UK Competition Appeal Tribunal Issues Rare Judgment on Online Sales Restrictions

Despite the importance of competition law for companies looking to implement selective distribution or other forms of distribution arrangement in a compliant manner, court judgments that examine the legality of specific vertical restraints are relatively rare.? (The Ping case, which culminated in a Court of Appeal judgment at the beginning of 2020 confirming the illegality of an online sales ban, is a notable exception.)? Although the UK has recently seen an explosion of competition litigation cases, including standalone claims that do not rely on a prior infringement decision, the commercial context for distribution disputes, and the relatively low sums of money at stake, mean that such claims do not typically involve vertical agreements and those that do (such as the Beauty Bay case) tend to be settled before they reach trial.??

The judgment of the UK Competition Appeal Tribunal (‘CAT’) of 31 October, in Up & Running (UK) Limited v. Deckers UK Limited (https://www.catribunal.org.uk/sites/cat/files/2024-10/16155723%20Up%20and%20Running%20%28UK%29%20Limited%20v%20Deckers%20UK%20Limited%20-%20Judgment%20%2031%20Oct%202024.pdf) therefore presents a rare opportunity to examine how a specialist competition court assesses the legality of actions taken by a brand against a retailer in the context of a selective distribution system.? In particular, the judgment provides important guidance on:

·????? the extent to which a brand may exercise its discretion when deciding when to eject a retailer from its selective distribution system;

·????? the steps that a brand can legitimately take to control a retailer’s online sales; and

·????? the extent to which a brand can manage sales of out of season products to avoid its retail margins being undermined.

Seasonality and discounting

?Before turning to the judgment, it may be helpful to provide some context on the pricing dynamics of the footwear sector, as they are important for this case.? As is the case for fashion in general, footwear brands commonly operate a seasonal model, through which promotional activity focuses on the brand’s latest models, which the brand aims to sell at full price.? Once a model has been on the market for a while, it may no longer be possible for retailers to sell it at full price, as marketing and consumer attention will have shifted to the new season’s models.?? At that point, the older model may need to be sold at a more substantial discount off its original price.? The challenge brands then face is how to avoid the sale of old stock at high discounts bleeding across to the pricing of current products, which they (and their authorised retailers) will want to keep at a level that is as close to possible to the recommended retail price (recognising that mandating the retail price will almost certainly be unlawful).? Often, this outcome is achieved by the brand selling out of season stock in an unobtrusive manner through dedicated clearance retailers, who specialise in releasing out of season products onto the market in a way that does not undermine the premium placement of in-season products.?

While it may be relatively straightforward for the brand to manage this process in a manner that complies with competition law when it comes to selling through its own stocks, since it can decide what it does with such products, it is harder to control what retailers do with stocks that they have already bought from the brand, and which they can in principle sell off as they see fit.? Although brands commonly find that selective distribution is a powerful tool for lawfully limiting the number of retailers who are able to sell its products, and for exerting control over how those products are sold, it does not provide them with carte blanche.? In particular, brands must still take care to ensure that their actions do not unduly limit retailers’ freedom to sell products via the internet, at a retail price set freely by the retailer.?

The Judgment

?Returning to the CAT’s judgment, the facts of this case are relatively straightforward.? The defendant, Deckers, is a distributor of running shoes, including shoes marketed under the HOKA brand.? As well as distributing shoes to its authorised retailers, Deckers also sells direct to consumers through its own retail websites.? Up & Running was a long-standing retailer of HOKA shoes, which were supplied to it by Deckers.? Although Up & Running mainly sold HOKA shoes through a network of physical stores, it also sold them through its own website, upandrunning.co.uk.? When the Covid-19 pandemic hit in 2020, Up & Running was left with large amounts of unsold stock, which it was unable to sell through its brick and mortar stores.? While it needed to sell this stock at a discount to clear it, it did not want to do so on its main website, upandrunning.co.uk, as it felt that this would make it harder for it to maintain premium pricing for products where it did not have excess stock and (in the words of Up & Running) risked “creating customer mistrust”.? As a result, it came up with a plan to create a separate website, runningshoes.co.uk (the ‘Running Shoes website’), specifically to sell surplus stock.?

Although Deckers’ terms and conditions did not prohibit online sales (which, as the Ping case confirmed, would almost certainly have infringed competition law), they did state that a retailer could only sell from a website that was compliant with Deckers’ website requirements, the contents of which had been approved by Deckers.? On this basis, Up & Running asked Deckers for permission to sell HOKA shoes on its new clearance website.?Deckers refused, on the grounds that the website was inconsistent with their brand strategy.? Up & Running nevertheless went ahead with its plan and sold HOKA shoes on the Running Shoes website, after which Deckers terminated its account and ceased supplying it with HOKA shoes.?

