European Union: ECJ Ruling On Absolute Ban On Internet Sales In Selective Distribution Agreements

Last Updated: 16 January 2012

Article by Charlotte Walker-Osborn Head of TMT Sector and Laura Friend, Solicitor, Commercial.

What? The European Court of Justice ("ECJ") has ruled that bans on online sales contained in selective distribution agreements are illegal under Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU") where they have as their "object" the restriction of competition.

So What? This judgment confirms the view long held by the European Commission and set out in the new vertical restraints guidelines that "every distributor must be allowed to use the internet to sell products".

Although any general and absolute ban on selling goods via the internet is likely to have the "object" of restriction of competition, the ECJ did appear to leave open the possibility that such restrictions could be legally acceptable if there was an objective justification for their use.

The French regulator's decision

This case arose following an investigation by the French Competition Council (the "Council") into the use of selective distribution systems for cosmetics and personal care products.  The Council found that the ban on online-sales was a "hardcore" restriction and contravened the competition rules. A number of cosmetic manufacturers that were the subject of the investigation offered binding commitments to the Council to remove any clauses that restricted competition by "object" under Article 101(1) of the TFEU.  One manufacturer, Pierre Fabre Dermo-Cosmetique ("Pierre Fabre"), refused to offer similar commitments, and was consequently fined €17,000 for infringing Article 101(1) of the TFEU.

Pierre Fabre accounts for approximately 20% of the French market for the manufacture of cosmetic and personal care products.  Pierre Fabre distributed its products throughout the EU using a selective distribution system which required sales to be "made exclusively in a physical space, in which a qualified pharmacist must be present".  These requirements effectively banned all online sales of the Pierre Fabre products.

Pierre Fabre argued that the products, by their nature, required the physical presence of a qualified pharmacist at the point of sale and so the restriction was justifiable.  However, the Council decided that the ban on internet sales amounted to a limitation on the commercial freedom of the distributors,  restricted the choice of the consumer and ultimately had the object of restricting competition.   The Council required the clause to be removed from the contracts and ordered Pierre Fabre to pay a fine of €17,000.

The appeal

Pierre Fabre appealed the decision before the cour d'appel de Paris (the "Court of Appeal"). The Court of Appeal asked the ECJ to consider the following question:

"Does a general and absolute ban on selling goods via the internet, imposed on authorised distributors in the context of a selective distribution network, in fact constitutes a "hardcore" restriction of competition by object for the purpose of Article 101(1) TFEU which is not covered by the block exemption provided for by Regulation No 2790/1999 but which is potentially eligible for an individual exemption under Article 101(3) TFEU?"

The ECJ Judgment

The ECJ approached the issue in three parts:

  • Does a restriction on selective distributors making sales via the internet amount to a restriction of competition by "object"?
  • Can a selective distribution contract containing such a clause benefit from the Vertical Agreements Block Exemption ("VABE")?
  • Where the block exemption is inapplicable, can such a contract nevertheless benefit from individual exemption under the exception provided for in Article 101(3) TFEU ("Individual Exemption")?

A restriction by "Object"?

In making its decision, the ECJ held that the use of selective distribution systems can fall outside of Article 101(1) TFEU as long as:

  • resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion;
  • the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use; and
  • the criteria imposed by the selective distribution do not go beyond what is necessary.

It was not disputed that Pierre Fabre's resellers were chosen on the basis of objective criteria of a qualitative nature, which were laid down uniformly for all potential resellers. The ECJ had to decide whether the restriction went further than was necessary to pursue the legitimate aims of the selective distribution system.

The ECJ  rejected Pierre Fabre's argument that the clause was necessary to preserve the image of the products (as the ECJ could not perceive any damage or harm that could possibly be caused to the brand by a distributor selling the product online in addition to selling from a physical site) and decided that the aim of maintaining a prestigious image is not a legitimate aim for restricting trade.

Ultimately, the ECJ held that a contractual clause in a selective distribution system requiring sales to be made from a physical store where a qualified pharmacist must be present, resulting in a ban on the use of the internet for those sale, amounts to a restriction of competition by object.

The possibility of the vertical block exemption?

The ECJ considered whether a selective distribution contract which contained a clause that was anti-competitive by its object could benefit from the safe-harbour provided by VABE.

Pierre Fabre argued that the ban on internet selling should be viewed by the ECJ as equivalent to a prohibition on operating out of an "unauthorised establishment",  as permitted by VABE. However, the ECJ distinguished the internet from an "unauthorised establishment" and, in this context, held the internet to be a marketing mechanism.

The ECJ held that the provisions of VABE could not apply to a selective distribution agreement which contained a clause prohibiting de facto the use of the internet as a method of marketing the contractual products.

Is an Individual Exemption available?

The ECJ did not consider itself to have sufficient information to assess whether the clause, effectively prohibiting online sales, satisfied the conditions for individual exemption, however it did not rule out the possibility of Individual Exemption being available for this clause.   This element will be decided upon by the referring French Court of Appeal.

Comment

The judgment confirms the view long held by the European Commission, but which the European Court has until now not had to consider, that an absolute ban on internet sales will in most cases be considered to have the object of restricting competition and will take a distribution agreement outside the safe harbour of the VABE. The judgment leaves open the possibility that in individual cases the pro-competitive efficiencies resulting from such a ban might outweigh the anti-competitive restriction, though a supplier would need to tread carefully and carry out a proper analysis before relying on Individual Exemptions, as the consequences of getting it wrong are potentially serious.

The judgment does not outlaw an absolute ban on internet sales where for example this is objectively necessary for health and safety reasons, but of course in such circumstances the supplier would also be expected to refrain from internet sales. Unfortunately the judgment leaves unanswered the numerous questions resulting from the European Commission's 2010 vertical restraints guidelines but on the back of this judgment, suppliers may be reluctant to test the bounds of these guidelines.

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