Deckers v Up & Running: redrawing the boundaries of object infringements in distribution systems

The Court of Appeal has handed down its judgment in Deckers UK Limited v Up & Running (UK) Limited, unanimously overturning the Competition Appeal Tribunal’s (the CAT) earlier ruling that Deckers’ termination of Up & Running as an authorised distributor constituted a restriction of competition “by object”.

The Court of Appeal's judgment, by bringing together recent key rulings of the EU and UK Courts, provides helpful clarification of the legal test for object restrictions, and is therefore relevant to more than just distribution arrangements. It confirms that the proper application of the legal test requires a fact-specific analysis of each agreement’s context (including the parties’ market position), rather than a formalistic approach that treats certain categories of conduct as inherently unlawful.

The judgment is, however, of particular importance to suppliers of luxury, high-end and specialist consumer goods that operate selective distribution systems in the UK. Such firms should welcome the finding that protecting the integrity of the network is a key factor that can justify a restriction of competition, even where one of the objectives of that restriction is to reduce price competition.

The judgment also emphasises that even conduct characterised as resale price maintenance (RPM) cannot be condemned without a full assessment of its objectives and legal and economic context, to assess whether it presents a “sufficient” degree of harm to competition.

Background

Up & Running, a specialist running shoe retailer with 29 UK stores, was supplied with HOKA branded running shoes by Deckers from 2016-2021. These supplies were made under a selective distribution system (in which products are sold only through a network of authorised resellers).

Under Deckers’ terms and conditions, distributors were required to obtain permission before selling HOKA products via any website. Deckers’ policy was that authorised retailers could sell HOKA products on websites with domain names identical or similar to the name under which they operate their bricks-and-mortar stores. Sales via marketplaces such as Amazon and eBay were prohibited. Importantly, distributors were free to sell at or below recommended resale prices from their stores and branded websites, even when Deckers was confronted with evidence of below-RRP discounting.

Up & Running proposed to launch an anonymised website (“runningshoes.co.uk”) to sell excess HOKA stock accumulated during the COVID-19 pandemic at discounted clearance rates. Deckers refused permission, citing the fundamental principles of its brand strategy. When Up & Running proceeded anyway, Deckers terminated its supply agreement for breach of its policy. 

Up & Running brought proceedings before the CAT, alleging that the termination infringed the Chapter I prohibition of the Competition Act 1998 (CA98) as a restriction of competition “by object”, both as an online sales restriction and as RPM.

The CAT found for Up & Running. It held that the termination was motivated by a desire to prevent Up & Running from discounting HOKA products on the anonymised website. The CAT treated this as a form of RPM – a “hardcore restriction” that removes the benefit of the “safe harbour” under the Vertical Agreements Block Exemption Regulation¹ (VBER). It also concluded that there was no plausible explanation for Deckers’ conduct save to control price, and that this was restrictive of competition by its very nature and so amounted to a restriction by object. On that reasoning, the CAT concluded it did not need to examine the broader legal and economic context.

The Court of Appeal’s analysis: the correct test for a restriction by object

The Court of Appeal held that the CAT had erred in law by conflating the objective or purpose of a restriction with the whole of the legal test for a by-object infringement. 

Following a detailed review of the existing CJEU case law – including Cartes Bancaires, Generics (UK), Pierre Fabre, Super Bock and Superleague – the Court reiterated that the proper legal test to determine whether an agreement presents a “sufficient degree of harm” to competition requires the examination of four cumulative components:

1. the content of the agreement;
2. its objectives;
3. its legal context; and
4. its economic context.

It is notable that the CMA intervened in the appeal to support Deckers’ position on the law, submitting that the CAT had erroneously treated the objective of the conduct alone as determinative of the legal test for a by-object infringement, when in fact the question of sufficient harm can only be determined by examining each of the four components set out above. Commenting further on the economic context, the CMA noted that, in selective distribution cases, the loss of intra-brand competition is only problematic where inter-brand competition is limited, such that market power is always a relevant consideration. 

On the treatment of RPM, the Court rejected the proposition that RPM is restrictive by object in almost all circumstances. Even in the case of traditional RPM (i.e. the express imposition of fixed or minimum resale prices), the full four-part test must be applied, and the legal and economic context must be taken into account. There is no presumption that RPM restricts competition sufficiently to amount to a by-object infringement. 

Equally, the Court held that the concepts of a “hardcore restriction” under the VBER and a “restriction by object” do not necessarily overlap. Categorisation as a hardcore restriction is relevant to the legal context but does not, in itself, warrant a finding of a by-object infringement.

