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Prohibition of online sale and competition law

Prohibition of online sale and competition law

The European Court of Justice recently ruled that a ban on sale via internet is a restrictive provision and therefore in violation of competition law.

Case
Pierre Fabre Dermo-Cosmétique is one of the companies that belong to the Pierre Fabre group. It is active in the manufacture and marketing of cosmetics and personal care products. These products are mainly sold via pharmacies, both on the French market and the European market as a whole.

The products in question are cosmetics and personal care products that do not fall under the category of medicines and are therefore not included in the monopoly that has been given to pharmacies pursuant to the Code de la Santé Publique (French Public Health Code). The selective distribution contracts for the products in question specified that the sales may exclusively take place in a physical space in which a qualified pharmacist had to be present. This requirement excluded de facto any form of sale via internet.

After investigation, the French competition authority concluded that the prohibition of sale via the internet imposed by Pierre Fabre Dermo-Cosmétique on its authorised distributors resulted in a restriction of competition that was in violation of both the European and French prohibition of cartels. That is why Pierre Fabre Dermo-Cosmétique was That is why Pierre Fabre Dermo-Cosmétique was ordered by a decision dated 29 October 2008 to scrap every statement in its selective distribution contracts that was equivalent to a prohibition of online sale of its cosmetics and personal care products and to explicitly include in these contracts the possibility for the distributors to opt for this form of distribution. Pierre Fabre Dermo-Cosmétique was ordered to pay a fine of EUR 17,000.

Pierre Fabre Dermo-Cosmétique lodged an appeal with the Cour d’appel de Paris demanding that the decision be declared void and, alternatively, that the contested decision be revised. In this procedure the Cour d’appel submitted a request for a preliminary ruling from the Court of Justice: ‘Does the general and absolute prohibition of selling the contract goods to the end users via the internet which was imposed on the authorised distributors in the context of a selective distribution network indeed, according to its purport, result in a hard-core restriction of competition in the sense of Article 81 (1) EC [Article 101 (1) of the Treaty on the Functioning of the EU] that is not eligible for the block exemption provided for in Regulation no. 2790/1999, but possibly eligible for an individual exemption pursuant to Article 81 (3) EC [Article 101 (3) of the Treaty on the Functioning of the EU]?”

Response to the request for a preliminary ruling
The question from the Cour d’appel de Paris can actually be divided into three sub-questions:
(i) Can a prohibition of online sale be regarded as a restrictive provision?
(ii) Can a prohibition of online sale that can be regarded as a restrictive provision benefit from the block exemption for vertical cooperation?
(iii) If a prohibition of online sale cannot benefit from the block exemption for vertical cooperation, can such a prohibition then still be eligible for an individual exemption provided for (currently) in Article 101 (3) of the Treaty on the Functioning of the EU?

Re (i) Qualification of the prohibition as a restrictive provision
The Court of Justice points out first of all that a contract can only fall under the prohibition of Article 101 (1) of the Treaty on the Functioning of the EU if it ‘envisions or results in competition on the common market being prevented, restricted or distorted’. That is why attention is first devoted to the purport of the contract in connection with the economic circumstances in which it must be applied. If it established that a contract aims to restrict competition, the consequences of this for competition do not need to be further investigated. According to the Court of Justice, in order to assess whether the contract provision in question aims to restrict competition, the wording and intention of the provision must be examined, as well as the economic and legal context of the contract.

The Court of Justice also notes that the selective distribution system does not fall within the scope of the prohibition of cartels as long as:

the distributors are chosen on the basis of objective criteria of a qualitative nature that are uniformly determined for all potential resellers and applied without discrimination, the properties of the relevant product necessitate such a distribution network in order to retain the product’s quality and ensure the proper use thereof, and the criteria that are stipulated do not go further than necessary.

Although the national judge must look into whether the requirements cited above are satisfied, the referring court is given an important indication. The Court of Justice stressed specifically that it was already decided in earlier judgements concerning the free movement of goods that the online sale of over-the-counter medicines and contact lenses may not be prohibited with reliance on the argument that there is a need to give the person tailored advice and to protect him/her from incorrect use of the products. If the referring court finds no objective justification for the prohibition of online sale, the provision is a restrictive provision according to the Court of Justice.

Re (ii) reliance on the block exemption for vertical cooperation
The Court of Justice notes that a distinction is made in the block exemption between active and passive sale. This is important because if passive sale is prohibited in a distribution contract, the relevant contract cannot benefit from the block exemption. According to the Court of Justice, a prohibition of online sale can be regarded as a prohibition of passive sale. This means, therefore, that a distribution contract that prohibits online sale cannot benefit from the block exemption.

Re (iii) individual exemption on grounds of Article 101 (3) of the Treaty on the Functioning of the EU
The last part of the question referred for a preliminary ruling is answered very briefly by the Court of Justice. Although a prohibition of online sale cannot benefit from the block exemption for vertical cooperation, such a provision can be exempt from the prohibition of cartels on grounds of Article 101 (3) of the Treaty on the Functioning of the EU under certain circumstances. All four of the requirements cited in Article 101 (3) of the Treaty on the Functioning of the EU must indeed be satisfied in that case:

the prohibition of online sale must have technical or economic added value
a reasonable share of this advantage must benefit the users the prohibition of online sale may not go further than necessary and there must not be any less invasive way of achieving the same advantage
enough remaining competition must still exist.

In conclusion
Sale via internet is a topic that is very current. The Supreme Court recently ruled that the cancellation of a distribution contract in order to get a successful bicycle dealer off the internet can be in violation of competition law.

Eric Jansen

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