14 February 2019

Adword restrictions: Commission’s Guess decision creates uncertainty for brand owners

The European Commission recently fined Guess for restricting retailers from using its trademarked brand name when advertising products online through Google Adwords. The ban was part of a package deal with retailers, which also included other restrictions, such as territorial limitations and resale price maintenance. The Commission has labelled these agreements anti-competitive “by object” rather than “by effect”, which lowers the standard of proof. It is almost impossible for this type of restriction to be justified under existing exemptions of the cartel prohibition if pro-competitive effects outweigh any anti-competitive ones. The restrictions are presumed harmful, irrespective of market impact. The Commission’s view in Guess that AdWord restrictions violate competition law “by object” sets a dangerous precedent. The finding lacks nuance and creates uncertainty whether pro-competitive justifications for Adword restrictions will hold weight for brand owners in other circumstances.

When it comes to a registered trademark, the trademark owner may restrict usage to ensure that the goods or services under the trademark originate from the trademark owner or an economically connected party. The European Court of Justice confirmed this in Google France. This does not, however, apply to retailers who resell the original products of the trademark owner. Under trademark law, they are allowed to use the trademarked brand name of the products they resell. Nonetheless, a producer and retailer can voluntarily make other arrangements in their distribution agreement. In an exclusive distribution system a retailer can, for example, be lawfully restricted from pro-actively advertising products online in jurisdictions outside of a clearly defined, exclusive territory (where the territorial allocation is permitted by virtue of the supplier and buyer’s limited or moderate market positions). This is also true when it comes to “paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory”, according to the European Commission in its Guidelines on Vertical Restraints. But, as so often is the case, IP protections do not guarantee lenient treatment under competition law. This has been confirmed again in the recent Guess decision published on 25 January 2019, where the Commission fined Guess for over EUR 39 million.

Guess’ online search advertising restriction

In the Guess case, the European Commission established – with reference to Guess’s internal documents – that it had a strategy to sell online to customers directly, thus becoming a competitor of its affiliated retailers. Internal documents further demonstrated that Guess intentionally restricted its retailers’ online presence in favour of its own e-commerce strategy. The agreements between Guess and its retailers contained several restrictions, including:

  • Usage of Guess brand names and trademarks, in particular in Google AdWords;
  • Selling the goods online without the prior authorisation (at the sole discretion) of Guess;
  • Selling the products to customers located outside their allocated territories;
  • Cross-selling among other authorised wholesalers and retailers; and
  • Deciding, independently of Guess, the retail price at which products would be sold.

The Commission analysed each individual restriction under the cartel prohibition and vertical block exemption, rather than assessing the package of restrictions as a whole. By contrast, Germany’s highest court ruled in the Asics case that the whole package of restrictions resulted in the retailers’ inability to sell online and the court considered that unlawful.

In relation to the online search advertising restriction, the Commission provides two reasons why Guess implemented the restriction. First, it states the objective of the online search advertising restriction was “to reduce competitive pressure by authorised retailers on Guess’ own online retail activities and to keep down its own advertising costs”. The Commission used this first reason to reject Guess’ claim that the restriction served to protect the brand image within its selective distribution system. When analysing the same restriction “in its context”, the Commission found that the objective of the online search advertising restriction was to restrict retailers in selling outside their contractual territory or territory of activity, which resulted in a partitioning of the market. This second reason was used to demonstrate that the restriction falls foul of the cartel prohibition in Article 101(1) TFEU as a restriction by object, because it considerably limits intra-brand competition between retailers.

Legitimate objectives of online research advertising restriction

According to the European Court of Justice judgment in the Cartes Bancaires case, when it comes to a restriction by object, “regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms a part”. The Commission apparently found two objectives and used these to find anti-competitive conduct. However, the categorisation of the behaviour as a by object restriction means the Commission can justify side-stepping the trickier debate about whether this conduct actually had any anti-competitive effect.

In an antitrust landscape that is moving towards rational, economic analysis, such a broad-brush approach is worrisome, particularly when other pro-competitive justifications could exist for this type of behaviour. Indeed, the Commission mentions one in its Vertical Guidelines: avoiding active sales in an exclusive territory of another retailer. For example, the restrictions on keyword search advertising might be justifiable to prevent active sales into another territory, as long as the retailer can use the trademark in combination with a geographical indication or language of its exclusive territory. Another might be to allow a supplier to control pre-sales information and services through its own website, in order to inform potential customers about the products, particularly where quality aspects are an important differentiator from other brands in the market. This approach is likely to be easier to justify where the supplier does not have its own web shop, bearing the facts of the Guess-case in mind.

Objectrelated restriction lacks nuance

Objectrelated restrictions are the worst type of competition law violation. They are presumed to produce negative effects on the market because they are not capable of producing benefits for customers, which is one of the criteria to qualify for an exemption. By characterising the standalone online research advertising restriction in the Guess case as a restriction “by object” – instead of the whole package of restrictions which made it practically impossible for a Guess retailer to have an online presence – the Commission creates uncertainty about the ability to exempt such a restriction on a standalone basis. Furthermore, how will the Commission (or a national competition authority following Guess as a precedent) now assess a narrower restriction, such as a restriction to use a trademark in online search advertising in isolation, but which otherwise allows retailers to use the trademark in combination with other search terms or without restrictions offline. To confuse the debate further, the Commission mentions this restriction in its Vertical Guidelines as being a potential reason for a legitimate exemption.

If effects-based analysis can be circumvented, this could also lead to unchecked consequences in private litigation, where retailers and suppliers find themselves before national courts, defending or rebutting the presumption that AdWord restrictions intrinsically violate of competition law, even in circumstances where there are be pro-competitive effects behind such vertical agreements.

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