?Up & Running subsequently brought a claim before the CAT, in October 2023, arguing that Deckers’ terms and conditions infringed the Chapter I prohibition of the Competition Act 1998 (the UK equivalent of the Article 101 TFEU prohibition of anticompetitive agreements), on the grounds that they unduly restricted its ability to sell online and that the manner in which they had been applied by Deckers, namely effectively to prevent Up & Running from selling the products concerned at a discount, amounted to unlawful retail price maintenance.

In its defence, Deckers argued that its terms and conditions implemented a selective distribution system that was compliant with the well-established Metro criteria (which provide that a system will fall outside competition law if (1) resellers are chosen on the basis of objective, qualitative criteria; (2) the criteria are laid down uniformly for all potential resellers and not applied in a discriminatory fashion; (3) the characteristics of the product necessitate selective distribution and (4) the criteria do not go beyond what is necessary).? Even if it was not so compliant, Deckers argued that its system did not involve any restriction of competition ‘by object’ (i.e. a serious restriction of competition, for which no proof of effect is required) and that, in any event, it was protected from challenge by the EU’s Vertical Agreements Block Exemption Regulation (‘VBER’).? Deckers also argued that its decision to cease supplying Up & Running was commercially justified, as it had concerns about the company’s creditworthiness and its ability to handle the additional logistics of the Running Shoes website.? In addition, the new website would have breached Deckers’ requirement that retailers sell only from a site with a domain name that was identical or highly similar to the retailer’s brick and mortar store name, in order to show that the products were being sold by an authorised retailer (referred to as the ‘signposting requirement’).? On this basis, Deckers claimed, its refusal to approve the Running Shoes website was lawful and had nothing to do with the fact that its products would be sold at a discount on the site.

?Up & Running’s claim was subsequently allocated to the CAT’s ‘fast track’ procedure, with recoverable costs being limited to ￡150,000 for each side.? Unusually for competition proceedings, the owner of Up & Running represented himself, as a litigant in person.? The four day trial took place in July 2024, before a panel comprising Ben Tidswell (a former City litigation lawyer) as Chair, with public policy economist Keith Derbyshire and competition law professor Pablo Ibá?ez Colomo as side members.

?The expert tribunal had little trouble in concluding that Deckers had, indeed, infringed the Chapter I prohibition.? Unsurprisingly, it ruled that its selective distribution system did not satisfy the Metro criteria.? Since the criteria applied by Deckers were unclear, involved quantitative elements, were subjective, were not recorded in a uniform manner, were not transparent and were applied in an entirely arbitrary and discriminatory way, neither condition (1) nor (2) were met in this case.? (It left open the potentially contentious question of whether running shoes are products that necessitate selective distribution.)? As a result, Deckers’ selective distribution system was open to challenge under competition law.

?Having determined that point, the CAT ruled that the Deckers approval requirement for retailer websites, and its related refusal to allow sales of HOKA shoes on the Running Shoes website, infringed the Chapter I prohibition by object.? Based on the evidence before it, the Tribunal established that the requirement had two related purposes, namely:

·????? to restrict entry into what it called the ‘clearance channel’ (namely the dedicated channel for the online clearance of residual stock) so as to enable Deckers to determine when and in what volumes products are sold through that channel; and

·????? to limit authorised retailers to selling HOKA products through the main retail channel and thereby inhibit their ability to engage in heavy discounting.?

Crucially, Deckers itself sold excess stock at a heavy discount through its own clearance website, as well as through its contracted clearance website operators. ?On this basis, the CAT concluded that it was not open to Deckers to argue that its website controls were objectively justified by the legitimate need to protect its brand.? In the words of the CAT, given the facts, “it is not plausible that the opaque and discretionary restriction of entry into the Clearance Channel was driven by a concern with the protection of HOKA’s brand image”.? The reasons given by Deckers’ main witness (who was judged by the court to be neither reliable nor credible) for the refusal to give permission, namely concerns over ‘signposting’, credit and logistics, were “an edifice” that had been “largely constructed after the event to justify the approach Deckers were taking”.

Deckers’ case was not aided by the fact that its evidence was partial and, to the extent that evidence was available, it did not support its case.? Notably, one of Deckers’ witnesses confirmed that the signposting requirement was introduced after its initial refusal of permission for Up & Running to sell its shoes on the Running Shoes website.? Another Deckers witness, who acted at the relevant time as the company’s in-house counsel, was criticised for “setting out to say as little as possible” so as not to contradict other witnesses, and for circulating a document preservation notice to staff at an “unreasonably late date”, leading to gaps in the company’s documentary records covering key periods.? The court also observed that Deckers had not applied its signposting policy consistently, noting a number of instances where retailers had been permitted to operate websites under a different name than their brick and mortar stores.? Deckers was unable to provide a coherent explanation for these exceptions.

