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.


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.

Third-party platform bans justified for genuinely luxury brands

The Court of Justice of the European Union (‘CJEU’) has today ruled that third-party platform bans may be justified in the selective distribution of luxury goods. The CJEU’s decision in the Coty Germany reference proceedings broadly follows the opinion of Advocate General Wahl which was handed down earlier this year (see here, and further background here). 

The Court makes a number of rulings which will be of interest to brand owners:

  • Selective distribution may be justified for luxury goods to protect the ‘allure and prestige’. This clears up the uncertainty which arose following the Pierre Fabre judgment which seemed to suggest that the preservation of a luxury image could not justify a restriction of competition. The CJEU has confirmed that the judgment in that case should be confined to the particular facts at issue.
  • Third party platform bans may be justified in the selective distribution of luxury goods. The CJEU has ruled that, in the context of selective distribution, a supplier of luxury goods can, in principle, prohibit authorised distributors from using ‘in a discernible manner’ third-party platforms such as Amazon. Any third-party platform ban must have the objective of preserving the luxury image of the goods, be applied uniformly and not in a discriminatory fashion, and be proportionate to the objective pursued.

This ruling certainly gives some more leeway for brand owners of luxury goods, but should not be seen as an absolute green light for third-party platform bans. In particular, such restrictions must be justified by the goods in question (i.e. they must have a genuine ‘aura of luxury’) and must be a proportionate means of preserving the luxury image. This will be for national courts and authorities to interpret, and we can expect a fairly high threshold. The German Competition Authority, the Bundeskartellamt, has already said that it considers the CJEU’s decision to be limited to genuinely prestigious products. That said, the ruling does make clear that third-party platform bans do not amount to a hardcore restriction of competition, and thus it will be open to brand owners to seek to justify their use on a case-by-case basis.  

Luxury brands, third party platforms and EU competition law – guidance from AG Wahl

The Court of Justice of the European Union (‘CJEU’) has today handed down Advocate General Wahl’s opinion in the Coty Germany reference proceedings (see press release here, the full opinion should be published later today). The press release explains that the Opinion proposes that the European Court find that a supplier of luxury goods may prohibit its authorised retailers from selling its products on third-party platforms such as Amazon and EBay. For the background to the case see our earlier post here

The Opinion begins by restating that selective distribution systems for luxury and prestige products do not necessarily fall within the prohibition of anticompetitive agreements under Article 101(1) if they meet three well-established criteria:

  1. the resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers; 
  2. the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used; and 
  3. the criteria established do not go beyond what is necessary.
AG Wahl then goes on to deal with the restriction which is at the centre of this dispute, namely a provision which prohibits the authorised sellers from using third party platforms for internet sales “in a discernible manner”. He states that – in the present state of development of e-commerce – such a restriction does not necessarily fall within Article 101(1) where three criteria are met. However, it seems to us that the criteria he lists is merely a restatement of the well-established criteria for lawful selective distribution set out above, i.e. that the criteria:  

  1. are dependent on the nature of the product; 
  2. are determined in a uniform fashion and applied without distinction; and 
  3. do not go beyond what is necessary.
The assessment of the facts will ultimately be left to the German Court.  However, AG Wahl does observe that the contested clause does not appear to be caught by Article 101(1). In fact, he suggests that the restriction is likely to improve competition by ensuring the products are sold in an environment that meets the qualitative criteria and guarding against the phenomena of “parasitism” (a more loaded term than the usual reference to ‘free-riding’). He points out that the restriction does not amount to an absolute prohibition on online sales (which is considered a serous restriction of competition) for two reasons. First, the restriction still allows authorised distributors to sell through their own websites and to make use of third party platforms “in a non-discernible manner”. Second, distributors’ own online stores are still the preferred distribution channel so such a restriction cannot be assimilated to an outright ban or substantial restriction on internet sales.  This analysis leaves a number of questions open, and certainly suggests that the analysis of such restrictions may change if the popularity of third party platforms continues to grow.  

