Turkey: A Closer Look at Resale Price Maintenance and Restrictions on Internet Sales: The JOTUN and Duru Cases

The Turkish Competition Board ("Board") recently published its decisions in the JOTUN^[1] and Duru^[2] cases. These cases were highly significant for the Turkish competition law regime, as the Board assessed allegations concerning the practice of resale price maintenance ("RPM").

In Dura, the RPM allegations revolved around the alleged practice of determining the shelf prices of retail chains and putting limitations / restrictions on their discount rates.

In JOTUN, the Board evaluated allegations that JOTUN had restricted the online sales of its authorized dealers through a prohibitive provision, in addition to its RPM practices.

In both decisions, the Board first provided an overview of the legal framework that applies to RPM allegations under the Turkish competition law regime. The Board characterized "indirect RPM" as: (i) setting the profit margin of the buyer, (ii) setting the maximum discount rate that may be applied to the recommended price, (iii) providing additional discounts to the buyer, as long as the buyer complies with the recommended prices, or (iv) delaying or suspending delivery of its products or terminating the agreement if the buyer fails to comply with the recommended prices.

Although JOTUN had informed the dealers of the purchase and sales prices for large-scale projects, there was no indication or proof that such communications had taken place with respect to its small-scale retail sales. The Board noted that JOTUN's conduct involved setting a maximum price that included a special discount rate for large-scale projects, rather than what could be described as clear-cut RPM practices. Therefore, the Board did not find a by-object restriction on the part of JOTUN. Thus, the Board proceeded to engage in an "effects analysis" and compared the resale prices offered by various dealers of JOTUN's products. The Board ultimately determined that the dealers' resale prices differed not only from each other but also from JOTUN's recommended price list price. The Board therefore concluded that JOTUN had not determined the resale prices of its retail products.

In Duru, the Board considered whether Dura and its retailers had been in contact with each other for the purpose of (i) determining shelf prices, (ii) engaging in price negotiations, and (iii) deciding the timing and schedules of discount campaigns. The resale points asserted that Duru had not intervened in their resale prices, which were shaped and determined by effective competition at the retail level.

In its decision, the Board first provided an overview of the relevant sector, and analyzed market data regarding production, import and export levels as well. In its analysis, the Board considered various factors, such as (i) whether the relevant market was competitive, (ii) intrabrand competition, (iii) market concentration, (iv) the market power of the undertaking that allegedly engaged in RPM practices and the market positions of its competitors, (vi) whether there was buyer power and compliance with the prices recommended by the supplier, and (vii) whether the supplier implemented monitoring and/or enforcement mechanisms to ensure compliance with the recommended prices.

The Board ultimately determined that the relevant market did not exhibit high levels of market concentration, given that (i) Dura had a low market share, and (ii) the HHI level (i.e., the Herfindahl-Hirschman index, which is a commonly accepted measure of market concentration) was below 1,000.

Regarding the competitive landscape of the relevant market, the Board emphasized that the competitive pressures generated by the discount stores and other chain stores was particularly significant due to their competitive prices. The Board also determined there were a significant number of undertakings that were active in the market as suppliers and/or resellers. The Board further observed that, even though Dura's products were generally more expensive than its competitors', customers still preferred them due to their high quality. The Board also considered responses received from interviewed retailers, who indicated that (i) Dura was not in a position to determine their resale prices, and (ii) they established their own shelf prices according to their own profit/loss calculations. The Board therefore concluded that Dura was not in a position to exercise RPM with respect to its retailers.

Nevertheless, the Board acknowledged and reiterated certain possible negative effects that might arise from an RPM practice in the market. The Board enumerated several potential negative effects, such as (i) an increase in product prices, (ii) a decrease in pressure that could be applied by sales points to their suppliers in terms of reducing prices, (iii) steering consumers to products for which the resale prices had already been fixed, and (iv) preventing undertakings from entering the downstream market with lower costs and prices. The Board finally resolved that these potential negative effects were not possible in this particular case, considering the competitive landscape of the relevant market.

The Board also compared the actual resale prices of the sales points with Duru's recommended prices, and concluded that the sales points generally did not follow Dura's recommended prices; instead, they followed and matched their competitors' relatively low prices due to the existence of fierce price competition in the market.

Factoring in all the aspects and circumstances of the case, including (i) the competitive structure of the relevant market, (ii) intrabrand competition, (iii) the competitive pressure of retail chains, (iv) the existence of products that were sold at nearly half off compared to the prices in discount markets, (v) Duru's low market share, (vi) low concentration level in the market, (vii) the fact that retailers often priced their products below the recommended prices, and (viii) the absence of any evidence regarding any enforcement or monitoring mechanisms for the implementation of the recommended prices set by Dura, the Board ultimately declined to initiate a full-fledged investigation against Dura.

In JOTUN, in addition to its RPM analysis, the Board also assessed allegations that JOTUN had restricted online sales by its authorized dealers. To that end, the Board reviewed JOTUN's previous and current dealership agreements. As a result of its examination, the Board found that the current dealership agreement included a provision which restricted the online sales of JOTUN's products.

In its analysis, the Board first pointed out that internet sales have been growing in Turkey and throughout the world in recent years. The Board noted that this growth trend has persisted because such sales reduce customers' search costs and lower undertakings' distribution costs, in addition to providing a wider geographic range for products and enabling access to more consumers. The Board also referred to the European Commission's ("Commission") recent actions, emphasizing that the Commission has already issued a sector report on e-commerce. In this context, the decision articulated and observed that restraints concerning prices, prohibitions against online sales, restrictions concerning price comparison tools and the exclusion of online sellers from distribution networks are becoming rather widespread in the e- commerce context. The decision further underlined the Commission's perspective with respect to distribution agreements, which focuses on the fundamental view that the freedom of dealers to conduct their sales via the internet should not be restricted.

