Eddie Powell, commercial partner at Fladgate LLP discusses the legal issues behind the accusations of price fixing of replica football kits

Following the huge fines for price fixing and the ongoing private litigation brought by a UK consumers' body, UK suppliers of replica football kits have again been in the news in relation to a competition issue. On this occasion Asda announced its intention to source and start stocking replica football shirts of English Premiership clubs. It claimed that its attempts to source the shirts were blocked by the manufacturers, including Nike. Nike declined to supply the supermarket chain, citing the need to protect its selected retailer network. Nike is reported as saying:

'Nike markets its products in the UK in accordance with a retailer distribution policy, ensuring that the retail environment for the sale of Nike products complies with certain minimum quality standards, so as to enable the customer to make purchases in an appropriate retail environment.'

It is no secret that the sportswear manufacturers use selective distribution for their products; that fact was cited in the Office of Fair Trading (OFT) investigation into price fixing in the replica shirt market. What is interesting is that what also came out of the OFT investigation and subsequent court judgments was the sportswear brands' terror of supermarkets and discounters getting their hands on replica kits.

Nike's retailer requirements have been alleged to include the following 'quality standards':

·            The use of high quality merchandising equipment which is approved by Nike and which separates Nike products from other, lesser products;

·            The presence of enough staff trained in the relevant Nike products; and

·            The separation of Nike from other sports and fashion products which do not have such strong brand awareness.

In practice these restrictions exclude supermarkets.

Some manufacturers are breaking ranks; in November it was reported that Diadora had agreed to deal with Asda to allow the supermarket to stock Diadora's Scotland national team replica shirts.

What is selective distribution?

In a selective distribution network, both distributors and the retailers in the product supply chain are assessed by the manufacturer/supplier for their suitability to sell the product concerned before they are included in the distribution system. All the participants in such a system are subject to terms that forbid them to sell the product to wholesalers or retailers outside the selective distribution network except for sales by retailers to end consumers. The effect is that it is difficult for retailers outside the network to acquire stock of the relevant goods, so the limited number of approved shops are the only ones selling the products.

The competition law regime

An agreement which is so restrictive of who can sell what to whom could easily fall foul of Article 81 of the EU treaty (the prohibition of agreements or practices that have the object or effect of preventing or distorting competition within the EU and which will affect trade between EU Member States) or its equivalents in the UK Part 1 Competition Act 1998.

 

There are, however, perceived benefits of selective distribution for consumers: for high-tech goods, consumers get the benefit of trained and knowledgeable staff and a good selection of products. If the limitations on resellers were not present, then no retailer could justify the costs of training and premises involved. For luxury brands, where the exclusivity of the brand makes up a large chunk of what the consumer is buying, that exclusivity would clearly be lost if the goods could be resold by anyone, no matter how 'bargain basement'.

It has, therefore, been recognised that some selective distribution systems should be allowed, and EU competition law contains limited exemptions to Article 81 for them. Article 4(b) of Commission Regulation under 2790/1999 (the Vertical Agreements Block Exemption [VABE]) provides that the prohibitions on resale outside the system will not automatically be caught, even though such restrictions are generally prohibited.

The VABE only applies to vertical agreements where the market share held by the supplier does not exceed 30% of the relevant markets. In this instance, what is 'the relevant market'? If the test for 'the market' is goods that can be effectively substituted for each other, it seems hard to escape the conclusion that the market is a market for that club's replica kit alone (and possibly even if restricted to shirts), in which case the manufacturer (who is usually the exclusive licensee from the club) has 100% of the market. If that is the case, VABE does not apply at all, and an analysis must be conducted under Article 81(3) of the EU treaty.

Article 81(3) provides (in summary) that agreements which improve production or distribution, or promote technical or economic progress, can be excluded from Article 81(1) provided certain conditions are met. These conditions include:

·            Consumers must share in the benefit of the arrangement;

·            The restrictions must not be 'indispensable' to the benefits outlined above; and

·            The restrictions do not allow competition to be eliminated.

European cases decided before VABE under Article 81 have come down in favour of selective distribution provided that a number of conditions are met:

·            The nature of the products must be such that selective distribution is necessary to either protect the value of the brand or to ensure that consumers receive the benefit of specialist retail support or both;

·            The criteria for admission to the selective distribution system must be fixed and applied objectively. Criteria must be qualitative rather than quantitative so that the number of retailers is not fixed and any resellers who meet the criteria are allowed to join; and

·            The restrictions imposed on distributors as part of their admission to the selective distribution system must be no more than is absolutely necessary.

The argument for selective distribution of replica shirts

From the manufacturer's point of view it is easy to see why selective distribution seems to make sense. A brand such as Nike does not only produce replica shirts; it produces football boots and other supporting equipment, some of which is extremely technical in nature. It is easy, therefore, to see why Nike would consider that its product ranges as a whole should be subject to selective distribution to ensure the products are sold in a proper environment.

 

As valid as this is, the question is really whether it should apply to replica shirts, as distinct from other sports goods. It is too easy to allow manufacturers to get away with saying that, because its product requires a specialist retail environment, none can be sold elsewhere. The argument is unsustainable in my view in the case of replica shirts for the following reasons:

·            A consumer visits a shop, be it a professional sports shop or a supermarket, knowing which team's shirt he or she wishes to buy, chooses his or her size and then buys the item. The issue of product choice does not come into it: apart from the choice between home and away strip, there is only one product of interest to the consumer. The presence of a changing room may be a feature that would be appreciated by some consumers but now even most supermarkets have this facility.

·            A replica shirt is not really a technical sports product; the bulk of replica kit (for adults at least) are probably hardly used as sportswear. Replica shirts are fashion wear, or at least leisurewear. I remember the same argument being run by Levi Strauss when they were suing Tesco for selling parallel imported jeans from outside Europe; the suggestion that a trained sales assistant was necessary to help someone choose a pair of jeans was greeted with derision in the UK. Why should a replica shirt be different?

·            Nor is the exclusivity of the product part of its value. A Manchester United fan is hardly likely to be disappointed if, having bought his or her new-season shirt, he or she finds several thousand other supporters dressed in identical shirts.

There is a clear case for replica kit, as opposed to genuine technically advanced sports goods, to be treated differently and removed from the ambit of selective distribution. On the converse side, suppliers may be able to agree that if replica kit could be sold outside the selective retailing system, the return for specialist shops on the rest of the product line would make selective distribution unsustainable.

Is selective distribution justified?

Doubtless, all replica sportswear manufacturers have now gone to great lengths to ensure that there is never a repeat of the price fixing that led to the OFT's action. The ability to exercise control over suppliers through selective distribution, however, must have contributed to the situation, or at the very least led to a situation where the price-fixing arrangement was sustainable. The question must be asked whether the brake on intra-brand competition in the replica sports kit market can really be justified in these circumstances.

In Summary

Manufacturers argue that selective distribution is necessary because retailer requirements must reach 'quality standards' and these restrictions exclude supermarkets as distributors.

The requirements mean that for high-tech goods, consumers get the benefit of trained and knowledgeable staff and a good selection of products; the question is whether this applies to replica shirts.

There is a clear case for replica kit, as opposed to genuine technically advanced sports goods, to be removed from the ambit of selective distribution, however, suppliers may be able to argue that if replica kit could be sold outside the selective retailing system, the return for specialist shops on the rest of the product line would make selective distribution unsustainable.

Eddie Powell, Partner
Fladgate LLP
epowell@fladgate.com