CAT’s judgment on how (not) to run a selective distribution system
In its recent judgment in Up & Running[1], the Competition Appeal Tribunal (“CAT”) found that a selective distribution system operated by a manufacturer of branded running shoes gave rise to a by object infringement of competition law as it amounted to indirect resale price maintenance (“RPM”) and a restriction on the effective use of the internet.
A selective distribution agreement is a type of vertical agreement in which the supplier agrees to supply only distributors who meet specified minimum criteria and the approved distributors agree only to supply end users or other distributors within the same network. As the CAT recognises in its judgment, with the exception of RPM, it is unusual for a provision in a vertical agreement to be found to restrict competition by object. The specific facts of the case merit consideration by companies engaged in vertical supply arrangements.
Factual background
Deckers is a manufacturer of branded running shoes, including HOKA shoes. Deckers operated two distribution channels. The first was for the sale of new HOKA stock, through a network of authorised retailers (the “Main Retail Channel”). Up & Running was one such authorised retailer, both in bricks and mortar stores and online. The second was for the sale of out-of-season stock, through a direct-to-customer online sales channel (the “Clearance Channel”) owned by Deckers.
In July 2020, Up & Running sought approval from Deckers to launch its own clearance website to sell excess HOKA stock at a discount. Deckers declined to approve this second website by reference to a clause in its terms and conditions, which required retailers to obtain advance approval for website sales. Up & Running nonetheless launched its “Running Shoes” website to sell residual HOKA and other stock at reduced prices. According to Up & Running, in November 2020, Deckers threatened to cease to supply the retailer if its website continued to sell HOKA shoes and, in December 2020, it went on to cease such supply.
Up & Running alleged that Deckers’s refusal to supply gave rise to an infringement of the Chapter I prohibition of the Competition Act 1998 as: (i) it restricted the ability of Up & Running to market and sell HOKA shoes online and otherwise make effective use of the internet as a sales channel; and/or (ii) it was intended to maintain higher prices by preventing the use of a clearance website to sell unsold HOKA stock at reduced prices, effectively giving rise to RPM.
The relevant legal principles
EU and UK competition rules recognise that a selective distribution system may be used to achieve a legitimate purpose such as maintaining brand image or preventing free-riding. Where such a system satisfies the criteria established by the European Court of Justice in Metro [1], it falls outside the scope of Article 101 of the Treaty on the Functioning of the European Union and/or the Chapter I prohibition against anti-competitive agreements.
The Metro criteria require that: (i) resellers are chosen on the basis of objective criteria of a qualitative nature; (ii) the criteria are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion; (iii) the characteristics of the products in question necessitate such a network; and (iv) the criteria laid down do not go beyond what is necessary. Where a selective distribution agreement meets these criteria, it does not infringe Article 101 or the Chapter I prohibition.
Where a selective distribution system does not meet these criteria, and therefore does not fall within the Metro safe harbour, it will be assessed under the EU / UK vertical agreements block exemption (“VABE”) [2] to ensure that it does not have as its object or effect the restriction of competition.
Even where a selective distribution system is caught by competition law, it may nevertheless be exempted by virtue of the VABE provided that it does not contain any so-called “hardcore restrictions”, and otherwise satisfies the VABE requirements.
The CAT’s judgment
The CAT held that Deckers’s selective distribution system did not meet the requirements in Metro: (i) resellers were not selected or rejected for entry into either Deckers’s Main Retail Channel or Clearance Channel on the basis of objective criteria of a qualitative nature; (ii) the criteria were not laid down uniformly for all potential resellers and (in so far as they were discernible at all) were applied in a discriminatory fashion; (iii) whilst it was possible that specialist running shoes had characteristics that justified protection to preserve quality and ensure proper use, the Tribunal did not draw a firm conclusion on this limb of the test; and (iv) the criteria went beyond what was necessary.
Since the Metro safe harbour was not available, the CAT went on to assess whether Deckers had infringed competition law. The CAT found that Deckers’s refusal to approve the second website was a restriction of competition by object. This is because Deckers:
- restricted entry into the Clearance Channel. This was a form of discriminatory self-preferencing against retailers, as Deckers competed for sales on the Clearance Channel through its own clearance website; and
- restricted retailers’ ability to discount on a clearance basis (through refusing permission for a clearance website and ceasing to supply). Accordingly, this was a restriction on pricing and an attempt to indirectly fix minimum resale prices.
The CAT held that, for the purposes of the VABE, both were “hardcore restrictions” and, accordingly, the safe harbour provided by the VABE did not apply.
Comment
The UK judgment serves as a reminder to suppliers of the need to ensure that their selective distribution systems are designed and operated to pursue legitimate aims, are properly recorded, and consistently applied to resellers. By the same token, resellers should feel empowered to challenge suppliers where their selective distribution arrangements are opaque, applied inconsistently, or pursue an anti-competitive aim.
Footnotes
[1] Up & Running (UK) Limited v Deckers UK Limited [2024] CAT 61. Judgment was handed down on 31 October 2024.
[2] Case C-26/76 Metro v Commission.
[3] Commission Regulation (EU) 330/2010 and the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022.