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The European Court of Justice has held that a general and absolute ban on Internet sales in the context of a selective distribution network constitutes a restriction on competition "by object" (i.e., has as its purpose the restriction of competition), within the meaning of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU).ⁱ  In its judgment, the ECJ largely followed the recommendations of the Advocate General, reported by us here.

Context

French company Pierre Fabre Dermo-Cosmétique SAS, seeking to ensure that its products were sold only in pharmacies and with the advice of a qualified pharmacist, prohibited its authorized dealers from selling cosmetics and personal care products to end users via the Internet.

In October 2008, the French Competition Authority imposed a fine of €17,000, on the grounds that a general and absolute prohibition on all Internet sales constituted a “hardcore” restriction of competition and infringed the provisions of the French Commercial Code as well as EU competition law.

Pierre Fabre challenged this decision before the Paris Court of Appeal. The Paris Court of Appeal in turn asked the ECJ to issue a preliminary ruling on the question of the legality of an absolute ban on Internet sales in the context of vertical agreements.

Judgment of the ECJ

Not surprisingly, the ECJ followed the Opinion of the Advocate General delivered to the ECJ in early March 2011, and concluded that the absolute prohibition on Internet sales should be regarded as anti-competitive "by object" because, pursuant to the ECJ, it "considerably reduces the ability of an authorized distributor to sell the contractual products to customers outside its contractual territory or area of activity" and is therefore "liable to restrict competition in that sector."ⁱⁱ  The ECJ concluded that the restriction may not benefit from the Vertical Agreements Block Exemption Regulation.

The characterization of absolute bans on Internet sales as anti-competitive "by object" is significant. In fact, if a restriction is "by object," then any party alleging a competition infringement need only to show the presence of an agreement including such a restriction, regardless of the actual potential anti-competitive effects of such restriction. The degree of market power held by the undertaking party and the lack of effect in the market are therefore irrelevant.

The ECJ does not however exclude the possibility that a clause prohibiting de facto all forms of Internet sales may be "objectively justified" considering the nature of the products in question. The ECJ leaves it to the referring court (i.e., the Paris Court of Appeals) to examine this question but nonetheless provides the referring court with  interpretive guidelines. In particular, the ECJ recalls that,  "in the light of the freedoms of movements" [sic], it has never accepted, as an objective justification of Internet sales bans, arguments relating to the need to provide individual advice to the customer in relation to non-prescription medicines, or to maintain the prestigious image of the productsⁱⁱⁱ.

Finally, the ECJ recalls that a selective distribution contract that contains a clause prohibiting de facto the marketing of the contractual products via Internet may benefit from an individual exemption under Article 101(3) TFEU^iv, provided that the conditions for such individual exemption are met. These conditions amount to requiring that the agreement achieve sufficient economic efficiency benefits. 

In the US, the approach is more lenient

In several respects, the ECJ interpretation contrasts with the United States Supreme Court's more lenient approach to non-price – and indeed price-related – vertical restraints. Unlike the ECJ's categorization of a franchisor's restriction of a franchisee's/distributor's sales outside a contracted territory as "by object," "hardcore," and accordingly unlawful without regard to the resultant market effects, restrictive distribution territories have not been per se unlawful under Supreme Court standards since 1977; restrictions on minimum resale prices are no longer per se illegal after the 2007 Supreme Court decision in Leegin.^v In the US, all forms of vertical restraints are judged by the "rule-of-reason" balancing of both anticompetitive and procompetitive market effects. This would apply to an absolute ban on Internet sales, whether challenged as a location restriction or a resale pricing restraint.

The ECJ approach would treat a ban on extraterritorial selling as "anticompetitive by object" unless the restriction is shown to be objectively justified; US courts would presume the restraint to be procompetitive until shown to result in substantial anticompetitive effects and would only then apply the balancing test to determine the net effects. And in the net-effects analysis, the sole concern is for interbrand competition (not intrabrand). In Leegin, the Supreme Court suggested four types of evidence of collusion or market power that may indicate the likelihood of anticompetitive effects; but even where such evidence is present, the evidence of pro-competitive effects must be weighed in the balance. Also contrasting with the ECJ interpretation, in the US, franchisors' desires to assure proper customer training or other point-of-sale services or to establish a prestigious image or provide a special in-store customer experience can constitute cognizable justifications for non-price or price vertical restraints, subject to rule-of-reason analysis.

Finally, the theoretical availability of an individual exemption from Article 101(1) would not constitute an approximation of the US rule-of-reason balancing test for the ban on Internet sales because one requirement of that exemption appears to be that there is no elimination of competition to be weighed in the balance.

In the EU, next moves

The ECJ's judgment confirms that an absolute ban on Internet sales will in most cases be considered to have the purpose of restricting competition. The judgment leaves open the possibility that in individual cases the pro-competitive efficiencies resulting from such a ban might outweigh the anti-competitive restriction. In practice however, the conditions under which a restriction may be considered as "objectively justified" or may benefit from individual exemption are narrowly evaluated.

Accordingly, it will likely not be permissible for franchisors and manufacturers that want to do business in Europe to prohibit their franchisees and distributors from selling via the Internet.

The debate in the EU will now turn on the types of limitations that may be imposed by franchisors and manufacturers regarding online sales. The Commissions' Guidelines on Vertical Restraints already provide a list of hardcore restrictions regarding online sales that will automatically exclude franchise agreements from the benefit of Vertical Agreements Block Exemption Regulation.

For more information about this issue, please contact Carol A.F. Umhoefer and Pauline de Boissy (in Paris) and Kenneth G. Starling (in Washington, DC).

 

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ⁱ _{Judgment of the ECJ (Third Chamber) dated October 13, 2011 in Case C-439/09: http://curia.europa.eu/juris/document/document.jsf?text=&docid=111223&pageIndex=0&doclang=en&mode=doc&dir=&occ=first&part=1&cid=252025.}
ⁱⁱ _{Ibid., paragraph 38.}

ⁱⁱⁱ _{See Deutscher Apthekerverband, paragraphs 106, 107 and 112, and Case C-108/09 Ker-Optika ECR I-0000, paragraph 76.}

^iv _{Pursuant to Article 101(3) TFEU, any anti-competitive agreement restricting competition may benefit from an individual exemption provided that: (i) it contributes to improving the production or distribution of the goods or promotes economic or technical progress; and (ii) consumers are allowed a fair share of the resulting benefit; and (iii) it does not impose any nonessential restrictions on the parties to the agreement, and (iv) it does not give the possibility of eliminating competition.}

^v _{Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).}