European Court of Justice rules that banning online sales in selective distribution systems is liable to be a restriction by …

On 13 October 2011, the European Court of Justice (“ECJ”) handed down its preliminary ruling in the Pierre Fabre case (see VBB on Competition Law, Volume 2011, No. 2, available at www.vbb.com). The ECJ found the de facto prohibition on online sale imposed by Pierre Fabre Dermo-Cosmétique ("Pierre Fabre") in the context of the selective distribution for its cosmetic and personal care products to be a “restriction by object” within the meaning of Article 101(1) TFEU unless it can be objectively justified. While such an obligation could not benefit from the applicable Vertical Agreements Block Exemption (Regulation No 2790/1999), the ECJ decided that it is for the national court to decide whether or not it could benefit, on an individual assessment, from the exception under Article 101(3) TFEU.

In the national proceedings, the French Competition Authority had found that Pierre Fabre breached Article 101 TFEU and the equivalent provision of French law by de facto prohibiting its distributors in its selective distribution system from selling cosmetic products over the Internet through the requirement that its products had to be sold in a physical space where a pharmacist was present (see VBB on Competition Law Volume 2008, No. 10, available at www.vbb.com). The French Competition Authority found that the total ban on Internet sales imposed by Pierre Fabre amounted to a restriction of active and passive sales which constituted a hardcore restriction within the meaning of the 1999 Vertical Agreements Block Exemption (“1999 VABER”) and which could not benefit through an individual assessment from the exception under Article 101(3) TFEU. Pierre Fabre brought an action for annulment against this decision before the Paris Court of Appeal and obtained the suspension of the obligation imposed by the decision to amend its selective distribution contracts pending its appeal on the merits (see VBB on Competition Law Volume 2009, No. 2, available at www.vbb.com).

In its appeal before the Paris Court of Appeal, Pierre Fabre alleged that the competition authority had erred in law by not recognising that the agreement benefited from the 1999 Vertical Agreements Block Exemption Regulation or met the conditions to benefit on an individual basis from the exception under Article 101(3). Both Pierre Fabre and the Commission, who intervened as amicus curiae, suggested that, should the Paris Court of Appeal have doubts as regards the interpretation of the EU competition rules, it should stay the proceedings and make a preliminary reference to the ECJ. Thus, in view of (i) the contradictory interpretation of the relevant competition rules given by the parties, (ii) the silence of the 1999 VABER as regards Internet restrictions and (iii) the non-binding character of the Commission’s Vertical Guidelines (which indicate that a total ban on Internet sales amounts to a hardcore restriction), the Paris Court of Appeal asked the ECJ to rule on whether a ban on Internet sales would be a hardcore restriction by object within the meaning of Article 101(1) TFEU and the 1999 VABER. The ECJ somewhat reformulated the Court of Appeal’s question as seeking to ascertain, first, whether the contractual clause imposed by Pierre Fabre amounts to a “restriction by object” within the meaning of Article 101(1) TFEU, secondly, whether a selective distribution contract containing such a clause – where it falls within the scope of Article 101(1) TFEU – may benefit from the block exemption established by the 1999 VABER and, thirdly, where the block exemption is inapplicable, the contract could nevertheless benefit from the exception provided for in Article 101(3) TFEU.

The ECJ began by considering that in assessing whether such a clause is restrictive by object, regard must be had to its content, the objectives it seeks to obtain and its economic and legal context. The Court held that selective distribution agreements “necessarily affect competition in the common market” and must therefore be regarded, in the absence of objective justification, as “restrictions by object”. Yet, the Court went on to reiterate its well-established case law according to which selective distribution can be considered to be in conformity with Article 101(1) TFEU if it is justified by certain “legitimate requirements” which have the effect of enhancing competition in relation to factors other than price. To this end, the ECJ cited its ruling in the AEG Telefunken case according to which “the maintenance of a specialist trade capable of providing specific services as regards high-quality and high-technology products” is a legitimate goal. In addition, the ECJ recalled the specific conditions which a selective distribution network must meet in order to escape the application of Article 101(1) TFEU, namely that: (i) resellers are appointed on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, (ii) the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use, and (iii) the criteria laid down do not go beyond what is necessary.

