Introduction
Caudalie's selective distribution system
Complaints against Caudalie
Imposition of minimum resale through maximum discount
Territorial restrictions on active and passive sales
Admissibility of evidence and composition of investigation file
Commitments offered by Caudalie
Comment
On 6 May 2021 the Competition College of the Belgian Competition Authority (BCA) imposed a €859,310 fine on three undertakings of the Caudalie group. The BCA qualified Caudalie's imposition of minimum prices and the limitation on active and passive sales on the group's distributors as hardcore restrictions of competition by object under Article IV.1 of the Belgian Code of Economic Law (CEL) and Article 101 of the Treaty on the Functioning of the European Union (TFEU). The BCA found that these practices constituted a single and continuous infringement between the end of 2014 and the beginning of 2018.
This decision closes the investigation opened into Caudalie following two complaints brought by pharmacies Newpharma and Pharmasimple, which sell Caudalie products. The BCA accepted commitments offered by Caudalie and took them into consideration when granting a reduction in the fine.
Caudalie's selective distribution system
Caudalie is a high-end French brand of cosmetic products that require specially-adapted marketing conditions and sold with expert advice on usage. To maintain its luxury image, Caudalie operates a selective distribution system for its products in some EU member states, based on both qualitative and quantitative criteria. One of the noteworthy qualitative criteria for distributors was a ban on affixing labels on the front side of Caudalie products and on using signage containing words such as "prix barrés", "prix cassés", "remise x%", or any other discount-related copy. In 2013, Caudalie also introduced specific qualitative criteria for online sales in its online distribution contracts.
While Caudalie already recommended resale prices to its distributors, its standard online distribution contract provided that the distributor is free to set its own resale prices, yet specified that the distributor should refrain from implementing promotional initiatives that could depreciate the brand's image. Compliance with these contractual requirements, particularly those related to quality, is carried out by Caudalie SAS's e-retail department and by Caudalie's sales representatives in physical outlets. In practice, Caudalie only allowed for a maximum percentage of rebate to be applied to its recommended prices. If Caudalie was informed of and/or observed the application of higher rebates than those it had authorised, then it would ask the distributors concerned to adapt their pricing policy. Claudalie urged distributors who continued to disrespect the pricing policy to comply with the prescribed rebate levels or excluded from them selective distribution network entirely.
Caudalie's standard online distribution contract and specific e-retail instructions also provided that the selective distributor may only deliver products in the country in which its website is located, unless otherwise agreed upon by Caudalie. Moreover, to ensure that online sales are only made to end consumers, distributors may not accept orders from those consumers for more than a certain amount of the same Caudalie products.
The Competition College objected to both:
- the imposition of a minimum resale price, particularly the fixing of the maximum level of rebates that the distributor may grant on the Caudalie-recommended selling price to the consumer; and
- the limitations on active and passive sales for selective distributors with an online presence in a member state other than that of the end users.
Imposition of minimum resale through maximum discount
While the terms of Caudalie's distribution contracts allow the selective distributors to freely set their retail prices, the BCA's investigation showed that Caudalie required its distributors to apply a maximum percentage of discounts on the recommended prices. When selective distributors applied higher rebates, Caudalie would send communicatons urging them to comply with the presribed rate and imposed penalties(1) when distributors refused to change their prices after such communications.
In particular, Caudalie contractually prohibited its distributors from advertising rebates. The BCA's College found that the usefulness of rebates is negated when it is impossible to communicate such rebates to consumers. If the consumers are not informed in advance of the advantage resulting from a rebate policy, then they are not encouraged to buy the products that are most advantageous for them. Consequently, by preventing its selective distributors from using usual rebate display marketing techniques, Caudalie considerably reduced each distributor's interest in applying rebates when it cannot inform its customers.
Therefore, the Competition College concluded that Caudalie imposed a minimum resale price on its selective distributors present on the Belgian market.
Territorial restrictions on active and passive sales
The BCA's Competition College stated that a selective distribution contract may impose requirements aimed at ensuring the quality of the product but stressed that these requirements must be proportionate to the legitimate objective pursued. In the context of a selective distribution agreement, a supplier may require its distributors to resell products in the territory of the selective distribution network only to end-users or authorised resellers. According to point 52 of the Guidelines on Vertical Restraints, online sales are considered as passive sales. According to Article 4(c) of Regulation 330/2010 (VBER), the restriction of passive sales to end-users by the members of a selective distribution system constitutes a hardcore restriction. The same goes for restrictions of active and passive sales to buyers established in member states outside the geographic area of the selective distribution network.
During the investigation, it became apparent that Caudalie acted in breach of these principles as:
- it undertook to limit active and passive sales by selective distributors with an online presence established in a member state other than that of the end users they sell to; and
- it prohibited distributors from selling more than an imposed maximum amount of Caudalie's product to an end consumer.
