consultation is intended to review the effectiveness of the UK’s competition and consumer protection laws in digital markets) may lead to further intervention.

What next for digital advertising?

The Committee’s report illustrates that the digital ad market remains a focus of attention and concern.  Despite the CMA’s stated position in the report, discussion of increased ex ante regulation, and ex post competition based investigations cannot be ruled out. But for all the focus on British competitiveness, and even though localisation of ads is important, many aspects of this debate transcend national boundaries.  The British government and the CMA are not the only players who will define the evolution of online ad markets.

Online sales bans in the sports equipment sector: the CMA’s Ping decision

In August last year, the UK Competition and Markets Authority (CMA) announced that it had imposed a fine of £1.45 million on Ping Europe Limited (Ping) for breaching the EU and UK competition rules.  The CMA found that Ping had infringed the Chapter 1 prohibition of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union (TFEU) by entering into agreements with two UK retailers which banned the sale of its golf clubs online.  The CMA chose to apply Rule 10(2) of its procedural rules and addressed the decision only to Ping.  A non-confidential version of the decision was published in December 2017, revealing the UK competition authority’s detailed reasoning for the first time.  

Background. Ping is a manufacturer of golf clubs, golf accessories and clothing.  It operates a selective distribution system in the UK, supplying only retailers which meet certain qualitative criteria. Ping considered that ‘dynamic face-to-face custom fitting’1 was the best way to enhance golf-club choice and quality for consumers, and that such custom fitting could not take place over the internet.  As a result, Ping instigated an ‘internet policy’ which banned its authorised retailers from selling any of its golf clubs online.

The CMA’s competition assessment.  Relying on the CJEU’s judgment in Pierre Fabre, the CMA held Ping’s online sales ban restricted competition ‘by object’.  In the UK authority’s analysis, the ban reduced retailers’ ability to reach customers outside their local geographic areas and to win customers’ business by offering better prices online.  The CMA also relied on Advocate General Wahl’s Opinion in Coty (the CMA’s decision pre-dated the CJEU’s Coty judgment, which we commented on here).  AG Wahl had contrasted the contractual clause at issue in that case (which prevented authorised retailers from selling on third-party online platforms) with more serious restrictions, such as the outright internet sales ban that gave rise to the Pierre Fabre ruling.

Ping had argued that its online sales ban was objectively justified under the competition rules for three main reasons:

  1. The aim of the ban was to promote face-to-face custom fitting, which fosters inter-brand competition by enhancing product quality and consumer choice;
  2. The ban was necessary to protect Ping’s brand image.  Selling non-custom-fitted clubs would result in an inferior product being placed in consumers’ hands, which would damage Ping’s reputation;
  3. The ban enabled Ping to resolve a ‘free rider’ problem by ensuring that authorised retailers had appropriate incentives to invest in custom fitting. It would be commercially unsustainable for retailers to make investments in appropriate facilities if a potential customer could obtain a custom fitting in a bricks-and-mortar store and then buy the clubs online.

Noting that other high-end golf club manufacturers such as Callaway and Titleist did not restrict online sales of custom-fit clubs, the CMA dismissed Ping’s submissions on objective justification.  Whilst the CMA accepted that the promotion of custom fitting was a “genuine commercial aim”, it thought Ping could have achieved this through alternative, less restrictive means.  According to the CMA, the “main alternative” available to Ping was to permit authorised retailers to sell online if they could “demonstrate [their] ability to promote custom fitting in the online sales channel”.2

Ping’s appeal to the CAT.  Ping has appealed against the CMA’s decision.  In its press release responding to the decision, Ping stated: “Our Internet Policy is an important pro-competitive aspect of our long-standing commitment to custom fitting”.  It also argues in its Grounds of Appeal that the CMA was wrong to find that the online sales ban was disproportionate: the CMA’s proposed alternative measures would, in Ping’s view, be impractical and less effective at maximising rates of custom fitting.  The appeal is due to be heard by the UK Competition Appeal Tribunal (CAT) in May this year.

Comment.  The Ping decision is the latest in a line of recent cases in which suppliers have sought to restrict retailers’ ability to sell products over the internet.  As we noted here, the German Bundeskartellamt has taken a particularly dim view of online sales restrictions in a number of decisions concerning brand owners’ selective distribution systems.  The publication of the Ping decision also comes hot on the heels of the CJEU’s preliminary ruling in the Coty case, in which it was held that manufacturers of luxury goods can, in principle, prevent their authorised retailers from selling via third-party online platforms such as Amazon and eBay, provided that certain conditions are fulfilled (see here).

Also of note was the CMA’s decision to set out in an ‘Alternatives Paper’ its provisional considerations of ‘realistic alternatives’ to achieve the legitimate aims identified by Ping.  Whilst the CMA states that the evidential burden of establishing whether the online sales ban was justified was Ping’s and despite the CMA’s assertion that it was not required to do so, it is interesting that the CMA was willing to engage in its own alternatives assessment.

It remains to be seen what the CAT will make of Ping’s justifications for its online sales ban.  In the meantime, however, the CMA’s decision again highlights the competition law risks of imposing an outright ban on internet sales.  Like other national competition authorities, the CMA has frequently emphasised the importance of the online sales channel in intensifying intra-brand price competition.  As Senior Director for Antitrust Enforcement Ann Pope put it in the CMA’s press release of August 2017: “The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted.

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1 Dynamic face-to-face custom fitting generally involves: an initial interview; a static fitting in which the golfer’s basic measurements are taken; the fitter identifying potential club shafts for the golfer; a dynamic fitting, including a swing-test assessment of how the golfer is hitting the ball; purchasing advice; and grip fitting.

2 In particular, Ping could (according to the CMA) require its retailers to display on their websites a prominent notice recommending that customers take advantage of custom fitting; and it could determine that only retailers with an appropriate website providing a range of Ping custom fit club options would satisfy its selective distribution requirements.