Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Case C-439/09: Is it just us, or is the ECJ naming the “EU rule of reason”?

with 7 comments

Last Thursday, the ECJ issued its Judgment in Case C-439/09, Pierre Fabré Dermo Cosmétique v. Président de l´Autorité de la Concurrence. Little attention has so far been paid to this Judgment which, to me, appears as having more substance than it meets the eye. Let´s see:

In 2009, the French Conseil de la Concurrence adopted a decision sanctioning Pierre Fabré  (“PF”) for including a de facto ban on the sale of its cosmetics and personal care products via the internet in its selective distribution contracts. In reality, PF´s contracts obliged its distributors to sell its products in the physical presence of a person with a degree in pharmacy. The Conseil considered that this constituted a restriction of passive sales in so far as it precluded online sales.  PF appealled the decision and the Cour d´Appel de Paris addressed a reference for a preliminary ruling to the ECJ.

What meets the eye:

The specific  and obvious discussion at stake relates to whether the exception contained in Art. 4 c) of Regulation 2790/1999 (now replaced by the same Art. of Regulation 330/2010 ) [pursuant to which ” the exemption to the prohibition laid down in Article 101(1) TFEU is not to apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object  (…) c)  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“) (emphasis added)] justifies a requirement such as that included in PF´selective distribution contracts. The solution adopted by the Court is that, given that companies will allways enjoy the possibility of benefiting from an individual exemption pursuant to Art. 101(3) TFEU, it is not necessary to give a broad interpretation to the provisions bringing agreements within block exemption regulations.

In sum, the ECJ ruled that in case of doubt Block Exemption Regulations are not to be interpreted broadly, and that in such circumstances the competitive assessment of the agreements at issue shall be carried out within the framwork of Article 101(3). You may or may not agree, but it is reasonable enough.

What doesn´t meet the eye:

As we said above, there might be more about this Judgment than meets the eye. Perhaps we´re wrong; the fact that this Judgment has grabbed no one else´s attention does not mean we´re smarter (which is definately not the case), but simply that we may not be right. Let us explain ourselves:

(Click here to continue reading)

When dealing with the question on whether the de facto ban at issue should be characterized as a restriction by object, the Court refers to its settled case-law, that, as you know, has consistently held that whereas selective distribution systems constitute, in principle, restrictions of competition by object “there are legitimate requirements, such as the maintenance of a specialist trade capable of providing specific services as regards high-quality and high-technology products, which may justify a reduction of price competition in favour of competition relating to factors other than price” and that therefore“systems of selective distribution, in so far as they aim at the attainment of a legitimate goal capable of improving competition in relation to factors other than price constitute an element of competition which is in conformity with Article 101(1)“. (See e.g. AEG-Telefunken v. Commission C-107/82, para. 33) .

In Thursday´s Judgment, the ECJ concluded that “maintaining a prestigious image” is not to be considered a legitimate aim in the sense of the case-law above. But perhaps -and only perhaps- more importantly, the Court summarizes its previous case-law stating that “[s]uch [selective distribution] agreements are to be considered, in the absence of objective justification, as ‘restrictions by object’. 

 Hold on a second!  Did the Court say “objetive justification”???

Yep, and the same term is used in the operative part of the Judgment, which replies to the preliminary reference with the following wording “Article 101(1) TFEU must be interpreted as meaning that, in the context of a selective distribution system, 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 a ban on the use of the internet for those sales, amounts to a restriction by object within the meaning of that provision where, following an individual and specific examination of the content and objective of that contractual clause and the legal and economic context of which it forms a part, it is apparent that, having regard to the properties of the products at issue, that clause is not objectively justified

Where did that come from?

AEG-Telefunken, which is the precedent quoted by the Court, does not use this terminology; it refers to “legitimate requirements” which may lead to not considering these agreements as restrictions by object. Similary, Judgments such as GlaxoSmithkline (also cited by the Court in this case), Wouters or Meca-Medina talk about a necessary examination of the “economic and legal context” or to the “overall context”, but never refer to “objective justifications”.

Indeed, until now this notion had (and please correct us if we´re wrong) exclusively been used in the context of Art. 102 cases. In Pierre Fabré the ECJ uses it for the first time in relation to Art. 101 . If you think it could be an “accident”, take into consideration that the Judgment comes from the 3rd Chamber of the Court, which is Presided by Judge Lenaerts.  That Chamber is not a likely place for accidents to happen.

