In the third of our series of blog posts on antitrust and e-commerce in Europe, we look at the €40 million fine imposed on clothing company Guess by the European Commission (EC) in December 2018.

The case is the first in which the EC finds that restrictions on the use of a brand name for online advertising may constitute a per se infringement of EU antitrust law. With the recent Nike decision¸ it emphasises the limits placed by EU antitrust rules on owners’ ability to control use of their brand. Together, the two cases form part of a resurgence in EC enforcement activity involving online distribution following its 2017 e-commerce sector inquiry.

What did Guess do?

In Europe, Guess distributed its products – online and offline – through a mixed network of subsidiaries and authorized third-party distributors. Guess’ agreements with distributors contained a number of restrictive provisions, including:

• restrictions on use of the Guess brand name in online search advertising;
• a general prohibition on online sales without prior authorization;
• obligations to comply with minimum prices (resale price maintenance); and
• restrictions on cross-border sales between EU countries.

These restrictions formed part of a comprehensive e-commerce strategy in which third-party distributers were expected to focus on offline sales, while online sales were channelled primarily through an online shop owned and operated by Guess itself. Guess’ internal documents showed that the overall purpose was “to avoid cannibalisation of [the] official Guess website.” The EC found that each of the four categories of restrictions above constituted a per se violation of EU antitrust rules.

Restrictions on use of the Guess brand name in online advertising

Guess prohibited distributors from bidding on Guess brand names as keywords when purchasing online advertising on Google. Guess regarded Google AdWords as a particularly important advertising tool as it generated around 30% of all visits to the Guess online shop. Internal documents identified two objectives for the advertising ban:

• to maximize traffic to Guess’ own online shop, by limiting distributors’ ability to advertise their alternative sites online; and
• to minimise Guess’ advertising costs, by preventing distributors from bidding up the price of Guess brand related terms.

The EC concluded that by reserving the exclusive rights to the Guess brand name to itself, Guess achieved a significant online competitive advantage over its retailers and, as a result, restricted intra-brand competition.

Other per se restrictions

In addition to the novel advertising restriction, Guess also imposed several more established per se restrictions on its distributors. First, they were prohibited from making any online sales without first obtaining specific authorization from Guess. Guess had established no criteria for authorizing online sales and its internal documents stated “Less is more” and “We need to set up very clear criteria which will help us not to answer positively.”

Second, certain distributors were required to comply with a list of minimum prices set by Guess. The intention was said to be “making the product image uniform.”

Finally, Guess implemented a number of measures limiting the ability of distributors to sell outside the territory allocated to them, including requirements to:

• advertise and market only within their territory; and
• sell only to end users (i.e., not to potential exporters).

What do we learn from this?

Various features of the case are worth pausing on. First, as well as creating a new per se violation of EU antitrust rules, the Guess case widens the gap between EU and US policy on verticals. While the FTC has also taken action against restrictions on the use of brand names in online advertising (in the 1-800 Contacts case), the FTC’s action related to agreements between competitors, not agreements between a supplier and its distributors.

Second, in Europe, the focus on this form of restriction is not limited to the EC. The German national competition authority has already taken enforcement action in the Asics case, and the French and UK national authorities have issued reports condemning them. Combined with public statements from EC officials that there are “quite some” such restrictions out in the market, further cases seem inevitable.

Third, Guess managed to adopt three of the four established per se violations identified as priority concerns by the EC in its e-commerce sector inquiry report (in addition to the new brand advertising restriction). Engaging in multiple per se violations is always likely to increase your enforcement risk.

Finally, the decision underlines the importance of taking care when generating internal documents. Guess made the EC’s job particularly easy by being so frank about the unlawful objectives of its restrictions on distributors.