The European Court of Justice (ECJ) has ruled that a restriction
imposed on the online sale of cosmetics and personal care products
breaches EU competition rules and cannot be justified in the terms
of the block exemption for distribution and supply
agreements. Although the ECJ's 13 October
2011 judgment relates to the provisions of one
particular contract, its findings will have major implications for
the online sales of many products, above all when read in
conjunction with the European Commission's 2010 revision of the
block exemption.
Some of the competition law terms used in this note are explained
at the end in a Key to jargon.
The French connection
The ECJ's judgment relates to a French case, ruling on a
question of law referred to it by the Paris Court of Appeal.
Pierre Fabre Dermo-Cosmétique SAS markets its products
(including brands such as Avène, Klorane, Galénic and
Ducray) under contracts which stipulate that sales of the products
must be made in a physical space and in the presence of a qualified
pharmacist.
In 2008, the French national competition authority decided that
such provisions represented a de facto ban on all internet
sales and amounted under both French and EU competition law to a
restriction of competition by object which could not be exempted,
either through the general terms of a block exemption or through
individual exemption. Pierre Fabre put forward a number of
arguments to justify its requirements, e.g. that the products could
have adverse dermatological consequences or that Pierre Fabre
wished to discourage counterfeit products. The French
authority rejected these arguments, largely because the products
were not medicines and because the arguments were not relevant at
the point of sale.
Pierre Fabre appealed to the Paris Court of Appeal, which in turn
referred the underlying point of law to the ECJ for its
interpretation. The French court's question was whether
"a general and absolute ban on selling contract goods to
end-users via the internet, imposed on authorised distributors in
the context of a selective distribution network" was an
automatic infringement of the rules which could not be exempted
under the verticals block exemption and whether, if indeed the
block exemption did not apply, the provision could be exempted on
an individual basis.
The ECJ's main findings
The ECJ focused on the precise terms of the Pierre Fabre contracts
and broke the question into three parts.
- First, was the requirement for a physical space and for the presence of a pharmacist a restriction of competition "by object" under Article 101? The ECJ held that the operation of a selective distribution system may not be such a restriction where the system is based on objective criteria linked to the nature of the product. However, any restriction within the system had to "pursue legitimate aims in a proportionate manner" and the maintenance of a prestigious brand was not a legitimate aim justifying this clause, which therefore represented a restriction by object.
- Second, could a de facto restriction of online sales benefit from block exemption? The verticals block exemption prohibits "a restriction of active or passive sales to end users by members of a selective distribution system, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment", whatever the parties' market shares. The restriction in this case was a prohibited restriction of this type and a ban on internet sales was not equivalent to a refusal to authorise a "place of establishment". Pierre Fabre's restriction could not therefore benefit from block exemption.
- Third, was the restriction on online sales eligible for individual exemption? The ECJ confirmed that, in principle, the restriction could benefit from individual exemption. It did not, however, have enough information to assist the French court in assessing whether or not the restriction was in fact exemptible on an individual basis.
Does the ECJ's approach fit with the new
verticals block exemption?
The ECJ's judgment relates to the verticals block exemption
which was in place before implementation of a revised block
exemption on 1 June 2010. The old and new block exemptions
are substantively identical on the main point regarding the
illegality of a ban on sales to end users within a selective
distribution system, so the ECJ's findings are equally relevant
to the current regime.
However, the European Commission's revised guidelines
accompanying the new block exemption contain new guidance on
restrictions of online sales within a selective distribution
system. The new guidelines explain that, in principle, a
distributor or retailer must be free to sell online, even within a
selective distribution system. It may be possible to impose
criteria on the detail of how the sales are made, but such criteria
must be equivalent to criteria imposed on bricks-and-mortar outlets
– or, at least, differences in the criteria must be a
reasonable reflection of differences between the two distribution
modes.
The ECJ's judgment does not relate to the new verticals block
exemption. It does, however, allow for the possibility of
individual exemption and the new block exemption guidelines may
assist businesses in deciding what may be exemptible on an
individual basis.
Selective distribution for luxury goods at
risk?
It is often argued that selective distribution is suitable
primarily for products which involve some element of technological
sophistication. However, in a number of historic cases, it
has also been accepted that products with a luxury brand image can
be selectively distributed, even where they are not complex in
technological terms.
On this point, it is interesting that the ECJ stated in Pierre
Fabre that protection of brand prestige is not a legitimate aim to
justify the requirement for a physical space and a
pharmacist. Although this statement in its context rejects
brand prestige as a justification for the specific clause at issue,
other restrictions in selective distribution systems for luxury
products may in future be harder to justify.
Summary: key points from the Pierre Fabre
case
Online sales represented over 10% of all UK 2010 retail sales
– a figure which is likely to double in the next five
years. The question of when a supplier can ban online selling
of its products is likely to be of increasing relevance. The
Pierre Fabre case offers three points of significant
clarification:
- The need for a selective distribution system is not a justification for banning online selling.
- It is still possible for conditions to be attached to online selling on the grounds of selective distribution, but those conditions should be broadly equivalent to conditions imposed on bricks-and-mortar sales. The possibility of measured conditions may offer suppliers some consolation on this point.
- It may be harder to justify limiting online sales where the aim is only to protect a luxury brand image, but that will in particular depend on each individual case.
Key to jargon
Article 101 – This article of the Treaty on
the Functioning of the European Union contains (at Article 101(1))
the prohibition of agreements between different undertakings which
"have as their object or effect the prevention, restriction or
distortion of competition" in the EU.
Block exemption – Article 101(3) allows
for exemption from the Article 101 prohibition where stipulated
criteria are met. A "block exemption" regulation
applies to a particular class of agreements and sets out the
criteria which make a restriction in such agreements
exemptible. Where an agreement falls clearly within the terms
of a block exemption, exemption is automatic.
Individual exemption – The possibility
of exemption from the Article 101 prohibition on an individual
basis for restrictions in agreements which do not satisfy the terms
of a block exemption.
Restriction of competition by object – A
type of anti-competitive restriction which is deemed to infringe
the Article 101 prohibition without the need to demonstrate actual
anti-competitive effect.
Selective distribution – A system where
the supplier appoints distributors or retailers of its products
according to defined qualification criteria.
Verticals block exemption – The block
exemption for all forms of distribution or supply agreements which
relate to the purchase, sale or on-sale of any goods or
services.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 14/10/2011.