Is an online platform ban still compatible with EU competition law?

More and more often, we are consuming online. As a result, discussions are held about the way in which an online distribution and/or trademark licensing system can be implemented. In the summer of 2020, the Amsterdam Court of Appeal ruled in a case that is relevant to parties who work with such systems for the marketing of their products. The judgment was for a short period put online, but remarkably enough taken offline after a few days. Fortunately, we have been able to make a copy of the judgment. If you would like to receive a copy of the judgment, please feel free to reach out to us. Below we briefly discuss the content of the case and provide relevant background information.

Relevant background information:

In a previous judgment, the so-called Coty-decision, the European Court of Justice (“ECJ”) rendered its much-anticipated judgment in a dispute between a supplier of luxury cosmetics (Coty) and one of its authorised resellers. The central question was whether Coty is allowed under the competition rules to forbid its resellers to sell Coty products over third-party internet platforms (like Amazon and Bol.com). The ECJ ruled that such an “online platform ban” is not incompatible with EU competition law. The Court ruled that online platforms bans can be appropriate in the context of a selective distribution system provided such bans do not go beyond what is necessary to preserve the luxury image of products.

The ECJ confirms that suppliers have considerable freedom under EU competition rules to design their (selective) distribution networks as they see fit.

The ECJ’s judgment largely follows previous case law (Metro-decision) indicating that selective distribution systems which are mainly intended to preserve the ‘luxury image’ of products are not necessarily caught by the cartel prohibition. This is the case where such selective distribution system meets three criteria:

A selective distribution system is necessary because of the properties of the products concerned;

The resellers are chosen on the basis of objective criteria of a qualitative nature which are determined and applied uniformly; and

The criteria established do not go beyond what is necessary for the preservation of the special character of the products supplied within the selective distribution system (e.g. their luxury image).

In its judgment, the ECJ ruled that online platform bans in such selective distribution networks can be an appropriate and necessary means to preserve the luxury image of products sold. Following the ECJ’s ruling, a remaining point of uncertainty arguably lies in what may qualify as a ‘luxurious’ good and whether the ban may be applied to selective distribution networks that involve ‘non-luxurious’ products. In Germany, the national competition authority had ruled that online platform bans tend to restrict competition. Conversely, a Dutch court had recently ruled that a brand owner was allowed to impose an online platform ban on its authorised distributors and that it does not matter whether it is a luxury product.

The Amsterdam Court of Appeal has now confirmed that a ban on sales via online market platforms can be included in distribution agreements, even if the agreement is referring to non-luxurious products. In fact, it also seems to follow from this judgment that a supplier may make a distinction between the different platforms if it is based on the same criteria for selecting the members of the selective distribution system. We refer to legal ground 3.7.8:

“(…) Even if it is true that Action Sport did not know exactly which internet platforms were allowed by Neon, it would have been up to Action Sport to delve into this and ask Neon about it. Neon could, in order to maintain some control over the way in which its products were offered and advertised, restrict the authorised internet platforms to the ones which had a contractual relationship with Neon. It is a misconception that Neon had to justify to Action Sport on the basis of which criteria it determined with which internet platforms it entered into a contractual relationship.”

Based on the above, an online platform ban is compatible with EU competition law, even if – at the same time – sales via another online market platform are allowed if the distributor believes that such a platform is more compatible with the image of its products and can meet the criteria set within the selective distribution system.

Interpretation of a franchise agreement in light of inequality between parties

Introduction

The new Dutch Franchise Act has come into effect on 1 January 2021. The aim of the Franchise Act is to achieve a better balance in the relationship between franchisor and franchisee. This is based on the assumption that the relationship between franchisor and franchisee is, in a sense, intrinsically unequal. In recent legal proceedings between a franchisor and franchisees, the question rose whether or not such inequality should be taken into account in the interpretation of a franchise agreement. After some comments on the legal framework of the interpretation of contracts in the Netherlands we will briefly discuss the content of the case.

