On 13 October 2011, the ECJ handed down its ruling in a preliminary reference from the Paris Court of Appeal which questioned the application of Article 101 of the TFEU to selective distribution agreements that contain absolute bans on selling cosmetics and personal care products to end-users.
On 13 October 2011, the European Court of Justice (ECJ) handed down its ruling in a preliminary reference from the Paris Court of Appeal which questioned the application of Article 101 of the TFEU on selective distribution agreements that contain absolute bans on selling cosmetics and personal care products to end-users. The ECJ found that, in the context of a selective distribution system, a contractual clause that amounted to an absolute ban on internet selling was a restriction by object within the meaning of Article 101(1) of the TFEU unless it was objectively justified, which was unlikely in this case. Further, the ECJ confirmed that the clause restricted active and passive sales and therefore constituted a hardcore restriction preventing the application of the Vertical Agreements Block Exemption, although the contract could potentially benefit from individual exemption under Article 101(3) of the TFEU if the conditions were met.
Close speedreadPierre Fabre Dermo-Cosmétique SAS (PFDC) manufactures and markets cosmetics and personal care products. PFDC's distribution contracts for cosmetics and personal care products under the Avène, Klorane, Galénic and Ducray brands require sales to be made in a physical space in the presence of a qualified pharmacist. This has the de facto effect of preventing all internet sales.
In 2006, the Conseil de la concurrence (French Competition Board (the Board)) opened an investigation into practices in the distribution sector for cosmetics and personal care products. In 2007, the Board accepted binding commitments from all the undertakings under investigation, other than PFDC, by which they agreed to allow the members of their selective distribution networks to sell their products on-line.
In October 2008, the Board reached a decision finding that PFDC had infringed Article L.420-1 of the French Commercial Code and Article 101 of the Treaty on the Functioning of the European Union (TFEU). The Board found, inter alia, that the requirement in PFDC's distribution contracts that sales of the products in question must be made in a physical space in the presence of a qualified pharmacist constituted a de facto ban on internet selling. The Board held that the ban on internet selling was equivalent to a restriction of authorised distributors' active or passive sales and necessarily had the object of restricting competition. In addition, the ban was found to limit the commercial freedom of PFDC’s distributors by excluding a means of marketing its products which also restricted the choice of consumers wishing to purchase products on-line.
The Board concluded that the de facto ban on internet sales constituted a hard core restriction of competition. Therefore, PFDC's distribution agreements did not fall within the Vertical Agreements Block Exemption (Regulation 2790/1999). In addition, they did not satisfy the criteria for individual exemption under Article 101(3) of the TFEU.
The Board ordered PFDC to remove all terms that were equivalent to a ban on internet selling from its selective distribution agreements and ordered PFDC to expressly allow its distributors to use the internet for sales of its products. PFDC was also fined EUR17,000 (see Legal update, French Competition Council requires Pierre Fabre to allow internet sales (www.practicallaw.com/5-384-1341)).
PFDC appealed against the Board's decision to the Paris Court of Appeal.
The Court of Appeal decided to stay the proceedings and refer a question to the European Court of Justice (ECJ) for a preliminary ruling. It asked whether the general and absolute prohibition to sell goods to end-users via the internet, imposed on authorised distributors in the context of a selective distribution network, constituted a 'hardcore' competition restriction by object under Article 101 of the TFEU which was not covered by the block exemption, but that could possibly benefit from an individual exemption as in Article 101(3) of the TFEU (see Legal update, French Court of Appeal asks ECJ to decide whether prohibition of online selling imposed on authorised resellers constitutes a hardcore restriction (www.practicallaw.com/4-501-1360)).
On 3 March 2011, Advocate General Mazak gave an opinion on the reference for a preliminary ruling. The Advocate General considered that a general and absolute ban on selling via the internet in the context of a selective distribution network has the object of restricting competition under Article 101 of the TFEU if it goes beyond what is objectively necessary in order to distribute products in an appropriate manner for the type of product. The Advocate General also added that an absolute ban on internet sales restricted active and passive sales and so constituted a hardcore restriction preventing the application of the block exemption. The Advocate General concluded that selective distribution agreements with absolute bans on internet sales could, however, benefit from individual exemption under Article 101(3) of the TFEU if the conditions were met (see Legal Update, Advocate General's opinion on absolute ban on internet sales in selective distribution agreements) (www.practicallaw.com/6-505-0100).
The ECJ began by stating that neither Article 101 of the TFEU nor the old Vertical Agreements Block Exemption (Regulation 2790/1999) refer to the concept of 'hardcore' restrictions of competition. The ECJ then considered the following issues:
Restriction by object within the meaning of Article 101(1) of the TFEU. The ECJ first considered whether the contested clause banning internet sales in PFDC's distribution agreements could be classified as a restriction of competition. Case law has established that where the anti-competitive object of the agreement is established, it is not necessary to examine the clause's effect on competition. However, even where the anti-competitive object of the agreement is established, it is still necessary to examine the content of the provisions of the agreement in question, the objectives it seeks to attain and the economic and legal context of which it forms a part.
