Supply and demand

The application of EU competition law to distribution agreements raises a variety of questions '“ both theoretical and practical. For theorists, the circumstances in which 'vertical' restraints justify legal prohibition are controversial. At one extreme, there is a school of thought that, as Robert Bork put it in his seminal polemic The Antitrust Paradox, '[a]nalysis shows that every vertical restraint should be completely lawful'. At the other extreme, some think that competition law should produce 'fair' competition, and that there is a considerable role for intervention to prevent the exploitation of dealers and consumers.

In practical terms these are important points because distribution arrangements are common, so lawyers frequently encounter them in practice. Being able to give clear advice on how such arrangements should be drafted and when they are enforceable is essential.

The EU has generally adopted a middle ground, in which distribution arrangements have been seen neither as fundamentally innocuous, nor as fundamentally suspect. It has preferred to be pragmatic rather than doctrinaire. It has been especially concerned with the way that distribution networks can frustrate single market ideals, and therefore regarded some sorts of restraints, including those that are intended to produce tightly policed territorial protections, as especially problematic.

In Case C-439/09 Pierre Fabre (Third Chamber, 13 October 2011), the ECJ considered how this suspicion of territorial restrictions should be applied in the context of selective distribution agreements and internet sales. A 'selective distribution' network is one in which the manufacturer chooses 'authorised distributors' who are to sell the manufacturers' brands. Pierre Fabre, a leading French cosmetic company, operated such a distribution network. One of its requirements was that its authorised distributors had to operate from physical premises at which there would be a qualified person trained in the products and able to examine and advise customers. That precluded internet sales.

Tough stance

The ECJ held: (1) the preclusion of internet sales was a term whose 'object' was to restrict competition, so that (unless exempted under article 101(3) TFEU) it was illegal; and (2) the preclusion of internet sales prevents a selective distribution agreement from benefiting from the block exemption provided by regulation 2790/1999. Whether to permit individual exemption was a matter on which the ECJ gave no explicit guidance, though its conclusions on the other aspects of the case seem to make it unlikely.

The ECJ's reasoning on the first topic was summary. A term that reduces the ability of the distributor to sell by the internet makes it more difficult to sell to customers 'outside its contractual territory or area of activity' and is therefore a restriction; and a restriction in a selective distribution agreement is '“ apparently as a matter of law '“ to be treated as a 'restriction by object', unless justified by a goal 'capable of improving competition in relation to factors other than price'. The ECJ was not persuaded that any justification was forthcoming in this sense. It thought that there was no need to protect consumers (these were not prescription medicines). And it was explicit that the desire on the part of the manufacturer to 'maintain a prestigious image' could not be a legitimate aim in this context.

The arguments about the block exemption received similarly short shrift. Although requirements as to premises were acceptable, a prohibition on internet selling took the arrangement out of the scope of the block exemption because it was a 'restriction on active or passive sales'.

Not all about price

Although the result might seem inevitable, the case actually marks a hardening of attitudes towards selective distribution networks, which may (in the internet age) in effect spell their demise. The relative equanimity with which such networks have been viewed has been the result of an appreciation that competition is not all about price. Consumers also value service (expertise, a good range of products, local outlets and so forth). But it costs money to provide those. The trouble is that it's often difficult to restrict the service to those who will pay more.

A consumer will go to a high-quality local outlet for advice, and then go and buy the product online. The high-quality outlet pays the costs of servicing the customers; the low-cost online retailer gets the money. Even if you insist that the online retailer has the same quality of staff and premises, the playing field is not truly levelled, because online customers simply don't generate the same costs '“ they don't actually turn up at the premises in significant numbers and the per-unit cost is therefore much lower. Without some way of preventing the high-volume low-cost internet retailer 'free-riding' on the efforts of the local retailer, there is a 'race to the bottom', and, having briefly enjoyed both high-quality service and low prices, consumers end up with just low prices.

The trouble with the ECJ's decision is that it does not seem to recognise this problem, treating the argument as if it was just about 'image', when it's really about service and the costs of providing service to purchasers. De facto geographical restrictions are, really, needed, because the costs of servicing local and distant customers are different. Insistence on a 'unified' market operating over the internet enables distributors to target the lower-cost distant customers, and the system unravels. There's always a price to be paid, and the price to be paid for low-cost internet-based selling is bound to be a lower level of local service. Why should that choice be forced upon manufacturers by competition law?