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Toy Brand LEGO Investigated by German Competition Authority for Anti-competitive Rebate System

By means of a press release of 18 July 2016, the German Competition Authority announced that it has terminated proceedings against toy manufacturer LEGO. The German Competition Authority had been investigating LEGO’s rebate system on the suspicion that it disadvantages online retailers vis-à-vis brick-and-mortar retailers.

LEGO is one of the world’s biggest producers of toys and is particularly famous for its trademark-protected interlocking plastic bricks. In 2015, LEGO overtook Ferrari as the world’s most powerful brand, according to the branding consultancy Brand Finance.

The German Competition Authority had received complaints about LEGO’s rebate system from retailers, and subsequently initiated investigations against LEGO. Under LEGO’s rebate system, which it introduced Europe-wide in 2014, only brick-and-mortar retailers were able to be granted the highest possible amount of rebate points. This was because a number of criteria were tailored exclusively toward brick-and-mortar retailers.

For example, one of the criteria to receive rebate points was the shelf length that the retailers could provide. As a consequence, online retailers, even those that acted in an exemplary manner, received lower discounts than retailers that sold exclusively in brick-and-mortar stores, which in turn led to brick-and-mortar retailers being able to buy LEGO products for lower prices.

The German Competition Authority eventually accepted commitments from LEGO to change its rebate system so as to maintain equal rebate opportunities for both brick-and-mortar and online retailers; it therefore decided to terminate its investigations. LEGO’s new rebate system will be in force as of 1 January 2017.

According to the President of the German Competition Authority, Andreas Mundt, producers are, of course, free to set requirements on the quality of the distribution of their products and to grant retailers different rebates for different services. However, producers must not structurally disadvantage e-commerce as a distribution channel.

Andreas Mundt also stated that many retailers have a dual distribution system, in order to win over customers by practising e-commerce in addition to maintaining brick-and-mortar stores. According to Mundt, such business models have to be possible, also in order to support brick-and-mortar retail.

However, Mundt stated that for the consumer it is important that there is effective competition throughout all distribution channels.

Hong Kong sellers interested in exploiting opportunities via e-commerce may be interested to know that the German Competition Authority has, in the past, cautioned a number of producers in different industries not to discriminate between e-commerce and brick-and-mortar retail. Producers’ tendencies to disadvantage e-commerce are often based on the desire not to threaten the image of their brand.

In January 2016, LEGO had already been investigated by the German Competition Authority. At that time, the investigations were prompted by LEGO pressuring retailers to raise the retail prices of products that were especially popular with customers, which led the Competition Authority to eventually impose a fine of € 130,000 against LEGO. In some cases, LEGO threatened retailers with a reduction in supply or a refusal to supply if retailers offered products at a retail price that was below the price determined by LEGO’s price lists. After the German Competition Authority had initiated proceedings, LEGO carried out internal investigations and cooperated with the Competition Authority in the clarification of the facts of the case. LEGO also carried out some organisational and personnel changes as a consequence of the competition law violations.

Hong Kong businesses operating in the EU may like to know some more about this area of competition law. Vertical restraints on competition, i.e., restraints within supply and distribution agreements, are generally considered less harmful than horizontal competitive restraints (between direct competitors) and may provide substantial scope for, e.g., more efficient distribution. However, illegal vertical restrictions on competition, which are agreements that prevent, restrict or distort competition, do arise if there is insufficient competition at one or more levels of trade.

Illegal vertical restrictions on competition can take many forms. Examples, other than a structural discrimination between e-commerce and brick-and-mortar retail, are if a producer were to sell to only one or a limited number of buyers (exclusive distribution, selective distribution) or non-compete obligations which prohibit distributors from purchasing and reselling competing products.

If a vertical agreement is concluded between companies whose market share is below 30%, those companies may be exempted from the prohibition against vertical preventions, restrictions and distortions of competition, if the vertical restraint in question is not a hard-core restriction. Hard-core restrictions are, for example, restrictions imposed on the buyer's ability to determine his sales price, or certain types of re-sale restrictions.

Another type of hard-core restriction is a so-called dual pricing system, according to which a retailer is given different wholesale prices depending on whether the retailer sells products in brick-and-mortar stores or via the internet. By determining different wholesale price levels for the respective distribution channels, producers that have the ability to direct the retailer’s distribution via different distribution channels could potentially prevent any online sales and in turn prevent retailers from building up an e-commerce distribution channel. For that reason and because a restriction of internet retail also limits the geographic scope of the distribution and can thereby be considered as restricting the territory or the group of customers, such dual pricing systems constitute a hard-core violation of competition law.

Content provided by Picture: HKTDC Research
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