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Hampering a driver to competition: CMA brings proceedings against golf club manufacturer for restricting online sales

11 July 2016

In a serious reminder to businesses regarding the issue of restricting sales of consumer products by online retailers, the UK’s Competition regulator, the Competition and Markets Authority (“CMA”) on 9 June 2016 announced that it has issued a formal Statement of Objections (“SO”) against Ping Europe Limited (“Ping”) a major manufacturer of golf balls, clubs and other equipment. This announcement, whilst reflecting only provisional findings (the details of which remain confidential), comes on the back of a press release in October 2015 revealing that the CMA was initiating initial investigations into suspected malpractice in the sports equipment sector.

Web sales bans can become tangled in the law!

The CMA has not published substantive detail as to the precise nature of the findings which it has provisionally reached in relation to Ping’s alleged conduct, but it has confirmed that the CMA’s statement of objections concerns a prohibition which Ping has been operating against online sales of Ping golf clubs. This is the provisional finding which the CMA has arrived at following its review of a series of responses it has received to requests for information from Ping.

As the responsible CMA Senior Director in charge of the case, Ann Pope, is quoted as stating in the CMA’s press release, “traditional businesses operating through high street shops face intense competition from online sales”, Ms Pope adding that “the internet is an increasingly important distribution channel… [which] drives competition among rival retailers because they compete to attract consumers who are using the internet to shop around for the best deals”. With the increasing recognition among regulators at an EU and UK level of this fact, so scrutiny on companies’ practices in relation to online distribution has intensified.

The European Commission’s (“Commission”) Guidance on Vertical Restraints (2010) recognises online sales as a form of “passive” selling (i.e. that which responds to unsolicited orders or enquiries from customers) and that, without objective justification, outright restrictions on sales by online resellers and distributors risk being deemed a so-called “hard-core” restriction on competition that cannot benefit from the Commission’s safe harbour for vertical agreements under its 2010 Block Exemption Regulation. Instead, the guidelines lay down certain guiding principles that should be followed whenever seeking to govern online versus ‘bricks-and-mortar’ sales, which notably are limited to prescribing only that a certain minimum volume (but not percentage) of sales must be made ‘off-line’ and to maintaining at least one bricks-and-mortar outlet. What the Guidelines confirm is prohibited is to ban online sales or to make supplies of goods for resale to online distributors subject to higher prices or other non-equivalent terms.

Indeed, on 21 June 2016, the CMA issued guidance (including a short video) for businesses on avoiding any unlawful restrictions on discounts by online retailers generally.

Online selling is seen as central to competition, so very good reasons are needed to restrict it

The rationale behind the prohibition on online sales bans is that with the internet having become a favoured mode of purchasing for many consumers, to restrict sales of certain product lines to only ‘bricks-and-mortar’ stores would represent a significant reduction in the competitive pressure which the retailers of those goods would otherwise face, in turn encouraging higher prices, reduced choice and, potentially, reduced incentives for innovation and improvements in product quality.

As such, the general position under Competition law is that online sales restrictions, whether outright or not, will face the potential for complaints and subsequent regulatory enforcement – with the attendant risk of fines of up to 10% of worldwide group turnover - and/or private claims by online retailers that they are unenforceable and that a court should therefore order that products be sold to them (and possibly award damages for lost profits). That is, unless the company seeking to impose a ban on internet sales can provide objectively justifiable reasons why it is doing so, which even then must relate directly to the product and its inherent features and demonstrate that the step of banning sales online is “indispensable” to viably running its business and goes no further than is strictly necessary in order to pursue the relevant purpose – for instance, with certain sanitary or medical products, to ensure safe use by consumers.

In line with this approach, Ms Pope has further remarked that, “we will now consider any justifications put forward by Ping for the alleged conduct”.

What happens next?

The CMA’s SO, which will not be published, serves as notice to Ping of a proposed decision against them that they have committed an infringement of Chapter I of the Competition Act 1998 (which contains the prohibition on anti-competitive agreements). As the CMA clarifies in its press release, an SO is provisional only and Ping will have the opportunity to make written and oral submissions regarding the allegations levelled against them in the CMA’s SO. Third parties who requested a non-confidential copy of the SO by 23 June 2016 will also be invited to comment provided that they are “in a position materially to assist the CMA in testing its factual, legal or economic arguments”.

The CMA estimates that it will address representations between August and September 2016, before then deciding whether to issue a formal decision.

Subject to those representations, Ping stands to receive financial penalties of up to 10% of its group worldwide turnover, as well as potential private actions from affected retailers.

If you consider you may be affected by the prohibition on online sales bans and wish to seek advice on your position, please do not hesitate to contact the EU & Competition team.