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In a judgment handed down on 13 October 2011 judgment handed down on 13 October 2011, the European Court of Justice confirmed that a contractual clause in a selective distribution system requiring products to be sold in a physical space, de facto banning online sales, is anti-competitive unless it is objectively justified.
Pierre Fabre Dermo Cosmétique SAS (PFDC) manufactures cosmetics and personal care products and sells them on European markets using a selective distribution network. In October 2008, the French Competition Board fined PFDC for imposing a de facto ban on internet sales within its selective distribution network in breach of French and EU competition laws, by requiring its distributors to sell the products in a physical space in the presence of a qualified pharmacist.
PFDC appealed the fine to the French Court of Appeal, which subsequently asked the ECJ whether a general and absolute ban on internet selling in a selective distribution system constituted a restriction of competition by object.
The court held that selective distribution agreements affect competition in the EU and amount to ‘restrictions by object’ in the absence of objective justification. Excluding a method of marketing products (for example via internet sales) reduces the ability of a distributor to sell products actively and passively to customers outside its contractual territory or area of activity. Therefore, ‘a contractual clause requiring sales of cosmetics and personal care products to be made in a physical space where a qualified pharmacist must be present, resulting in the ban on the use of the internet for those sales, amounts to a restriction by object...where...it is apparent that, having regard to the properties of the products at issue, that clause is not objectively justified’. Such a prohibition will not benefit from the EU’s Vertical Agreement Block Exemption Regulation as it amounts to a hardcore restriction under Art 4(c).
Whilst acknowledging that it is for the referring court to decide whether the prohibition of online sales in this case could be objectively justified as a legitimate aim, the court noted that it has not previously accepted arguments relating to the need to provide individual advice to potential customers of non-prescription medicines and contact lenses as justifying an internet sales ban, nor did the court accept the aim of maintaining a prestigious image as a legitimate aim for restricting competition. The court did not have sufficient information to assess the application of individual exemption under Art 101(3) of the TFEU.
This judgment confirms the general principle set out in the EU’s Guidelines on Vertical Restraints, that distributors must be allowed to sell products on the internet. It also confirms that the prohibition of online sales within a selective distribution system is likely to be regarded as a restriction by object. Unfortunately, the ruling does not provide much, if any, guidance on the circumstances in which an absolute ban on internet sales may be justified.