In Türkiye, e-commerce is defined in Law No. 6563 on the Regulation of Electronic Commerce as "all kinds of online economic and commercial activities carried out electronically without physically meeting each other".
Enterprise sales techniques and processes have changed as a result of the growth of e-commerce. The competitive dynamics at the retail level have changed dramatically as a result of sellers using both traditional and online sales channels. With these developments, restrictions on internet sales through vertical agreements between undertakings are observed.1
Vertical Agreements in Turkish Competition Law and the Effects of EU Law
Vertical agreements have a special importance in Turkish Competition Law. In Türkiye, restrictions in vertical agreements are regulated under Article 4 of Law No. 4054 on the Protection of Competition ("Law No. 4054")2. As is known, in accordance with Article 4 of Law No. 4054, Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited. In the preamble of the article, it is clearly stipulated that the term "agreement" covers horizontal and vertical agreements.
Vertical agreements are defined in the Block Exemption Communiqué on Vertical Agreements Communiqué No:2002/2 ("Communiqué")3 as "Agreements concluded between two or more undertakings operating at different levels of the production or distribution chain, with the aim of purchase, sale or resale of particular goods or services". Based on the definition, it can be said that vertical agreements have three main elements. Firstly, two or more enterprises must be parties to the agreement. Secondly, enterprises must operate at different levels of production or distribution. A distribution contract concluded between a producer enterprise acting as a supplier and a wholesaler, is an example of a vertical agreement that is frequently encountered in practice. Thirdly, there are certain goods or services that must be for the purpose of purchase, sale, or resale.
Article 5 of Law No. 4054 authorizes the Competition Board to "grant exemptions" as a group to agreements that meet certain conditions and to issue communiqués specifying such conditions. Although it restricts competition, it is also acknowledged that under some circumstances, agreements with positive elements may be exempt from the Communiqué since they are more equitable and economically advantageous. Exempted agreements will have effects and consequences for the parties and third parties, even if they contain anti-competitive provisions. Therefore, pursuant to the amended paragraph 2 of Article 2 of the Communiqué, agreements that do not contain restrictions listed in Article 4 of the Communiqué and where the market share of the provider in the relevant market affected by the vertical agreement does not exceed 30%4 are considered within the scope of group exemption.
Article 4 of the Communiqué lists the limitations that exclude agreements from the scope of group exemption. Subparagraph (a) of the first paragraph of Article 4 of the Communiqué relates to the restriction of the buyer undertaking's freedom to determine its own sales price. Pursuant to this provision, the buyer is prohibited from setting a fixed or minimum selling price. However, it is possible for the supplier to determine the maximum selling price or recommend the selling price, provided that it does not turn into a fixed or minimum selling price as a result of pressure or encouragement by any of the parties. Therefore, agreements within the scope of group exemption are exempt from the prohibition under Article 4 of Law No. 4054 has been kept.
While it is prohibited to set the resale price directly by including an "express provision" in the vertical agreements concluded between the parties, it is also prohibited to set the resale price indirectly. Determination of the buyer's profit margin, promising additional discounts to the buyer if the buyer complies with the recommended prices, or delaying deliveries or terminating the agreement in case of non-compliance with the recommended prices can be given as examples of prohibited situations due to the indirect determination of the resale price. Such indirect resale price determination practices are also prohibited under subparagraph (a) of the first paragraph of Article 4 of the Communiqué.
On the other hand, pursuant to subparagraph (b) of the first paragraph of Article 4 of the Communiqué, indirect or direct sales restrictions to certain regions or customer groups are also prohibited. However, the exceptions to this provision are explicitly listed in the following sentences. The types of region or customer sharing listed under four headings are not considered restrictions that exclude agreements from the group exemption:
- "Restriction of active sales by the supplier to an exclusive territory or exclusive group of customers allocated to it or to a buyer, provided that this does not include sales by the buyer's customers,
- Restriction of sales to end-users by the buyer operating at the wholesaler level,
- Restricting members of a selective distribution system from selling to unauthorized distributors,
- In the case of parts supplied for the purpose of assembly, restricting the buyer from selling them to competitors of the supplier who is the manufacturer.5"
Except for the first of the four exceptions set forth in subparagraph (b) of the first paragraph of Article 4 of the Communiqué, no distinction is made between active and passive sales. While active sales is a type of sale where the provider and/or resellers reach consumers through elements such as advertising and promotion, passive sales is a type of sale where the consumer reaches the seller without any effort on the part of the provider and/or resellers.
Within the scope of competition law, internet sales are defined as passive sales.6 Passive sales cannot be subject to any restriction under competition law, except for exceptions. In other words, in cases where the last three exceptional provisions are applicable, any active or passive sale by the buyer may be restricted by the provider7.
