Antitrust Alert: EU Court Advisor Recommends that Prohibition on Internet Sales Be Per Se Infringement
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.
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.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Bernard E. Amory
Eric Morgan de Rivery
Paris / Brussels
+188.8.131.52.38.69 / +32.2.645.15.08
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