Distributors or retailers operating within a selective distribution network cannot, as a rule, be impeded from selling the products which they market online, the European Court of Justice has recently asserted. Such a restriction would be in breach of competition law unless it can be objectively justified.
The message sent by the court in this ruling, and in previous ones before it, is clear- Mariosa Vella Cardona
Clauses in distribution agreements entered into between manufacturers and their distributors can be found to be in breach of competition law if they are found to have a foreclosing effect on competition in any particular market. Such anti-competitive clauses can take various forms and each one of them needs to be vetted carefully in order to ascertain that they are not infringing the competition rules.
Over the years the European Commission has sought to simplify matters for industry at large by issuing a block exemption for such vertical agreements. This means that where a vertical agreement is concluded between companies that have limited market power, that is, whose market share does not exceed 30 per cent, and provided that such an agreement contains no hardcore restrictions of competition, such agreement falls under the purview of the block exemption for vertical agreements and is therefore deemed not to fall foul of the competition rules.
On the other hand, companies whose market share exceeds 30 per cent cannot benefit from the solace afforded by such a block exemption when they enter into vertical agreements. However, there is also no presumption that the agreement is illegal. In such cases, it is necessary for the companies themselves to assess the agreement’s negative and positive effects on competition in the relevant market, using the guidelines issued by the European Commission. Indeed, in certain cases, where the positive effects on competition outweigh the negative ones, it could very well be that an agreement merits an individual exemption from competition rules.
This particular case which came before the European Court concerned a selective distribution agreement entered into by a manufacturer of cosmetics with its distributors. In its agreements, the manufacturer stipulated that despite not being medicines, the products in question had to be sold exclusively in a physical space and in the presence of a qualified pharmacist. This meant that the manufacturers prohibited all forms of online sales by its distributors.
Following an investigation, the national competition authorities concluded that, owing to the outright ban on all internet sales, these distribution agreements were anti-competitive and hence illegal. The manufacturer challenged the decision before the national courts which in turn requested guidance from the European Court of Justice as to whether a general and absolute ban on internet selling amounts to a restriction of competition and whether such an agreement may benefit from a block exemption or from an individual exemption.
The European Court of Justice re-asserted, in line with previous jurisprudence on the matter, that selective distribution agreements can indeed be found to be in breach of competition law. However, the court also re-affirmed that a selective distribution system is compatible with EU law to the extent that distributors or resellers are chosen on the basis of objective criteria of a qualitative nature.
These criteria must apply across the board to all potential resellers and must not be applied in a discriminatory fashion. Furthermore, the manufacturer must show that the characteristics of the product in question necessitate such a distribution network in order to preserve the product’s quality and ensure its proper use. The criteria laid down by the manufacturer must also not go beyond what is necessary.
In so far as the prohibition on online sales is concerned, the court reasserted that it was not willing to accept arguments relating to the need to provide individual advice to the customer and to ensure his protection against the incorrect use of products, as justifications for a ban on internet sales. Similarly, the need to maintain the prestigious image of the products is not considered as an acceptable justification for restricting competition.
The court also reaffirmed that the block exemption for vertical agreements does not apply to 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. Such a restriction is considered as a hardcore restriction which disallows the application of the block exemption to a particular agreement. Where a selective distribution contract contains a restriction on online sales it is restricting passive sales to end users wishing to purchase online and located outside the physical trading area of the relevant member of the selective distribution system.
Hence, such a contract cannot benefit from the block exemption. In such cases, it is up to the companies involved to bring forward evidence that their agreement brings, or is likely to have positive implications on competition and consumers which outweigh the negative effects. If this is the case, the agreement can benefit from an individual exemption.
The message sent by the court in this ruling, and in previous ones before it, is clear. Manufacturers and suppliers cannot impinge negatively on the advantages accruing from a single market economy and bereft consumers from purchasing products from wherever they desire to do so. Manufacturers are free to choose the most appropriate network and mode in which to market their products but never to the detriment of competition.
mariosa@vellacardona.com
Dr Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is the deputy chairman of the Malta Competition and Consumer Affairs Authority as well as a member of the National Commission for the Promotion of Equality.