FRANCE: The French Competition Council position on the use of Internet in selective distribution.

Didier FERRIER | FRANCE | 2009-02-16


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The position thus taken by the French Competition Council is surprisingly categorical, reflecting a potentially questionable legal and economic analysis of the Internet distribution business.
Indeed, from a legal standpoint, the Competition Council considers that such a prohibition against Internet selling constitutes a manifest restriction, within the meaning of Article 4(c) of EC regulation no. 2790/1999, which provides that the block exemption granted to vertical agreements does not extend to agreements that restrict ‘active or passive sales to end users by members of a selective distribution system.’ Such restrictions are considered ‘hardcore’ and are thus punishable without the Council having to demonstrate how they restrained competition or produced an anticompetitive effect.

This analysis seems debatable in that: firstly, the regulation does not specifically refer to prohibitions against Internet selling; secondly, the guidelines to the regulation do not formally forbid such prohibitions; thirdly, more flexible solutions had previously been applied by the EU authorities, as well as by the Competition Council itself.
As a result, to escape penalties, the promoter of the selective distribution network must itself demonstrate that it satisfies the conditions of the individual exemption provided for by Articles 81(3) of the EC Treaty and L420-4 of the French Commercial Code.
From an economic standpoint, moreover, the Competition Council’s analysis is even more debatable.

It was argued, on the one hand, that the producer is entitled to determine the place where the products are marketed and, on the other hand, that the consumer benefits from being able to receive the distributor’s advice at the sales outlet. In reply, the Competition Council objected that an Internet site is not a marketing place, but rather an alternative means of selling, like selling through stores or by mail order, which is tantamount to denying the marketing component of the activity performed by ‘pure players’ as well as the position taken by the Supreme Court in its 2006 Jardin des fleurs decision.

It was further argued that Internet selling did not allow consumers to receive advice from the pharmacist-seller. The Competition Council considers that it is up to the producer of the selective distribution system to adapt the requirements involved in marketing its products to the Internet context.
Lastly, it was argued that the prohibition against Internet selling served to prevent the ‘free-riding’ that would otherwise occur between selected distributors that use a website and those that do not. The Competition Council rules out, apparently on principle, the possibility of any such free-riding within a distribution network.
The Council’s position seems all the more severe as it is hard to see, (i) in a sector as competitive as the cosmetics industry, how such a prohibition against Internet selling would have an anticompetitive effect and, (ii) more generally, in the realm of selective distribution systems, why it would not be legitimate for the promoter of such a system to protect it against the free-riding risk inherent in a two-tiered commercialization context, where some sales are made at physical outlets where all the attendant services justifying the selection are rendered, while others are made on a website that acts as a mere vehicle for sales transactions.
For the sake of the selective distribution system, one can only hope that the courts will prove to be more legally rigorous or more economically open.



Didier Ferrier, IDI Country Expert for France.



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