CASE NOTE JUDGMENT OF THE EUROPEAN COURT OF JUSTICE, 13 OCTOBER 2011, PIERRE FABRE DERMO-COSMÉTIQUE SAS

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1 CASE NOTE JUDGMENT OF THE EUROPEAN COURT OF JUSTICE, 13 OCTOBER 2011, PIERRE FABRE DERMO-COSMÉTIQUE SAS, C-439/09 CONCERNING ANOTHER RESTRICTION BY OBJECT ON INTERNET SALES BAN Dr. iur. Verena Klappstein, London School of Economics (Article 101(1) and (3) TFEU Regulation (EC) No 2790/1999 Articles 2 to 4 Competition Restrictive practice Selective distribution network Cosmetics and personal care products General and absolute ban on internet sales Ban imposed by the supplier on authorised distributors) I Introduction The European Court of Justice (ECJ) ruled in line with recent case-law 1 on the general and absolute de facto ban of internet sales in a selective distribution network. Thereby strengthening the internet as a sales channel. Neither the protection of customers against the incorrect use of products 2 nor the manufacturer's intention to maintain its prestigious image 3 were legitimate aims to justify such a ban. Furthermore the safe harbour provided in the vertical agreements block exemption regulation (Regulation (EC) No 2790/1999, VABER 4 ) was narrowed, 5 with the application of Article 101(1) TFEU expanded. This decision of the ECJ's purports the Commission's view in its re-draft of VABER. II The Significant Facts Pierre Fabre Dermo-Cosmétique SAS (PFDC) produces and sells cosmetics. These cosmetics are primarily sold in pharmacies, however they are not medicines. PFDC's French market share in 2007 was approximately 20% 6. Distribution contracts for four brands of its products stipulated that sales had to be made exclusively in a physical space, in which a qualified pharmacist must be present 7. With this provision PFDC excluded de facto online sales. After a general investigation of the distribution practices in the cosmetics sector, the French Competition Authority (Conseil de la concurrence) ordered PFDC to remove from its selective distribution contracts all terms that are equivalent to a ban on internet sales [...] and to make express provision in its contracts for an option for its distributors to use that method of distribution [and] to pay a fine of EUR PFDC appealed this order before the cour d appel de Paris, reasoning that the decision was illegal as it denied the block exemption of VABER as well as the individual exemption of Article 101(3) TFEU. The cour d appel de Paris asked the ECJ two questions in the preliminary process: 1 ECJ 2 December 2010 (Ker-Optika bt C-108/09) Para See below: IV(a). 3 : See below: IV(a). 4 Regulation (EC) No 2790/1999 of 22 December 1999, OJ L 336/21. 5 See below: IV(b). 6 ECJ 13 October 2011 Pierre Fabre Dermo-Cosmétique SAS C-439/09 PARA Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) para 27.

2 UK Law Student Review - January Volume 1, Issue 2 Firstly, whether a general and absolute ban on selling contract goods to endusers via the internet, imposed on authorised distributors in the context of a selective distribution network, in fact constituted a hardcore restriction of competition by object 9 (Article 101(1) TFEU) 10? Secondly, whether this was justified either by a block exemption according to VABER 11 or by an individual exemption according to Article 101(3) TFEU 12? III The Issue and the Result III(a) The restriction of competition by object, Article 101(1) TFEU The contractual clauses used by PFDC provide a restriction by object, according to Article 101(1) TFEU. Even after individual and specific examination neither its content nor its objective nor its economic context cannot yield an objective justification. III(b) The justification: (1) The block exemption, Regulation (EC) No 2790/1999 (VABER) The block exemption provided for in Article 2 VABER with regard to Article 4(c) VABER is not applicable to a selective distribution contract with a clause prohibiting de facto internet sales. III(c) The justification: (2) The individual exemption, Article 101(3) TFEU Though a contract with such a clause might benefit from the exception provided for in Article 101(3) TFEU the ECJ could for the lack of sufficient information not decide on this matter. IV The Reasons IV(a) The restriction of competition by object, Article 101(1) TFEU So do PFDC's contractual clauses provide a restriction of competition by object within the internal market? If affirmed, the French Competition Authority did not have to prove that any potential harm to competition existed. Thus the restriction of competition by object is similar to the U.S. concept called per se illegality (Section 1 of the Sherman Act). To answer the first question one has to look at the precise purpose of the agreement within the economic context in which it is to be applied. 13 That involves respect to all circumstances, especially the clause's content and objectives, as well as its economic 9 Pierre Fabre Dermo-Cosmétique (n6) para See below: IV(a). 11 See below: IV(b)(1). 12 See below: IV(b)(2). 13 ECJ 30 June 1966 (Société Technique Minière (L.T.M.) C-56/66) ECR 1966 p. 235 (249); ECJ Pierre Fabre Dermo-Cosmétique (n6) para

