No outright ban on online sales
An outright ban imposed by a manufacturer on its distributors from selling products over the internet falls foul of the competition rules, the ECJ’s Advocate General Ján Mazák recently declared.
Each case has to be examined on its own merits in order to ascertain whether such a clause in a distribution agreement can be granted an exemption.
EU law condemns any agreement, whether horizontal or vertical, which can restrict competition on a particular market. However, provided that certain conditions are satisfied, such an agreement can benefit from an individual exemption from the competition rules.
Furthermore, over the years, the European Commission has issued so-called block exemptions which provide certain categories of agreements, such as distribution agreements, with an automatic exemption provided that the criteria found in the said block exemption are satisfied.
However, the block exemption dealing with vertical agreements also contains a list of so-called “hardcore restrictions” which if present in any particular agreement would not allow that agreement to benefit from an automatic exemption in terms of the block exemption.
In the particular case under examination, a French manufacturer of various ranges of cosmetic and personal care products imposed a clause in its distributors’ agreements which required all sales to be made from an outlet where a qualified pharmacist would be present.
The manufacturer restricted its distributors from making any online sales. Following investigations, the French Competition Authority concluded that since they included such a restriction, these particular distribution agreements were in breach of both EU and French competition laws.
The Authority noted that the presence of such a clause limited the commercial freedom of the distributors and restricted consumer choice.
Moreover, the Authority decided that the distribution agreements could not benefit from an individual exemption. The French Appellate Court seized of the case requested the ECJ guidance as to whether the general and absolute ban on internet sales constitutes a “hardcore” restriction of competition and whether such an agreement could benefit from a block exemption or be eligible for an individual exemption.
Advocate General Ján Mazák noted that as a general rule a blanket provision banning online sales in the context of a selective distribution network is anti-competitive and hence is caught by the competition rules. In its defence, the manufacturer claimed that such a ban was justified on public health grounds, as correct use of the products required the advice of a pharmacist.
The AG disagreed with this line of defence, maintaining that the products in question were not medicinal products and therefore there was no regulatory requirement to ensure that their sale is conducted from a physical outlet and only in the presence of a qualified pharmacist.
The AG noted that, in previous cases, the European Court of Justice has accepted that selective distribution agreements, whereby only distributors who fulfil certain criteria can form part of a distribution network, are an acceptable way of distributing beauty products in order to preserve the aura and image of the goods in question. However, in the context of such agreements, it was important to ascertain whether a general and absolute ban on Internet sales was proportionate to the aim that the manufacturer of such products was seeking to achieve.
In the AG’s view, a manufacturer could impose appropriate, reasonable and non-discriminatory conditions on Internet sales in order to protect the image of its products.
This means that a general and absolute ban on internet sales can only be considered as being proportionate in very exceptional circumstances. Moreover, the AG noted that a ban on internet sales eliminated a modern means of distribution which would allow customers outside the catchment area of a physical outlet to buy these products. Internet sales also enhanced price transparency, thereby contributing to more intra-mark competition. The AG therefore concluded that such a blanket provision constituted a hardcore restriction and hence could not benefit from the block exemption dealing with vertical agreements.
It was then for the national court to ascertain whether the agreement could still benefit from an individual exemption provided that it satisfies the criteria laid down in the law.
Since the AG’s opinion is not binding, one has to await the judgment of the ECJ in order to obtain a definitive ruling on the matter.
Nonetheless, this opinion is a clear indication that clauses inserted by manufacturers or suppliers in distribution agreements must be in full compliance with both national and EU competition rules in order to avoid the unpleasant implications of being found to be in breach of competition law.
Dr Vella Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is also a member of the National Commission for the Promotion of Equality.