American clothing and accessories brand and retailer Guess is under investigation by the European Commission as to whether certain restrictions in Guess’ distribution agreements illegally restrict retailers from selling Guess products cross-border to retailers or to consumers in other Member States. The investigation will also focus on whether Guess is restricting wholesalers from selling to retailers in other Member States.
The announcement of the investigation has taken a toll on Guess with its stock price falling sharply on the New York Stock Exchange in response. In addition, the brand may face potential securities claims by shareholders under US law on the basis that Guess may have issued materially misleading business information to the investing public.
Many businesses often restrict distributors from cross-border selling. Other businesses with multiple national websites often restrict or deny access to consumers in order to partition geographical markets or as part of pricing policies.
But, territorial restrictions on the sale of products raise competition law concerns. In particular, restrictions of the territory into which a distributor may sell are generally considered hardcore restrictions of competition, subject to a limited number of exceptions.
The European Commission’s investigation into Guess’s distribution agreements and practices follows a two-year long inquiry into the e-commerce sector. In the final report published in May 2017, the European Commission highlighted that retailers are frequently refusing to sell to customers abroad by imposing measures known as “geo-blocking”. For example:
- blocking access to websites,
- re-routing customers to websites targeting other Member States, or
- by simply refusing to deliver cross-border or to accept cross-border payments.
Whilst the majority of geo-blocking measures result from decisions of the retailers themselves not to sell cross-border, more than 11% of retailers complained of contractual cross-border sales restrictions imposed on them in their distribution agreements.
Furthermore, geo-blocking measures imposed by a dominant company, or as a result of an agreement between two or more parties may well fall foul of competition law.
This is because such restrictions and measures act as a barrier to the Digital Single Market. In the press announcement regarding the investigation into Guess, the European Commissioner for Competition, Margrethe Vestager, made it clear that “one of the key benefits of the EU’s single market is that consumers can shop around for a better deal”.
As part of the European Commission’s overall Digital Single Market strategy, the European Commission proposed in 2016 a new Regulation to ensure that consumers wishing to buy products (or services) in other EU member states are not discriminated against by reference to their nationality, country of residence, or establishment within the EU (for more info, click here). In effect, the Regulation aims to prevent unjustified geo-blocking. At the present time, the proposed Regulation is under review by the European Council and European Parliament.
Take home points
The outcome of the investigation into Guess remains to be seen. However, for the time being:
- suppliers should ensure that their distribution agreements do not infringe competition law generally;
- given the focus of the European Commission on providing better access for businesses and consumers to digital goods and services across Member States, businesses selling online need to review their distribution policies in order to ensure that the particular provisions regarding internet sales do not infringe competition law; and
- suppliers need to be aware that failure to comply with competition law can result in substantial fines, claims for damages by injured third parties, and distribution agreements being found to be unenforceable.