Finally, the Opinion proposes that, in the event that a restriction on third party platforms does fall within Article 101(1), it may well be exempted under Article 101(3), including under the block exemption for vertical agreements. AG Wahl does not consider a third party platform ban to be a hardcore restriction which would automatically exclude the relevant distribution agreement from the benefit of the block exemption. 

Overall, the AG Opinion appears to be in line with the Commission’s recent final report in its e-commerce sector inquiry, which recognised that price is not the only relevant competition consideration when selling goods online: “While price is a key parameter of competition between retailers, quality, brand image and innovation are important in the competition between brands. Incentivising innovation and quality, and keeping control over the image and positioning of their brand are of major importance for most manufacturers to help them ensure the viability of their business in the mid to long term.”  The AG Opinion is a first step in showing how this balance may in future be struck – although crucially the Opinion is not binding on the CJEU who will now begin its deliberations in this case. The final word on these issues will be left to the European Court, and this will no doubt be keenly awaited by brand owners, online retailers and third party platforms alike.

Transparency may undermine online competition: Commission’s Final Report on the E-commerce Sector Inquiry

On 10 May 2017 the European Commission published its Final Report on the E-commerce Sector Inquiry, together with accompanying Q&As, and, for those who want something rather longer, a Staff Working Document

The inquiry, launched over 2 years ago, and part of the wider Commission Digital Single Market Strategy (see our earlier comment here) has gathered evidence from nearly 1,900 companies connected with the online sale of consumer goods and digital content.
The Report’s main findings

  • Price transparency has increased through online trade, allowing consumers instantaneously to compare product and price information and switch from online to offline. The Commission acknowledges that this has created a significant ‘free riding’ issue, with consumers using the pre-sales services of ‘brick and mortar’ shops before purchasing products online. 

  • Increased price transparency has also resulted in greater price competition both online and offline.  It has allowed companies to monitor prices more easily, and the use of price-tracking software may facilitate resale price maintenance and strengthen collusion between retailers.

  • Manufacturers have reacted to these developments by seeking to increase their control of distribution networks though their own online retail channels, an increased use of ‘selective distribution’ arrangements (where manufacturers set the criteria that retailers must meet to become part of the distribution system) and the introduction of contractual restrictions to control online distribution.
How about changes to competition policy? 

The Report does not advocate any significant changes to European competition policy, but rather confirms the status quo. The key point of interest are as follows: 

  • Selective distribution – whilst the Commission has not recommended any review of the Vertical Block Exemption Regulation (‘VBER’) ahead of its scheduled expiry in 2022, the Commission notes that the use of selective systems aimed at excluding pure online retailers, for example by requiring retailers to operate at least one ‘brick and mortar’ shop, is only permissible where justified (for example in respect of complex or quality goods or to protect suitable brand image).

  • Pricing restrictions – dual pricing (i.e. differential pricing depending on whether sales are made online or through a bricks and mortar outlet) will generally be considered a ‘hardcore’ (or object) restriction of competition when applied to one and the same retailer, although it is capable of individual exemption under Article 101(3) TFEU, for example if the obligation is indispensable to address free-riding by offline stores.  

  • Restrictions on the use of marketplaces – the Report finds that an absolute ban on the use of an online marketplace should not be considered a hardcore restriction, although the Commission notes that a reference for a preliminary ruling is pending before the CJEU (C-230/16 - Coty Germany v Parfümerie Akzente).

  • Geo-blocking – a re-emphasis of the existing position on territorial and customer restrictions – active sales restrictions are allowed, whereas passive sales restrictions are generally unlawful. Within a selective distribution system, neither active nor passive sales to end users may be restricted. The Commission also make clear that companies are free to make their own unilateral decisions on where they choose to trade.

  • Content licensing – the significance of copyright licensing in digital content markets is noted, as is the potential concern that licensing terms may suppress innovative business practices.  