Given the facts, the CAT concluded that the website approval requirement had the object (at least in part) of preventing retailers from discounting on a clearance basis and therefore preventing them from setting retail prices as they wished.? As the judgment succinctly puts it, the question was not (as Deckers claimed) whether a brand is entitled to operate a selective distribution system that limits retailers to selling its products from only one authorised website but was, rather, “whether a system that: arbitrarily denies entry into a clearance channel; gives unfettered discretion to the supplier; and lacks transparency and discriminates (in favour of Decker’s retail arm and against third-party resellers) has a restrictive object”.? The “inescapable” conclusion, in the court’s views, was that the restriction gave rise to two distinct ‘by object’ infringement, based on well-established case law, namely a restriction on retailers’ ability to sell online and a restriction of their freedom to set their own prices.?

?It is interesting to note that, in reaching this conclusion, the court referred to the recent Superleague judgment of the CJEU, as well as the European Court’s much older AEG-Telefunken judgment, as authority for the proposition that the absence of a framework governing the exercise of discretion may, in itself, point to the existence of a ‘by object’ infringement.? Even more interesting, perhaps, is the footnote observing that, although the Superleague judgment post-dates the UK’s departure from the EU, and hence is not binding on the court, the CAT is entitled to “have regard” to it and has done so in this case.

Given the court’s conclusion on the policy’s object, it took only two paragraphs for the CAT to dismiss Deckers’ argument that the selective distribution system was protected from challenge by the VBER.? Although the parties’ market shares were well below the VBER’s 30% market share threshold, each object infringement also amounted to a restriction that was “clearly hardcore” under the VBER, as a restriction of active or passive sales to end users (Article 4(c) of the then VBER) and of the buyer’s ability to set its prices (Article 4(a)), respectively.? As a result, the VBER was unavailable.

Having ruled that Deckers had infringed the Chapter I prohibition, the question of damages will be determined in a separate trial.? The CAT refused Up & Running’s application for an injunction mandating that Deckers restore supplies of shoes to it, on the grounds that workable commercial relations between the parties were unlikely to be restored following such acrimonious litigation and that damages would provide an adequate remedy.

Conclusions

Notwithstanding the fact that this was a fast-track case, subject to strict cost-capping and involving a litigant in person, the CAT has produced a closely reasoned judgment running to over 100 pages.? It has also taken the opportunity to send a number of messages to companies implementing selective distribution and their advisers.? The legal analysis applied by the court followed well-established precedent, as well as extensive guidance.? Although the court’s criticism of Deckers for applying its website policy inconsistently could be viewed as contradicting the CJEU’s ‘Auto 24’ judgment of 2012, which confirmed that a brand operating a selective distribution system may be flexible in how it applies its admission criteria, it is important to note that that case concerned admission to a selective distribution, rather than ejection (an inherently more risk exercise, given the inevitable focus on the retailer’s behaviour in the run-up to ejection).? It is also critical that in that case the supplier’s selective distribution system did not involve any hardcore restrictions.? As a result, its system was protected under the relevant block exemption.? The contrast with this case is thus marked.

?The CAT also took care in this case to confirm that selective distribution does not inevitably involve a restriction of competition by object (thereby helping to clarify some ambiguous passages on this point in historic judgments of the CJEU).? Rather, what was important here was that the selective distribution system implemented by Deckers was “incomplete and flawed in its design and operation”.? Admission criteria were not properly recorded, they were applied in an inconsistent and even arbitrary manner and there was a “virtual absence of anything resembling a framework for treatment of separate channels”.? (While the court was critical of the fact that Deckers had “no recorded criteria” for admission to the clearance channel, a question mark remains over how such a channel should be managed, in the context of a selective distribution system focused on the sale of in-season products.)? In this context, Deckers’ decision to eject Up & Running from its selective distribution system once it started selling HOKA shoes at a heavy discount on its new website was asking for trouble.?

To quote the CAT in the closing words of the judgment, competition law compliance need not be complex or resource intensive.? Rather, it is a matter of ensuring that there is a “discernible business strategy pursuing a legitimate aim”, on the one hand, and a “clear, identifiable link between this strategy and a set of well-designed vertical restraints” on the other. ?This is sound advice.? The key lesson from this judgment for brands wishing to maintain tight control over retailers’ online sales is thus not that this is not possible but, rather, that any selective distribution system that aims to achieve this objective must be implemented with care.? Furthermore, any action by a brand to eject an authorised retailer from its system in a scenario where that retailer is engaging in discounting must be taken even more carefully.?