The European Court of Justice (ECJ) has ruled 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. Although the ECJ’s 13 October 2011 judgment relates to the provisions of one particular contract, its findings will have major implications for the online sales of many products, above all when read in conjunction with the European Commission’s 2010 revision of the block exemption.
Some of the competition law terms used in this note are explained at the end in a Key to jargon.
The French connection
The ECJ’s judgment relates to a French case, ruling on a question of law referred to it by the Paris Court of Appeal.
Pierre Fabre Dermo-Cosmétique SAS markets its products (including brands such as Avène, Klorane, Galénic and Ducray) under contracts which stipulate 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 law to a restriction of competition by object which could not be exempted, 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. that the products could have adverse dermatological consequences or that Pierre Fabre wished to discourage counterfeit products. 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 ECJ 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 exempted under the verticals block exemption and whether, if indeed the block exemption did not apply, the provision could be exempted on an individual basis.
The ECJ’s main findings
The ECJ focused on the precise terms of the Pierre Fabre contracts and broke 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 ECJ 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 justifying this clause, which therefore represented a restriction by object.
- Second, could a de facto restriction of online sales benefit from block exemption? The verticals block exemption prohibits “a restriction of 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 ECJ 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 was in fact exemptible on an individual basis.
Does the ECJ’s approach fit with the new verticals block exemption?
The ECJ’s judgment relates to the verticals 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 point regarding the illegality of a ban on sales to end users within a selective distribution system, so the ECJ’s findings are equally relevant to the current regime.
However, the European Commission’s revised guidelines accompanying the new block exemption contain new guidance on restrictions of 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 detail 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.
The ECJ’s judgment does not relate to the new verticals block exemption. It does, however, allow for the possibility of individual exemption and the new block exemption guidelines may assist businesses in deciding what may be exemptible on an individual basis.
Selective distribution for luxury goods at risk?
It is often argued that selective distribution is suitable primarily for products which involve some element of technological sophistication. However, in a number of historic cases, it has also been accepted that products with a luxury brand image can be selectively distributed, even where they are not complex in technological terms.
On this point, it is interesting that the ECJ stated in Pierre Fabre that protection of brand prestige is not a legitimate aim to justify the requirement for a physical space and a pharmacist. Although this statement in its context rejects brand prestige as a justification for the specific clause at issue, other restrictions in selective distribution systems for luxury products may in future be harder to justify.
Summary: key points from the Pierre Fabre case
Online sales represented over 10% of all UK 2010 retail sales – a figure which is likely to double in the next five years. The question of when a supplier can ban online selling of its products is likely to be of increasing relevance. The Pierre Fabre case offers three points of significant clarification:
- 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.
Key to jargon
Article 101 – This article of the Treaty on the Functioning of the European Union contains (at Article 101(1)) the prohibition of agreements between different undertakings which “have as their object or effect the prevention, restriction or distortion of competition” in the EU.
Block exemption – Article 101(3) allows for exemption from the Article 101 prohibition where stipulated criteria are met. A “block exemption” regulation applies to a particular class of agreements and sets out the criteria which make a restriction in such agreements exemptible. Where an agreement falls clearly within the terms of a block exemption, exemption is automatic.
Individual exemption – The possibility of exemption from the Article 101 prohibition on an individual basis for restrictions in agreements which do not satisfy the terms of a block exemption.
Restriction of competition by object – A type of anti-competitive restriction which is deemed to infringe the Article 101 prohibition without the need to demonstrate actual anti-competitive effect.
Selective distribution – A system where the supplier appoints distributors or retailers of its products according to defined qualification criteria.
Verticals block exemption – The block exemption for all forms of distribution or supply agreements which relate to the purchase, sale or on-sale of any goods or services.