A New Glance at Online Sales: The Competition Board’s BSH Decision
Introduction
The Competition Board (“Board”) has recently published a reasoned decision in which it evaluated BSH Ev Aletleri Sanayi ve Ticaret A.Ş.’s (“BSH”) request for negative clearance or exemption with regard to its practice of prohibiting authorized dealers from making sales through online marketplaces.[1] The decision is noteworthy as it indicates that the Board does not exempt the practices that entirely restrict the sales of dealers through online platforms.
Information with regard to BSH
BSH is an undertaking operating in the fields of production, import, export, domestic distribution and marketing of small and large household appliances and providing after-sales services. BSH operates in Turkey with the brands Bosch, Siemens, Profilo and Gaggenau. The category of large household appliances includes items such as refrigerators, washing machines, dishwashers and ovens, while the small household appliances category includes vacuum cleaners, irons, food processors and similar devices. As a matter of fact, it is stated in the decision that each product type constitutes an individual relevant product market. BSH carries out the retail sale of the products it produces or supplies under the Bosch, Siemens and Profilo brands through a selective distribution network. Authorized dealers of the Bosch and Siemens brands which are a part of BSH’s distribution system work as exclusive dealers. In other words, these dealers do not sell any products that compete with those supplied by BSH. Authorized dealers have the right to sell BSH products through their own websites and/or marketplaces. In the decision, the Board stated that the main purpose of BSH in establishing a selective distribution system is to protect the brand value and image of BSH products. It is also noteworthy that BSH also sells products via its own websites by giving priority to authorized dealers for the supply of the products.
Application Subject to the Decision
The application made by BSH to the Board concerned its request for a negative clearance (or exemption) to be granted regarding its practice of prohibiting BSH’s authorized dealers from selling on online platforms such as N11, Amazon, Trendyol, Morhipo, and Hepsiburada. The factual background to the application is set forth in the circular prepared by BSH. According to the circular, authorized dealers are prohibited from making sales through online marketplaces on the grounds that such sales are more likely to be accompanied by misleading information about BSH products, and content that does not comply with corporate identity, brand image, quality and safety standards. It explains that BSH’s policy is to warn an authorized dealer in writing in case of a violation of the sales ban and if the contradiction is not remedied, the agreement with the authorized dealer may be terminated for good cause.
Legal Framework
The request for exemption concerns BSH’s intention to completely eliminate online sales of authorized dealers through the marketplaces. The vertical relationship between BSH and authorized dealers is known as a “selective distribution system.” In selective distribution systems, suppliers aim to ensure that their products are sold in places that meet certain standards and by people with technical knowledge which will in return contribute to consumer demand. The selective distribution system may also be preferred as a means to create and maintain a luxury brand image. The Board states that the issue of whether the selective distribution system, which has restrictive effects on competition, is based on reasonable and proportional grounds should be examined within the scope of paragraph 171 of the Guidelines on Vertical Agreements (“Vertical Guidelines”). In case the aforementioned conditions are not met, an agreement that violates Article 4 of the Law on the Protection of Competition No. 4054 (“Law No. 4054”) must be subject to an exemption assessment.
The selective distribution system examined in this case can be considered a qualitative selective distribution system. Yet, in qualitative selective distribution, distributors are selected based on objective criteria due to the nature of the product, such as the training of sales personnel, the service provided and the sale of a certain product range. Therefore, the application of these criteria does not directly limit the number of distributors.