If we were right, this could bring about some needed coherence to the enforcement of Articles 101 and 102. Objective justification would the the name given to that “previous filter” that takes place within the framework of Article 101.1  that until now rested unnamed and that some in the EU referred to as a “rule of reason” (failing to see the notable differences with the US notion). The Court would be giving this label to a filter that, as noted in Luis Ortiz Blanco´s brilliant and forthcoming Market Power in EU Competition Law, has revealed itself as a sort of truncated 101(3) assessment. Once the first and third conditions of 101(3) are substantially met (that is, when the restriction gives rise to something which is obviously positive and when the restriction is obviously indispensable) then it will be concluded that an arragement that restricts competition is not to be considered restrictive in the sense of Article 101(1) or, in other words, that it is “objectively justified”.

P.S. If we are wrong on this, you can certainly mock us. If we´re right, we want a reference in future textbooks!   😉

Written by Alfonso Lamadrid

18 October 2011 at 5:46 pm

7 Responses

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  1. Hi Alfonso,

    It is probably a long shot to infer a rule of reason-type of reasoning from there, considering that the issue was not specifically raised by the French court referring the case to the ECJ. But indeed your remarks are worth noting and perhaps the EU Court should expressly say something when they will have the opportunity.

    Perhaps some help to interpret the meaning of the unfortunate expression “objective justification” used in the judgment can be found in the AG Opinion (see from para 31 – heading “Objective justification”), and para 60 of the Vertical Guidelines. I think they were discussing the exceptional circumstances where a restriction may be objectively “necessary” (and hence “justified”).

    Unfortunately, the judgment does not include all the passages in the AG Opinion — and I guess para 33 could have made the trick and provided some context to understand what “justification” stands for:

    “The Commission states that as indicated in paragraph 51 of the Guidelines, a restriction on internet sales will not fall within the prohibition in Article 81(1) EC if it is objectively justified. In exceptional cases a restriction will not fall within the scope of that provision where it is objectively necessary for the existence of an agreement of that type. The Commission considers that when the marketing of the contractual products is not subject to regulation, an objective justification for a hardcore restriction generally cannot apply.”

    Well, I hope this helps. Of course you can mock me – if I am wrong. Otherwise quote me 🙂

    Ciao
    Gabriele

    Gabriele Accardo

    19 October 2011 at 7:14 pm

  2. Hi Gabriele, and thanks a lot for your excellent comment.

    You´re very right in pointing out that the AG had already referred to the term “objective justification” in the Opinion. The post (or rather, I) failed to give the AG enough credit for that. But judging by the paragraph you quote (33) it would appear as if the Commmission was the one behind this. Did they use this term intentionally or not? I´ve no clue.

    I really have no idea of how this term made it to the Commission´s submission, to the Opinion, and to the Judgment, but the view I expressed in the post stems from the conviction (which may very well be unfounded) that it cannot be possible that it escaped Judges and their cabinets that referring to “objective justification” has connotations other than if they had just said that something was “objectively necessary”.

    Now, assuming that what the post says is a long shot (and, again, it probably is), and even if the use of this notion was “unfortunate” (as you say) or “accidental” (as I would rather put it in that scenario): wouldn´t it make sense for the Court to put some order by doing what I think it may have already done?

    Thanks a lot again for the comment. I think it adds a lot to the debate. Moreover, it´s good to know that we have to compete for the quotes! 😉

    Alfonso Lamadrid

    20 October 2011 at 6:01 pm

    • Alfonso,

      Let’s be clear. I am not saying “it doesn’t matter” or it’s just an unfortunate “typo”, especially because the EC didn’t do much to avoid that. And, like in American movies… when the4 cop address the felon he says “any word you say would be used against you..”, so I would personally use this ruling against the EC in any way possible in future…

      But… there is always a “but”… the judgment does refer to “legitimate requirements” which may justify the restriction of competition in the para following the one you quoted:

      “However, it has always been recognised in the case-law of the Court that there are legitimate requirements, such as the maintenance of a specialist trade capable of providing specific services as regards high-quality and high-technology products, which may justify a reduction of price competition in favour of competition relating to factors other than price. Systems of selective distribution, in so far as they aim at the attainment of a legitimate goal capable of improving competition in relation to factors other than price, therefore constitute an element of competition which is in conformity with Article 101(1) TFEU (AEG-Telefunken v Commission, paragraph 33).”

      Now, unless at the ECJ they all became poets who can make free use of words, then we should sleep soundly… But if the use of “objective justification” has been made on purpose (and I am more concerned because of a bold heading in the AG opinion — but an opinion is an opinion..), then it is indeed something that the EC Courts better address with a clear statement at the next conference (questions from the floor anybody?!) and then in a ruling when the issue arises.

