Preventing Goods Being Sold Over The Internet

We often receive enquiries from businesses that want to prevent resellers and distributors from selling their products on websites such as eBay, because they believe that sale of their products at discounted rates on the internet causes damage to their brands.

A business has no general legal right to control what happens to goods after it sells them. A legal right to prevent or restrict how resellers and distributors can act from selling products on the internet needs to be spelled out in the relevant sale contract. Contracts that impose such restrictions may breach provisions relating to “exclusive dealing” in Part IV of the Trade Practices Act 1974 (Cth) (“TPA”).

Sometimes a business uses its practical market power to pressure a reseller or distributor into agreeing not to sell their products on the internet. This may still amount to exclusive dealing even without a written contract and could also amount to “unconscionable conduct” under Part IVA of the TPA.

The general legal principles relating to exclusive dealing are set out in this article. It is fundamentally important to obtain legal advice before engaging in any conduct that could be challenged as exclusive dealing.

Exclusive Dealing

If a business supplies goods on condition that the customer will not re-supply those goods in a particular market, or refuses to supply goods because that customer has breached a previous agreement not to re-supply those goods in a particular market, or refuses to supply goods because the customer won’t agree not to re-supply those goods, or engages in other defined conduct, the business engages in exclusive dealing.

Not all exclusive dealing is illegal under the TPA. The conduct must also have the purpose or effect of “substantially lessening competition” in a “market”. There is a two stage test for this. First, what are the markets in which both the business and reseller or distributor operate? Secondly, does the dealing have the purpose or effect of substantially lessening competition in either market?

The Market Test

A market is an area of close competition between firms. Goods are in the same market if there is a sufficient degree of substitution between the goods. A market should be defined so that the court can make a sensible prediction about the effects on competition. You need to consider analysis of the product as well as geographic, temporal and functional aspects of the marketplace.

The Competition Test

To decide if there has been a substantial lessening of competition in a market, the structure of the market before and after the relevant conduct must be considered. Specifically, the number of sellers in the market, the height of barriers to entry into the market, the extent of product differentiation in the market, the extent of vertical integration in the market and the nature of arrangements between firms that restrict their ability to act as independent competitors need to be taken into account.

What You Should Do?

To decide if a business can prevent a reseller or distributor from selling their product over the internet, you need a detailed analysis of the markets in which your business and the reseller or distributor operate, as well as consideration of the nature of the proposed restrictions.

MST can help you in that analysis. If you would like detailed advice so that you can avoid the risk of infringement of TPA provisions that prohibit exclusive dealing arrangements, please contact us to discuss your situation.

Author: Laughlin Nicholls