Restricting online sales and selective distribution

The European Court of Justice ("ECJ") has stated that where a selective distribution agreement contains a clause which indirectly prevents a distributor from selling products online, it will constitute an anti-competitive restriction on sales and an infringement of Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU"). Such a ban between suppliers and distributors would not normally benefit from exemption under the Vertical Restraints Block Exemption Regulation ("VRBE"). However, if it is objectively justifiable, the restriction may benefit from individual exemption under Article 101(3), in certain circumstances.

Background

Pierre Fabre Dermo-Cosmétique ("Pierre Fabre") manufactures and markets cosmetics and personal care products which are sold mainly through pharmacies in the French and other European markets. Although the products were not classified as ‘medicines’ in its distribution agreement, Pierre Fabre stipulated they could only be sold in the presence of a pharmacist. This indirectly restricted sales via the internet as it only permitted sales in store. In October 2008 the French Competition Authority, Autorité de la concurrence ("ADLC"), decided that this selective distribution agreement was anti-competitive under French and EU Competition Law, as the implied ban on internet sales restricted and distorted competition. As such, the agreement could not rely on the VRBE. The ADLC also decided that the agreement was not capable of being individually exempted.

Pierre Fabre challenged this decision before the Cour d’appel de Paris, the French Appeal Court, which referred the following questions to the ECJ:

1. is a general and absolute ban on internet sales to end users in the context of a selective distribution agreement anti-competitive under Article 101(1) and therefore not exempt under the VRBE; and, if so
2. could the agreement still benefit from individual exemption under Article 101(3)?

Pierre Fabre Selective Distribution Agreement

The ECJ stated that a selective distribution network itself will not be prohibited under Article 101(1) if the distributors are chosen on the basis of objective criteria which are equally applied to all resellers. A selective process will however only be acceptable where the characteristics of the product concerned necessitate such a selection in order to preserve the product’s quality and to ensure its proper use. Finally, the criteria must not go beyond what is necessary to achieve these aims.

In this case, the distribution agreement stipulated that the product be sold in the presence of a pharmacist, which meant that online sales were not possible. Distributors were therefore not able to sell to customers based in any other member state wishing to purchase the products online. This would be an infringement of Article 101(1) if the requirement had as its ‘object’ or ‘effect’ the restriction of parallel trade between member states and could not be justified on an objective reasoning.

Pierre Fabre argued the requirement that a pharmacist be present at the point of sale was justified for two reasons:

• the cosmetics and personal care products concerned required individual advice from a pharmacist to the customer to ensure their correct use; and
• the requirement was necessary to protect and maintain the prestigious image of Pierre Fabre and the products concerned.

The ECJ’s Decision

The ECJ rejected both of Pierre Fabre’s arguments. On the first point, it compared Pierre Fabre’s products to non-prescription medicines and contact lenses^¹. The ECJ stated that such products did not require individual assistance from a pharmacist to ensure protection of the customer or correct use of the product. Pierre Fabre’s requirement, and indirect restriction, was therefore not objectively justified.

In relation to the second argument, the ECJ stated that the preservation of the prestigious image of the products and of Pierre Fabre was not an acceptable justification to prohibit online sales.

The Vertical Restraints Block Exemption

The ECJ stated the VRBE would not apply in this case because the exemption will not cover a contract containing a clause which, by its nature, restricts passive sales to customers. Internet sales are defined as ‘passive’; sales which are made in response to an unsolicited request for that product from individual customers. Pierre Fabre’s stipulation prevented customers in other Member States from finding and purchasing its products online from distributors. Such a prevention of passive sales constitutes a hardcore restriction and will not be covered by the VRBE.

Individual Exemption under Article 101(3) TFEU

The ECJ decided it did not have sufficient information before it to provide guidance as to whether Pierre Fabre’s selective distribution agreement satisfied Article 101(3). The question was referred back to the national court. The French Appeal Courts will now decide whether the stipulation that sales must be limited to those made in the presence of a pharmacist satisfies each of the four conditions. These conditions are:

• the agreement constitutes an improvement in the production or distribution of goods or in technical or economic progress;
• consumers receive a fair share of the resulting benefit;
• only restrictions indispensible to the achievement of these objectives are imposed; and
• the agreement does not eliminate competition in the product markets concerned.

It is for Pierre Fabre to show these conditions are met, although it may find it difficult to demonstrate that its stipulation is indispensible to ensure the correct use of its products. In the meantime the ECJ has provided some clarity on the ability of brand owners to restrict online sales within selective distribution agreements.

Lawyers Robert Vidal, Louisa Penny

¹Deutscher Apothekerverband, paras 106,107 and 112, and Case C-108/09 Ker-Optika [2010] ECR I-0000, para 76.