The French Competition Authority publishes its findings in the opinion "12-A-20"

On 4 July 2011, the French Competition Authority (The Authority) launched an inquiry into competition in the sector of online commerce. On 18 September 2012, the Authority published its findings in the opinion "12-A-20".

Online commerce is growing rapidly in France. In 2011, online commerce was estimated to be worth approximately €37 billion, an increase of 88% since 2008.

The Authority focused on several sub-sectors: luxury perfumes and beauty products, home electronic goods, and non-medical pharmaceutical products. It examined 3 types of seller: pure players(online sellers), click & mortar operators (online sellers who also sell through brick & mortar outlets) and brick & mortar sellers, also called traditional distributors.

The Authority identified differential pricing policies by the three types of seller which may appear as a particular hindrance to the development of online commerce.

1. Policies of differentiation according to retail channels

1.1 Established practices

The Authority points out that many manufacturers apply different distribution policies for different retail channels ("channel management"). Some manufacturers sell different ranges and products to the different categories of distributors. Each retail channel may sell different ranges of products.  In certain circumstances, manufacturers may grant exclusive distribution rights for certain products.

In some cases, policies of differentiation may be characterised by different pricing conditions.  The Authority points out, for example, that unit purchase prices of home electronic goods are lower for click & mortar operators than for pure players.  Since pure players cannot expect, in most cases, to be paid by suppliers for traditional commercial cooperation services, purchase price differences are likely to result, in the main, from differences in the specific terms and conditions of supply, including differences in the levels of discount and rebate that they receive.

In other cases, there may be differences in non-price terms of supply such as allocation of supplies in the event of stock shortage, or limiting distribution of new products to selected outlets for an initial period.

2. Reminder of applicable competition law principles

2.1 Refusal to supply

In principle, manufacturers can establish contractual relationships with distributors of their own choice, according to the principle of freedom of contract.

However, competition law has a number of potential exceptions to this principle:

  • A refusal to supply may constitute an abuse of a dominant position: if a refusal to supply is by a company in a dominant position, that refusal would be liable to limit or exclude a competitor, and is done without objective justification, the refusal may constitute an abuse of dominant position.  In practice, this is only likely to be relevant where access to the products concerned is required by distributors in order to enable them to compete effectively at the downstream level.
  • A refusal to supply may constitute an anti-competitive agreement: the refusal cannot be the result of an agreement between different manufacturers or suppliers to refuse to supply a distributor. A collective boycott of this nature between manufacturers or suppliers of the same kind of goods or services may be considered as a quasi-cartel.  This should not be taken to limit the ability (unilaterally) of manufacturers or suppliers to choose who they use to get their products to market (for example, excluding pure players) or the terms that they may offer to their distributors (for example, exclusivity), provided these arrangements do not have an appreciable effect on competition in light of their scope and duration or the market position of the supplier and the manufacturer.

2.2 Pricing differentiation

In principle, manufacturers are authorised to negotiate specific terms of sales with individual distributors, as a consequence of the principle of freedom of tariff negotiation.

However, competition law also limits this principle:

  • Pricing differentiation must not result in discrimination which would constitute an abuse of a dominant position: In principle, a dominant manufacturer should offer prices which are the same for equivalent transactions with equivalent customers, and divergence from this principle should be on the basis of objective justification.  Furthermore, pricing between different types of customer should also be objectively justifiable (and not arbitrary) and should not lead to the exclusion of certain types of retailers from the market. Note that this pricing obligation will only apply to manufacturers or suppliers who are dominant in their respective markets.
  • A system of pricing differentiation may constitute an anti-competitive  practice where it is implemented by a manufacturer in relation to certain distributors which have approved it in the knowledge of its discriminatory character. The Authority admits that manufacturers may apply different pricing conditions to brick & mortar sellers, or to click & mortar operators and pure players. However, this differentiation must be objectively justified, for example by reference to the volumes purchased, or by reference to the abilities of brick & mortar or click and mortar operations to offer certain specific services. Arrangements which are put in place with certain types of distributor in order to suppress competition from other types could fall within the prohibition of restrictive agreements.

