On March 3, 2011, Advocate General (AG) Mazák delivered
an opinion to the European Court of
Justice (ECJ) in Pierre Fabre Dermo-Cosmétique SAS
(PFDC). PFDC, a French manufacturer of cosmetics and personal care
products, prohibited its retailers from selling via the Internet.
AG Mazák advised the ECJ that, absent exceptional
circumstances, a manufacturer of branded products infringes Article
101 TFEU if the manufacturer requires distributors to sell only
offline.
On its face, PFDC relates to only one type of EU distribution
system, the so-called "selective distribution." Suppliers
of luxury and branded products (such as PFDC) and distributors of
goods with complex technical features often use selective
distribution networks in the EU. There are particular antitrust
rules for selective distribution systems in the EU. However, AG
Mazák makes a number of general comments on how online
distribution needs to be reviewed from the perspective of Article
101 TFEU, the EU equivalent to §1 Sherman Act.
AG Mazák's opinion is an important sign for business, as
it is the first time that an AG has opined on Internet distribution
since the EU Commission's revision of its Guidelines on
Vertical Restraints (Guidelines) in May 2010. Though the Guidelines
deal extensively with Internet distribution, it is the ECJ, rather
than the EU Commission, that has the final say on whether a
particular distribution arrangement complies with the terms of
Article 101 TFEU. If the ECJ follows the AG's opinion
– as it usually does – it will endorse the EU
Commission's restrictive position on limitations on online
sales and take a generally favorable stance on Internet
distribution.
Case history
PFDC is a French manufacturer of pharmaceutical, homeopathic and
para-pharmaceutical products. In France, PFDC sells its cosmetics
and personal care products through pharmacies. PFDC's
distribution agreements require that pharmacists to sell
exclusively in a physical space and that a qualified pharmacist be
present at all times. These requirements make it impossible for
pharmacists to sell online.
PFDC's competitors used similar provisions in their
distribution agreements. In 2006, France's Conseil de la
concurrence (Competition Council) initiated an investigation of the
distribution sector for cosmetics and personal care products. PFDC
and some of its competitors were subjects of this investigation.
PFDC's competitors agreed to amend their distribution
agreements so that distributors were permitted to sell online.
However, PFDC refused to comply with the Competition Council's
request, arguing that the design of its products
requires advice from a qualified pharmacist because of the way in which those products act, as they have been developed as health care products... Our products are suitable for specific skin problems, for example, intolerant skin where there is a risk of an allergic reaction. Hence, we consider that internet selling would not meet the expectations that consumers and health professionals have of our products, and consequently, the requirements we include in our general conditions of sale.
The Competition Council decided in 2008 that PFDC infringed EU and French prohibitions on restraints of trade. PFDC filed an appeal with the Cour d'appel de Paris (Court of Appeals). The EU Commission intervened in support of the Competition Council. The Court of Appeals stayed proceedings and requested that the ECJ provide an opinion on whether a ban on reselling through the Internet infringes Article 101 TFEU.
GA Mazák's opinion
Restraint of competition by object or by
effect. Pursuant to Article 101(1) TFEU, agreements are
restrictive of competition either by their "object" or
their "effects." While the "effects" test
requires a detailed assessment of the facts at issue, a restriction
by "object" essentially means that an agreement is
illegal per se.
In the EU, there are no precise rules on the exact level of factual
analysis required for a finding of a restriction by
"object" (other than for cartels). Indeed, GA
Mazák noted a certain "degree of confusion" before
the Court of Appeals regarding these fundamental principles of
Article 101(1) TFEU. He pointed out that a finding of an
infringement by "object" also necessitates that the
agreement must be reviewed in light of its content, objectives and
context and that such a review "cannot be established solely
[by] using an abstract formula."
GA Mazák's comment is a reminder of the limited role the
EU's block exemption regulations have in this context. For
example, the EU Block Exemption Regulation On Vertical Restraints
(VBER) lists certain "hardcore" restraints of trade that
nullify a safe harbor that would otherwise apply to specific
restraints of trade included in the agreement. GA Mazák
emphasizes that just because a distribution agreement does not
comply with the VBER, does not mean that the agreement has the
"object" (or effect) of restricting competition in the
sense of Article 101(1) TFEU. GA Mazák added that such an
agreement may still benefit from an individual exemption pursuant
to Article 101(3) TFEU. In both instances, GA Mazák stated
that a case-by-case assessment is warranted.
Health and safety justifications. GA Mazák
dismissed PFDC's "health" arguments in defense of its
ban on Internet sales. He concluded that PFDC's public health
and safety claims are "objectively unfounded" because
such justification would need to be based on public law. EU and
French public laws are silent on the issue.
In addition, PFDC claimed that its prohibition on Internet sales
was necessary to combat counterfeiting. AG Mazák concluded
that Internet sales would not lead to increased counterfeiting.
Moreover, PFDC took the position that allowing online commerce
would facilitate free-riding. AG Mazák, by contrast, argued
that
given that the setting-up and operation of an internet site to a high standard undoubtedly entails costs, the very existence of free-riding by internet distributors on the investments of distributors operating out of a physical outlet cannot be presumed.
Selective distribution. PFDC argued that its
ban on online sales was necessary to maintain the concept of luxury
that is associated with its products. AG Mazák pointed out
that the requirements that manufacturers of branded or luxury
products may impose on their retailers must be considered within
the perspective of the criteria EU competition law provides for
selective distribution systems. In essence, AG Mazák was
saying that an agreement is a "by object" restraint of
trade if it fails to satisfy those requirements. This means that
the specific effects of a ban on online distribution do not need to
be considered to conclude that there is an infringement of Article
101(1) TFEU. If it did, the result might be different, as
PFDC's market share was 20%, and in France there were
approximately 23,000 physical outlets for PFDC products.
Under EU competition law, "selective" distribution
systems are permissible provided that the manufacturer chooses its
distributors using objective non-discriminatory criteria that
relate to the distributor's qualifications and the suitability
of its trading premises. Those suppliers may wish to rely on
brick-and-mortar shops to ensure the appropriate levels of pre- and
after-sales services and to protect their brand. Does an outright
prohibition on Internet sales infringe Article 101(1) TFEU? On the
basis of the EU Commission's Guidelines, the answer is
"yes." The Guidelines note that the
internet is a powerful tool to reach a greater number and variety of customers than by more traditional sales methods, which explains why certain restrictions on the use of the internet are dealt with as (re)sales restrictions. In principle, every distributor must be allowed to use the internet to sell products.
AG Mazák's interpretation of Article 101(1) TFEU
supports this restrictive position: a "general and absolute
ban on internet sales imposed by a manufacturer on a distributor
is, in my view, proportionate only in very exceptional
circumstances." He reasoned that PFDC could have provided
product information and advice to costumers also via the Internet
or, at a minimum, informed customers that additional information
regarding the products is available at specific physical
outlets.
AG Mazák's opinion is important because he assumes that
the Internet provides sufficient means and safeguards for retailers
to ensure that their high-quality products continue to enjoy the
reputation of a luxury good and to make sure that customers receive
the appropriate service. This assumption is key to his finding that
PFDC could have resorted to less rigid means than to an outright
ban on Internet sales. In his view, suppliers have sufficient
control over how retailers sell their products online. If this
opinion is accepted by the ECJ, it likely will increase the hurdles
for justifying any limitation of sales to the offline world.
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