  • Big Data – possible competition concerns are identified relating to data collection and usage. In particular, the exchange of competitively sensitive data (e.g. in relation to prices and sales) may lead to competition problems where the same players are in direct competition, for example between online marketplaces and manufacturers with their own shop.  
What happens next?

The Commission has identified the need for more competition enforcement investigations, particularly in relation to restrictions of cross-border trade.  It is expected that more investigations will be opened in addition to those already in play in respect of holiday bookings, consumer electronics and online video games. In a more novel approach, the Commission’s press release also name-checks a number of retailers (in particular in fashion) who have already reformed their business practices “on their own initiative”.
The Commission also highlights the need for a consistent application of the EU competition rules across national competition authorities.  It remains to be seen whether the Commission will seek to use its enforcement investigations to address inconsistencies such as those evident in the more interventionist stance of some national authorities (e.g. the Bundeskartellamt) in respect of issues such as pricing restrictions.

Back to the future: the Commission opens e-commerce competition investigations

True to its current focus on all things digital, the European Commission has recently announced that it has launched three separate investigations into whether certain online sales practices prevent, in breach of EU antitrust rules, consumers from benefiting from cross-border choice in their purchases of consumer electronics, video games and hotel accommodation at competitive prices.

The context to the investigations is the Commission's Digital Single Market Strategy and its related sector inquiry on e-commerce, which suggested that the use of online sales restrictions were widespread throughout the EU (previous posts here and here).

The Commission is now examining whether the companies concerned are breaking EU competition rules by “unfairly restricting retail prices” or by excluding customers from certain offers because of their nationality or location (geo-blocking). 

The Commission’s rationale for the inquires is that these practices may make cross-border shopping or online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower online prices.  Whether the evidence gathered from the investigations ultimately bears out this hypothesis is very much an open question. 

Whatever the wider benefits to the Commission of the sector investigation, it is questionable whether these investigations in themselves justify the full arsenal of an antitrust sector inquiry.  To judge by the press release, at least a significant part of the Commission’s concern appears to relate to classical infringements of competition law – resale price maintenance and contractual barriers to parallel trade – which merely happen to have come to light through the sector inquiry.  Time will tell whether this hypothesis is correct, or whether more specific types of online anti-competitive conduct are in fact concerned.

The European Commission’s E-commerce Conference

On 6 October, the Commission held a conference on its Preliminary Findings of the E-commerce Sector Inquiry: the entire day was made available via webcast (no geo-blocking for the Commission…).  

This follows the publishing of its Preliminary Report last month (which we covered here and here).  The conference was an opportunity for those working in industry, academia and competition authorities around the EU to comment on the findings.  A list of the speakers can be found here.  We have provided a summary of the main issues raised below.


In today’s digital world, selective distribution systems are used for a very wide range of products and they are no longer limited to those products which are accompanied by a service.  It was suggested that using selective distribution to ban the use of third party platforms raised important competition law and political questions.

In the context of consumer goods, selective distribution can be beneficial, allowing brands to maintain consistency across retail channels and strengthening consumer protection.  However, it was noted that they can be detrimental to SME retailers, which often struggle to gain market share as a result of restrictive distribution practices.  The need for clear and objective criteria was also raised as an issue.  Some industry representatives called for greater parity between online and brick and mortar stores in terms of the products they are allowed to sell.  This view was not shared by all – others were quick to emphasise the differences between online and physical stores and the benefits of differentiating between these types of sales.  

Turning to the media content sector, the focus was on the use of exclusivity which gives rise to a similar dynamic to selective distribution in the goods economy.  On the one hand, the competition for exclusivity among media organisations has been a driver of innovation and investment in the production of new technologies (e.g. Ultra HD TVs) and has facilitated the creation of more choice among content providers.  On the other hand, distribution contracts are often awarded for lengthy terms and – in the Commission’s view – certain terms risk giving rise to anti-competitive effects.  One example which was discussed was the use of automatic renewal provisions, extending the duration of exclusivity; however, such terms may be justified on the basis of the considerable investment needed to create new content. Such terms will need to be considered on a case-by-case basis.

