On 31 January 2013, the Cour d’Appel of Paris in the Pierre Fabre case, on the basis of a preliminary ruling of the EU Court, concluded that a de facto ban on internet sales of non-prescription cosmetic products under qualitative selective distribution agreements constitutes a restriction by object under Article 101(1) TFEU, and the exceptions envisaged by Article 101(3) TFEU are not applicable to it.
1. The case
Pierre Fabre Dermo-Cosmétique (PFDC) is a company dedicated to the production and distribution of cosmetics and body hygiene products. PFDC signed distribution agreements which require its authorised distributors to have an establishment and a pharmaceutical presence to sell the products. This contractual clause automatically prevented the authorised distributors to sell the products via the internet.
On the Decision n. 08-D-25 of 29 October 2008, the French Competition Authority concluded that the de facto ban on internet sales imposed by PFDC for its authorised distributors amounted to a restriction on competition contrary to Article 101 TFEU and the relevant French competition law, and ordered PFDC to pay a fine of 17,000 Euros. PFDC appealed the decision before the Cour d’Appel of Paris.
2. Court of Justice’s preliminary ruling
On the 13 October 2011, the European Court of Justice (EU Court) answered a preliminary ruling1 referred by the Cour d’Appel of Paris.
The EU Court determined that, in the context of a selective distribution system, a contractual clause requiring sales of cosmetics and personal care products to be made in a physical space where a qualified pharmacist must be present, resulting in de facto ban of online sales, constitutes a restriction by object under the meaning of Article 101 TFEU, unless that clause is objectively justified taking into account the content and objective of that contractual clause and the legal and economic context.
The EU Court recalled that, under its well-settled case law on selective distribution,2 those objective justifications are deemed to occur when certain conditions are met: i) resellers must be chosen on a basis of objective criteria of qualitative nature, laid down for all potential buyers and not applied in a discriminatory manner, ii) the contract products must require a selective distribution network in order to guarantee their quality and proper use, and iii) the restrictions need to be proportionate.
In the case at issue, the EU Court did not dispute that the PFDC’s resellers have been chosen following an objective criteria of a qualitative nature, laid down uniformly for all potential resellers. Nevertheless, the EU Court proceeded to analyze whether these provisions complied with the other requirements, in particular as to whether the restrictions pursue a legitimate objective.
The EU Court rejected the argument raised by PFDC as to which the protection of the image of brand of non-prescription cosmetics is a legitimate objective justifying a competition restriction under Article 101(1) TFEU.
The EU Court then provided guidance to the Cour d’Appel as to whether block exemptions (Regulation 2790/1999,3 now Regulation 330/20104) or individual exceptions under Article 101(3) TFEU were applicable to this case.
As to the block exemptions, the EU Court recalled that Article 4(c) of the Vertical Block Exemption Regulation provides that this exception does not apply to vertical agreements which directly or indirectly restrict active or passive sales to end consumers by members of a selective distribution system, without prejudice to the possibility of prohibiting a member of the selective system from operating out of an ‘unauthorised place of establishment’. The EU Court considered that a de facto prohibition of online sales at issue would result to a restriction of passive sales to end consumers wishing to buy online. It also rejected the interpretation according to which internet has to be taken as a ‘place of establishment’, since this expression only refers to outlets where the products are sold directly to end consumers. Therefore, the de facto prohibition of online sales would result in a restriction by object, and on a immediate lose of the benefit of the block exemption under Article 4(c) of the Regulation.
However, the EU Court held that such a contract may still benefit, on an individual basis, from the legal exception provided for in Article 101(3) TFEU if the required conditions are met. Due to the lack of information, the EU Court did not provide any guidance to the Cour d’Appel as regards to the possibility for PFDC to benefit from the individual exemption.
3. Cour d’Appel ruling
In the judgment delivered on 31 January 2013,5 the Cour d’Appel followed the EU Court’s response on its preliminary ruling and ruled on the individual exception applicability.
First of all, the Cour d’Appel admitted that clause in PFDC’s selective distribution agreements constitute a de facto ban of the selling via the internet, and the ban of online selling was integral part of the these agreements. The Cour d’Appel remarked that the legitimacy of that selective distribution contract was never challenged by the decision of the French Competition Authority.
The Cour d’Appel rejected PFDC’s claim as regards the individual exception of Article 101(3) TFEU. As is known, the criteria laid down therein are the efficiency gains, the fair share for consumers, the indispensability of the restriction, and the absence of elimination of competition in respect of a substantial part of the product concerned.
The Cour d’Appel rejected the claims brought forward by PFDC insofar as it considered that two of these criteria were not met.
First, as regards the indispensable nature of the restriction, the Cour d’Appel stated that the applicant shall establish that a ban on internet sales would be necessary so as for the client to receive the best possible personalized advice and that in the absence of such a ban, the quality of the advice that the client can get, would be substantially reduced. The Cour d’Appel determined that PFDC’s selective distribution agreement thereby imposed restrictions which, given the nature of the product, are not indispensable to guarantee consumers a personalized quality service advice. The Cour d’Appel ruled that, by having the possibility of acquiring the products on-line, the client would i) have all the necessary information available, including detailed instructions of use, ii) be able to cross-check with other information contained in similar products, iii) be able to obtain advice via e.g. hotline service.
Secondly, the Cour d’Appel considered that the requirement as to the contribution to improve production or distribution, or promoting technical or economic progress was neither met.
With specific reference to the improvement of the distribution, PFDC failed to show that online sales increase the risk of counterfeiting and that its products are less exposed to this risk compared to competing products which are sold via internet. It did not show either that consumers are fully informed of the internet sales ban. Accordingly, it could not be ruled out that consumers can distinguish between genuine products sold in outlet with those sold online and allegedly counterfeit.
In light of all these reasons, the Cour d’Appel concluded that the PFDC’s contractual clause establishing the de facto internet sales ban could not benefit from the individual exemption laid down Article 101(3) TFUE. Therefore, it dismissed the appeal and ordered PFDC to pay the costs.
The findings in Pierre Fabre case confirm that it is unlikely that an online sale ban can be justified. According to the Commission’s view, as it results from Vertical Guidelines, this may be the case when the prohibition of online sales refers to dangerous substances (6) or a supplier wants to launch an existing brand in a new market (7). This restrictive approach on the objective justifications is unlikely that will allow certain industries, such as the companies operating in the luxury sector, to limit or prevent online sales to protect the prestige of their brands.
Internet remains one of the most interesting new frontiers for competition law not only for vertical restraints. After the recent closure with commitments of the e-books case by the Commission,8 on 20 February 2013 the German Competition Authority started an investigation on Amazon’s price policy, whereby retailers were not allowed to offer the product at a lower price in internet sites like eBay or their own online store. The German Competition Authority considered that this measure would go against antitrust rules if it is found that this clause limits competition amongst the different internet marketplaces to the extent that the traders’ freedom to sale their products at lower prices on other websites has been reduced.