Such restrictions inevitably limit the ability to supply customers established in member states outside the geographic area of the selective distribution network, as well as passive sales to final consumers and authorised distributors. The College further argued that these restrictions were disproportionate to the objectives that a supplier may legitimately pursue to ensure compliance with proportionate qualitative conditions imposed on its distributors in a selective distribution network.
The College concluded that Caudalie's policies of limiting the passive sales of its products intended or possibly intended for the markets of other member states, as well as passive and active sales to buyers established in a member state outside the geographic area of the selective distribution network constituted, given Article 4(c) of the VBER, hardcore restrictions of competition by object within the meaning of Article IV.1 Section 1 of the CEL and Article 101 Section 1 of the TFEU.
The College further considered that it had no evidence to rebut the presumption that these infringements did not fulfil the cumulative conditions of Article IV.1 Section 3 of the CEL and Article 101 Section 3 of the TFEU.
Admissibility of evidence and composition of investigation file
In addition to the two substantial infringements discussed above, the BCA's decision also addressed two issues of a procedural nature, related to the admissibility of recordings of electronic communications between Caudalie and Newpharma and the BCA's composition of the investigation file following the dawn raids carried out by the French Competition Authority at Caudalie's premises in France.
While Caudalie argued against the legality of these two investigative practices, the BCA confirmed that these practices were conducted in line with Belgian and European law and judicial precedents.
Commitments offered by Caudalie
Caudalie offered three sets of commitments to the BCA to address the competition concerns identified. The commitments made public in the BCA's decision of 6 May 2021 consisted of Caudalie submitting, within two months of the decision and subject to the BCA's Prosecutor General's approval, a draft communication intended for its authorised distributors, clarifying:
- Caudalie's requirements concerning the preservation of its brand image and the freedom of its authorised distributors to both determine their own resale prices and to apply promotions to Caudalie products; and
- the measures that Caudalie could take to protect the integrity of its network, to preserve its brand image and to ensure a quality service to consumers without infringing competition rules.
The College decided to make these commitments binding, although it considered that given the serious nature of the infringements, the commitments were not enough to conclude that there were no further grounds for action by the BCA. Therefore, a fine was also imposed. However, when calculating the fine the College explicitly referred to the commitments offered as mitigating circumstances and reduced it by 5%, setting the final amount at €859,310.
Caudalie has appealed the BCA's decision on its merits before the Market Court. Pending the Market Court's ruling on this appeal, Caudalie has also requested the Court to suspend the execution of the decision insofar as the BCA accepted and made the commitments proposed by Caudalie binding. On 30 June 2021, the Market Court accepted this request for suspension. This means that Caudalie will not have to implement these commitments until the Market Court has issued its ruling on the merits of the case.
In recent years, competition authorities have increasingly scrutinised vertical restrictions such as resale price maintenance and restrictions on active and passive sales. While decisions by competition authorities provide guidance on the practical application of the competition law rules, the VBER and the Vertical Guidelines, it sometimes remains difficult to understand or infer the extent to which a practice can be considered as a restriction of competition, particularly due to the sensitive information made confidential in these decisions and therefore not available to third parties. Although the Market Court has temporarily suspended the implementation of the commitments pending its decision on the merits in appeal, the two sets of binding commitments discussed above could be used to facilitate the development of guidance on qualitative obligations that are aimed at protecting the supplier's brand image while being compatible with competition law. Although the communications from Caudalie to its distributors as approved by the BCA will be confidential, they would provide greater clarifications for undertakings as to what practices and policies can or cannot be considered as infringing the competition law rules. In our opinion, it would be an interesting path for the BCA to publish generalised guidelines available for all market players based on Caudalie's communications as approved and reviewed by the BCA.
Notably, the decision is not only addressed to and the fine not only imposed on Caudalie Belgium SRL, which is the undertaking participating directly in the infringement, but also on two other undertakings in the Caudalie group, namely:
- Caudalie SAS: the entity with which the selective distribution contracts have been concluded, which has overseen the monitoring of online websites in Belgium and sent Caudalie Belgium the list of sales outlets to be closed in the event of non-compliance with the distribution contract; and
- Caudalie International Holding, in its capacity as the parent company of Caudalie Belgique SRL and Caudalie SAS.
Finally, the European Commission is currently assessing the rules contained in the VBER and the Vertical Guidelines, which are due to lapse by May 2022. The rules currently applying to resale price maintenance and active/passive sales have received particular attention and their concrete application may consequently be adapted or further specified upon the Commission's proposed revised rules.
For further information on this topic please contact Carmen Verdonck or Nina Methens at ALTIUS by telephone (+32 2 426 1414) or email ([email protected] or [email protected]). The ALTIUS website can be accessed at www.altius.com.
Endnotes
(1) For example, Caudalie blocked the orders of a selective distributor because that distributor did not respect the minimum imposed resale price. The ultimate penalty was the termination or non-renewal of the selective distribution agreement.