In its judgment of 13 October 2011, the EU Court of Justice confirmed that a cosmetics group is not allowed to prohibit its appointed distributors to sell its products via the internet. The judgment was rendered under the former block exemption for vertical restraints (Regulation nr. 2790/1999), that has been replaced in 2010, but nevertheless gives us an opportunity to summarize the issues
The French group Pierre Fabre Dermo-Cosmétique (hereafter ‘Pierre Fabre’) is a manufacturer of well-known cosmetics and personal care products, distributed mainly but not exclusively via pharmacies. From a regulatory perspective the products did not fall under the legal monopoly of the pharmacies. The group applied the principle of selective distribution, implying that the distributors are selected and appointed if they comply with specific criteria, and the selected distributors are allowed to sell the products only to end customers and other appointed distributors. They are not allowed to sell the products to other vendors who are not appointed by the manufacturer, an act that would constitute breach of contract. Furthermore, the contracts of the Pierre Fabre group stated that the distributors were only allowed to sell the products in a physical point of sale, and that at least one person with a pharmaceutical degree needed to be present in order to advise the customers. Thus the distributors were de facto prohibited to sell the products via the internet.
The French competition watchdog Autorité de la Concurrence investigated these practices in 2007 and concluded that Pierre Fabre imposed on its distributors an illegal prohibition of active and passive sales to end customers, which is considered an illegal restriction on competition (thus an infringement on article 101 of the Treaty on the Functioning of the EU and relevant French
law). It imposed a fine and required Pierre Fabre to state explicitly in its distribution contracts that distributors could opt for sales via the internet.
Pierre Fabre stated as its main defense that the presence of a person with a pharmaceutical degree in a physical point of sale was necessary in order to give tailored advice to customers, a requirement that would benefit the customers. However, since the products were not considered pharmaceuticals, this argumentation was not withheld.
The judgment of the Court of Justice
Pierre Fabre appealed against the decision and the Paris Cour d’appel submitted a prejudicial question to the Court of Justice. The Court of Justice first repeated in its judgment of 13 October 2011 (case C 439/09) its classical principle that selective distribution systems with selected distributors are acceptable for certain products when the distributors are selected on the basis of objective qualitative criteria , which are applied uniformly. However, the competition authorities must examine in detail whether a contract provision that requires the sale of the products within a physical point of sale in the presence of a person with a pharmaceutical degree, is justified in the economical context of the contract, taking into consideration the characteristics of the products involved. Although the Court did not decide on the merits of the case (this is the task of the referring French court), it implied clearly that these products, which are not considered pharmaceuticals, did not necessarily require face to face advice or warnings and did not justify a prohibition to sell the products via the internet.
The Court of Justice decided that a selective distribution system that prohibits de facto sales via the internet, could not be exempted under the old block exemption for vertical restraints since it restricts the passive sale of products to end customers. However, it did not exclude an individual exemption of these contracts if the requirements for individual exemptions would be fulfilled (art. 101, par. 3 of the Treaty on the Functioning of the EU)(in short: when the distribution system would contribute to improvements in the distribution of products or the technical progress, to the benefit of the end users, insofar no restrictions would be imposed on the involved enterprises that would not be absolutely necessary and insofar competition would not be eliminated for a substantial part of the products involved).
The 2010 block exemption and internet sales
The judgment was rendered under the former block exemption. The European Commission assessed the issue of internet sales in the different distribution systems in its new block exemption for vertical restraints (Regulation 330/2010 of 20 April 2010) and the accompanying guidelines (2010/C 130/01). According to the Commission, the manufacturer may require that all appointed distributors
operate a physical point of sale in conformity with the manufacturer’s relevant requirements. Thus, an appointed distributor is not entitled to limit his sales to internet sales if the manufacturer so requires. However, all restrictive requirements that would be required by the manufacturer regarding the internet sales must be equivalent with similar restrictions required for offline sales (e.g. requirements regarding standing, image, presentation of the brand, minimum product lines that must be offered...). This does not mean that these requirements should be exactly similar, but they must focus on a similar concern and outcome. The manufacturer may e.g. require that an appointed distributor sells a limited amount of products to individual end customers, up to a certain maximum,
in order to avoid a disguised sale to not-appointed vendors. If online sales would create an increased risk for such disguised sale, the imposed maximum can be different for online sales compared to offline sales in physical points of sale.
The sale of products by not-appointed vendors on the internet is still a sensitive issue. The prohibition to sell products to not-appointed vendors is merely a contractual prohibition imposed on the appointed distributor through his distribution contract. The not-appointed vendor who is able to purchase the products from an appointed distributor and sells the products to end customers, is not bound by such contractual prohibition. However, if he is aware or should be aware of the prohibition he may be found guilty of contributory infringement, at least in certain legal systems. In 2010 the Louis Vuitton group (LVMH), manufacturer of luxury products under several well-known trademarks including Louis Vuitton and Christian Dior, was able to obtain a judgment of the Paris Cour d’appel against eBay, sanctioning the online sale of LVMH luxury products intended for the selective distribution channels. Although eBay was not bound by any restrictive agreement with LVMH, the court decided that eBay had damaged the LVMH trademarks. According to the 2010 block exemption the manufacturers may now require that their selected distributors operate at least from a physical point of sale where the relevant products are sold. The European Commission has taken this concern of the famous trademark owners into consideration. On the other hand, they cannot require that all products are sold in a physical point of sale unless they can provide an acceptable justification for this requirement, taking into consideration the characteristics of the products. This principle is now confirmed by the Court of Justice in the case of Pierre Fabre.
In the block exemption of 2010, the European Commission clarified the issue of internet sales not only in the framework of selective distribution, but in the framework of other distribution systems as well, such as exclusive distribution. It is well known that a manufacturer who appoints an exclusive distributor for a certain territory, is not allowed to prohibit this exclusive distributor to engage in passive sales with customers residing in the territory that is reserved for another exclusive distributor, while the manufacturer is on the other hand allowed to prohibit an active sales policy towards potential customers outside the reserved territory . This means that an exclusive distributor is always entitled to accept an order emanating from customers residing outside his own exclusive territory. The Commission has now clarified that a website which can be visited by potential customers outside the exclusive territory, must be regarded as a technique of passive and not active sales, which cannot be restricted as such. The manufacturer cannot require the distributor to reject or re-direct visitors from ‘outside’ territories (e.g. as an automated reaction based on the visitor’s IP address or credit card data). Furthermore, he cannot impose a maximum volume of products that may be sold online (nor a maximum share of the products sold online within the global sales volume), and in principle he cannot require that products offered online would be offered at a higher price than products offered offline. On the other hand, an active sales policy on the internet that would specifically target prospect customers residing outside the exclusive territory may be prohibited, e.g. publicity via search engines that are focused on such territory.
Thus, the European Commission and the Court of Justice apply the principles of competition law in the virtual world, indicating once more that the line between the virtual and the real is often very thin.