The Court of Justice of the EU (CJEU) ruled on 13 October 2011 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.
Blocking online sales: new ruling from the Court of Justice of the EU
The Court of Justice of the EU (CJEU) ruled in a judgment of 13 October 2011 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.
The judgment relates to a Frenc case referred to the CJEU by the Paris Court of Appeal for a ruling on a question of law. This case concerned Pierre Fabre Dermo-Cosmétique SAS, wich marketed its products (including brands such as Avène, Klorane, Galénic and Ducray) under contracts which stipulated 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 laws to a restriction on competition which could not be subject to an exemption, 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. the products could have negative dermatological effects or Pierre Fabre's wish to discourage counterfeits. 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 CJEU 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 subject to exemption under the verticals block exemption and whether, if indeed the block exemption did not apply, the provision could be subject to exemption on an individual basis.
The CJEU focused on the precise terms of the Pierre Fabre contracts and divided 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 CJEU 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 in the terms of this clause, which therefore represented a restriction by object.
- Second, could a de facto restriction on online sales benefit from block exemption? The verticals block exemption prohibits “a restriction on 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 CJEU 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 could in fact be subject to exemption on an individual basis. The French court will have to assess the individual exemption on the basis of the new elements that will be brought by Pierre Fabre.
It should be noted that this judgment relates to the vertical 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 points regarding the illegality of a ban on sales to end users within a selective distribution system, so the court’s findings are equally relevant to the current regime.
The European Commission’s revised guidelines accompanying the new block exemption, however, contain new guidance on restrictions on 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 details 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.
In conclusion, the Pierre Fabre case offers three points of significant clarification as far as online sales are concerned:
- 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.