3 Pierre Fabre Dermo-Cosmétique Sas, C-439/09 and legal context. 14 PFDC's clause stipulates that the sales of a certain four brands of its products have to be made in an external space, where a qualified pharmacist is present, where from, it can be concluded that internet selling is de facto prohibited as it does not provide a physical external space where a pharmacist can be present. 15 Thereupon, the ability of a distributor to sell PFDC's products to customers outside of his contractual area of activity is reduced, restricting competition in that very sector. 16 The ECJ once again emphasised that agreements which constitute a selective distribution system necessarily affect the competition in the common market and are as long as an objective justification is missing restrictions by object. 17 Such an objective justification might be the maintenance of a specialist trading network that is capable of providing specific services and therefore lead to a reduction of price competition, but at the same time attaining the improvement of competition to factors other than price. 18 For that, the resellers have to be chosen on the ground of objective criteria of quality, uniformly applicable to all potential resellers. Such a network has the following three requirements: firstly, it has to preserve the products quality, secondly, it must ensure its proper use and thirdly, the criteria have to be necessary. 19 With the contractual clauses at issue PFDC laid down objective and uniformly applicable criteria to select the resellers. But the ECJ held that in a selective distribution system, the distributor could be restricted by the supplier, if and only if the supplier could come up with a legitimate aim that is proportionate to the given restrictions. 20 With regard to the freedoms of movement the need to provide the customer with individual advice, therewith ensuring his protection against the incorrect use of products is not sufficient if it concerns non-prescription medicines and contact lenses, thus banning internet sales. 21 As the cosmetic products are neither medicines nor similar products that provide a significant risk to the consumers, they do not need to be selectively distributed by a physically present pharmacist. The manufacturer's intention to maintain its prestigious image 22 cannot provide a sufficient and proportionate aim to justify the restriction of competition by object. To summarise, neither the protection of customers against the incorrect use of products nor the manufacturer s intention to maintain the prestigious image of the 14 ECJ 6 October 2009 (GlaxoSmithKline Services Unlimited and others Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P) ECR 2009 p. I-9291, para 58; Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) paras 36 & Pierre Fabre Dermo-Cosmétique (n6) para ECJ 25 October 1983 (AEG-Telefunken C-107/82) ECR 1983, p. I-3151, para 33; Pierre Fabre Dermo-Cosmétique (n6) para AEG-Telefunken C-107/82 (n17); Pierre Fabre Dermo-Cosmétique (n6) para ECJ 22 October 1986 (Metro SB-Großmärkte C-26/76) ECR 1977, p. I-1875, para 20; ECJ 11 December 1980 (L Oréal C-31/80) ECR 1980, p. I-3775, p para 15 & p para 16; Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) para ECJ 11 December 2003 (Deutscher Apothekerverband C-322/01) ECR 2003 p. I-14887, paras 106 & 107, p para 112; ECJ 2 December 2010 (Ker-Optika bt C-108/09) para 76; Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) paras 45 &

