The prohibition on online third party platforms applied by Nike European Operations Netherlands (NEON) within its European selective distribution system does not violate the European ban on cartels. The Amsterdam District Court (District Court) came to that conclusion in a judgment of 4 October 2017. According to a judgment of 14 July 2020, the Amsterdam Court of Appeal (Court of Appeal) concurred.
Both the District Court’s and the Court of Appeal’s judgements have been withdrawn on www.rechtspraak.nl for unknown reasons. This blog is based on the text of the judgments as published on www.uitspraken.nl and on www.navigator.nl respectively. It is assumed that both texts are identical to the texts withdrawn by both Dutch courts.
The American Nike group produces and distributes sportswear, sports shoes and related articles. NEON belongs to this group and is responsible for the distribution of Nike products in Europe.
Action Sport operates a sports goods shop in Bagheria (Italy). Since 2001, Action Sport has been a selective distributor of NEON. By letter dated 16 November 2015, NEON dissolved the distribution relationship because Action Sport sold Nike products through Amazon. The problem: Amazon was not an “e-tailer” authorised by NEON. By selling Nike products through Amazon anyway, Action Sport acted contrary to NEON’s ‘Selective Retailer Distribution Policy‘ (Policy).
Action Sport then brought an application for interim measures before the court in Termini Imerese (Italy). That court declared it had no jurisdiction. NEON and Action Sport had in fact made a valid choice of court in favour of the District Court. Subsequently, NEON brought the matter before the latter court. In the aforementioned judgment of 4 October 2017, the District Court ruled that NEON was entitled to terminate the distribution relationship with Action Sport. Action Sport was unable to accept that judgment and submitted the case to the Court of Appeal.
Judgment of the Court of Appeal
NEON’s prohibition on online platforms
Under the Policy, authorised Distributors may only sell Nike products through selected online platforms (Prohibition). NEON has designated Zalando, Le Redoute, Otto and Bol.com as such. However, Amazon is not a NEON-approved e-tailer in Europe. Action Sport and NEON disagree as to whether the Prohibition violates the ban on cartels.
Assessment by the Court of Appeal
The Court of Appeal takes as a starting point that selective distribution systems are not incompatible with the ban on cartels. In view of this, it is for Action Sport to demonstrate that the Policy is incompatible with this ban (recital 3.7.1). Action Sport took the view that the Metro criteria were not met, which NEON contradicted (recital 3.7.2.). According to the Court of Appeal that point of contention does not require a decision, if it is established that the Policy can benefit from the Vertical Block Exemption Regulation (VBER) (recital 3.7.3.). Therefore, the Court of Appeal examines whether the conditions of the VBER are met.
Is the VBER limited to luxury products or is it wider in scope?
Contrary to Action Sport’s view, The Court of Appeal is of the opinion that the exemption for selective distribution systems under the VBER is not restricted to luxury products. Even if Nike products lack a luxury character, NEON’s selective distribution system may fall within the scope of the VBER (recital 3.7.7).
Prohibition on online platforms: a hardcore restriction or not?
Article 4 VBER lists a number of “hardcore restrictions” which a vertical agreement may not contain. If parties have entered into one or more such hardcore restrictions, the VBER does not apply to their agreement. Action Sport argued that the Prohibition constituted such a hardcore restriction. According to the Court of Appeal it follows from the Coty judgment that that is not the case (recital 3.7.7). The Court of Appeal further points out that the Prohibition is less far-reaching than the prohibition at issue in the Coty case. In the latter case, the Court of Justice of the EU (CJEU) accepted a general ban. Action Sport, on the other hand, was able to sell through various approved online third party platforms (recital 3.7.8).
Conclusion of the Court of Appeal
According to the Court of Appeal, NEON’s Prohibition is valid. Since Action Sport infringed that Prohibition, NEON was entitled to terminate the distribution agreement (recitals 3.7.9 and 3.8.3).
The competition law assessment of restrictions in the context of a selective distribution system consists of three stages. First it has to be determined whether the restrictions fall under the ban on cartels. For this purpose, the above-mentioned Metro criteria (as confirmed by Pierre Fabre judgment) are taken into account. If these criteria are not met, the selective distribution system falls under the ban on cartels. However, the system can be exempted from this ban, provided that the VBER is complied with. If not, it will have to be examined whether reliance on the legal exception (Article 101(3) TFEU) is successful.
Pragmatic approach by the Court of Appeal
In the present case, the Court of Appeal takes a pragmatic approach to the matter at hand. Rather than applying the assessment framework step by step, the Court of Appeal leaves open the question of whether NEON’s Prohibition is contrary to the ban on cartels. Consequently, the Prohibition is not assessed in light of the Metro criteria. The Court of Appeal examines directly whether the Prohibition is exempted from the ban on cartels under the VBER. Against this background, the most important question is whether the Prohibition is a ‘hardcore restriction‘ as referred to in Article 4(b) and (c) of the VBER. If so, the Prohibition is not exempted from the ban on cartels.
In the Coty judgment, the CJEU made it clear that the “prohibition imposed on the members of a selective distribution system for luxury goods […] does not constitute a restriction of customers […],or a restriction of passive sales to end users” within the meaning of Article 4 (b) or (c) respectively of the VBER (recital 69). The CJEU clearly mentions “luxury goods“. Nevertheless, the Court of Appeal considers that the luxury nature has been mentioned by the CJEU only because of the specific circumstances of the matter referred (paragraph 3.7.6) and has not been relevant to the CJEU’s final judgment (paragraph 3.7.7). Moreover, in the Court of Appeal’s view, the GBER is not reserved to luxury products (paragraph 3.7.7). Consequently, even in the absence of a luxury character, NEON’s Prohibition does not constitute a hardcore restriction. Since the other conditions of the VBER are fulfilled, or at least Action Sport had not proved otherwise, NEON’s Prohibition is in any event exempted from the ban on cartels.
Reversal of the burden of proof
According to the Court of Appeal, the ANVR/IATA judgment required Action Sport to prove that NEON’s Prohibition infringes the ban on cartels. In order to do so, Action Sport had to demonstrate that the Prohibition did not satisfy the conditions laid down in the VBER. This sounds logical, since the Court of Appeal found that selective distribution systems are, in principle, permissible (recital 3.7.1). However, this starting point is not correct. It follows from the Coty judgment that selective distribution systems “necessarily affect competition within the internal market“. Such a system is only excluded from the scope of the ban on cartels if the Metro criteria are met (recitals 23-24). Action Sport had argued that this was not the case. Had Action Sport been proved right on this point, it would have proven that NEON’s Prohibition infringes the ban on cartels. NEON would then have been obliged to demonstrate that its Prohibition was exempt from the ban on cartels because all the VBER conditions are met. According to Article 2 of Regulation No 1/2003, an undertaking which invokes the legal exception in Article 101(3) TFEU must bear the burden of proving that the conditions laid down in that provision have been met. This necessarily also applies to the VBER, since it constitutes a block exemption of Article 101(3) TFEU. From this point of view, with its pragmatic approach the Court of Appeal has actually reversed the burden of proof to the detriment of Action Sport.
* photo by Freddy Do on www.unsplash.com