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French Competition Authority confirms prohibition on banning online sales in selective distribution systems

    • Competition, EU and Trade - Competition e-briefings

    06-06-2013

    On 12 December 2012, 10 years after starting its investigation, the French competition authority, the Autorité de la Concurrence (“ADLC”) fined Danish luxury hi-fi manufacturer Bang & Olufsen France (“B&O”) €900,000 for banning its approved distributors from selling its products via the Internet.[1] The ADLC also confirmed that suppliers cannot restrict the ability of their distributors to sell products online.

    Facts and Procedure

    B&O’s selective distribution system in France was made up of 48 distributors throughout the country. Its selective distributions agreements (the “Agreements”) dated back to and had not been amended since 10 August 1989. The Agreements contained a provision prohibiting distance selling, but which made no express reference to the Internet. In August 2000, B&O circulated a document which clarified its policy regarding the Internet. This document stated that distributors were allowed to signal on their own websites that they were B&O resellers and that they were qualified to give advice on B&O products. However, distributors were not allowed to use B&O’s logos and trademarks on their own websites. Certain distributors could also apply to have a separate page on B&O’s own global website.

    The ADLC’s investigation started in February 2002, when France’s Minister for the Economy, Finance and Industry referred conduct in the hi-fi and home cinema equipment sector to the ADLC’s predecessor, the Conseil de la Concurrence. This initial investigation led to three undertakings, Bose, Focal JM Lab and Triangle Industries, offering commitments which were accepted and made binding in October 2006[2]. However, B&O decided not to offer such commitments; leading the ADLC to continue its investigation into the Agreements in a separate proceeding.

    Case law background (Pierre Fabre case)

    Whilst the ADLC continued its investigation against B&O’s distribution system, it ruled on a similar, but separate, case in October 2008 concerning cosmetics and personal care products manufacturer Pierre Fabre Dermo-Cosmétique’s (“Pierre Fabre”) distribution system. Pierre Fabre’s distribution agreements required its products to be sold in a physical space with the mandatory presence of a pharmacists, resulting in a ban on online selling. The ADLC held this breached French competition laws as well as Article 101 TFEU. Pierre Fabre appealed the ADLC’s decision and the case was ultimately referred to the European Court of Justice (“ECJ”). Probably due to the relevance of the Pierre Fabre case, the ADLC suspended proceedings against B&O pending the ECJ’s Pierre Fabre judgment.

    The Pierre Fabre saga came to an end in October 2011 when the ECJ held that a clause in a selective distribution agreement which prohibits distributors from selling products online amounts to a restriction of competition by object, unless the clause can be objectively justified.[3] The ECJ rejected Pierre Fabre’s arguments and justifications which were in particular based on its products’ prestigious image and on health and safety grounds. The ECJ further ruled that Pierre Fabre’s distribution agreement as a whole could not benefit from exemption under the Vertical Agreements Block Exemption Regulation[4] (the “VBER”).

    Competition concerns expressed against B&O

    On 13 March 2012, B&O’s parent company, Bang & Olufsen A/S received a Statement of Objections from the ADLC, which set out the competition breaches serving as basis for the ADLC’s action.

    B&O stated that at the time the Agreements were drawn up, the Internet did not exist. Therefore, what was prohibited was general distance selling and not selling over the Internet, which B&O highlighted was lawful. B&O argued that such a restriction was necessary due to the highly logistical and technical nature of its very high-end products which is incompatible with online selling. B&O also emphasised that it had never had to deal with the issue of Internet selling as it had never been asked by any of its distributors whether they could sell B&O products over the Internet.

    The ADLC did not agree with B&O’s argument and held that the prohibition on distance selling in the Agreements amounted to a de facto prohibition on Internet sales. The French regulator further stressed that the Internet is a sales channel which could have been used by B&O’s distributors (but was actually not) allowing them access to a greater number of customers. Consumers in turn would have benefited from greater product choice, easier access to B&O products and ultimately lower prices.

    Like the ECJ in Pierre Fabre, the ADLC held that B&O could not benefit from the VBER as its distribution agreements fell foul of Article 4(c) which states that the exemption does not apply to “the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment.”  According to the Commission’s Guidelines on Vertical Restraints[5] (the “Vertical Guidelines”), bans on online sales qualify as illegal restrictions on passive sales i.e. non-solicited sales.

    The ADLC held that B&O’s practices had restricted intra-brand competition which deprived consumers of lower prices and product choice, particularly affecting costumers living far away from points of sales. On these grounds, the ADLC concluded that B&O had breached Article 101 TFEU as well as Article L420-1 of the French Commercial Code on anti-competitive agreements.

    The Fine

    The ADLC issued a €900,000 fine and ordered that within three months B&O either amend the Agreements in order to permit distributors to sell their products online or issue a statement clarifying that such sales were permitted. The ADLC justified the €900,000 fine imposed by stating that B&O’s infringements, which covered the whole French territory, restricted intra-brand competition and ultimately deprived consumers of lowers prices. Interestingly, the ADLC also noted in its judgment that B&O’s importance in the distribution of hi-fi products is limited in France as B&O is constrained by several competitors, which also manufacture upscale hi-fi products. The regulator went as far as saying that B&O’s conduct only affected a limited number of potential customers due to the highly technical nature of its products.

    As noted by practitioners, the fine imposed on B&O by the ADLC appears relatively significant compared to the much smaller fine imposed in the Pierre Fabre case. B&O’s conduct only affected 48 distributors across France and it was fined €900,000. On the other hand, Pierre Fabre’s actions involved 23,000 points of sale and it was only fined €17,000.

    The B&O case appears to be a landmark case since it applies principles set out by the Commission and by the ECJ ruling in the Pierre Fabre case.  Both the Pierre Fabre and B&O cases should alert suppliers: although they can impose certain limitations and requirements on the way Internet selling is carried out, they should remain vigilant not to discriminate against Internet selling or engage in practices amounting to a de facto ban on Internet sales. 

    [1] Decision n°12-D-23, 12 December 2012, Bang & Olufsen
    [2] This was done according to a settlement procedure equivalent to the European Commission’s commitments procedure under Council Regulation (EC) No 1/2003
    [3] Case C-439/09 Pierre Fabre Dermo-Cosmétique SAS v Président de l'Autorité de la Concurrence and Others
    [4] Commission Regulation (EU) No 330/2010 of 20 April 2010
    [5] European Commission – Guidelines on Vertical Restraints (2010/C 130/01)

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