Manufacturers are increasingly including clause in distribution agreements which ban distributors from selling their products on internet platforms such as eBay and Amazon. We take an in-depth look at the legality of such actions.
Distribution agreement in dispute
We recently reported on a case in which a manufacturer of bags attempted to ban a retailer from selling its products on internet platforms such as eBay and Amazon.
As it is becoming increasingly common for manufacturers to attempt to prevent the online distribution of their products, this article takes an in-depth look at the legal position.
German competition law vs German trademark law
When it comes to answering the question whether manufacturers can prohibit the sale of their branded products over internet platforms such as eBay or Amazon two competing branches of law must be considered: competition law and trademark law.
German competition law is largely shaped by European Union rules and is designed to promote online trade. It advocates free competition underpinned by competitive prices and a wide range of products. Under these rules manufacturers are prohibited from reaching agreements with other market actors which noticeably impair market competition; this includes prohibiting the sale of products over online platforms.
German trademark law seeks to protect the value of brand-name products. This is because such products are often painstakingly developed by producers over a number of years. The legislative regime extends to being able to protect the image of a product from degradation through the selection of particular distribution channels. Through trademark law, manufacturers therefore retain a certain degree of discretion when it comes to the sale of their branded products. Producers are permitted, for example, to determine how their products should be presented on the internet in order to maximise sales.
Whether a manufacturer breaches competition law by banning a retailer from selling products on the internet depends on the type of distribution agreement that exists between the parties. The two types of distribution agreement which will be discussed here are those pertaining to sole distribution and selective distribution.
Under sole distribution agreements, a manufacturer allocates a particular area or group of customers to a distributor. The manufacturer is generally not permitted to restrict to the sale of products over the internet.
It can, however, prevent the distributor from actively appealing to customers which do not belong to the particular group. This means the active advertising of products can be restricted.
The European Commission takes the view that offering the products for sale over the internet is a passive and not active activity. Therefore, sole distributors cannot be prevented from selling products over the internet.
Under selective distribution agreements, a manufacturer selects a network of distributors based on specific criteria. Through these criteria a manufacturer can maintain a qualitatively high standard. Elements include choosing distributors with technical expertise, highly-trained employees or specialist infrastructure.
A manufacturer is generally free to regulate the distribution relationship in the agreement. Aspects it may choose to determine include:
- the kinds of internet platforms a distributor may use to sell a product
- the criteria a website must conform to before products can be sold on it
- whether retailers which sell exclusively online may distribute its products
- whether to restrict the number of a products a distributor may sell to a particular customer; thus preventing products being delivered to unauthorised retailers.
Such criteria and restrictions may never be arbitrary. Indeed, the manufacturer must be able to demonstrate that there is a business need and that the restriction is necessary in order to protect its trademark rights.
An example of an arbitrary restriction would be where a discount retailer is permitted by the producer to sell the product, but there exists a restriction on selling it via eBay or Amazon.
It should be noted that trademark law allows restrictions on online selling only under a selective distribution agreement. Nevertheless, blanket prohibitions on selling products over the internet are generally invalid. Competition law considerations therefore play a predominant role.
The German courts are divided as to how to answer the question of whether a ban on selling via internet platforms is legal.
There are a number of noteworthy judgments to consider:
1. School bags
The first case comes from an appeal court in Berlin (case ref.: 16 O 729/07).
It concerned a manufacturer of school bags. In its distribution agreement, the manufacturer restricted the sale of its products on internet platforms like eBay or Amazon, arguing that the high standard of the brand would be damaged if products were sold on the internet.
The judges held that the prohibition amounted to a restriction in competition, as it removed retailers’ freedom to trade.
The judgment has not yet been published in written form. However, the manufacturer has already indicated that it intends to appeal to Germany’s Federal Court of Justice. It cannot be ruled out that the case will be sent to the European Court of Justice for a preliminary ruling.
2. Sports goods
The second case concerns a manufacturer of sports goods which had prevented distributors from selling products on eBay. The judgment came from the Higher Regional Court of Munich (case ref.: U (K) 4842/08). The court ruled in favour of the manufacturer. It accepted that the manufacturer had a legitimate business interest in restricting the online sale of its products.
The Higher Regional Court of Karlsruhe held that the exclusion of internet auction platforms is legitimate if the website does not conform to a manufacturer’s expectations as to product presentation, brand image representation or advice offered (case ref.: 6 U 47/08). The court remarked that the demands of the product, the level of technical competence and the quality of infrastructure can all be considered when selecting distributors. Consequently, a manufacturer is permitted to place requirements on the presentation of a product.
4. EU case law
EU case law on the matter only offers some clarification. The ECJ has held that sweeping prohibitions on selling over the internet are illegal (case ref.: C-439/09).
The contrary of this would mean that it cannot be ruled out that limited restrictions on selling products over the internet are legal. However, it remains unclear how a limited restriction would operate in practice.
Manufacturer prohibitions on the passive sale of products on the internet are almost always invalid. If a producer intends to restrict the sale of products through the use of a selective distribution agreement, it should ensure that there are solid grounds for doing so. Nevertheless, any restriction in a distribution agreement is also open to challenge and would then be at the whim of the courts’ interpretation. They would consider whether there is a true legitimate business interest in protecting the manufacturer’s trademark rights.
Lawyers at WILDE BEUGER SOLMECKE take the view that prohibiting the sale of a product via individual internet platforms cannot be considered a restriction of competition, as the distribution of products over the internet via other websites remains possible.