National Competition Report Q1 2018 – Germany
April 1, 2018
Federal Court of Justice Confirms Illegality of Edeka’s Unilateral Requests for “Wedding Rebates”
On January 23, 2018, the FCJ issued its long awaited judgment on the prohibition of dominant firms against demanding advantages without an objective justification, also referred to as “tapping” (“Anzapfverbot”), under the Act Against Restraints of Competition (Sec. 19(2) No. 5 GWB).1
Factual Background
In 2008, Edeka—Germany’s largest supermarket operator—acquired all of Plus’s stores (a discount retailer). Following the takeover, Edeka unilaterally demanded additional favorable conditions (“wedding rebates”) from more than 500 suppliers, which included: the same preferential conditions that suppliers had granted Plus (essentially “cherry picking” where Plus’s conditions were better than its own), rebates on entire product portfolios, and “partnership reimbursements” for the renovation and modernization of the former Plus stores. The FCO initiated an investigation in 2009 following a complaint from the German Brands Association (“Markenverband”). This investigation focused on Edeka’s requests to producers of sparkling wine as the FCO considered that these concerns reflected the issues faced by all affected suppliers.
Legal/Competitive Assessment
In 2014, the FCO found that Edeka’s demands constituted an abuse of economic dependence. However the decision was overruled by the Düsseldorf Court of Appeal (“DCA”) in 2014.2 The DCA’s ruling concentrated on three of Edeka’s demands in particular: (i) “cherry picking” of conditions; (ii) “cherry picking” of payment terms; and (iii) “partnership reimbursement.” The DCA held that the requested advantages were objectively justified and Edeka’s conduct was not abusive.
The FCJ has now overturned the DCA’s ruling and provided additional guidance on the legality of “tapping.” The FCJ clarified that German law prohibits “tapping” by dominant undertakings and undertakings with “relative market power” vis-à-vis undertakings that depend on their purchases/supplies (according to Sec. 20(2) ARC).3 The FCJ explained that dependence is not determined based on the size of the undertakings involved, but instead on whether the potentially dependent undertaking has alternative sources of supply/sales channels. The FCJ found that the producers of sparkling wine had no alternative customer equivalent to Edeka in terms of compensation. Further, the FCJ determined that the prohibition does not require an actual abuse of dominance. (This has now been clarified by the German legislator as part of the recent ninth amendment to the ARC). A request by a dominant undertaking for an advantage without an objective justification or an appropriate quid pro quo is presumed by law to be based on the buyer’s assumption that it can impose the requested advantage in whole or in part because of its market power. The FCJ found that there is a rebuttable presumption that the request is not objectively justified when the return offered for the benefit is clearly disproportionate (“Leistungsgerechtigkeit”). The assessment of proportionality must be based on an overall assessment of all conditions, i.e., the proportion of all benefits claimed and everything that has been offered in return by the firm making the request.
For this assessment, the FCJ set out (non-exhaustive) factors such as the quantity of goods/services purchased, services provided in return, and any other economic justifications of the requesting undertaking. The FCJ added that the prohibition requires only the request of an unjustified benefit, and that it is not necessary to prove that the disproportionate request eventually bears out. Finally, the FCJ considered it irrelevant that Edeka considered its own request negotiable, and that it had used the request as a starting point for further negotiations with its suppliers.
Implications
The ruling is expected to have considerable impact on the negotiation strategies of (potentially) dominant firms, in particular for large retailers such as Edeka. To date, it has been common practice for large purchasers to commence commercial negotiations with demands for excessive benefits, premised on an implicit understanding that the parties would ultimately agree on terms that are significantly more reasonable. The FCJ’s ruling has now clarified that demands for benefits in purchasing negotiations may be illegal, unless the (powerful) procuring firm offers an appropriate quid pro quo from the outset.
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[1] FCJ, Decision of January 1, 2018, KVR 3/17 (“Hochzeitsrabatte”), available in German here.
