CJEU Sends Clear Message that Luxury Brands Cannot Prevent Retailers Selling Online

On 13 October 2011, the Court of Justice of the European Union (CJEU) handed down a judgment which makes it clear that a clause in a selective distribution agreement which operates as an absolute ban on internet sales has as its object the restriction of competition, and is therefore presumed to be unlawful.

The case, Pierre Fabre Dermo-Cosmétique v President de l'Autorité de la Concurrence and Others, arises from an Article 267 'preliminary ruling' reference to the CJEU from the French appeal court. That court is hearing an appeal from Pierre Fabre (PFDC), a French cosmetics manufacturer holding about 20% of the French market for luxury cosmetics and personal care products, against a decision by the French competition authority that its selective distribution agreements infringed both French and EU competition law. Specifically, the agreements in question contained clauses requiring that PFDC products be sold only in a physical store, with a qualified pharmacist present. This, in effect, amounted to an absolute ban on internet sales of the products concerned. The French appeal court asked the CJEU to consider whether, in these circumstances, an absolute ban on internet selling amounts to a restriction of competition "by object", and whether any exemptions are applicable.

The CJEU followed the advice of its Advocate General in stating that online sales bans in a selective distribution system were presumed to be contrary to Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). As a result, PFDC's agreements would be unlawful unless it could objectively justify the restriction of competition on the grounds that an online sales ban pursues a legitimate aim, in a proportionate manner.

PFDC sought to justify its ban on internet sales by arguing that the physical presence of a pharmacist was necessary to maintain the luxurious, high-quality image of its cosmetic products. However, the CJEU was clear in its judgment that the "the aim of maintaining a prestigious image is not a legitimate aim for restricting competition". The Court also noted that it had already ruled, in the Deutscher Apothekerverband case, that the need to ensure protection of the consumer against incorrect use of products was also insufficient to justify such a ban for non-prescription medicines and contact lenses.

Neither did the CJEU consider that PFDC's agreements with retailers could avoid infringement of Article 101(1) by falling within the scope of the Vertical Agreements Block Exemption Regulation (the Regulation). The CJEU observed that Article 4(c) of the Regulation excludes from the scope of the block exemption all agreements which have as their object the restriction of active or passive sales to end users by resellers within a selective distribution system. ("Passive" sales are those which result from a buyer approaching the seller unsolicited.) The Court agreed that a ban on internet selling is clearly a restriction of this sort of transaction, and as a result, its inclusion prevents the agreements from benefiting from the block exemption.

Relevant European Commission guidelines, which have been in place for more than ten years, clearly set out the principle that a manufacturer may not prevent sellers within a selective distribution system from using the internet to sell actively or passively to end users, and that doing so would prevent it benefiting from the block exemption. This judgment therefore confirms this position as hard, rather than 'soft', law.

The CJEU did allow for the possibility, if only theoretical, that PFDC's agreements could still avoid breach of Article 101(1) TFEU through "individual exemption", under Article 101(3) TFEU. This exemption is available if the benefits which consumers derive as a result of an agreement outweigh its anti-competitive effect. While the CJEU refused to speculate on this point, stating that it would be for the national courts to determine exemptability, the clear inference was that such an exemption would be unlikely.

PFDC must now await the French court's final decision on whether, under these circumstances, it can rely on the individual exemption. This remaining issue aside, courts Europe-wide are now in no doubt that, outside of exceptional situations such as prescription medicines or dangerous products, suppliers who attempt to impose bans on internet sales on their authorised retailers are likely to infringe EU competition law.