Pamela Abbott: EU allows the luxury of some control for upmarket designers

Published on Thursday 29 July 2010 17:33

LOTS of us will have snapped up a bargain in the summer sales. However, those who like to splash the cash on discounted luxury brands may not have been so fortunate. To protect the status of their brands some do not put their goods on sale or have outlet stores.

Manufacturers in the luxury market justify their high price tags not only because of the quality of their products, but also because of the prestige their goods carry thanks to the image they have carefully crafted over decades.

New competition regulations going through Europe were going to remove certain legal restrictions so that anybody would be able to sell such luxury products online, even if they could not sell them in their shops.

This, the luxury brands argued, would allow online retailers to make profits simply by piggybacking on all the hard work that has gone into crafting the brand and could, if sold on a website they didn't approve of, degrade the brand's image.

Once the draft regulations were published the luxury brands made their feelings known - Chanel designer Karl Lagerfeld even met the European Competition Commissioner to present the their case - with the purpose of securing greater control for such brands over how their products are sold online. But it is the designer companies that will be happier with Regulation 330/2010 (the "Regulation") which came into force on 1 June this year.

So, what is the new law all about? One of the chief drivers behind the establishment of the EU was the creation of a single market. This has meant that competition law, which regulates the exercise of market power by companies, governments and other entities, has been a cornerstone of the political body.

Competition encourages companies to provide products consumers want, be innovative and keep prices down. For these benefits of competition to exist, suppliers have to be subject to pressure from rival suppliers.

For this reason EU competition law prohibits, agreements between two or more firms which restrict competition, including those to agree to share the market or fix prices. There are certain "block exemptions" from this prohibition including some so-called vertical agreements.

A vertical agreement is one between companies at different levels of the supply chain from one another (for example, a designer, a manufacturer, a distributor and a retailer) the purpose of which relates to buying or selling goods or services. Provided that a vertical agreement without any "hardcore restrictions" is in place and the supplier's and also the buyer's market shares do not exceed 30 per cent, that vertical agreement will benefit from the block exemption.

The Regulation updates the regime governing when the block exemption will apply to vertical agreements. Two areas are of particular interest to the luxury brands in the context of online sales. Firstly, while suppliers must allow authorised distributors to sell online and cannot charge more for products to be sold in that way, the Regulation allows brand owners a degree of quality control; they can (1) impose certain minimum standards for internet distribution sites; (2) prevent customers from visiting the distributor's website through a website hosted by a third party; and (3) insist that a distributor have one or more physical shops or showrooms.

Secondly there is a general rule that a supplier can restrict a buyer from "actively" pursuing sales into an area or to a group of people over which the supplier or another buyer has exclusivity, but cannot prevent "passive" sales - those made as a result of unsolicited enquiries. This rule remains unchanged, but the guidance note to the Regulation says, for example, that sending unsolicited e-mails to customers and advertising online to a specific group of customers are forms of active selling which may be prevented.

It is not just luxury goods businesses who can benefit from these and other changes made by the Regulation. There is now a one year transitional period, an ideal opportunity for businesses that form part of a supply chain to consider whether their supply and distribution agreements are competition law friendly and whether they can benefit from the new rules.

Pamela Abbott is a solicitor with CCW Business Lawyers