Another successful round for the CMA
The Court of Appeal confirms that an absolute online sales ban imposed by a supplier on its authorised retailers is illegal.
Introduction
The Court of Appeal (the CoA") has now issued its judgment, dismissing Ping's further appeal (1) against the CMA's 2017 competition law infringement decision and the imposition of a £1.25 million fine and confirming that Ping's absolute online sales ban does infringe UK and EU competition law.
Ping, the manufacturer and distributor of golf clubs and other golfing equipment and clothing, operates a selective distribution network throughout the UK. Under Ping's Internet Sales Policy (the "ISP"), its authorised retailers have been prohibited from selling its golf clubs online.
The CMA had concluded that Ping's ISP amounted to a restriction of competition 'by object' under Chapter I of the Competition Act 1998 and Article 101 of the TFEU and that there was no objective justification for the absolute online sales ban which would negate this 'by object' conclusion. It had acknowledged that, through its ISP, Ping had been pursuing its legitimate commercial aim of promoting custom-fitting of its golf clubs; however, it also considered that this could have been achieved through less restrictive means than implementing an absolute online sales ban. The CMA concluded that the ISP did not satisfy the criteria for exemption from the Chapter I and Article 101 prohibitions.
Although certain aspects of the CMA's approach to its legal analysis were rejected by the Competition Appeal Tribunal ("the CAT") during the 2018 appeal (2) brought by Ping, the CAT did uphold the CMA's infringement finding. It also reduced Ping's fine from £1.45 million on the grounds that the CMA had been wrong to conclude that the involvement of a director in the infringement was an aggravating factor for the purposes of setting the level of the fine in this case.
Ping had appealed the CAT's judgment to the CoA, disputing that its ISP constituted an infringement 'by object', which negates the need for an analysis of the actual effect on competition before determining that there is a competition law infringement. It argued that its ISP had an objectively legitimate and pro-competitive aim of promoting the custom-fitting of its golf clubs, which ensured that customers bought the most suitable golf clubs to optimise their game and, thus, improved the quality of the product purchased and protected the Ping brand.
The CoA confirmed that there is "a body of case law and decisional practice" establishing that, for the purposes of Article 101 TFEU, the imposition by a supplier of an internet sales ban on its authorised dealers in a selective distribution network does reveal "a sufficient degree of harm to competition" so as to constitute a 'by object' infringement. An absolute prohibition on internet selling amounts to a ban on passive sales. The CoA reiterated the need for such a restriction to be examined in the economic and legal context in which it operates and referred to the European case law establishing that a restriction can amount to a 'by object' infringement even if it pursues other legitimate objectives.
The CoA held that the CAT had been correct in concluding that there was nothing in the economic or legal context in which Ping's ISP operated which negated the ISP being a 'by object' infringement. Despite Ping's assertion to the contrary, the CAT had taken into account the fact that Ping operated a selective distribution network and that there is inherently a certain degree of restriction on intra-brand competition when operating a legitimate selective distribution network. For example, a supplier is entitled to specify relevant, qualitative criteria for retailers seeking to participate in its distribution network and to prohibit its authorised retailers from selling to other retailers outside the network. The CAT had correctly considered whether the ISP went further than "what was generally regarded as a necessary and legitimate diminution of intra-brand competition". The CoA confirmed that the competition rules do not grant manufacturers freedom to set, as they see fit, the terms on which retailers along the distribution chain should market their goods to consumers.
The ISP restricted competition in two main ways. Firstly, it limited the ability of authorised retailers to sell Ping golf clubs to customers outside of the locality of their store and, thus, to compete against each other for the sale of Ping golf clubs to consumers anywhere in the UK and beyond. Consequently, there was also a diminution in price competition as customers could not simply purchase the golf clubs from the retailer in the UK or EU offering the best value to them, but would be limited to the prices offered by those retailers whose stores the customers could visit. The absence of the ability to complete an online purchase of Ping golf clubs also limited the ability of consumers to use online comparison tools to find the best available deal.
The CoA also dismissed the appeal against the fine imposed. Ping had sought to argue that only a nominal fine should have been imposed and that the CAT's finding that Ping had not intentionally, but only negligently, infringed competition law should have warranted a specific fine reduction.
What does this Judgment Mean?
Ping will now need to consider carefully how to adapt its ISP in order to comply with this judgment and competition law. Ping is not prevented from continuing to promote, or indeed from requiring its authorised retailers to promote, custom fitting, but must find other ways of achieving this without resorting to prohibiting online sales.
This judgment serves as a further warning to manufacturers and also retailers as to the importance of internet selling and how a complete ban on internet selling is a serious breach of UK and EU competition law. As the CMA commented in its press release following the judgment:
"This sends a clear and important message: companies that try to stop people from shopping online for their products could be breaking the law. We are determined that people should be able to shop around and enjoy the benefits of competition from online shops as well as in-stores."
Although the CMA has only taken action against the manufacturer in this and certain recent Resale Price Maintenance cases, retailers, who agree not to sell online at the request of, or to sell at a minimum price set by, their supplier in breach of competition law, do run the risk of enforcement action being taken against them in the future.
(2) Ping Europe Limited v Competition and Markets Authority [2018] CAT 13