Ever since the ECJ’s Pierre Fabre ruling (Case C-439/09 of 13 October 2011), there is no longer any doubt as to the fact that the prohibition of internet sales in a selective distribution agreement is liable to be considered a restriction “by object” and fall foul of Article 101(1) TFEU, unless the prohibition can be justified due to the properties of the product. Such clauses may also benefit from individual exemption, but the harshness of the conditions laid down in the ruling would seem to have rendered such exemption particularly unlikely (for more on this topic, see Louis VOGEL: EU competition law applicable to distribution agreements: review of 2011 and outlook for 2012, Journal of European Competition Law and Practice, 2012, vol. 3, No 3, 271). The decision in the Bang & Olufsen case rendered by the Paris Court of Appeal on 13 March 2014 may be an indication of a development in the matter.

The case began in 2002 with the referral to the Competition Council (now Competition Authority) by the Minister of the Economy relative to practices limiting or prohibiting online sales in the hi-fi and home cinema selective distribution sector. Three out of the four companies concerned by the preliminary assessment agreed to comply with a commitments procedure and the case was closed in relation to them. However, proceedings against Bang & Olufsen (B&O) continued and the company was eventually found guilty and fined EUR 900,000 by the Competition Authority for prohibiting de facto resellers of its selective distribution network from selling the brand products online by means of a combination of the terms of its distribution agreement and a circular letter it had sent out to the distributors (Comp. Authority decision No 12-D-23 of 12 December 2012). An appeal was lodged before the Paris Court of Appeal.

Applying the Pierre Fabre case law

The Court of Appeal found that there was a vertical agreement between B&O and its distributors, characterized by the existence of a concordance of wills as a result of both the European selective distribution contract plus a number of other factors including the behavior of the parties, providing clear evidence that the distributors tacitly acquiesced to the supplier’s request that they refrain from selling on the internet. The Court declared that such a prohibition within a selective distribution network constituted a restriction of competition by object, « in that it reduces the possibility [for distributors] to sell products to customers located outside of their area of activity and consequently restricts competition in the sector under consideration« .

Possibility of individual exemption due to the complex nature of the products?

B&O purported to rely on the individual exemption pursuant to Article 101(3) TFEU and Article L. 420-4 of the French Commercial Code, which requires that four cumulative conditions be fulfilled. Under Article 101(3) TFEU, the practice must: i) contribute to improving the production or distribution of goods or to promoting technical or economic progress, ii) while allowing consumers a fair share of the resulting benefit, iii) without imposing on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives, and iv) must not allow undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. For the third condition, the guidelines on vertical restraints (2010/C 130/01) specify that the agreement in question must not impose restrictions on competition that are not indispensable to attain the efficiencies it seeks to attain.

In the present case, B&O argued that the internet selling ban was intended to protect the network from acts of parasitism (free-riding) insofar as online selling « would strengthen the financial asymmetry between B&O distributors » and « would destabilize the territorial coverage of the stores« . The response of the Court of Appeal was that B&O had failed to demonstrate how other, less restrictive alternatives than a total and absolute ban on internet selling could not have reduced the free-riding issue. The Court found that the cheaper and less hi-tech B&O products “are particularly well-suited to selling via the internet in that, unlike complex, high-end products, they do not in every case require an in-store demonstration” nor do they generate “high storage and distribution costs”, which, for distributors would lessen the amount of investments needed for the creation of a website while at the same time reducing the alleged risk of parasitism. As B&O was found to have imposed “restrictions that were not indispensable to the running of an efficient network”, the Court ruled out the possibility of individual exemption.

An alternative interpretation of the Court of Appeal’s rationale is that an individual exemption could have been granted (in this case) if the ban on online selling had only concerned complex and expensive high-end products requiring a demonstration of use within stores, provided of course that the other exemption conditions had also been met. By taking account of the nature of the products, the Court of Appeal has adopted a reasoning which is similar to that of the Pierre Fabre judgment, where the European Court of Justice found the existence of an objective justification for the prohibition having regard to the properties of the products (but in that case pursuant to Article 101(1) TFEU). Could the supplier’s conduct be redeemed in terms of Articles 101(3) TFEU and L. 420-4 Commercial Code on account of the complex nature of products prohibited for sale online? The possibility of exceptions to the prohibition on banning internet selling is clearly to be welcomed in order to protect the prestigious image of products, which is particularly crucial in selective distribution systems. Will the Court of Appeal’s approach be confirmed? Only time will tell.

Huge reduction of the fine

This ruling is also remarkable because of the size of the reduction of the Competition Authority’s fine. Asserting the excessive and disproportionate nature of the sanction within a context of great legal uncertainty – having led to a reference to the European Court of Justice for a preliminary ruling on the question of the classification of “restriction by object” of an absolute ban on internet sales in a selective distribution agreement – Bang & Olufsen’s arguments have finally been heard by the Court of Appeal. Ruling that B&O could (only) be sanctioned for the infringement as of the Pierre Fabre judgment, the fine was reduced from EUR 900,000 to EUR 10,000.