The Authority refers to the Guidelines on vertical restraints¹ (the "Guidelines") and recalls that a dual pricing system, in which a manufacturer charges higher prices when a distributor resells online than when he resells through a brick & mortar store, constitutes an anti-competitive practice.

In this regard, the Authority points out some other practices with effects similar to dual pricing. In particular, according to the Authority, reserving the benefit of certain special terms and conditions of sale for distributors whose turnover in brick&mortar store achieves a certain threshold, may discourage online sales.

However, according to the Guidelines, such practices do not constitute competition restrictions if they are justified by the fact that online sales lead to higher costs for the manufacturer than other forms of sale.

3. Risk of exclusion of pure players resulting from selective distribution networks

3.1 Practices noticed

The Authority notes that in certain sectors (in particular cosmetic products sold in pharmacies, and home electronic goods), selective distribution is accompanied by specific requirements which apply to authorised distributors who are planning to sell products of a manufacturer online:

  • Some manufacturers only allow the sale of products online where the reseller has one or several authorised brick & mortar stores (sometimes requiring the reseller to have operated these brick & mortar stores for a minimum period (generally 1 year)).
  • Some manufacturers impose requirements regarding compliance with quality (for example, in relation to the technical specifications of the website, the presentation of the products, the information that must be provided, their referencing, the after-sales service that must be offered, etc).

3.2 Applicable principles

Firstly, the Authority recalls the general principles regarding selective distribution:

  • Manufacturers are free to organise the distribution of their products as they see fit, as long as they do not restrict competition. Depending on the nature of the product, the manufacturer may limit the distribution to appointed distributors only.  However, the products must be of a type or nature which merit selective distribution.  As a comparison, the Guidelines provide that selective distribution can benefit from the block exemption regardless of the nature of the product concerned and regardless of the nature of the selection criteria².
  • Manufacturers must choose their authorised distributors on the basis of disclosed objective criteria. These criteria must be applied without discrimination.
  • Manufacturers may require that distributors who intend to sell their products online must have brick&mortar stores.
  • Quality requirements must be equivalent for both brick&mortar and online points of sales.

However, the Authority also highlights some limitations resulting from the Guidelines and from its own case-law³:

  • Limiting online sales is a restriction by object (hardcore restriction), equivalent to a prohibition of passive sales.

In certain circumstances, this restriction may be justified and proportionate to a legitimate objective (giving rise to the possibility of individual exemption). However, since neither the Authority nor the Commission specify the cases in which this exemption may be granted, anyone seeking to argue that a ban on online sales is justified should proceed with caution.  In this context, the objective of preserving the prestigious image of the products has, been rejected as non-legitimate by both the Authority and the European Court of Justice in the Pierre Fabre case4.

  • The requirement regarding the possession of one or several brick & mortar points of sales may constitute a restriction of competition: The conditions of authorisation may limit the entry of new distributors on the market since the opening of new brick & mortar stores may take time and may be expensive. According to the Authority, the provision may also constitute discrimination against pure players.

Some manufacturers argue that this strategy prevents pure players from "free riding" on, or operating "parasitic" practices against, the trademark, as pure players could benefit from actions or investments made by manufacturers without having to incur a share of the costs. This justification may withstand scrutiny, but it has to be analysed on a case by case basis.

  • The requirement regarding quality standards for internet websites may constitute a restriction of competition if these standards are not justified, or are not proportionate to the objective at stake.

According to the Authority, some manufacturers have quality requirements in relation to websites which are too high.  For example, this is the case where the manufacturer requires that a minimum number of its products be offered for sale on the website or where the website of the distributor is required to meet unnecessarily high graphic standards.  What is acceptable and what is not acceptable will be determined by the Authority, but we would expect that the nature of the products concerned (for example cosmetics) will be of considerable importance for the individual analysis.

Finally, the Authority makes clear that judges may reach a conclusion that an agreement is restrictive of competition not only on the basis of an individual provision of the agreement but also on the basis of the cumulative effect of all the provisions it contains: the judge and the Authority have to assess the application of the criteria individually but also together.

In conclusion, the Authority's interest in this area can be expected to lead to continued vigilance over restrictions or bans implemented by suppliers on distribution over the internet. It is likely that further individual cases will arise requiring the Authority to review further the competitive health of the online commerce sector.