In the recent Pierre Fabre case, the European Court of Justice ruled that a clause in a selective distribution agreement banning the online sale of cosmetics breached Article 101 of the Treaty on the Functioning of the European Union (TFEU). This decision confirms that an absolute ban on internet sales contravenes EU competition rules unless it can be objectively justified.
The French company, Pierre Fabre Dermo-Cosmétique SAS (Pierre Fabre), used a selective distribution system which required sales of certain cosmetics and personal care products to be made in the presence of a qualified pharmacist. This effectively banned internet sales of the products by resellers. The French Competition Authority condemned the ban as contrary to competition law and imposed a fine of €17,000 on Pierre Fabre.
Pierre Fabre appealed to the Paris Court of Appeal which subsequently made a preliminary reference to the European Court asking it to consider the legality of internet sales bans in selective distribution agreements.
The European Court confirmed that a ban on internet sales in a selective distribution network amounts to a restriction of competition contrary to Article 101(1) TFEU. The Court acknowledged that a ban could be justified in an appropriate case if it had a legitimate aim and the restriction went no further than was objectively necessary. However, potential justifications are strictly reviewed. The Court disagreed with Pierre Fabre that the ban in question was necessary to protect consumers stipulating that in a previous case it had dismissed as a valid justification the need to advise customers on the use of non-prescription medicines. The Court also noted that Pierre Fabre had failed to demonstrate to the French Competition Authority in what way ‘face to face’ contact with a pharmacist would protect customers, particularly since any negative effects of the relevant product would only become apparent after use and in this event the customer would generally consult a doctor. Further, the Court also held that the protection of a prestigious brand image does not justify a restriction on competition.
The Court went on to consider whether an internet sales ban could benefit from the EU block exemption for vertical agreements (VBE). The VBE exempts selective distribution agreements from the application of Article 101(1) TFEU. However, the exemption does not extend to restrictions on sales to end users by members of a selective distribution system operating at the retail level of trade. Accordingly, the Court held that restrictions on internet sales to consumers are similarly excluded from the protection of the VBE. On the other hand, the VBE does allow for the possibility of prohibiting a distributor from operating out of an unauthorised place of establishment. However, the Court declined to characterise an internet sales ban as equivalent to a prohibition from operating out of an unauthorised place of establishment within the meaning of the VBE.
Although the French Competition Authority previously found that Pierre Fabre had failed to demonstrate that it could benefit from an individual exemption under Article 101(3) TFEU, the European Court did not have adequate information to consider the point and ultimately it will be for the Paris Court of Appeal to examine whether the conditions for an individual exemption are satisfied.
The Pierre Fabre case serves as a reminder of the strict approach to bans on internet sales. Competition law does not outlaw such a ban where, for example, it is necessary for the protection of the health and safety of the users of a potentially dangerous or complex product. However, maintaining a prestigious image is not a legitimate aim for restricting competition and manufacturers should be alert to the risks of seeking to protect brand profile through the prevention of online sales.
Contributed by Cormac Little.
