General ban on Internet sales found in contradiction with competition law – the “Pierre Fabre” case

The Court of Justice of the European Union (CJEU) has recently ruled on the (in)admissibility, under EU competition law, of a general ban on Internet sales imposed in the context of a selective distribution system.¹

Main facts

Pierre Fabre Dermo-Cosmetique SAS (“Pierre Fabre”), distributes its cosmetics and personal care products (Avène, Klorane, Galénic and Ducray brands) under selective distribution agreements that include an obligation that such products be sold exclusively on a physical space and in the presence of a qualified pharmacist (the “contended clause”). Such requirements are, in practice, equivalent to a general ban on Internet sales for all of the referred products.

Pierre Fabre justified the contended clause on the grounds of the specific nature of the products at stake (healthcare products involving the risk of allergic reaction), which imposed a specialist’s personal advice, based on a direct observation of the client. It further argued that the on-line sales ban was necessary to prevent the risks of counterfeit and free riding between the different authorised outlets.

The company was fined by the French Competition Council, which considered that the contended clause had the object of restricting competition (no assessment of effects being required) and disputed, furthermore, its ability to benefit from the block exemption of Regulation (EC) n.º 2790/1999 (which confers a presumption of liability to the agreement) or to an individual exemption (under which potentially anti-competitive agreements can be justified if they lead to an overall net competitive effect). The Council further ordered Pierre Fabre to modify its distribution agreements.

Pierre Fabre appealed the fining decision to the “Cour d’Appel de Paris” (the “referring court”), which in turn, decided to stay the proceedings and to address the CJEU a set of questions related with the interpretation of the applicable legal provisions.

The questions assessed by the CJEU

(i) Does the contented clause have as object a restriction of competition?

In the present case, an answer to this question would depend on whether or not the qualitative requirements imposed upon the Pierre Fabre authorised retailers (which, as referred, resulted in practice in a prohibition of online sales) constituted admissible qualitative requirements, in particular, if they were necessary to assure the adequate distribution of the products at stake (taking into account the product’s quality and appropriate use).

With a purpose of providing the referring Court with the points of interpretation of EU law, the CJEU began by referring to previous case-law relating to state measures that prevented the on-line sale of over-the-counter medicine sales and contact lenses. Such case-law states that justifications based on the need to provide individual advice to the customer and to ensure its protection against the incorrect use of products were not valid justifications for state measures that breach the EU principle of free movement of goods. Despite the difference in legal backgrounds between the present case and the evoked case-law, the Court’s reference suggests that the need to provide individual advice or to assure the product’s proper use are not a legitimate justification for restriction on the on-line sales of cosmetics.

The CJUE further refused Pierre Fabre’s argument that the prohibition of online sales was necessary to preserve the image of prestige of the products at stake.

The Court concluded – without solving the underlying question - that the dispute clause would amount to a restriction by object where, following an individual and specific examination of the content and objective of that contractual clause and the legal and economic context of which it forms part, the referring court finds that, having regard to the properties of the product at issue, the clause is not objectively justified.

(ii) The possibility of benefiting from a block exemption or from an individual exemption

A divergent interpretation on the provisions of Regulation n.º 2790/199 was on the basis of the dispute regarding the possibility to benefit from the block exemption: Pierre Fabre argued that the prohibition of online sales was the same as prohibiting a member of its selective distribution system to operate from a “non-authorised place of establishment” (which is permitted by the regulation); the CJEU considered such an interpretation was incorrect insofar as the reference to a “place of establishment” referred only to points of sale for directs sales. The CJEU further refused the possibility of a broad interpretation of the concept, as intended by Pierre Fabre.

For the CJEU, the restrictions imposed should qualify as “restrictions of active or passive sales imposed upon end users by members of a selective distribution system operating at retail level...” which excluded the application of the regulation (and therefore, of the underlying presumption of legality conferred on the distribution agreements).

Finally the CJEU acknowledged that even in the absence of a presumption of legality referred to above the parties in the agreement should be able to claim and prove the requirements laid down in n.º 3 of art. 101º TFUE and, as a result thereof, to benefit from an individual exemption. Such an individual exemption is however to be assessed by the referring court.

Comment

Until the issuance of this judgment and to the best of our knowledge, the CJEU had never been asked to assess the admissibility of a general ban on Internet sales in the context of a selective distribution system, in particular in light of competition law rules. The conclusions reached by court did not come as a surprise. The guidance given to the referring court however, was minimal and further elaboration on some key points would have been welcomed (considering the past practice on selective distribution in general and the novelty of the “Internet issue” in this context).

The adoption, in the meanwhile, of a new set of Guidelines of the European Commission² provide companies with more detailed and updated indications on the possibilities and limitations they face in relation to the use of the Internet.

Reading through the Guidelines, it is now clear that a supplier cannot prevent its distributors from using the Internet to sell their goods, even though the supplier may impose certain requirements to such use, in particular, when necessary to comply with the core aspects of the distribution system at stake (following a rationale similar to that which justifies restriction on offline distribution) as well as require that the distributor also operates physical outlets.

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