EU ruling on the prohibition of online sales
The Court of Justice of the European Union (the "Court of Justice") has today ruled that the restriction of online sales in a selective distribution agreement constitutes a restriction of competition "by object" under EU law (Case C-439/09 Pierre Fabre Dermo-Cosmétique v Président de l'Autorité de la Concurrence, Others). This judgment further supports the general EU rule set out in the recently revised EU vertical restraints guidelines that a supplier must allow its goods to be sold online.
In 2008, Pierre Fabre was fined by the French competition authority for infringing both EU and French competition law by prohibiting online sales as a result of requiring its distributors to sell its products only in brick and mortar stores with a trained pharmacist present. Pierre Fabre appealed the fine before the Cour d'appel de Paris, which, before ruling, requested the Court of Justice to clarify whether Pierre Fabre's prohibition of internet sales could be regarded as anti-competitive by "object".
Categorisation of a restriction as anti-competitive by "object" is significant under EU law. It means that the restriction is almost inevitably viewed as a "per se" infringement. In this context, a supplier faces the very significant challenge of showing that the restriction is either objectively justified (eg on grounds of health and safety), or produces offsetting benefits which satisfy the conditions of Article 101 (3) (which is often very difficult to prove). This is the case even for a supplier with a very small market share. The EU Vertical Agreements Block Exemption Regulation can normally apply where market shares are below 30%, but it cannot apply where a distribution agreement includes a restriction "by object".
The Court of Justice held that "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 the ban on the use of the internet for those sales, amounts to a restriction by object...where...it is apparent that, having regard to the properties of the products at issue, that clause is not objectively justified." The Court of Justice noted that it has already not accepted the need to provide individual advice to the customer and to ensure his protection against the incorrect use of products to be an acceptable justification for the prohibition of online sales in the context of non-prescription medicines and contact lenses. The Court also noted that the mere need to maintain a prestigious image could not be sufficient justification for a prohibition of online sales. The Court of Justice stated that it was for the Cour d'appel de Paris to examine whether the prohibition of online sales in this case could be justified by a legitimate aim. It also stated that it did not have sufficient evidence before it to assess whether the prohibition satisfied the conditions in Article 101 (3) TFEU, and that it was for the Cour d'appel de Paris to examine this question.
Whilst this judgment confirms that the prohibition of online sales in a selective distribution agreement will be regarded under EU law as a restriction by "object", and therefore very difficult for brand owners to justify, it is disappointing that the judgment does not cover in more detail the circumstances when such a prohibition could be objectively justified or be exempted under Article 101 (3). This is particularly disappointing considering that Pierre Fabre had a relatively small market share in the markets in question of 20%, and in view of the fact that there are different approaches to the issue in other jurisdictions. US federal law, for example, has a more relaxed approach to the restriction of online sales, although certain US states are more strict.
Brand owners will need to continue to rely on the recently revised EU Verticals Block Exemption Regulation which allows for the restriction of online sales in certain limited circumstances by permitting a requirement that only brick and mortar dealers may sell online, minimum sales targets for in-store sales, a fixed fee to support the sales effort in in-store sales, and standards for use of websites.
Brand owners should also watch closely the sector inquiry launched on 1 July 2011 by the French Competition Authority into the e-commerce sector where the issue of internet sales is being specifically investigated. The French Competition Authority has specifically stated that it will examine as part of this inquiry restrictions on online sales imposed by manufacturers or by distributors. It has stated, however, that the conclusion of its sector inquiry will in no circumstances put into question the rules relating to internet sales set out in the EU Vertical Agreements Block Exemption Regulation with which it is in full agreement.