European Union: EU General Court Endorses Selective Distribution Of Spare Parts For Luxury Watches

On 23 October 2017, the General Court of the European Union (the "Court") dismissed an action brought by Confédération européenne des associations d'horlogers-réparateurs ("CEAHR") against the European Commission (the "Commission") for the annulment of the Commission's decision to reject a complaint lodged by CEAHR concerning alleged infringements of Articles 101 and 102 TFEU by several Swiss watch manufacturers (Case T-712/14 Confédération européenne des associations d'horlogers-réparateurs (CEAHR) v Commission).

CEAHR is an association of nine national associations of independent watch repairers. In 2004, it lodged a complaint with the Commission against several Swiss watch manufacturers, alleging an infringement of Articles 101 and 102 TFEU resulting from their refusal to continue to supply spare parts to independent repairers. In 2008, the Commission decided not to pursue the complaint on the grounds that there was insufficient EU interest to continue the investigation (see VBB on Competition Law, Volume 2010, No. 12, available at www.vbb.com.), and CEAHR sought to annul this decision. The Court in that case, T-427/08 CEAHR v Commission, held that the Commission had made manifest errors in its assessment of the complaint and annulled the decision. As a result, CEAHR made a new complaint in relation to the same practices, which was again refused by the Commission in 2014.

In its further appeal of this 2014 rejection decision, CEAHR brought six pleas, the four substantive arguments being that the Commission had erred: (1) in its description of the market power of Swiss watch manufacturers; (2) in its assessment of the existence of an abuse arising from the refusal to supply spare parts to independent retailers; (3) in its assessment of the objectively justified nature of the selective repair system and refusal to supply spare parts; and (4) in its assessment of the existence of an agreement or concerted practice among watch manufacturers. All of these pleas were rejected by the Court. The Court's assessment of each of the first three pleas is described below.

Whether the selective repair system and the refusal to supply spare parts were objectively justified (Third plea)

The watch manufacturers had each set up authorised repair and maintenance networks for their products, membership of which required investment in machinery and training. Spare parts were supplied only by a manufacturer to the members of its authorised repair network and an authorised repairer could resell spare parts only to other resellers who were themselves members of the same authorised repairer network.  In its decision, the Commission had considered that what it regarded as a qualitative selective repair system would be likely to fall outside the scope of Article 101(1) TFEU because it was likely to satisfy the three conditions of the case-law, which requires the system to be: (i) objectively justified, (ii) non-discriminatory and (iii) proportionate.

In its appeal, CEAHR argued that - in order for a selective repair system to escape Article 101(1) - a fourth condition needed to be met that the Commission had failed to apply, namely that the system must not have the effect of eliminating all competition. The Court rejected this argument, finding that the Commission's approach was consistent with the Metro case-law, and declining to extend the test to include an examination of whether the repair system eliminates all competition.

The Court then examined whether the Commission's findings in relation to each of the three conditions of the selective distribution case-law suggested that it had made manifest errors.

Objective justification. In its decision, the Commission had concluded that the selective repair systems were objectively justified by four factors: (i) the increased complexity of prestige watches; (ii) the maintenance of high and uniform quality repair services; (iii) the prevention of counterfeiting; and (iv) the protection of the supplier's brand. The Court did not find fault with the Commission's reliance on the first three factors, but, basing itself on the ruling of the Court of Justice ("ECJ") in Pierre Fabre, it held that the goal of protecting a prestigious brand image could not prevent a restriction from falling within Article 101(1) and, therefore, the Commission was not entitled to rely on this objective in assessing compliance with Article 101(1). This assessment could be considered to be inconsistent with the Opinion of Advocate General Wahl in Coty (Case C‑230/16), in which he considered that the protection of the brand image of luxury and prestige products is a legitimate goal of selective distribution in considering the application of Article 101(1).

Despite this legal defect in the Commission's analysis, and taking into account that the goal of preserving the quality, and ensuring the proper use, of the manufacturers' watches would - according to the case-law - be capable of justifying the system, the Court nonetheless considered that the other three factors relied on by the Commission described above would be sufficient in themselves to provide an objective justification for the selective repair systems.

Non-discrimination. The Court did not find fault with the Commission's view in the decision that the selective repair systems were likely to meet the non-discriminatory requirement taking into account that their membership was determined by objective criteria.

Proportionality. Likewise, the Court did not find fault with the Commission's view in the decision that the obligations placed on members of the selective repair systems were proportionate taking into account, for example, that the obligations were similar to those imposed by associations of independent repairers on their members.

Whether there was an abuse arising from the refusal to supply spare parts to independent retailers (Second plea)

CEAHR argued that the Commission wrongly assessed the possibility of an abuse under Article 102 TFEU, claiming: (i) that the refusal to supply amounted to an abuse unless it was objectively justified; and (ii) that it was impermissible to infer lawfulness under Article 102 from the fact that the selective repair network was lawful under Article 101.

The Court recalled that, in order to establish an infringement of Article 102, the refusal of a dominant undertaking to supply the goods in question must meet three conditions: (i) the refusal must be likely to eliminate all competition on the market on the part of the customer; (ii) it must not be capable of being objectively justified; and (iii) the goods must be indispensable to the customer's business. Thus, only in these specific circumstances will there be a finding of abuse, and a mere lack of an objective justification is insufficient in this regard.

On the interaction between Articles 101 and 102, the Court held that lawfulness under one Article may be indicative, but not conclusive, of lawfulness under the other. On the facts, however, the Commission had considered other factors in its assessment which were capable of demonstrating that not all effective competition would be eliminated, including the existence of competition between authorised repairers and the possibility of new entrants to the repair system. Further, the Commission had not, as CEAHR claimed, given undue weight to the expressed intent of the watch manufacturers. Thus, the Commission had not erred in its finding that the refusal was unlikely to be an abuse contrary to Article 102.

Whether the market power of the watch manufacturers was correctly assessed (First plea)

CEAHR submitted that the manufacturers held a monopoly on the market for the supply of spare parts and criticised the Commission's decision for failing to take into account the effects of this monopoly (as distinct from dominance) in assessing whether their conduct was an abuse. In this respect, the Court held that there was no need to depart from the case-law under which the degree of dominance is irrelevant to the assessment of abusive conduct. It is relevant to an assessment of the effects of abusive conduct, but not to its existence as such.

Conclusion. The Court held that the Commission was justified in deciding not to further investigate the manufacturers' selective repair systems. It had applied the correct legal tests and concluded (in light of the complaints) that there was insufficient evidence to indicate that an eventual finding of anticompetitive behaviour was likely. In so doing, the Court robustly declined to apply the stricter rules applied by the Commission in the motor vehicle sector, which for example require authorised repairers to be able to sell to independent repairers even in the context of a selective repairer system, citing the specific factors applicable in that sector.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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