On 7 September 2018 the UK Competition Appeal Tribunal (CAT) upheld an infringement decision of the UK Competition & Markets Authority (CMA), confirming that a blanket restriction on online sales imposed by Ping Europe Limited (Ping), a leading manufacturer of golf equipment, was a restriction of competition by object.  Ping had argued that the restriction was necessary to promote or maximise custom fitting of golf clubs. However, the CAT said that the online sales ban prevented consumers from accessing Ping golf club retailers outside their local area and from comparing prices, and significantly reduced the ability of, and incentives for, retailers to compete for business using the internet.

While the CAT upheld the CMA’s finding of an infringement, it considered that the CMA was wrong to treat Ping’s managing director’s involvement in the conduct as an aggravating factor and reduced the fine from £1.45 million to £1.25 million.  According to the CAT, Ping’s case can be distinguished from a “secret cartel”, as Ping thought its policy was legal. The company’s infringement of competition law was negligent rather than intentional and the director’s involvement should not be treated as an aggravating factor.

The CMA considers this to be a landmark judgment, stating that “the internet is an increasingly important sales channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted by manufacturers.”

  1. Background

In August 2017 the CMA fined GBP 1.45 million for preventing its UK retailers from selling its golf clubs online. Ping operates a selective distribution system in the UK whereby it supplies its products only to authorised retailers who meet certain quality criteria. Ping argued that its online sales ban was objectively justified because:

  • it had the legitimate commercial aim of promoting face-to-face custom fitting (a process used to assist the customer in deciding which golf club best suits his/her individual requirements by recording his/her static measurements and then observing his/her swing and testing different clubs and combinations). According to Ping, custom fitting is the best way to optimise its products and enhance consumer choice and quality and cannot be carried out over the internet.
  • it preserved Ping’s brand image – selling non-custom-fitted clubs could lead to inferior products being placed in consumers’ hands, which would harm Ping’s reputation; and
  • the restriction enabled Ping to prevent a ‘free rider’ problem by ensuring that authorised retailers had appropriate incentives to invest in a custom fitting service. It would not be commercially viable for retailers to invest in facilities if a potential customer could obtain a custom fitting in a bricks-and-mortar store and then buy the clubs online.
  1. CMA’s Assessment

2.1    The CMA accepted Ping’s point that promotion of face-to-face custom fitting was a genuine commercial aim. However, it did not accept that the online sales ban was objectively justified and said that Ping could have achieved this aim through alternative, less restrictive means. In particular, the CMA noted that Ping’s competitors did not restrict online sales of custom-fit clubs, and Ping does not impose a similar online sales restriction on its US retailers.

2.2    The CMA considered that an alternative approach to achieve the same commercial aim would have been to permit authorised retailers to sell online if they could demonstrate their ability to promote custom fitting in the online sales channel.  For example, Ping could require its retailers to display on their websites a prominent notice recommending that customers take advantage of custom fitting (offer consumers all of the potential Ping custom fit options on their websites (e.g. through drop down menus when ordering online); and offer personal advice online e.g. through a live chat facility.

2.3    The CMA rejected Ping’s argument that the online sales ban was necessary to address free riding on the basis that all authorised retailers are required to have a bricks and mortar store and commit to providing custom fitting.

3.    CAT Judgment

3.1    Ping appealed the CMA’s decision to the CAT. It argued that the CMA was wrong to find that the online sales ban was disproportionate to its legitimate commercial aim, and claimed that the CMA’s proposed alternative measures would not be practical and would be less effective at maximising rates of custom fitting. The CAT disagreed and held that the CMA was correct to find that the ban revealed in itself a sufficient degree of harm to competition to constitute an object restriction, notwithstanding Ping’s legitimate aim.

3.2    The CAT’s approach as to whether the ban was a restriction by object is interesting. First, it considered whether the online sales ban fell outside the scope of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) altogether (the legal provision that prohibits anti-competitive agreements), as per the criteria set out by the European Court of Justice in the 1977 Metro judgment[1]: the conditions imposed as part of a selective distribution system must be qualitative, be applied uniformly and in a non-discriminatory way, and not go beyond what is necessary.