Paragraph 171 of the Vertical Guidelines states that in general, if the qualitative selective distribution systems meet three conditions, they will be considered outside the scope of Article 4 of Law No. 4054 due to the fact that they do not have any restrictive effect on competition. The first of these conditions is that a selective distribution system is necessary to ensure and maintain the quality of the product concerned and ensure its proper use. The second condition is that resellers are selected on the basis of quality-based, objective, non-discriminatory criteria. The third condition is that restrictions should not restrict competition any more than necessary. Selective distribution systems which do not meet these qualifications violate Article 4 of Law No. 4054. However, a system of this nature is also likely to benefit from a group exemption or an individual exemption. Pursuant to the Block Exemption Communiqué on Vertical Agreements No. 2002/2 (“Communiqué No. 2002/2”), the relevant agreement is exempt from the application of Article 4 of Law No. 4054 if the supplier’s market share in the relevant market where the goods or services subject to the vertical agreement is supplied does not exceed 30%. However, according to the Communiqué No. 2002/2, the restriction of active or passive sales to end users by system members operating at the retail level and the prevention of purchase and sale among system members are considered severe restrictions. If an agreement contains such conditions, it cannot benefit from the block exemption. As internet sales are considered passive sales, passive sales bans imposed on system member buyers in selective distribution systems are excluded from the block exemption.
Paragraph 29 of the Vertical Guidelines sets forth that the purpose of the restrictions on dealers should not be to prevent online sales and price competition. As a matter of fact, the Board considers it a violation when the supplier bans sales from platforms in general without putting forward conditions and justifications in line with the unique characteristics of the product.
BSH’s Arguments and the Board’s Approach
In its petition, BSH claimed that sales in marketplaces are restricted in order to preserve its brand image. BSH further claimed that if its products have to be marketed on a page with a domain name consisting of a third-party brand, the consumer must enter the website bearing the logo of the third party in order to reach it and this situation raises concerns in terms of brand image. However, in its evaluation, the Board stated that the platforms are open to cooperation in order to take the measures necessary to protect the brand image of BSH and that design studies can be carried out in order to achieve this, but that no communication had been made between BSH and the platforms on this point. In this respect, it concluded that the prohibition of sales in the marketplaces set forth by BSH, instead of meeting certain criteria, was not proportional to the purpose of protecting the brand image.
Another claim put forward by BSH was that product images and product information may be incomplete or misleading in online marketplaces. BSH emphasized that it has no means of legal or de facto control and intervention in these areas concerning its product image. On the other hand, the Board stated that the responsibilities imposed on dealers in physical channels and the management of the costs incurred for product promotion and the possibility of controlling these processes by the supplier and intervening in the processes are also possible in online channels. In addition, it determined that the right of control of the suppliers may arise with the contractual relations to be established directly with the dealers.
BSH stated that consumers convey their demands and complaints through the marketplaces during pre-purchase consultation, purchasing processes, delivery, assembly, return and repair phases and that they have limited opportunities to communicate directly with the seller and therefore, there may be delays in solving problems. The Board in return stated that the effectiveness of the communication channel between the buyer and the seller in the marketplace can be ensured to be at the desired level. The Board also stated that as a result of the contractual relationship to be established with authorized dealers, the responsibility on this point can be assigned to the relevant authorized dealer.
Another concern put forward by BSH is the coexistence of authorized and non-authorized sellers in the marketplaces, thus equating the authorized seller with the non-authorized seller in the eyes of the consumer. BSH contended that this situation contradicts the image and corporate identity of the brand. The Board replied that clearly stating that a dealer is authorized on the product page or on the information page is a viable method for addressing this concern. In addition, the Board stated that doing so would also reduce practices that mislead consumers.
In addition, BSH argued that the fact that its products are displayed together with other showcases on the marketplaces’ web pages harms the brand value by treating these products as the same product in the eyes of the consumer, even though they are not equivalent to the goods of BSH and other well-known brands. The Board, on the other hand, emphasized that many different brands selling products of the same quality offer side-by-side services in shopping malls where physical sales are made.