4 UK Law Student Review - January Volume 1, Issue 2 products can, with regard to cosmetic products, be a legitimate aim for an objective justification, thus annulling the given restriction of competition by objective. 23 IV(b) The justification: (1) The block exemption, Regulation (EC) No 2790/1999 (VABER) The ECJ then reflected on a possible justification in the case of a selective distribution contract that was rendered anti-competitive by its object. PFDC's first argument was that as the ban on internet sales was stated in a vertical agreement (Articles 2 VABER) itself as a supplier with a market share that did not exceed 30% of the relevant market (Article 3 VABER) then the ban was similar to a prohibition on operating out of an 'unauthorised place of establishment'. That is why PFDC should be benefiting from the block exemption according to Articles 2 and 3 VABER. 24 Article 4 (c) VABER excludes the application of Article 2 VABER for vertical agreements which have as their object the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade. The utilised contractual clauses that prohibited de facto the internet as a way of marketing have as their object the restriction of passive sales to end users who wish to buy online and in a different place from the one of the relevant member of the selective distribution system. 25 But Article 4 VABER provides in its last sentence a counter-exception for the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment. However, PFDC argued that the clauses used would meet this last sentence's counterexception. 26 The ECJ specified that a place of establishment according to Article 4 (c) last sentence VABER literally concerned only outlets where direct sales take place. A broad interpretation of the block exemption Articles, to include places from which internet sales services are provided was not needed on the base of a systematic argument: the individual exception in Article 101(3) TFEU already gives a broad protection. 27 Thus, the ECJ distinguished the internet sales method from an unauthorised place of establishment and held the internet to be a marketing mechanism. 28 As a result, a selective distribution contract containing a clause that prohibits de facto the internet as a method of marketing the contractual products cannot be subsumed to Articles 2 & 4(c) VABER and therewith a valid justification. 29 IV(b) The justification: (2) The individual exemption, Article 101(3) TFEU As the ECJ did not deem itself to have sufficient information as to whether an individual exception according to Article 101(3) TFEU could be satisfied by the 23 Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) paras 51 & Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) para 56 & Pierre Fabre Dermo-Cosmétique (n6) para Pierre Fabre Dermo-Cosmétique (n6) para

5 Pierre Fabre Dermo-Cosmétique Sas, C-439/09 clauses at issue that de facto prohibited online sales, it referred the question back to the cour d appel de Paris. 30 V The Two Ratio Decidendi Contractual clauses that generate a general and absolute de facto ban of internet sales in a selective distribution network are a restriction of competition by object according to Article 101(1) TFEU, as long as the restriction cannot be objectively justified with attributes of the product at issue. Such a general and absolute de facto ban of internet sales in a selective distribution network cannot generally be an exemption according to Regulation (EC) No 2790/1999, VABER, though it might in exceptional circumstances be justified according to Article 101(3) TFEU. VI The Author s Thoughts on the Decision Internet sales in the European single market are very important, and viewed as such by the Commission and the ECJ. With regard to the Commission's supplementary guidelines on vertical restraints (2010/C 130/01, especially pp. 13 paras 52 et seqq.), of May 2010, that emphasis placed on the importance of internet sales in the European Union the ECJ judgment does not come as a surprise. Unfortunately the decision neither uses para 56 of the guidelines as a supporting argument for the interpretation of Article 4(c) VABER nor does it answer the multitudinous questions resulting from these very guidelines. But at least it confirms the Commission's view that an absolute and general ban on internet sales has more often than not to be considered to restrict, by its very object, competition as well as not being subject to a block exemption of VABER. Though manufacturers cannot prohibit their distributors the internet sale entirely, there is latitude for some restrictions. Thus under certain circumstances for instance in contexts where the pro-competitive efficiencies resulting from such a ban outweigh the anti-competitive restriction an individual justification according to Article 101(3) TFEU might be possible. Hence a physical sales places might be a valid requirement as well as to define the minimum amount of products to be sold in that very physical place or the products presentation in the internet. While the ECJ seems to allow a loop to justify a ban of internet sales within a legal exception, there is not the tiniest hint which precise requirements fulfil such a justification, that are beyond public provisions. Furthermore, the burden of proof lies with the supplier. That is why a supplier has to analyse, with a lot of care, the situation, before he can rely on an individual exemption, even more so as the consequences can be significant. Ultimately, suppliers of luxuriousness are kept in doubt as to how to act. 30 Pierre Fabre Dermo-Cosmétique (n6) para