Cross-border access to content

The paradox that 50% of EU citizens shop online but only 15% shop cross-border was raised as an important issue.  The volume of complaints about geo-blocking directed to National Competition Authorities varied significantly.  Opinions differed on the prioritisation of geo-blocking and territorial restrictions generally.  

The discussion on consumer goods focused on the ability to sell across borders.  Legal fragmentation and lack of harmonisation, personalised products and distribution capacity were all identified as reasons why cross-border sales may be limited.  In addition to technical and logistical barriers, selective distribution systems were also considered to play a part in the availability of products in specific regions. 

Geo-blocking occupied a large part of the discussion on online content distribution.  Industry representatives argued that the territoriality identified in the report is not the result of active efforts by distributors to fragment the market.  Instead, it was said to reflect diverging national demands and differences in the level of investment that broadcasters are prepared to make in each territory.  The possibility of pan-European licences was dismissed as being prohibitively expensive as well as having the potential to be anti-competitive. 


Issues surrounding pricing and pricing mechanisms were raised throughout the day.  There was general agreement that the competitive impact of such mechanisms in e-commerce will depend heavily on the level of market power of those imposing the prices.

An interesting point on price discrimination was raised in the context of consumer goods.  If price discrimination is banned, firms adapt by changing their pricing and product strategies, which could harm or benefit consumers depending on the market.  It was noted that vertical restraints could be used strategically by suppliers in the marketplace. 

Pricing mechanisms were also raised as a concern in relation to online digital content.  It was suggested that it might be necessary for the Commission to examine restrictive payment structures in contracts and perhaps regulate the area to ensure a level playing field between mobile platform providers and application developers.

The Commission has invited stakeholders to submit comments on its Preliminary Report by 18 November 2016.  It remains to be seen whether the commentary put forward during the conference and the divergence of industry views will be reflected the Final Report.  Past sector inquiries tend to suggest that the changes between the preliminary and final reports may be few and far between…

EU Court to rule on ability of luxury brand owners to control online distribution

Following a dispute in Germany between perfume and cosmetics manufacturer Coty and one of its retail distributors (Parfümerie Akzente), a German court has sought clarifications on the proper application of the EU competition rules in respect of online distribution to the Court of Justice of the EU ("CJEU").  The case will likely decide how much control luxury brand owners have over distribution of their products on online platforms such as Amazon or eBay.  Whilst not a party to the German case, has recently sought permission to intervene in the case in order to ensure the views of third party online platforms are heard.

The original dispute arose in Germany after Coty sought to prevent Parfümerie Akzente from making sales through Amazon’s market place. 

On 18 July 2016 the Frankfurt Court of Appeals requested the CJEU to provide a preliminary ruling on whether a restriction by luxury brand owners on the use of online platforms is compatible with Article 101 of the Treaty on the Functioning of the European Union (“TFEU”).
Questions to the CJEU

The CJEU has been asked to consider the following:

  • Is the use of selective distribution systems by luxury brand owners to protect the ‘luxury image’ of their products compatible with Article 101(1) TFEU?
  • Is a general ban on online platforms compatible with Article 101(1) TFEU, even if the platform meets the criteria of the selective distribution system?
  • Does prohibiting the use of online platforms constitute a restriction by object under Article 101(1) TFEU as it restricts customer group retailers can sell to and their ability to make passive sales?

For luxury brand owners, the ability to have some control over the retail environment, whether online or offline, is an important consideration when setting up a selective distribution policy.  The nature of the products concerned will also be relevant in assessing whether restrictions are permissible.  Whether Amazon will be able to argue its case will however depend on whether the Court grants it permission to intervene. Demonstrating sufficient interest has historically been a difficult hurdle for companies to overcome, particularly where they have not been involved in the proceedings before the national court.  

