The Court of Justice of the European Union (CJEU) in its 13 October 2011 judgment has ruled that a restriction imposed on the online sale of cosmetics and personal care products breaches EU competition rules and cannot be justified in the terms of the block exemption for distribution and supply agreements. The findings in this judgment will have major implications for the online sale of many products, in particular when read in conjunction with the European Commission’s 2010 revision of the block exemption.

The CJEU’s judgment relates to a French case, ruling on a question of law referred to it by the Paris Court of Appeal.

Pierre Fabre Dermo-Cosmétique SAS is part of the French Pierre Fabre group, which manufactures and markets cosmetics and personal care products, mainly through pharmacies, throughout Europe. It does market its products (including brands like Avène, Klorane, Galénic and Ducray) under selective distribution contracts that inter alia stipulate that all sales of the products must be made in a physical space and in the presence of a qualified pharmacist.

The French national competition authority opened an ex officio antitrust investigation in which Pierre Fabre inter alia argued the products could have adverse dermatological consequences and that Pierre Fabre wished to discourage counterfeit products. The French authority rejected these arguments, mainly because the products did not qualify as medicines and because the arguments raised were not relevant at the point of sale, resulting in a decision in 2008 that the challenged provisions represented a de facto ban on all Internet sales. The sales requirements were deemed to amount to a restriction of competition that could not be exempted, either through the general terms of a block exemption or through individual exemption, and Pierre Fabre was ordered to amend the relevant distribution agreements. The authority also imposed a fine of EUR 17,000.

Pierre Fabre challenged this decision before the Paris Court of Appeal, which submitted a request for a preliminary ruling to the CJEU on the issue of whether (i) an absolute ban on Internet sales amounts to a hardcore restriction “by object” of competition, which is not covered by the Vertical Restraints Block Exemption Regulation, and (ii) whether such restriction is potentially eligible for an individual exemption on the basis of Article 101(3) TFEU (the so-called: exception legale).

The CJEU focused on the precise terms of the Pierre Fabre contracts and broke the question into three parts.

The first question was to whether the requirement for a physical space and for the presence of a pharmacist results in a restriction of competition “by object” under Article 101. The CJEU found that the operation of a selective distribution system may not be such a restriction where the system is based on objective criteria linked to the nature of the product. The restriction in this setting is an ancillary restraint and thus exempted from applying article 101(1) TFEU. However, any restriction within the system had to “pursue legitimate aims in a proportionate manner.” The CJEU considered the principle of free movement of goods and would not accept arguments that sought to justify a ban on Internet sales on the basis that is was necessary to provide individual advice to consumers, or to protect them against the incorrect use, nor was the maintenance of a prestigious brand found to be a legitimate aim justifying this clause, which therefore represented a restriction by object.

The second question is whether a de facto restriction of online sales could benefit from the block exemption. The verticals block exemption prohibits “a restriction of active or passive sales to end users by members of a selective distribution system, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorized place of establishment,” whatever the parties’ market shares. The restriction in this case was a prohibited restriction of this type and a ban on Internet sales was not equivalent to a refusal to authorize a “place of establishment.” Pierre Fabre’s restrictive clause could not therefore benefit from block exemption.

Finally, was the restriction on online sales eligible for individual exemption? The CJEU did confirm that, in principle, the restriction could benefit from individual exemption. It did not, however, have enough information to assist the French court in assessing whether or not the restriction was in fact exemptible on an individual basis.

Lessons Learned?

The CJEU’s judgment relates to the verticals block exemption which was in place before implementation of a revised block exemption on 1 June 2010. The old and new block exemptions are substantively identical on the main point regarding the illegality of a ban on sales to end users within a selective distribution system, so the court’s findings are equally relevant to the current regime.

However, the European Commission’s revised guidelines accompanying the new block exemption already provide guidance on restrictions of online sales within a selective distribution system where these guidelines explain that, in principle, a distributor or retailer must be free to sell online, even within a selective distribution system. It may be possible to impose criteria on the detail of how the sales are made, but such criteria must be equivalent to criteria imposed on brick-and-mortar outlets — or, at least, differences in the criteria must be a reasonable reflection of differences between the two distribution modes.

The CJEU’s judgment does not directly relate to the new verticals block exemption, but it confirms the possibility of individual exemption whereas the guidelines as issued to the new block exemption may assist in deciding what may be exempted on an individual basis.

Will this change the use of the selective distribution model for luxury goods? Selective distribution has typically been applied for the distribution of products that involve some element of technological sophistication. However, there are precedents where it has also been accepted that products with a luxury brand image can be selectively distributed, even where they are not technological complex products.

On this point, it is interesting that the CJEU stated in Pierre Fabre that protection of brand prestige is not a legitimate aim to justify the requirement for a physical space and a pharmacist on site. As in this context brand prestige was rejected as a justification for this specific clause, one may expect other restrictions in selective distribution systems for luxury products be harder to justify as well.

As regards online sales of luxury products the Pierre Fabre case offers some clarification by applying the general rules as expressed in the guidelines to the new block exemption to these goods. But it is now clear that the need for a selective distribution system is not a justification for simply banning online selling. It will still be possible to attach conditions to online selling on the grounds of selective distribution, but those conditions should be broadly equivalent to conditions imposed on brick-and-mortar sales. Measured conditions may offer suppliers some consolation on this point, but it will be harder to justify limiting online sales where the aim is only to protect a luxury brand image.