[2] FCO, Decision of July 3, 2014, B2-58/09; and DCA, Decision of November 18, 2015, Kart 6/14.
[3] In this article, both dominance and dependency are referred to as “dominance.”
Federal Court of Justice Confirms Unlawfulness of Asics’s Prohibition on Advertising on Price Comparison Websites
On December 12, 2017, the Federal Court of Justice (“FCJ”) confirmed prior decisions of the German Federal Cartel Office (“FCO”) and Düsseldorf Court of Appeal (“DCA”)1, ruling that a clause in Asics’s selective distribution agreements that prohibits merchants from supporting price comparison websites is anticompetitive and a hardcore restriction under the Vertical Block Exemption Regulation (“V-BER”).2
Factual Background/Previous Decisions
Asics, the market leader for running shoes in Germany, established a selective distribution system for its products in 2011. Among other things, Asics prohibited its retailers from using online price comparison websites such as idealo.de or billiger.de. The FCO found in 2015 that this general ban against using price comparison websites constituted a restriction of competition by object, arguing that Asics’s main purpose was to limit price competition and competition among retailers. As a result, Asics modified its selective distribution system by eliminating several provisions to which the FCO objected, and lodged an appeal with the DCA. On appeal, the DCA confirmed the FCO’s decision. Asics further appealed to the FCJ against the DCA’s judgment,3 but did not prevail.
The FCJ’s Ruling
The FCJ considered that a full ban on support price comparison websites is a clear infringement of Article 101 TFEU and a hardcore restriction that is not exempted under the V-BER. The court did not assess this issue in-depth, but stated that the anticompetitive character of such a prohibition was obvious and that it was not aware of any published views stating the opposite. The FCJ also mentioned the European Commission’s 2017 report on the results of the e-commerce sector inquiry.4 In the FCJ’s view, the European Commission also considered that a per se prohibition of this kind qualifies as a hardcore restriction.
Finally, the FCJ refused to refer the case to the European Court of Justice, because it had no doubts on the hardcore nature of this restriction, even though it conceded that the European Court of Justice had not analyzed such a prohibition in Pierre Fabre Coty.5 The FCJ found that price comparison websites are crucial for merchants to be discoverable online among their many competitors. In Coty, which was decided a few days earlier, the European Court of Justice held that distributors of luxury goods in a selective distribution system may impose restrictions on their merchants in relation to sales via third-party online platforms.6 The FCJ held that the European Court of Justice’s case was different from the case at hand: first, Asics does not sell luxury goods and, second, Asics’s selective distribution system was more restrictive, as it prohibited its merchants from supporting price comparison websites, from using the brand’s logo on third-party platforms, and from selling Asics products on third-party platforms that depicted the logos of such platforms.
Implications
The FCJ’s judgment confirms the FCO’s generally critical view with regard to any online sales restrictions within selective distribution systems. In this respect, the FCO adopted a somewhat different view than the European Court of Justice in its Coty judgement (although the FCJ is careful to point out the differences between the two cases). The FCO’s previous track record of cases regarding online sales restrictions means that it will be interesting to see how the authority navigates its enforcement between these two judgements in the future. Suppliers operating or planning to establish a selective distribution system should, however, be mindful of this decision.
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[2] FCJ, Judgment of December 12, 2017, KVZ 41/17.
[3] The DCA did not grant leave for appeal to the FCJ on points of law, but the parties are entitled to appeal against denial of leave for appeal with the FCJ.
[4] Report from the Commission to the Council and the European Parliament, Final Report on the E-Commerce Sector Inquiry, COM(2017) 229 final of May 10, 2017. See also Cleary Gottlieb Alert Memorandum of May 24, 2017, available here.
[5] Pierre Fabre Dermo-Cosmétique (Case C-439/09) EU:C:2011:649; and Coty Germany (Case C-230/16) EU:C:2017:941.
[6] See European Competition Report, October–December 2017, pp. 8–10; and Cleary Gottlieb Alert Memorandum of January 8, 2018, available here.
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