The Board’s Evaluation on Block Exemption
The Board qualified the prohibition of active and passive sales to end users by the members of the selective distribution system as heavy limitation due to the following reasons: (i) the sales of BSH’s dealers are completely restricted without applying any qualitative criteria regarding the sales to be made through the online platform, (ii) the relevant prohibition directly or indirectly prevents internet sales, (ii) the conditions stipulated by the provider are against the principle of equivalence and (iv) the buyers usage of the internet as a distribution channel is dissuading. Thus, the Board held that the agreement cannot benefit from the block exemption set forth in Communiqué No. 2002/2. The Board explained that in selective distribution systems, the equivalent of the criteria for authorized dealers for sales in physical channels can also be applied on online platforms for the same purpose. In addition, the Board highlighted that by determining the quality-based objective criteria that authorized dealers must comply with in their marketplaces and on their own websites, it is possible to authorize all dealers who want to sell in marketplaces to sell in online marketplaces, provided that they meet the criteria determined in a reasonable, equal and non-discriminatory manner. Having determined that the agreement could not benefit from the block exemption, the Board next turned to the existence of the cumulative conditions stipulated in Article 5 of Law No. 4054 for individual exemption.
The Board’s Evaluation on Individual Exemption
Within the scope of the individual exemption assessment, the Board evaluated the following conditions: if the practice in question (i) ensures new developments or improvements or economic or technical improvements in the production or distribution of goods and the provision of services, (ii) helps customers to benefit from these improvements, (iii) does not eliminate competition in a significant part of the relevant market and (iv) does not restrict competition more than necessary to achieve the goals set out in the first two conditions, the relevant application is not evaluated within the scope of Article 4 of Law No. 4054 and benefits from individual exemption.
The Board concluded that BSH’s statements on efficiency gain do not serve the purpose of trying to prevent the free rider problem, protect the efficiency of the distribution system and the brand image and therefore the objective of efficiency gain does not exist. The Board also highlighted that trying to protect brand image through a ban on internet sales is not the way often preferred by other competitors in the industry. In addition, the Board stated that a possible free-rider problem may have an impact on dealers but not BSH itself.
On the criterion of providing consumer benefit, the Board stated that online channels such as search engines, comparison sites, complaint sites and marketplaces are the primary channels where product research is carried out before purchase, and that product reviews in online marketplaces are the primary channels that affect the purchasing decisions of consumers. The Board also explained that the most common reason why marketplaces are preferred over the brand’s website is affordable prices. Taking into consideration the aforementioned reasons, the Board held that marketplaces provide consumer benefits at low prices, so that a complete restriction of such a channel would not result in a benefit to consumers.
As for the criterion of not eliminating competition in a significant part of the relevant market, the Board stated that online marketplace bans would limit price competition by tipping the balance in favor of large retailers, making it more difficult for small retailers to enter and sell in the market. Furthermore, the Board explained that the channel with the highest visibility of authorized dealers after physical channels is online platforms and therefore, as a result of the relevant ban, authorized dealers’ access to the internet channel and consumers would be significantly restricted. In this context, the Board stated that the limitation subject to review might reduce intra-brand and inter-brand competition by causing fewer sellers to benefit from effective competition in the online channel.
Finally, the Board evaluated the necessity of the restrictions on competition in the agreement and whether the benefits claimed to be obtained could be obtained through alternative means that would be less restrictive to competition. The Board concluded that the last criterion could not be met as the conditions in subparagraphs a and b of Article 5 of the Law No. 4054 could not be fulfilled.
Conclusion
The Board decided that since the agreements between authorized dealers of BSH and the circular subject to the application contain provisions that violate Article 4 of Law No. 4054, negative clearance could not be granted for these practices. In addition, the Board stated that the regulations in the circular attached to the dealership agreements signed between BSH and its authorized dealers, which stipulate that BSH’s authorized dealers are completely prohibited from making sales on online marketplaces and that various sanctions are imposed on authorized dealers who do not comply with the relevant prohibition, are not within the scope of the group exemption set forth in Communiqué No. 2002/2. In addition, the Board decided that BSH could not benefit from the individual exemption because it does not meet any of the conditions listed in Article 5 of Law No. 4054. In conclusion, the decision reveals that the Board does not tolerate practices that completely restrict dealers’ online sales.
- The Competition Board’s decision dated 16.12.2021 and numbered 21-61/859-423.
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