A wholesaler who prevents “price dumping” by his dealers may thereby breach the cartel prohibition. This has been established by the interim proceedings judge of the District Court of Amsterdam (Court) in a judgement dated 18 December 2020.
Trek Benelux, a wholesaler of road bikes, city bikes, mountain bikes and accessories of the Trek brand, has 255 dealers in the Netherlands. Trek Benelux’s general terms and conditions require these dealers to hand over a bicycle sold to a consumer “in a fully assembled state physically in the shop or any other permitted location“. This obligation also applies if the bicycle has been offered via the Internet (recital 2.5).
On 17 October 2020, a dealer of Trek Benelux sold a current model Trek bicycle on his website to a customer at a discount of 23.4% off the recommended retail price. In spite of the aforementioned obligation, the bicycle was sent by the dealer completely unassembled. Upon receipt, the customer asked another Trek Benelux dealer to mount the bicycle. In Trek Benelux’s opinion, the first dealer had violated the General Terms and Conditions for the second time. Consequently the dealership was terminated with immediate effect on 29 October 2020. The dealer did not leave it at that and took the dispute to the Court.
Judgement of the Court
The dealer argued that the termination of his dealership was in violation of (i) the cartel prohibition and (ii) reasonableness and fairness. Trek Benelux disputed this.
Termination in violation of the cartel prohibition
According to the Court, Trek Benelux and the dealer have a vertical relationship with each other. Therefore, whether the contested conduct of Trek Benelux is permissible from a competition law perspective, must be answered on the basis of the European and Dutch cartel prohibition “and the Vertical Block Exemption Regulation (VBER) that applies on the basis thereof (recital 4.4).
Selective distribution system
The Court finds that the dealer network of Trek Benelux has characteristics of a selective distribution system as referred to in the Pierre Fabre judgement. Although Trek Benelux had not “explained” that the conditions mentioned in this judgement were fulfilled, the Court held that a judgement on the qualification of the dealer network could be omitted. After all, the dealer had argued that the obligations imposed by Trek Benelux were “hardcore restrictions” within the meaning of the VBER (recitals 4.8-4.10).
A reliance on the VBER only succeeds if the market share of both the “supplier” and the “buyer” does not exceed 30% of the relevant market on which the contract goods are sold and purchased respectively. Since the dealer had not made it plausible that both thresholds were exceeded, the Court assumes that the VBER applies (recitals 4.11-4.12).
The dealer’s discount from the recommended retail price was characterized by Trek Benelux as “price dumping“. Trek Benelux argued it was entitled to prohibit this. It would not fit “the high segment of the Trek bicycles” (recitals 4.16). According to the Court, Trek Benelux had not “explained that a certain price level is necessary to maintain the brand image of Trek bicycles or to acquire or protect a market share for a new product, which could constitute permissible grounds for restricting the freedom of its distributors” as meant in the Coty judgement. As Trek Benelux wanted the dealer to stick to the recommended retail prices nevertheless, this requirement constitutes a “hardcore restriction” within the meaning of Article 4(a) of the VBER. In the absence of a plausible justification, the resale price maintenance intended by Trek Benelux is null and void. Therefore, the discount granted by the dealer was no reason to end the distribution relationship (Section 4.17).
Assembly and physical delivery obligation
The assembly and physicaldelivery obligation restricts the dealer in his ability to sell Trek bicycles online. According to the Court, this restriction may fit into a selective distribution system and may be justified by the quality requirements applied in the context of this system. The “most expensive Trek bicycles” are “made of lightweight and fragile materials, and the latest technology it [the manufacturer] applies requires accurate assembly and adjustment“. It is likely that “this requirement will entail a restriction on active or passive sales to the end user“. This restriction is, analogously to the Coty judgement, “justified by the segment of bicycles that [Trek Benelux] supplies and the luxury brand image that [Trek Benelux] aims to maintain“. According to the Court, the assembly and physicaldelivery obligation will therefore most likely be deemed permissible by the Court hearing the substance of the case (recitals 4.21-4.22).
Fairness and reasonableness
Although the dealer had breached the assembly and physicaldelivery obligation, Trek Benelux should not have terminated the dealership with immediate effect. After all, apart from a short interruption in 2011, the parties had been contracting parties for 30 years. Moreover, the dealer had only violated the General Terms and Conditions twice. The immediate termination was therefore, in the opinion of the Court, in conflict with reasonableness and fairness.
A selective distribution system that meets the so-called ‘Metro criteria‘ (recitals 20-21) is not in breach of the cartel prohibition. In the Coty judgement, the EU Court of Justice (ECJ) confirmed that restrictions within a selective distribution system that are necessary to
maintain the luxury image of the contract products are not in conflict with the cartel prohibition. In this light, it is striking that the Court explicitly left open the question whether the dealer network of Trek Benelux meets the “Metro-criteria“. The contested obligations of Trek Benelux are directly tested against the VBER. Normally, this test only comes into play at the moment it is established that the “Metro-criteria” are not met (Coty judgement, recital 59). Finally, in the negative case it is examined whether a reliance on the statutory exception is successful.
Reversal of the burden of proof
Based on the ANVR/IATA judgement, the dealer would have had to prove that Trek Benelux’s dealer network does not meet the “Metro-criteria“. If he had succeeded in doing so, it would have been up to Trek Benelux to prove that the challenged obligations were exempted from the cartel prohibition on the basis of the VBER or the legal exception. By skipping the first step of the aforementioned test, the dealer had to prove that the VBER was not applicable. The Court therefore reversed the burden of proof on this aspect.
The District Court believes it can be deduced from the Coty judgement that suppliers in the context of a selective distribution system:
|(i)||may prohibit “price dumping” by distributors, for example if it is necessary to maintain the brand image (paragraph 4.17)|
|(ii)||distributors may require the contract goods to be physically delivered to the customer fully assembled (paragraph 4.22)|
The question is whether this can be deduced from the Coty judgement. That judgement concerned an online ban on marketplaces, which is different from the ban on price dumping. The online marketplace prohibition from the Coty judgement shows some similarities with the assembly and physical delivery obligation from the present case. In both cases, the distributor is restricted in its online sales opportunities. However, in the present case the technical high quality of the “most expensive Trek bicycles” seems to have been the decisive factor. This aspect was not addressed though by the ECJ in the Coty judgement.
This brings me to the Stihl case. Dealers of the German multinational Stihl, a producer of garden tools, were not allowed to sell to novice users equipment that could be classified as dangerous without a “personalised delivery“, i.e. handover and instruction by the dealer. This obligation did not meet with objections from the German, Swedish and Swiss competition authorities. The French competition authority saw it differently. In a decision of 24 October 2018, a fine of EUR 7 million was imposed on Stihl for the same obligation. This decision was largely confirmed by the Paris Court of Appeal in a judgement of 17 October 2019. So, food for thought!
* Photo by Daniel Salcius via www.unsplash.com