3.3    If the online sales restriction did not satisfy the Metro criteria, it would be caught by Article 101(1) TFEU. It is then necessary to assess whether the agreement reveals a sufficient degree of harm to competition to be considered a restriction of competition by object within Article 101(1) TFEU. The CMA decided that the ban was a restriction by object unless it was objectively justified. The CAT agreed that the absolute ban on internet sales was a restriction by object.  The ban restricted consumers from accessing a greater number of Ping golf club retailers. In particular, retailers cannot attract consumers located outside their catchment areas to buy Ping golf clubs online by offering better prices or a quality online service.

3.4    The CAT considered whether the online sales ban was proportionate to Ping’s legitimate commercial aim of promoting or maximising custom-fitting. The CAT concluded that it was not, and agreed with the CMA that there were appropriate alternative measures that Ping could have used to achieve these aims, which were less restrictive than the prohibition on online sales.

3.5    Having concluded that the online sales ban was a restriction by object, the CAT went on to assess whether the restriction could nonetheless benefit from an individual assessment under Article 101(3) TFEU, which broadly requires an analysis of whether the pro-competitive benefits of the restriction outweigh any anti-competitive effects. The CAT set out the four conditions that Ping would have to show:

(a) The restriction on online sales must contribute to improving the production or
distribution of goods or contribute to promoting technical or economic progress;

(b) Consumers must receive a fair share of the resulting benefits;

(c) The restriction must be indispensable to the attainment of these objectives; and

(d) The restriction must not afford the parties the possibility of eliminating competition
in respect of a substantial part of the products in question.

3.6    Ping argued that its online sales ban was justified on the basis that it promoted non-price competition, namely the promotion of custom fitting which was to the customer’s benefit. The CAT agreed that the ban marginally increased custom fitting rates of Ping’s clubs. The scale of the benefit attributable to the ban was, however, limited because the ban was not a particularly effective means of increasing custom fitting rates. Further, the CMA’s less restrictive, alternative measures were viable alternatives in the sense that they were comparably effective at achieving the benefits of the ban. The online sales ban could not therefore be seen as indispensable to achieving efficiency. Ultimately, the CAT did not find that the benefits of the online sales ban outweighed the disbenefits to consumers, which include increased inconvenience and reduced choice of retailer. The online sales ban did not therefore benefit from an individual exemption under Article 101(3) TFEU.

3.7    As to the level of penalty imposed by the CMA, the CAT reduced this from £1.45 million to £1.25 million. It considered that the CMA should not have regarded the involvement of Ping’s managing director as an aggravating factor because Ping considered its internet policy to be legitimate and beneficial to its customers. According to the CAT, uplifts in penalty are appropriate in the most reprehensible cases such as secret cartels, where cartelists intend to restrict competition. In this case, the infringement was public and related to a central element of the Ping’s way of doing business. Ping restricted competition law through its negligence rather than with intention.

4.    Comment

4.1    The CAT’s judgment confirms that courts and regulators take a strict approach to restrictions on the ability of retailers to sell online. The judgment is in line with judgment of the European Court of Justice in Pierre Fabre[2], which confirmed that a general and absolute ban on internet sales constitutes a restriction of competition by object. While the CAT does not rule out the possibility of justifying a restriction by object, Ping’s case shows that this will be very difficult to achieve in practice, even where a manufacturer is pursuing a legitimate commercial aim.

4.2    One may question whether a similar case would be decided differently in a post-Brexit world (assuming a “no deal” Brexit scenario”). This seems unlikely, as both the CAT and CMA in this case have made it clear that the online sales ban, by its very nature, restricted competition between retailers through an important sales channel, both within the UK and throughout the EU. Given that the CMA has frequently stated that preserving competition in online and digital markets is a key priority, it is unlikely that the UK will take a more relaxed approach to online sales restrictions once it leaves the EU.

___________________________________________________________

[1]  Case 26/76 Metro SB‑Großmärkte v Commission EU:C:1977:167
[2]  Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi. ECLI: EU: C:2011:649.