In the continuation of the first paragraph of Article 4 of the Communiqué, the restriction of active and passive sales to end-users by system members operating at the "retail" level in the selective distribution system is also included within the scope of the prohibition. Likewise, it is also prohibited to prevent the sale and purchase among system members in the selective distribution system. Furthermore, in the case of goods created by assembling parts, in agreements between the supplier who sells these parts and the buyer who assembles them, the supplier is prohibited from selling these parts as spare parts to end users or to repairers who are not authorized by the buyer to maintain or repair the goods.
Another important restriction in the Communiqué is the "non-compete obligation". According to Article 5 of the Communiqué, all direct and indirect acts that prevent the buyer from producing, selling, or reselling goods or services that compete with the goods or services subject to the agreement are considered within the scope of the non-compete obligation. The duration of the non-compete obligation must be at least five years or indefinite. It is important to note that a non-competition obligation where the parties tacitly agree that the agreement will be renewed every year should also be considered indefinite. Non-competition imposed contrary to these obligations will remove the contract from the scope of the group exemption.
It is also important to consider how the non-competition obligations imposed on buyers in vertical agreements will affect the agreement in terms of group exemption. In the event that a non-compete obligation is imposed on the buyer that exceeds the limits permitted under this Article, if the provisions of the agreement containing this obligation can be separated from the other parts of the agreement, these provisions cannot benefit from group exemption. However, the remaining parts of the contract may benefit from group exemption. If the non-compete obligation in the vertical agreement between the supplier and the reseller can be separated from the other provisions of the agreement, the agreement may be maintained without the non-compete obligation. If the contractual provisions containing the non-compete obligation cannot be separated from the other provisions of the agreement, the agreement cannot benefit from group exemption in its entirety.
In Turkish competition law, the first decisions involving the restriction of internet sales in selective distribution systems did not make a detailed assessment and only focused on the "active/passive sales distinction". However, with the guidelines issued by the European Union ("EU") in 2010, the Competition Board decisions started to be influenced by the EU and started to include qualitative criteria put forward by the providers.8
Restrictions imposed on re-providers in e-commerce are generally encountered in selective distribution systems in EU competition law legislation, as in Turkish law. It is seen in the reports that the market share of e-commerce has expanded since the pandemic. However, vertical agreements and restrictions on resellers in selective distribution systems in the EU were first subjects to the Court of Justice of the European Union ("CJEU") in 1977 and 1986, respectively. The Metro I9 and Metro II10 decisions are still used today in the approach of the CJEU and the Competition Board to e-commerce restrictions. Accordingly, in the Metro I decision of the CJEU in 1977, it was held that price competition alone is not sufficient to impose restrictions on resellers.
The Metro I and Metro II judgments have been accepted as the "Metro Criteria" by the CJEU and have been used in exemption phases for vertical agreements.
Under the Metro Criteria;
- The nature of the product,
- Objective non-discriminatory criteria are applied in the selection of re-sellers; and
- If the criteria applied are not excessive, the group will be able to benefit from the group exemption for vertical agreements.
In particular, restrictions imposed on resellers in the selective distribution system must comply with Article 101/3 of the Treaty on the Functioning of the European Union ("TFEU"). Accordingly, any agreement is deemed to be contrary to EU competition law. The restrictions set out in Article 4 of Law No. 4054 are regulated in accordance with Article 101/3 of the TFEU, and the provisions restricting competition are more clearly set out in Law No. 4054.
Regulation No. 330/2010 of 20.04.2010 adopted by the European Commission11 ("Regulation No. 330/2010") and the Guidelines explaining Regulation No. 330/201012 ("EU Guidelines"), in line with Turkish competition law, considered internet sales as "passive sales". Passive selling means that providers and/or resellers do not advertise to reach consumers outside their territories.13 Most competition law authority decisions were unable to prevent passive sales. In addition, as in the Communiqué, vertical agreements that do not contain severe restrictions and do not exceed the 30% market share threshold under Regulation 330/2010 are considered to be within the scope of group exemption by the CJEU and outside the scope of Article 101 of the TFEU14.
The heavy restrictions in Regulation 330/2010 are the same as in the Communiqué;
- setting the reseller's resale price,
- limitations on the region and customer group,
- limitation of active and/or passive sales to end consumers in the selective distribution system, and
- preventing resellers who are members of the selective distribution system from making sales to each other.
An exclusive distribution system is a system in which the supplier determines only the region and number of resellers, without taking into account the characteristics of the product subject to sale in any way. According to this system, the above-mentioned market thresholds are exceeded and there are severe limitations, that would not be possible under the TFEU.