Interpretation of contracts in the Netherlands

In a nutshell, the interpretation of a contract or contractual provisions does not come down to a purely linguistic interpretation of the provisions of a contract(ual provision), but on the meaning which the parties may reasonably attribute to those provisions in the given circumstances and on what they could reasonably expect from each other in that respect. Interpretation is therefore a question of finding out what parties meant to agree upon. These intentions parties have when concluding an agreement will sometimes be laid down very well in the wording of the contract and perhaps in some cases the wording of the contract should be leading. However, in general, the wording of the contract can only be given a correct meaning in the context of the case at hand. Therefore, it is necessary to weigh those circumstances.

Relevant facts of the proceedings

Albert Heijn, owned by Ahold Delhaize, is the owner of the Albert Heijn supermarket formula. Albert Heijn is the largest Dutch chain of supermarkets. Since 1981, Albert Heijn has allowed third parties to operate the retail formula and franchise agreements have been concluded with third parties for this purpose. Since 1989 Albert Heijn has granted the master franchise for the Netherlands to Albert Heijn Franchising B.V. (“AHF”). All franchisees in the proceedings have a franchise agreement with AHF as franchisor.

In December 2014 about 240 franchisees started proceedings against Albert Heijn, Ahold Delhaize, AHF and several other affiliated companies (“AH”). The franchisees formulated nothing short of 48 claims against AH. In short, the dispute relates to financial issues: determination of the prices to be charged to the franchisees and the question to what extent the franchisees are entitled to (their part of) bonuses, discounts and purchase advantages, which AH obtains from its suppliers and on the extent to which AH is obliged to provide information. The franchisees claim that AH does not fully pass on some purchasing advantages to the franchisees. It would also impose some costs twice and would not share certain financial gains. According to the franchisees, AH no longer wants to share the advantages in question, whereas the principle of "fair sharing" is at the basis of the relationship. AH, in turn, accuses the franchisees of not understanding their position: they present themselves as part of a partnership, not as a franchisee. The franchisees say they want to share fairly, but they mean unilaterally. According to AH, it is possible to talk about a different division of financial gains, but then the franchisees must be prepared to change the basis of the relationship.

In first instance, the Court rejected all claims of the franchisees, in short because the Court did not find the mentioned principle of "fair sharing" in the franchise agreements. The agreements are based on the independence of the franchisee, who operate the supermarkets entirely at their own expense and risk.

After the franchisees took their case to the Court of Appeal, they argued that, in general, a franchise relationship is characterized by an imbalance of power between, and dependence of, the franchisee on the franchisor. The franchisees pointed out to the Court of Appeal that in practice they suffer a great deal from this and that this is one of the causes of the disputes with AHF. According to the franchisees, the Court repeatedly emphasized that the franchisees and AHF are legally and financially independent undertakings. In doing so the Court wrongly used the equality of the parties as a starting point.

The Court of Appeal ruled against the franchisees. It considered that the Court was right to point out that the franchisees and AH are independent companies; in the opinion of the Court of Appeal this means that there is only room for the distribution of the proceeds obtained by AH or the like in so far as parties have agreed upon this. Eventually, the Court of Appeal rejected all, but one claim of the franchisees.

The franchisees then appealed to the Supreme Court. Although parties are still awaiting the Supreme Court’s judgment, the procurator general already provided substantial thought and analysis in his advisory opinion of 16 October 2020.

According to the procurator general, the answer to the question (whether inequality between parties should be taken into account in the interpretation of a franchise agreement) should simply be yes. All circumstances can be relevant and there is no reason whatsoever to exclude the inequality between parties from this. That does not mean, however, that the inequality should play a (significant) role, nor is it clear, if the answer were affirmative, in which way the inequality should play a role. In so far as the franchisees argue that due to inequality the interpretation of the contract should give cause to a compensation of that inequality, the franchisees are wrong. In principle, there is no room for such a normative interpretation. With the interpretation of contracts judges try to get at the intentions of parties. This must be distinguished from the (if necessary) addition or modification of the legal effects arising from the contract, on the basis of reasonableness and fairness.