While holding that it is for the referring court to decide whether the contractual clause at issue prohibiting de facto all forms of internet selling can be justified by a legitimate aim, the ECJ nevertheless proceeded to provide guidance on the interpretation of EU law in order to enable the referring court to reach a decision.

Although it was not disputed that Pierre Fabre had, on the facts, chosen its resellers on the basis of objective criteria of a qualitative nature, the ECJ held that it still needed to be considered whether the anti-competitive restrictions inherent in the agreement pursued legitimate aims in a proportionate manner. In providing guidance on this determination, the Court first recalled that, under its case law in relation to the freedoms of movement, it had not been persuaded that a need to provide advice and protect consumers against incorrect use of the product justified a ban on Internet sales in the context of the sale of non-prescription medicines and contact lenses (Deutscher Apothekerverband and Ker-Optika). Secondly, the ECJ dismissed the argument of Pierre Fabre that the restriction was needed to maintain the prestigious image of the products, which it held not to constitute “a legitimate aim for restricting competition”. Although the Court did not consider it appropriate for it to make the final determination, it would appear to be strongly encouraging the national court to find the clause to be a restriction by object.

Finally, the ECJ found that the clause could not benefit from the block exemption under the 1999 VABER since such a clause at the very least has as its object the restriction of passive sales to end users wishing to purchase online and located outside the physical trading area of the relevant member of the selective distribution system. This, according to Article 4(c) of the 1999 VABER, constitutes a hard-core restriction. The Court rejected the argument that the restriction was equivalent to a “location clause” (i.e., a prohibition on operating outside of an authorised place of establishment) which is exempted under the 1999 VABER in the context of selective distribution. The Court did conclude, however, that the clause could in principle benefit from the exemption under Article 101(3) TFEU on an individual assessment where the conditions of that provision are met, although it felt it had insufficient information to provide any guidance on this determination.

The ruling is of interest in a number of respects.

First of all, and despite its reluctance to make a firm ruling on the point in deference to the national court, the wording of the judgment suggests that, as a matter of principle, the Court views very negatively under Article 101(1) prohibitions on the right of distributors to make Internet sales. The position of the European Commission as reflected in its Vertical Guidelines has therefore been vindicated.

Second, the ECJ uses new language in stating that selective distribution systems are to be considered, in the absence of objective justification, as “restrictions by object”. Although the test described by the Court to determine whether a selective distribution system is objectively justified under Article 101(1) is consistent with previous case law, the suggestion that a system which does not satisfy this test is a restriction by object (i.e., among the most serious restrictions of competition) may mean in practice that parties will face a heavy burden in attempting to demonstrate that such a system (regardless of whether it restricts Internet sales) nonetheless generates sufficient efficiencies to qualify for the Article 101(3) exception. This underscores the value to brand owners of the VABER which automatically exempts all forms of selective distribution systems regardless of whether they are objectively justified, provided that (as confirmed by the ECJ in this judgment) Internet sales are not prohibited. It is less clear how the Court, if it were asked, would view the approach of the Vertical Guidelines which suggest, for example, that criteria that are not “qualitative” may nonetheless be valid where the market is not overly concentrated or where they are not overly “quantitative” in their effect.

Third, the ECJ finds that the aim of maintaining the prestige of a brand does not justify a clause restricting competition in the context of a selective distribution system. This does not appear to sit easily with the General Court’s judgment in the 1996 Perfumes case, in which it was clearly stated that “preserving prestigious brand image […] and safeguarding, in the consumer’s mind, an aura of exclusivity and prestige” constituted a legitimate aim in a selective distribution system for high-quality luxury cosmetic products.

Finally, although the case concerned a selective distribution system, the negative approach of the Court to restrictions on the right of distributors to sell over the Internet would very likely apply in other forms of distribution system also. Indeed, the arguments in favour of such a restriction in other more open forms of distribution system (which tolerate, at least indirect, resale by resellers who are under no obligation to satisfy the resale criteria of the brand owner) are in general weaker than in the case of selective distribution. The Pierre Fabre ruling is therefore a fortiori of general application. Similarly, the limited changes introduced in the 2010 VABER, which replaced the 1999 VABER which was at issue in this case, should not affect the Court’s conclusion that a prohibition on the right of distributors to sell over the internet is not block-exempted.