Can a brand owner control online sales? FASHION LAW
The way products are sold can influence how customers understand, use and value them, so suppliers and distributors m ay find themselves asking the same question from opposite ends of the supply chain: who decides how a brand is sold online?
F
or a brand owner, a website is a shop window, fitting room, stockroom, outlet store and customer service desk all in one. For a distributor, it may be the quickest route to customers, the most efficient way of clearing stock and the best means of competing.
A brand owner may have good reasons for regulating online sales. It may want products presented properly, customers to receive appropriate advice, technical products sold by retailers with the necessary expertise, and returns, warranties and after-sales service handled consistently.
For many brand owners, however, the overriding concern is protecting brand value. They want to avoid products appearing on websites where they are stripped of context and reduced to little more than a price. While suppliers may regulate aspects of distribution, they cannot use brand protection as a disguise for restricting price competition. A supplier cannot dictate resale prices or penalise a distributor simply for discounting. Nor can it impose restrictions that, in reality, amount to a ban on online sales while claiming merely to regulate presentation. Likewise, it cannot reserve an unrestricted discretion and exercise it arbitrarily.
The distinction between legitimate brand protection and unlawful resale price maintenance remains fundamental.
Deckers UK Limited v Up & Running (UK) Limited The Court of Appeal recently considered these issues in Deckers UK Limited v Up & Running (UK) Limited, a dispute concerning the distribution of HOKA running shoes. Deckers operated a selective distribution system. Up & Running wished to sell surplus stock through a separate discount website. Deckers refused approval and terminated supply. The Competition Appeal Tribunal found against Deckers, but the Court of Appeal disagreed. The judgment does not mean suppliers now have unrestricted freedom to control online sales, nor that all online restrictions are lawful. Simply describing a network as a selective distribution system does not determine the outcome. Instead, the court focused on substance. The
key questions are what the restriction does, why it exists, how it is applied and what is happening in the market.
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impose maximum resale prices, provided these do not become fixed or minimum prices in practice. Distributors must remain genuinely free to determine their own resale prices. That freedom must exist not only in the agreement but also in practice. Pressure, threats, delayed supply, withdrawal of commercial benefits or selective enforcement may all indicate unlawful resale price maintenance.
A requirement that products may only be sold through approved websites may be lawful where approval is based on objective standards relating to presentation, customer service, product advice or the customer experience. By contrast, a rule whose real purpose is to prevent retailers discounting is far harder to justify. Although those rules may appear similar on paper, the difference is often found in the drafting, internal documents and the way policies are applied in practice.
Designing lawful online restrictions
The starting point is the product and the market. A supplier should identify why the product justifies controls on distribution. The case is generally stronger for premium, luxury, brand- sensitive or technically complex products than for products where the method of sale has little impact on purchasing decisions. Crucially, the rationale should be capable of being explained without reference to maintaining resale prices. The distribution system should be designed before it is needed. Admission criteria and requirements for approving online sales channels should be clear, objective and applied consistently throughout the network. Developing criteria only after a retailer begins discounting is unlikely to withstand scrutiny.
If approval is required before products may be sold through a new website, the agreement should explain the criteria that will be applied. Relevant criteria may include: the identity of the retailer; product information and imagery; staff expertise; customer service; warranties and returns; use of trade marks; and overall product presentation.
They should not make approval dependent, directly or indirectly, on avoiding discounting. Suppliers may recommend resale prices or
Market position matters Under UK and EU competition law, many vertical agreements receive more favourable treatment where supplier and distributor remain below the relevant market share thresholds and the agreement avoids hardcore restrictions. Although market share is no substitute for careful drafting, it remains an important part of the overall competition law assessment. A supplier with limited market power operating in a competitive market is in a different position from one whose products have few realistic substitutes.
The same principles apply from the distributor’s perspective. If approval for an online sales channel is refused, the distributor should ask for the relevant criteria and the reasons. If the objection concerns product presentation or customer experience, those issues may be capable of being addressed. If the real concern is low pricing, different competition law considerations arise. The practical lesson is straightforward: online distribution controls should be designed, not improvised. A supplier seeking to protect its brand should establish a carefully drafted distribution system based on objective, consistently applied criteria.
A distributor faced with restrictions should consider whether they genuinely protect brand standards or are, in substance, an attempt to control resale prices. The difference lies not in the label attached to the restriction, but in its purpose, operation and practical effect.
Stephen Sidkin is a commercial law partner at Fox Williams LLP (
www.fashionlaw.co.uk;
www.foxwilliams.com).
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