Background to online selective distribution

The European Commission Guidelines on Vertical Restraints (“the Guidelines”) allows a supplier operating a (qualitative) selective distribution system to impose equivalency requirement restrictions on authorised distributors in respect of online versus offline sales.  For example, obligations on authorised retailers to meet equivalent criteria in respect of online product presentation and sales advice as applies to their bricks and mortar sales.  However, Coty was seeking to impose an outright ban on the use of third party platforms (such as Amazon marketplace) and no doubt sought solace in the Guidelines which do specifically permit restrictions on sales through third party internet sites where those sites display the platform’s name and/or logo (Guidelines, paragraph 54). 

In a number of Decisions on selective distribution agreements, the German Bundeskartellamt ("FCO") has taken a dim view of prohibitions on online sales.  For example, the FCO’s investigation into Sennheiser’s selective distribution system resulted in the removal of a prohibition on sales on third-party platforms.  In that case Amazon itself was already an authorised distributor but the ruling opened up the possibility of sales being made over third party platforms, for example Amazon Marketplace.  In its investigations into Adidas and ASICS the FCO also found that general prohibitions on sales via third party platforms in selective distribution systems restrict intra-brand competition, and harmed small and medium-sized distributors. 


Brand owners and online retailers will be watching this case with interest as the CJEU will clarify a central question of whether it can ever be acceptable under competition law to restrict internet sales in order to protect brand image.

The e-Commerce sector inquiry gets under way

Yesterday evening, together with a few colleagues, I attended a seminar on the European Commission's e-commerce sector inquiry, which was launched in May this year.  The presentation was given by Thomas Kramler, who heads the Commission task force running the inquiry.
Thomas provided some interesting insights into the scale and scope of the inquiry.  In the UK alone, some 300 companies have received lengthy questionnaires. The recipients are digital content service providers (e.g. video-on-demand providers), online platforms (marketplaces such as eBay and price-comparison sites) and e-tailers (both online-only ‘pure-players’ and ‘hybrid’ (online and bricks-and-mortar) retailers).  

The inquiry will focus on private (contractual) barriers to cross-border trade, in particular in areas where e-commerce is already widely used such as clothing and consumer electronics. It is hoped that the information gathered will complement other portions of the Commission's 'Digital Single Market' initiative, which will examine public barriers to trade arising from copyright rules, consumer protection laws and the like.

The inquiry will in particular examine contractual clauses which create barriers to passive sales, hinder online sales generally (e.g. bans on sales via online platforms such as eBay or Amazon marketplace) and restrict price competition to the detriment of consumers (e.g. classic resale price maintenance (RPM) clauses and most favoured nation obligations (MFNs)).

Thomas admitted freely that the Commission had not actively investigated vertical restraints in the last decade. However, he indicated that the inquiry was likely to lead to enforcement which may clarify the Commission's approach to developments in distribution agreements which have arisen in response to the huge popularity of online commerce.

On timing, Thomas explained that the Commission is hoping to issue a preliminary report in mid-2016.  Following a public consultation, the Commission’s final report is due to be published in early 2017.

For those interested in more detail about the e-commerce inquiry, I’d recommend reading Sophie and Elisabetta’s recent article on the topic published in Competition Law Insight, which you can access here.  You might also want to take a look at Elisabetta’s Cookie Jar post here and Thomas' slides here.  The European Parliament has also very recently chipped in with its thoughts on competition policy in digital markets with this 80-page report.  There is clearly a lot going on in this space and so we will be sure to follow up with further comment. Watch this space.

Most-favoured-nation clauses in e-commerce: a guest economist’s view!

The CLIP Board is delighted to welcome its first guest blog post, which has been kindly written by Dr Avantika Chowdhury of Oxera.  Avantika brings a much-needed economics perspective to the vexed question of MFN clauses.  For those who would like to read more on this subject, Oxera has also recently published an article on the topic in its regular Agenda series.


