In its judgment of 23 October 2017, the General Court (“EGC”) - which is a constituent court of the Court of Justice of the European Union (“CJEU”) - ruled that watchmakers do not have to provide independent watchmakers with spare parts for luxury/prestige watches, if they themselves have established a qualitative selective repair system. Such a restriction is permitted under competition law. It serves to protect the quality of the watches, ensures proper usage and provides protection from counterfeiting. The ruling can also help manufacturers in other sectors to better control the use of their spare parts by means of a selective repair system.
Background and proceedings
The ruling of the General Court is the last chapter – for the moment – in the proceedings which began way back in July 2004. At that time, the Confédération Européenne des Associations d’Horlogers-Réparateurs (CEAHR), an association of national interest groups of independent watch repairers, filed a complaint with the European Commission about the practices of a number of Swiss luxury watch makers (including Rolex, Richemont and LVMH). Beforehand, the manufacturers had each introduced a selective repair and service system for their watches, and since that date have not permitted the supply of non-authorised i.e. independent watch repairers. In its complaint, the CEAHR accused the manufacturers of having concluded anti-competitive agreements, thus breaching Art. 101 TFEU, and of abusing their market dominance under Art. 102 TFEU.
Following the introduction of the selective repair systems, the manufacturers have only authorised watchmakers who satisfy certain qualitative criteria, in particular with regard to training, experience and equipment of the watchmakers and with regard to the premises in which they provide their services. Only these authorised watchmakers are given access to the spare parts, brand-specific tools and technical information required for the repair and service of the respective watches. Reselling spare parts to non-authorised watchmakers is contractually prohibited.
In July 2008, the Commission rejected the complaint of the CEAHR for the first time. In December 2010, the EGC reversed this decision. According to the EGC, the Commission had infringed its obligation to take into consideration all the relevant matters of law and of fact and to consider attentively all the matters of fact and of law which CEAHR had brought to its attention. The Commission reopened proceedings against the watchmakers but again rejected the complaint of the CEAHR, The CEAHR in turn responded by filing an action for annulment. The EGC has now rejected this claim in its judgment of 23 October 2017.
Lawful qualitative selective distribution and repair systems
The EGC's statements on selective (repair) systems and Art. 101 (1) TFEU deserve particular attention. The EGC confirmed the Commission's view that Art. 101 TFEU does not apply to the selective repair systems and that the prohibition to resell spare parts to independent watchmakers is an element inherent in selective distribution systems. In this respect, selective repair systems are to be treated as selective distribution systems.
It is established case law by the CJEU that an agreement for purely qualitative selective distribution is in general considered to fall outside Article 101(1) TFEU for lack of anti-competitive effects, provided that three conditions are satisfied:
- First, the nature of the product in question must necessitate a selective distribution system, in the sense that such a system must constitute a legitimate requirement, having regard to the nature of the product concerned, to preserve its quality and ensure its proper use;
- Secondly, rresellers must be chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all potential resellers and are not applied in a discriminatory manner.
- Thirdly, the criteria laid down must not go beyond what is necessary.
The EGC has expressly confirmed that these requirements apply accordingly to selective repair systems. In the case at hand, they were also satisfied. The CEAHR inter alia referred to the Pierre Fabre judgment of the CJEU, according to which the "aim of maintaining a prestigious image is not a legitimate aim for restricting competition". Although the EGC confirmed this statement,it clarified that even according to Pierre Fabre the objective of preserving the quality of products and ensuring their proper use could justify a selective system. Therefore the Commission was right to take these aspects into account. Furthermore, the Commission was right to assume that the selective repair system and the refusal to supply independent watch repairers could be justified by the objective to prevent product counterfeits. The CEAHR therefore failed to advance adequate counterarguments.
Just like the Commission, the EGC also rejected any analogy to the rules applicable to the motor vehicles sector, in particular to Art. 5 lit a) Regulation 461/2010. Under this provision, the restriction of the sales of spare parts for motor vehicles by members of a selective distribution system to independent repairers which use these parts for the repair and maintenance of a motor vehicle constitutes a hardcore restriction which does not qualify for exemption. However, the same cannot be valid for luxury/prestige watches, since, inter alia, the after-sales services in this sector are less profitable.
The EGC has confirmed the Commission's view that, given the lawfully practised selective repair systems, one cannot simply assume the abuse of possible market-dominant positions in the markets for repair services and for the supply of spare parts.
Practical recommendation and perspective
The EGC's judgment emphasises once again how manufacturers of branded goods can protect themselves against the uncontrolled use of their products by means of a properly established selective distribution or repair system.
The EGC is not willing to accept a prestige character or a particular luxury image of selectively bound products as the sole reason for the non-application of Art. 101 TFEU. In that case, such systems would require an exemption which would also be subject to certain conditions. By contrast, in the case Coty Germany, Advocate General Wahl has just recently held the view that a prestige character or a particularly luxury image can exclude selective systems from the scope of the prohibition in Article 101 TFEU as well. On 6 December 2017, the CJEU will have the last word in that regard.