On January 27, 2020, the French Competition Authority (“FCA”) accepted Lego’s commitments, thereby closing a five-year long investigation into the discount policy applied to distributors by the building games manufacturer.[1] Lego committed to redefine the criteria of its discount scheme to allow online distributors to obtain the same level of discount as brick-and-mortar distributors.
Price differentiation concerns
In 2013, Lego decided to increase the price of all its products by 15% and, simultaneously, to implement a “functional discount” policy under which distributors could obtain a discount of up to 13.044%. This discount scheme was based on a point system including three criteria.
The first criterion, which allowed distributors to obtain up to ten points, was based on the shelf space allocated to Lego products in the distributor’s store.
The second criterion, awarding up to five points, related to the distributor’s stock of Lego products, in particular the range of products which could be bought directly in-store (with no need to order the product).
The third criterion awarded up to five points for Lego’s brand representation, which was appreciated notably on the basis of the availability of a printed catalogue.
In 2015, Cdiscount and EMC Distribution, which both belong to the Casino group, complained to the FCA that Lego’s discount policy discriminated against online sellers, particularly pure players. They alleged that under Lego’s new discount policy, Casino would receive a different discount depending on whether a product was sold through Cdiscount’s e-commerce website or Casino’s brick-and-mortar stores. The FCA opened an investigation.
Concurrently, the German Federal Cartel Office led an investigation on Lego’s discount policy.[2] In 2017, as part of this investigation, Lego took the initiative to revise its discount policy to make it easier for online distributors to obtain a discount. The revised policy (i) allowed distributors to qualify for the first criterion if they could prove that a certain number of children from 2 to 11 years old had spent at least two hours on a non-commercial/ entertainment site dedicated to Lego products over the last year; (ii) included delivery delays under the second criterion, so that online distributors could get points under this criteria; and (iii) included internet-specific examples, such as an online catalogue, to qualify under the third criterion. Lego introduced a fourth criterion regarding brand representation, which included two sub- criteria referring to a premium sales experience in stores. It also introduced a fifth criterion allowing distributors to obtain points if they offered a “homogeneous omni-channel experience across all contact points” (free translation).
In June 2020, as part of its preliminary assessment, the FCA considered that the award criteria for the discount policy—in both the initial and revised versions—resulted in a differential treatment between online pure players and other distributors, to the detriment of the former. The FCA found that the revised discount scheme made it still more difficult for online distributors to obtain a discount. In particular, it found that the first two criteria were unlikely to be fulfilled by any online distributor (because an online distributor does not shelf space in a shop nor a printed catalogue). It also noted that, because of the way the fourth criterion was subdivided, only brick-and-mortar stores could be eligible to obtain all the points attributed under the fourth criterion, and that the fifth criterion excluded pure players.
The FCA observed a difference ranging between 7% and 9%, depending on the period, in the discounts granted to pure players compared to other distributors. It also observed a lack of communication and transparency with regard to the applicable discount rates and the discount award timing. Accordingly, the FCA considered that the practices implemented by Lego were likely to result in an anticompetitive agreement, without specifying with which parties/distributors.
Lego’s commitments
In July 2020, Lego submitted a first commitment proposal to the FCA offering to (i) amend two of the five criteria and (ii) make the discount policy and related communications with distributors more transparent. Further to the FCA’s market test and an oral hearing held in December 2020, Lego submitted a revised proposal in January 2021. It offered—for a period of five years, instead of the two years initially proposed—to:
redefine the discount criteria with a view to ensuring that online distributors would be able to fulfil them, including existing players seeking to expand their online activity (for example, Lego reduced the time to be spent by children to qualify for the first criterion; regarding the second criterion, it allowed for same-day delivery to a pick-up location, a locker or a click & collect point, in addition to a same-day delivery to the customer’s address);
increase the transparency of the discount scheme by informing distributors of the new discount policy and improving the internal management of the discount policy (with, for example, Q&As and a firm-wide scoring directory for all distributors).
Lego also committed to submitting an annual report to the FCA on the implementation of the commitments. The FCA considered that the substantially modified commitments addressed its competition concerns and closed the investigation.[3]
Take-aways
This decision confirms the FCA’s keen interest in restraints of online sales, making it clear that companies must take particular care not to penalize online distributors—be it through their discount policies or distribution agreements. In this case, the FCA analysed the practice under Article 101(1) TFEU, but price discrimination may also constitute an infringement of Article 102(c) TFEU if the undertaking in question holds a dominant position on the relevant market.
[1] See FCA Decision No. 21-D-02 of January 27, 2020, regarding practices implemented in the building games sector, available at: https://www. autoritedelaconcurrence.fr/sites/default/files/integral_texts/2021-01/21d02complete.pdf.
[2] See Bundeskartellamt press release of July 18, 2016, available at: https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/ Pressemitteilungen/2016/18_07_2016_Lego.html;jsessionid=089D4465AEEC791EB9DF257B11A0DFB9.1_cid381?nn=3591568.
[3] See FCA press release of January 29, 2021, available at: https://www.autoritedelaconcurrence.fr/en/press-release/lego-makes-commitments-autorite-de-la- concurrence-amend-its-price-discount-system#:~:text=Following%20an%20open%20procedure%20before,products%20in%2Dstore%20or%20online.