The use of ‘most-favoured-nation’ (MFN) clauses in e-commerce has recently become a closely debated topic in the antitrust world and is causing competition authorities some headaches. 

For those not too close to the developments, several national competition authorities (NCAs) across Europe have recently been grappling with competition issues in a variety of online markets including online hotel bookings, books, motor insurance and sports good retail. Among these, the hotels and books cases have been creating the most waves so far. Both cases involve MFN clauses, which are essentially agreements between a supplier (e.g. a hotel) and a specific distributor/retailer (e.g. a travel agency) stipulating that the supplier will offer the best available terms to the distributor/retailer. The scope of ‘best available terms’ does vary. For example, an MFN may require the supplier to offer the best available terms among those offered to all other sales channels (a ‘broad’ MFN), or it might require that the terms are best among those offered to specific sales channels or available through the supplier’s own distribution channel (a ‘narrow’ MFN). Although MFNs are not considered anti-competitive per se and in some circumstances will even have efficiency benefits, the authorities are concerned that certain types of MFNs may restrict competition among sellers and/or distributors/retailers. Broadly speaking, the potential concerns are the following.

  • Softening of competition in the downstream market, including anti-competitive foreclosure: This in essence arises from the fact that the distributor (or retailer as the case may be) with an MFN is assured of getting the best terms and hence is protected from competition, including from potential entrants. 
  • Softening of competition in the upstream market: An MFN, depending on its scope, may restrict a seller’s ability to offer selective discounts through specific channels. If very broad MFNs are used by a majority of the upstream and downstream firms, it can reduce the incentive of sellers to reduce prices.   
There is also a concern that MFNs or similar parity provisions can be used as a tool to implement collusive behaviour, especially in online markets where monitoring of rivals is easier. 

In the online hotel booking cases, the focus thus far has been on the potential restriction of downstream competition. More than 10 NCAs have been investigating agreements between hotels and online travel agents such as and Expedia, which potentially prevent/restrict price competition. Interestingly, although the key issue(s) being looked at across various jurisdictions are similar, earlier this summer the Commission expressly decided not to launch its own investigation. It remains to be seen whether this changes following recent developments (e.g. the recent success of Skyscanner in persuading the UK Competition Appeals Tribunal to quash the OFT’s decision for the UK market - see here).  

The concern in the US e-books case, on the other hand, was about collusion. In this case, both the US DoJ and the European Commission investigated Apple and five publishers for price-fixing. While the Commission settled its case, the US investigation culminated in a decision which found that MFNs between Apple and each of the publishers served as a tool to implement explicit collusion that was aimed at stopping Amazon’s discounting of e-books and at increasing the prices above the ‘wretched $9.99’ price. It is notable that the MFNs, by themselves, were not found to be anticompetitive in this case (see US District Judge Cote’s opinion here, and an excellent summary here). The more recent debates about this market have Amazon under the spotlight, with calls by publishers in Germany and the UK to open a competition investigation into the market (see here). 

So, how do MFNs affect competition? 

The answer to this (fortunately or unfortunately) depends on a few factors, including whether the distributor is acting as an agent; whether the MFN is about wholesale terms,  or retail prices; the breadth of the MFN; the position of the parties to the agreement and the extent of use of MFNs in the market more broadly. 

To illustrate, I will focus below on the specific example of a retail MFN in an agency business model, i.e. where a supplier offers a product to consumers through retailers who merely act as ‘agents’ (with no involvement in price setting) and pays each agent a commission for every product it sells. For example, if a hotel H advertises a room through two online travel sites (Site 1 and Site 2), H will set the prices available through each site (in the figure, these are P1 and P2) and pay a pre-agreed commission to each (C1 and C2) based on their bookings. Suppose also that an MFN between H and Site 1 stipulates that H cannot advertise the same room for a lower price through an alternative travel site (e.g. Site 2) or even through H’s own website (i.e. it is a ‘broad’ retail-level MFN). 