In addition, in the selective distribution system, resellers should make a selection based on objective criteria according to the nature of the products. The aim of the selective distribution system is to protect the brand image in luxury and niche products and to provide pre-and post-sales services to consumers.15 In this distribution system, more restrictions can be imposed on the reseller than in the exclusive distribution system, such as the complete blocking or limitation of online sales and restrictions on advertising.
One of the absolute restrictions under Regulation 330/2010 is the complete blocking of internet sales by re-sellers. One of the primary objectives of both European and Turkish competition law is consumer welfare. However, if internet sales are blocked, the end consumer's easy access to products is prevented and the possibility of low prices is eliminated. Nevertheless, if the provider has objective criteria, pursuant to Regulation No. 330/2010, as under the Communiqué accordingly, it will be possible to include it within the scope of the exemption. As stated in the EU Guidelines, circumstances such as public health may be considered grounds for absolute prohibitions. In Pierre Fabre16 decision, the protection of the public interest and blocking internet sales as the sole means of protecting the public interest are not in themselves limitations requiring an exemption. However, both are necessary reasons for an exemption to be granted by the Competition Board as well as by the CJEU.
Relevant Competition Board Decisions on the Subject
In the Yatsan and Antis cases, the Competition Board evaluated the prohibition of online sales in the context of the selective distribution system.
In the Antis I17 decision concerning the distribution of cosmetic products, a negative clearance certificate is requested for the resale agreement signed between the manufacturer and authorized resellers. As a result of its investigation, the Competition Board determined that the restriction of authorized resellers to sell over the internet without the written permission of the manufacturer restricts intra-brand competition pursuant to Article 4 of the Communiqué titled "Restrictions Excluding Agreements from the Scope of Group Exemption". Accordingly, the vertical agreement was not within the scope of group exemption on the grounds that competition was restricted and subsequently made an individual exemption assessment. As a result of the examination, the consumer's skin using a product suitable for its structure is essential to get the highest expected benefit from that product. It is emphasized that consumers may make mistakes in this regard in sales made through the internet or may have incomplete information on usage. For this reason, it has been concluded that the brand image targeted by the manufacturer may not be achieved and that this restriction is necessary for the benefit of the consumer.
However, the contracts in question met all the conditions listed in Article 5 of Law No. 4054. Therefore, an individual exemption was granted.
In Yatsan18, another decision in which internet sales were restricted in the selective distribution system, it was held that the ban on internet sales constituted a severe restriction in the context of preventing passive sales.
It was then analyzed whether there was an objective justification for such a restriction, such as the protection of public safety and health, and the introduction of a new product to the market/marketing of an existing trademark for the first time in a new market. Accordingly, these conditions were not met in this particular case. The economic integrity of the undertaking through vertical applications in which the undertaking determines the sales price and prohibits internet sales is in violation of Article 4 of Law No. 4054. is found to constitute a contradiction. It is concluded that such practices cannot benefit from the exemption provided by the Communiqué. In the individual exemption assessment, it was acknowledged that the risk of free-riding and the protection of the brand image, which were put forward by the undertaking as justifications for the prohibition, was important. However, noting the approach adopted by the Commission in the Guidelines, it was emphasized that there were less restrictive measures to achieve these objectives. It also referred to the benefits of the internet for consumers and stated that the restriction is unlikely to be beneficial for the consumer. Therefore, since it does not meet the conditions set forth in Article 5 of Law No. 4054, the said practices cannot be granted individual exemptions.
In the first decisions in Turkish competition law involving restrictions on internet sales in selective distribution systems, no detailed evaluation was made and only the active/passive sales distinction was emphasized. However, with the guidelines issued by the European Union ("EU") in 2010, the Competition Board decisions started to be influenced by the EU and include qualitative criteria put forward by the providers.19
Decisions of the European Competition Authorities
The application of a retailer who was prevented from selling "Scout" branded backpack products on eBay was assessed by the German Competition Authority.20 The provider justified its refusal to allow the sale of the product on the eBay platform, although it allowed the sale of the product in physical stores, by citing the protection of the brand image. According to the decision, although Scout applied a selective distribution system, the German Competition Authority stated that this restriction was incompatible with the nature of the product. Scout brand bags are school bags and are not luxury and niche products. Due to the nature of the product, there is no need for any limitation, and the consumer does not have any interest in the relevant limitation. The German Competition Authority did not find it appropriate to restrict the internet sales of dealers due to the absence of the conditions set forth in Article 101.3 of the TFEU. Since Article 4 of Law No. 4054 is regulated in parallel with Article 101.3 TFEU, such limitations are also considered inappropriate by the Competition Board.