      And who knows, maybe the expression was a lost in translation-type of situation?

      Well, let’s see what they (from the Court) have to say!

      PS: I forgot – your comment is excellent too!!!! (Just teasing.. I hope my contribution didn’t sound too nerdy!)

      Gabriele Accardo

      21 October 2011 at 10:15 am

  3. …final note on this. Perhaps the solution is simpler than we both thought:

    The case is based on the old BER and Vertical Guidelines. In particular, para 51of the VG states that “An outright ban on Internet or catalogue selling is only possible if there is an objective justification.”

    So the crux of the case, i.e. where the h.. the expression came from, may be there.

    I am pretty sure the answer from the Court or the Commission is that they don’t care much because the case relates to issues under the old legislation or something like it….

    Gabriele Accardo

    21 October 2011 at 3:21 pm

  4. Allow me to take a different angle. What struck me is the Court’s statement in paragrah 39 that you highlighted: that agreements setting up selective distribution systems are agreements with an anticompeitive object. This is erroneous, surely. The Court in Telefunken did not say that at [33] nor later at [41-43]. para 33 speaks of ‘affecting competition’ at the start but if you read the whole paragraph you cannot get anywhere near the so-wrongly-called “object box”. So this sets the whole judgment off on the wrong foot. Note that the Court corrects this later at para 47 where it says that selective distribution agreements that prevent internet sales are agreements restrictive by object. I can live with this narrower assertion.

    You are right that the precedents did not speak of objective justification, but if you look to Telefunken something akin to that concept is already there: that is, selective distribution agreements do not infringe competition when they are designed so as to, for example, enhance the quality of service the consumer obtains. And this has to be shown objectively e.g. by showing consumers need expert advice when shopping and that the selection criteria ensure that expertise is available. Yes, this is some kind of ‘truncated’ Article 101(3) analysis, but we already had this in 1977 with Metro I, so there’s nothing particularly novel. In historical context, the Court in Metro I was probably responding to concerns that the Commission was reading the prohibition of Article 101(1) too widely and crafted a mechanism that would allow parties to avoid the perils of notification (note also that there was no Block Exemption for Selective Distribution before Reg 2790/99). See the paper by Whish and Sufrin in the 1987 volume of the Yearbook of European Law on the case law applying a more ‘reasonable’ reading of Art 85 EEC, as it then was.

    Perhaps the court is trying (this is my long shot) to rationalise this unusual strand of cases that read Article 101(1) more reasonably by allocating burdens of proof. In this case, selective distribution is restrictive by object (end of Commission/NCA/plaintiff’s evidentiary burden of proof); but the parties may then provide evidence that there are merits to such a system of selective distribution (i.e. show that there is an objective justification in terms of: efficiencies that beneft the consumer, and an indispensability of the restrictions stipulated to achieve those beneficial effects), and it is for agency or court to weigh these up. (or is this almost reading 101(3) into 101(1)?) Will this puzzle ever be solved? Is Tele2 the elephant in the room?

    I could go on but am already writing more than I should, sorry.

    Giorgio Monti

    26 October 2011 at 1:24 am

    • Thanks so much for this excellent comment, Giorgio. We wouldn´t have mind if you´d kept on writing!

      Your comment has in fact triggered a very interesting discussion this morning between Luis Ortiz and myself, and we have decided to write a joint post for this blog on this matter. We look forward to drafting something and to discussing it with you as well as with Gabriele (see upper comments) given the very valuable input that you both have put on the table.

      We share your opinion on the wrong use of the notion of “restriction by object” (which I would say is an error inherited from Metro) to name what could be otherwise seen as a “restriction at first sight” or “apparent restriction”. And certainly there was something similar -in fact, I would say the same thing but under a different name; or rather unnamed- in previous case law. The “new” term sounds good to us, and it could hopefully constitute a starting point for the Courts to attempt at rationalizing the balancing that takes place within 101.1 by setting out the relevant -non economic- criteria that shall govern such assessment.

      It´s frankly satisfying to receive comments like the ones this post has received. If we manage to spur this sort of debate amongst people like you that means we´re doing precisely what this blog was intended to do. Thanks again.

      Alfonso Lamadrid

      26 October 2011 at 8:35 pm

  5. […] Lamadrid sugiere en Chilling Competition que la afirmación del Tribunal que hemos transcrito en nuestra entrada sobre la sentencia […]


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