The ECJ found that the clause in PFDC's distribution agreements requiring a qualified pharmacist to be present at a physical sales point amounted to a de facto prohibition on authorised distributors from any form of internet selling. The ban on internet selling was therefore liable to restrict competition because it significantly reduced the ability of authorised distributors to sell PFDC products to customers outside the authorised distributor's contractual territory or area of activity.
Selective distribution and objective justification. The ECJ then considered whether a selective distribution agreement containing a clause banning internet sales could benefit from the Vertical Agreements Block Exemption (Regulation 2790/1999). Case law has established that selective distribution agreements affect competition in the common market and are considered, in the absence of objective justification, as restrictions by object.
Selective distribution networks are not prohibited under Article 101(1) of the TFEU if resellers are chosen on the basis of objective criteria of a qualitative nature, where such conditions are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion, and where the characteristics of the products in question necessitate such a network in order to preserve the quality and ensure their proper use, and the criteria do not go beyond what is necessary.
The ECJ noted that the referring court needs to consider whether the clause banning internet sales in PFDC's distribution agreements can be justified as a proportionate means of achieving a legitimate aim. To help the referring court, the ECJ provided some guidance on points of interpretation of EU law.
The ECJ stated that it is undisputed that PFDC's resellers are chosen on the basis of objective criteria of a qualitative nature, which are laid down uniformly for all potential resellers. However, the ECJ has not previously accepted arguments relating to the need to provide individual advice to the customer and to ensure his protection against the incorrect use of products in the context of non-prescription medicines and contact lenses to justify an internet sales ban. The ECJ also noted that the aim of maintaining a prestigious image is not a legitimate aim for restricting competition.
Application of the Vertical Agreements Block Exemption. The ECJ noted that, in the context of a selective distribution network, suppliers may benefit from the Vertical Agreements Block Exemption (Regulation 2790/1999) where the supplier's market share does not exceed 30%. However, under Article 4(c) of the block exemption, there is no exemption for selective distribution agreements which restrict active or passive sales to end-users by members of the distribution system to end-users by members operating at the retail level. This is without prejudice to the possibility of prohibiting a member of the system from operating out of an authorised place of establishment.
The ECJ held that a general and absolute ban on internet sales restricted both active and passive sales and so fell foul of Article 4(c) of the block exemption. PFDC argued that sales via the internet should be considered equivalent to a prohibition on operating out of an unauthorised establishment. The ECJ agreed with the Paris Court of Appeal and the Advocate General in holding that the internet may not be considered as a virtual place of establishment in this context, but rather as a method of selling and marketing goods. The sale via the internet of contract goods by an authorised dealer does not constitute operating out of an unauthorised place of establishment pursuant to Article 4(c) of the block exemption. Accordingly, an absolute ban on internet selling in a selective distribution agreement will cause the agreement to lose the benefit of the block exemption under Article 4(c).
Individual exemption under Article 101(3) of the TFEU. The ECJ noted that if the referring court finds that the ban on internet selling restricts competition and cannot benefit from the vertical agreements block exemption, the referring court must then consider whether the conditions for individual exemption under Article 101(3) of the TFEU are met. Even if the agreement is found to have the object of restricting competition under Article 101(1) of the TFEU, the agreement is not automatically excluded from the benefit of Article 101(3) of the TFEU.
The ECJ did not consider that it had adequate information to assess whether PFDC's selective distribution agreements satisfied the conditions set out in Article 101(3) of the TFEU and declined to give further guidance on this point to the Paris Court of Appeal.
The ECJ, therefore, concluded that, in the context of a selective distribution system, a clause which prevents internet sales by requiring that cosmetics and personal care products are sold in a physical space in the presence of a qualified pharmacist, amounts to a restriction by object within the meaning of Article 101(1) of the TFEU if it is not objectively justified. Consideration of the objective justification of the clause requires an individual and specific examination of the content and objective, and the legal and economic context of which it forms a part, with regard to the particular properties of the products. Such a clause will prevent the application of the Vertical Agreements Block Exemption. However, it may benefit from individual exemption if the conditions for exemption under Article 101(3) of the TFEU are met.
The Commission's new Guidelines on vertical restraints, accompanying the new Vertical Agreements Block Exemption (Regulation 330/2010) contain guidance on attempts by manufacturers to prohibit internet sales (see Legal update, Commission adopts new vertical agreements block exemption and vertical restraints guidelines (www.practicallaw.com/9-502-0673)).
The Commission considers that restrictions on the use of the internet can amount to a restriction on passive sales. The Guidelines explain that, in principle, every distributor must be allowed to use the internet to sell products. The Guidelines confirm that within a selective distribution system, dealers should be free to sell, both actively and passively, to all end users, also with the help of the internet. The Guidelines state that the Commission will regard it as a hard core restriction where criteria are imposed for online sales that are not overall equivalent to the criteria imposed on sales from bricks and mortar shops, albeit that the criteria need not be identical due to differences in the distribution modes. The Guidelines provide examples of restrictions in selective distribution systems relating to quantities of sales to individual customers, delivery times or help desks that may justifiably need to be different for online and offline sales.
The Guidelines also provide guidance as to the permissibility of the imposition of quality standards for the use of an internet site, in particular in a selective distribution network (just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general).
For further discussion of the impact of the new vertical rules on online sales see Channelling past experience online: Four lessons from the new vertical restraints rules. (www.practicallaw.com/6-502-5969)