Example of retail MFNs in an agency model

Such a broad MFN could restrict competition in a number of ways. First, it can reduce the incentive of Site 1 to compete for reduced commission rates. This is because, in the absence of the MFN, H has the incentive to ‘reward’ the site that offers the lowest commission rate by offering to advertise the lowest prices through this site to encourage sales. However, the broad MFN prevents H from ‘rewarding’ low-commission sites (e.g. Site 2) without extending the ‘reward’ to Site 1.. Hence, in presence of a sufficiently broad MFN, Site 1 will not be concerned about its competitiveness in the retail market even if it increases its commission. This in turn raises the likelihood of consumer harm, on the presumption that higher commissions ultimately feed through into higher retail prices.

MFNs can also restrict competition by undermining market entry and expansion. For example, a new travel site that wishes to offer lower commissions to H in order to be able to advertise lower prices to consumers and gain market share, will not be able to do so without facing a matching low price from Site 1. Hence low-cost/low-price entry and expansion may be foreclosed. Existing literature suggests that the larger the party (or parties) with the MFN(s) in place, the more likely the foreclosure effects. Given that innovation in e-commerce often arises from new business models, there is therefore a broader concern regarding potential dampening of innovation in e-commerce. 

It is worth noting, however, that some recent academic literature (for example, see here) shows that in certain situations, retail MFNs increase incentives to enter due to the increased profits available (this occurs, for example, when commissions are based on profit sharing and when an entrant’s business model is similar to the incumbent’s). It is also notable that there has been little assessment of the actual benefits of MFNs, although that they exist is accepted by economists and authorities (see, for example, the DoJ’s workshop here). One of the key benefits of MFNs is to prevent hold-up of investments by retailers/agents, because MFNs, by preventing the supplier from offering better terms to other retailers and/or undercutting via the supplier’s own sales channels, can prevent others ‘free-riding’ on a specific retailer’s investment (think of eBay and consumers using its reviews to make an informed decision but ultimately buying through another platform or through the supplier’s own site which offers lower prices). MFN clauses can also benefit consumers directly by, for example, allowing retailers to advertise their ‘lowest price offers’, and hence reduce consumer search costs. However, the real question is whether such efficiency arguments hold in specific online markets.  

All in all, lots of questions, not so many answers. The hotels investigations by the various NCAs will hopefully provide some answers quite soon. Now let’s just hope they come up with similar answers… 

Avantika Chowdhury, Oxera

The views expressed here are solely those of the author and do not necessarily reflect those of Oxera

'Care'-ful with know-how and trade marks

Recent developments (in particular the Motorola / Samsung decisions relating to the use of standard essential patents, alluded to on this blog here) may suggest that competition law and IP are unhappy bedfellows, with the former hampering IP right holders' ability to obtain injunctive relief in respect of their patent rights.  

Last week's judgment by Mr Justice Henderson in the High Court provides something of a corrective. In Carewatch Care Services v. Focus Caring Services et al, a competition law defence was raised in respect of a claim that the defendants had breached post-termination restrictions in a care home franchise agreement.  

The raising of 'euro-defences' in general commercial litigation is sometimes viewed as something of a try-on. Generally, it is all too rare to see the limits to the competition rules, with competition authorities all too rarely giving reasoned analysis as to why certain agreements or practices do not infringe.

Here, there was no criticism of Focus for having raised the competition law defences, but those defences did not hinder the claimant’s enforcement of the contractual restrictions.  Applying Pronuptia de Paris, as suitably adjusted for a services, rather than a distribution, franchise, Henderson J robustly dismissed those defences. He particularly emphasised the need for the franchisor to have the ability to protect its know-how and reputation in a setting characterised by the intensely personal relationships between carer and care-home resident - to do otherwise would be to allow the former franchisee to benefit from the knowledge imparted to it by the franchisor to set up in competition with it.  An injunction restraining breach of the post-termination restrictions was therefore allowed.

Sophie Lawrance