Netherlands: Court Of Justice Of The European Union Rules Against An Absolute Ban On Internet Sales In Pierre Fabre

On 13 October 2011, the Court of Justice of the European Union (CJEU) rendered a decision in Pierre Fabre v. Autorité de la Concurrence (case C-439/09).

The CJEU ruled that an absolute ban on Internet sales to end users in the context of a selective distribution network constitutes a restriction of competition 'by object', unless objectively justified.

The CJEU further stated that a ban on Internet sales is not covered by the Vertical Restraints Block Exemption Regulation (No 2790/1999).1

The CJEU did not go so far as to state that a distribution agreement that provides for such a ban may not benefit, on an individual basis, from the exemption provided for in Article 101(3)TFEU. Indeed, the Court did not have sufficient information before it to assess whether the conditions for an individual exemption were met in the case at hand.

On 13 October 2011, the CJEU ruled on a request for a preliminary ruling brought by the Paris Court of Appeal in the matter of Pierre Fabre Dermo-Cosmétique versus the French Competition Authority.

Pierre Fabre Dermo-Cosmétique is part of the France-based Pierre Fabre group, which manufactures and markets throughout Europe, mainly through pharmacies, cosmetics and personal care products. The cosmetics and personal care products, sold under brand names such as Klorane, Ducray, Galénic and Laboratoires dermatologiques Avène, are not classified as medicines. Pierre Fabre distributes its products through a selective distribution network. Pierre Fabre's distribution agreements provide that the group's products may only be sold in brick-and-mortar shops where a qualified pharmacist is present. This requirement excludes de facto all forms of distance sales.

The French Competition Authority opened an antitrust investigation of Pierre Fabre and found that the de facto ban on Internet sales amounted to a violation of Article 101 TFEU (formerly Article 81 EC) and ordered the group to remove the offending clauses from its distribution agreements and pay a fine of EUR 17,000.

Pierre Fabre challenged this decision before the Paris Court of Appeal, which submitted a request for a preliminary ruling to the CJEU on the issue of whether an absolute ban on Internet sales amounts to a hardcore restriction 'by object' of competition, which is not covered by the Vertical Restraints Block Exemption Regulation, and whether it is potentially eligible for an individual exemption on the basis of Article 101(3) TFEU (formerly Article 81(3) EC).

In its answer, the CJEU recalled the distinction between restrictions of competition by object and restrictions by effect. Where, based on the purpose and economic context of the agreement, it is established that an agreement has an anticompetitive object, it can be characterised as a restriction of competition by object, in which case it is not necessary to examine the effects of the agreement on competition.

In determining whether a contractual provision constitutes a restriction of competition by object, the context of the clause, its objectives and the economic and legal background are all taken into account.

In that respect the CJEU noted that a de facto ban on Internet sales is liable to restrict competition, as is a system of selective distribution. According to the CJEU, such agreements should be considered restrictions of competition by object, unless objectively justified.

The CJEU recognised that selective distribution may be objectively justified by legitimate objectives, such as the maintenance of a specialist trade capable of providing services with respect to high-quality, high-technology products, which may justify a reduction in price competition in favour of competition based on other factors. A selective distribution system is permissible to the extent resellers are chosen on the basis of objective qualitative criteria, applied uniformly to all potential retailers in a non-discriminatory fashion, the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally, the criteria laid down do not go beyond what is necessary.

In assessing whether Pierre Fabre's selective distribution system met these criteria, the CJEU noted that the resellers were chosen on the basis of objective qualitative criteria. The CJEU however noted that in the light of the principle of the free movement of goods, it would not accept arguments that sought to justify a ban on Internet sales on the ground that it is necessary to provide individual advice to consumers or protect them against incorrect use of over-the-counter medicines and contact lenses. In addition, the CJEU does not consider the need to maintain a prestigious image for a product, an argument which Pierre Fabre raised, a legitimate ground for restricting competition.

Hence, the CJEU ruled that the de facto ban on Internet sales, in the context of a selective distribution system, amounts to a restriction of competition by object, where there appears to be no objective justification for the restriction, based on the specific context and objective of the clause.

The CJEU further noted that an agreement containing such a restriction cannot be covered by the Vertical Restraints Block Exemption. According to the Court, a de facto ban on Internet sales amounts to a restriction of passive sales to end-users located outside the physical trading area who wish to purchase the product online. It follows from Article 4(c) that an agreement that restricts passive sales to end users by members of a selective distribution system cannot be covered by the Vertical Restraints Block Exemption. In addition, the CJEU stated that a de facto ban on Internet sales does not qualify as a prohibition on operating out of an unauthorised place of establishment, within the meaning of Article 4(c) of the Regulation.

Finally, the CJEU recalled that an agreement containing a restriction of competition by object which is not covered by a block exemption can still be exempted on the basis of Article 101(3) TFEU (formerly Article 81(3) EC), provided the requirements for an individual exemption are fulfilled. The Court however maintained that it had insufficient information before it to determine whether the conditions for an individual exemption were met in the case at hand.

The CJEU's decision is important as it pertains to the hotly debated issue of Internet sales and the possibilities for suppliers or manufacturers to restrict or ban sales of their products over the Internet.

In its 2010 Guidelines on Vertical Restraints,2 the European Commission maintained that within a selective distribution system, distributors should be free to sell, both actively and passively, to all end users, including with the help of the Internet. The Commission considers any obligation that dissuades appointed dealers from using the Internet to reach a greater number and variety of customers by imposing criteria for online sales which are not equivalent overall to those applicable to sales in a brick-and-mortar shop to be a restriction on passive sales and hence a hardcore restriction of competition.

The CJEU's Pierre Fabre decision confirms the European Commission's position on Internet sales in the context of a selective distribution system: a ban on Internet sales constitutes a restriction of competition by object (unless objectively justified), which cannot be qualified as a restriction related to the 'place of establishment' and which amounts to a restriction on passive sales that cannot benefit from the Vertical Restraints Block Exemption.3

The CJEU's decision is somewhat disappointing as it does not provide guidance on the assessment of whether the agreement qualifies for an individual exemption under Article 101(3) TFEU.

The fact that the CJEU mentions that an agreement can still possibly be exempted on the basis of Article 101(3) TFEU, provided the conditions for an individual exemption are met, should, in our opinion, not be perceived as a positive indication by the Court on the outcome of such an assessment. Considering that an absolute ban on Internet sales is deemed a hardcore restriction of competition by object, it will be difficult to demonstrate fulfilment of the conditions for an individual exemption on the basis of Article 101(3) TFEU.

It can therefore be concluded that the CJEU has ruled against an absolute ban on Internet sales imposed by a supplier on its distributors. However, certain restrictions on the implementation of Internet sales, which do not amount to an absolute ban on Internet sales, remain possible as explained in the Commission's Guidelines on Vertical Restraints.

Footnotes

1. Regulation (EC) No 2790/1999 has been replaced by Regulation (EC) No 330/2010.

2. See Commission Notice - Guidelines on Vertical Restraints, SEC/2010/0411 final, para. 56.

3. Regulation (EC) No 2790/1999 has been replaced by Regulation (EC) No 330/2010. Article 4(c) of both regulations is the same, however.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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