The European Competition Commission investigated allegations that Nike, directly and indirectly, restricted its dealers' cross-border active and passive online sales and engaged in anticompetitive practices.21 Nike delivers its products to consumers directly or indirectly through authorized dealers to whom it licenses its products. Nike has taken some actions to actively and passively restrict its resellers' online sales. One of the most significant sales restrictions is the prohibition of Nike's licensed dealers from selling outside their exclusive territories. Out-of-territory sales are contractually restricted and Nike has the right not to renew the contract in case of a breach. Although not explicitly stated, it is understood from the wording that Nike will not renew its contracts with licensed resellers and this puts pressure on sellers. An administrative fine was imposed for anticompetitive acts and for restricting passive sales. The non-restriction of passive sales except for exceptions is regulated by both the European Competition Commission and the Competition Board and has been the subject of many other decisions.
Another decision regarding the selective distribution system is the Coty22 decision. Coty, a perfume manufacturer, has adopted a selective distribution system, whereby preventing its dealers to use online platforms. As per the ruling of the Frankfurt Regional Court, the relevant vertical restriction limits consumer welfare and completely denies access to the product concerned to a certain group of consumers. It was considered to be an absolute limitation and incompatible with the TFEU. In line with the Coty decision, the Competition Board's decisions have shown that competition in the relevant market is not restricted in cases where consumer welfare is sought. Restrictions are made according to the distribution system organized in accordance with the characteristics of the product and this situation is based on objective criteria.
CONCLUSION
The market share of e-commerce sales, which has become widespread, especially during the pandemic period, is increasing both in Türkiye and in the world. However, it is observed that providers try to restrict or prevent sellers from using the internet for various reasons. Maintaining the competitive market provided by the internet and preventing anticompetitive transactions fall within the scope of competition law. With the development of the internet and the widespread use of e-commerce, it is clear that the regulation and supervision of vertical agreements and internet restrictions are of great importance for the protection of competition. Therefore, it is necessary to closely follow the developments and to keep our regulations on the subject up-to-date in e-commerce, which is increasing use in our country and in the world.
When the decisions of the European competition authorities and the Competition Board decisions are analyzed together, the situations that resulted in warnings to providers or administrative fines have been identified as the same. It has been observed that the TFEU and Law No. 4054, which are similar in terms of legislative arrangements, may impose certain obstacles to re-sellers in cases where consumer welfare is sought as a basis and the qualities of the product are objectively taken into account.
Footnotes
1. Friederiszick ve Glowicka 2015, 1
2. 4054 sayılı Rekabetin Korunması Hakkında Kanun, https://www.mevzuat.gov.tr/mevzuat?MevzuatNo=4054&MevzuatTur=1&MevzuatTertip=5
3. 2002/2 sayılı Dikey Anlaşmalara İlişkin Grup Muafiyeti Tebliğ, https://www.rekabet.gov.tr/Dosya/tebligler/2002-2-sayili-teblig-(2021-4-degisiklikleri-islenmis)-20211108175938391-pdf
4. While the market share limit was 40% in the previous version of the clause, the numbered 2021/4 published in the Official Gazette dated 05.11.2021 reduced to 30% with the communiqué.
5. Article 4/1/b-(1-4) of the Communiqué No. 2002/2 on Group Exemption for Vertical Agreements
6. TÜSİAD Competition Law Workshops, Vertical Restrictions in Competition Law, p.8, October 2016
7. Competition Board, Guidelines on Vertical Agreements, § 35
8. Hande Göçmen, Vertical Restrictions on Internet Sales
9. Metro v Commission, [1977], Case 26/76 (Metro I).
10. 41 Metro v Commission, [1986], Case 75/84 (Metro II)
11. https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:102:0001:0007:EN:PDF
12. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52010XC0519%2804%29
14. https://www.ab.gov.tr/files/pub/antlasmalar.pdf
15. IACUBUCCI E./WINTER R.A., European Law on Selective Distribution and Internet Sales: An Economic Respective, Antitrust Law Journal, 2016, s.46-48
16. Pierre Fabre, Case C-439/09 [2011]
17. Decision of the Competition Board dated 05.05.2008 and numbered 08-32/401-136
18. Decision of the Competition Board dated 23.09.2010 and numbered 10-60/1251-469
19. Hande Göçmen, Vertical Restrictions on Internet Sales
20. Scout Satchel, Case
21. Ancillary Sports Merchandise, Case C-40436 [2019]
22. Coty, Case C-230/16 [2017]
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