Furthermore, the Board referred to the Commission's Vertical Agreements Block Exemption Regulation ("EU Regulation"), its Guidelines on Vertical Restraints ("EU Guidelines"), as well as several precedents of EU courts. In this regard, the Board emphasized that, according to the EU Vertical Guidelines, distribution agreements that do not entail hardcore restrictions and do not exceed the relevant market share threshold would be exempted from the application of Article 101 of the Treaty on the Functioning of the European Union ("TFEU"). Nonetheless, restrictions of active/passive sales to the end users by a supplier that operates a selective distribution system would be regarded and treated as a hardcore restriction, in accordance with the EU Regulation. The EU Guidelines assert that the direct restriction of passive sales (or any other conduct that would produce the same results) would be deemed as a restriction of competition. According to the EU Guidelines, besides the direct restrictions imposed on passive sales, the following types of behavior are prohibited within the scope of the rules against the indirect restriction of passive sales:

• Restriction of a customer's access to a website, when the customer is determined to be located within the territory of another exclusive distributor, or the redirection of such a customer to the supplier's or distributor's website;
• Cancelling a customer's order if it is determined from the customer's credit card information that the customer is not located in the exclusive territory;
• Restriction of the percentage of total sales that can be conducted via the internet; and
• Determination of the resale price of the distributor for products that will be sold through the internet by a comparison with the sales prices of traditional sales channels.

In accordance with the EU Guidelines, for such restrictions to benefit from the protective cloak of an individual exemption, there must an objective reason for the product to be sold physically (i.e., offline). In this context, the Board referred to the French Competition Authority's Pierre Fabre decision^[3], where it was concluded that the investigated undertaking (which was a self-care and cosmetics firm) had implemented restrictions against online sales for anticompetitive purposes, and thus the restrictions in question were not granted an individual exemption. The European Court of Justice ("ECJ"), in its appellate review, noted that the restriction on internet sales did not provide a product- specific objective justification or reason, and therefore could have competition-restrictive purposes. The Board observed that the defenses concerning products subject to the agreement in that case, namely the argument that use of the relevant products required expert guidance and recommendations and that, consequently, internet sales would damage the brand image, had not been accepted by the ECJ.

The Board highlighted the fact that the Commission's approach toward restrictions on internet sales focuses on the existence (or absence) of an objective legitimate justification, which must be based on the particular characteristics of the product, and that the prohibition against internet sales is fundamentally limited to (and can only be justified for) prescription medicines and other products that may be prohibited from being sold online in consideration of public bans (e.g., illicit and illegal products). Therefore, if an internet sales restriction is imposed on a particular product and the restriction cannot be objectively justified by offering product- specific reasons, this would be regarded and deemed as competition-restrictive behavior by the investigated undertaking.

In its analysis, the Board finally referred to the Coty decision of the ECJ^[4], where the internet sales restriction for online platforms had been evaluated. In that case, the Court had determined that, considering the specific characteristics of the products in question, there had been no passive sales restriction. In other words, the ECJ decided that, in order to protect the brand image of luxury products, restrictions related to sales conducted via third-party online platforms could be imposed on the distributors.

In the context of Turkish competition law legislation, the Board noted that internet sales are primarily categorized as "passive sales," as per paragraph 24 of the Guidelines on Vertical Agreements, and therefore, restrictions on such sales would be deemed and evaluated as restrictions on passive sales. In this context, the Board also declared that, although a supplier can prohibit sales to unauthorized distributors within the scope of selective distribution systems, it cannot restrict active or passive sales to end users at the retail level. Accordingly, the Board indicated that, although JOTUN had established a selective distribution system, any provisions restricting the online sales of authorized distributors would cause the vertical agreement to fall out of the scope of Communiqué No. 2002/2. In this respect, the Board assessed that prohibiting online sales in their entirety would constitute a disproportionate measure for the purpose of restricting or preventing sales to unauthorized distributors, and thus, such a measure would not benefit from an individual exemption. The Board also noted that JOTUN could have adopted and implemented less restrictive arrangements in order to prevent its distributors from conducting sales to unauthorized distributors (for instance, imposing limits on customers' purchase amounts for internet sales, which could also be applied to physical sales points under certain conditions).

Accordingly, the Board ultimately concluded that JOTUN had not determined the resale prices of its retail products. However, in the Duru decision, the Board resolved to send an opinion letter to Duru, pursuant to Article 9 of the Law No. 4054, stating that Duru should indicate in its price lists that the relevant prices are either maximum or recommended sales prices, and must cease any conduct that may lead to the determination of shelf prices and discount rates, or that may be associated with fixing resale prices by any other means. In its JOTUN decision, regarding the restriction of internet sales, the Board decided not to initiate a full-fledged investigation, because JOTUN's market power was found to be limited (and thus the effects of the foregoing restriction would also be limited). However, as per Article 9 of the Law No. 4054, the Board indicated that JOTUN should amend its dealership agreements in order to remove the prohibition against passive sales, in particular the restriction against internet sales, and cease all of its conduct and activities on this front.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in September 2018. A link to the full Legal Insight Quarterly may be found here.

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