The Court also provided guidance on the nature and amount of evidence required to establish a by-object restriction, finding it to be context specific. In a collusive horizontal price-fixing agreement between oligopolists, not a great deal of additional evidence might be needed beyond the primary facts. But at the other end of the spectrum, in a vertical distribution agreement in a busy consumer market, significantly more evidence of harm to competition will be required. The Court was keen to point out that competition law is “quasi-criminal”, so a finding of infringement should not be arrived at lightly, without a “proper evidential base”.

Application of the test to the facts

Taking the facts as found by the CAT, the Court of Appeal concluded that, applying the correct legal test, there was no basis upon which the CAT could have found that Deckers’ termination had the object of restricting competition. A selective distribution agreement is a vertical agreement that by its nature presents a lower risk to competition than a horizontal agreement, and the Court’s assessment of the four components pointed against a finding of a by-object infringement.

1. As to the content of the agreement, the scope of the restriction was narrow: it related to a one-off tranche of surplus COVID-19 stock, targeted only Up & Running, and concerned only the use of an anonymised website.
2. Assessing the objective of Deckers’ conduct, the termination was motivated in part by concerns around undue discounting, but also by a legitimate desire to protect the integrity of the selective distribution network. Importantly, this did not prevent Up & Running from discounting on its branded website or in its physical stores.
3. As to the legal context, case law from Metro through to Coty recognised that the restrictions inherent in selective distribution systems were not necessarily unlawful. The CAT itself had accepted that Decker’s terms and conditions and its online sales policy were legitimately designed to protect network integrity. Furthermore, the classification of RPM as a "hardcore" restriction under the VBER did not create any presumption that it was a restriction by object.
4. On economic context, the evidence was that Deckers was the sixth largest supplier in a competitive market with approximately ten suppliers sharing around 70% of the market. Further, the product volumes affected by Deckers’ conduct would be a very small proportion of Decker’s and Up & Running’s market share, and a much smaller proportion of the total product market. This went strongly against the conclusion that the restriction could sufficiently harm competition.

The Court also observed that competition law’s function is “not to unravel an otherwise freely entered into contract which, because of unforeseen circumstances, turns out to be adverse. It is not the function of competition law to save parties from bad bargains, or deals they come to regret.” 

Applicability of the block exemption

Although the Court of Appeal had already concluded that there was no by-object infringement, the Court also found that the CAT had erred in finding that the VBER did not apply to exempt Deckers’ conduct. 

Drawing on the CJEU’s reasoning in Coty, the Court held that the key question was whether, in a real and practical sense, retailers’ resale prices were restricted, and customers were denied access to the goods. Given that the default position was that retailers could sell at whatever price they pleased, and consumers could buy from branded websites and stores, the narrow restrictions at issue did not fall within the exceptions that remove the benefit of the block exemption at Articles 4(a) (a restriction of the buyer’s ability to determine its resale price) or 4(c) (a restriction of active or passive sales to end users by members of a selective distribution system). Accordingly, the block exemption did apply.

Key takeaways

The Court of Appeal’s judgment is of direct relevance to operators of distribution systems in the UK – particularly selective ones. Key points to note include the following.

1. The legal test for a by-object infringement requires an appropriate analysis of content, objective, legal context and economic context. Objective or purpose alone is not sufficient. When looking at selective distribution systems in particular, even where a supplier’s conduct is motivated in part by price concerns, if it also pursues the legitimate aim of protecting the integrity of its network, and the economic context does not support a finding of sufficient harm, there is unlikely to be a by-object restriction.
2. Market share is an important factor when assessing whether contractual restrictions – including those classified as RPM – amount to restrictions of competition by object. Suppliers operating in competitive markets with modest market shares will take considerable comfort from this.
3. The concepts of a hardcore restriction under the VBER and a restriction by object under section 2 CA98 are distinct. Therefore, classification of conduct as a hardcore restriction does not create a presumption of an infringement by object.

4. The Court’s reasoning reveals a tension within the case law. The CAT had relied heavily on the Pierre Fabre ruling, which states that selective distribution agreements are, in the absence of objective justification, to be considered restrictions by object. Yet the Court of Appeal observed that the broader EU case law does not support the proposition that, in the abstract and divorced from economic context, the restrictions inherent in a selective distribution system must necessarily be viewed as having an anticompetitive object.

    

   Trainee Solicitor Benjamin Mack contributed to this article.