Chillin'Competition

The previous instalment of this series (see here) dealt with the relationship between the Wouters-Meca Medina doctrine and the notion of restricition by object. I explained why, as I understand the law, it is in the nature of things that a practice that is is genuinely necessary to the attainment of a legitimate public interest goal does not have an anticompetitive object.

This second instalment deals with the relationship between the ancillary restraints doctrine and restrictions by object. More precisely, it deals with the application of Article 101(1) TFEU to selective distribution agreements.

We have known since the Metro I judgment of 1977 that purely qualitative selective distributions agreements escape Article 101(1) TFEU altogether (that is, they do not restrict competition, whether by object or effect) where certain conditions are fulfilled.

These conditions are well known: (i) the product demands a selective distribution system (for instance, a luxury handbag); (ii) the (qualitative) criteria to join the system are objective and applied without discrimination; and (iii) they do not go beyond what is necessary to attain the legitimate aims pursued by the supplier.

What if a selective distribution system does not meet one or several of these conditions? What if, for instance, the system concerns running shoes, instead of luxury handbags? What happens where the system is not purely qualitative and introduces a quantitative element?

Some commentators have argued that, where one or several of the Metro I conditions are not met, the selective distribution system is restrictive by object.

This reading of Metro I is based on a single passage in Pierre Fabre, where the Court held that:

’39.  As regards agreements constituting a selective distribution system, the Court has already stated that such agreements necessarily affect competition in the common market (Case 107/82 AEG‑Telefunken v Commission [1983] ECR 3151, paragraph 33). Such agreements are to be considered, in the absence of objective justification, as “restrictions by object”‘.

As you can see from this passage, the Court does not expressly state that agreements that do not meet the Metro I conditions are restrictive by object (AEG-Telefunken does not state anything of the kind, either). The above reading is a (reasonable) interpretation of a paragraph that could be construed in more ways than one.

The question is whether the abovementioned interpretation of Pierre Fabre is the most reasonable one.

My view has always been that it is not. One argument in this sense is such an interpretation is at odds with the case law, which emphasises the need to consider the relevant economic and legal context.

A second argument is that selective distribution is known to be a source of pro-competitive gains for various reasons (it typically promotes, rather than restricts, competition). And it is clear, at least since Generics, that the pro-competitive potential of a practice is a central consideration when ascertaining the object of a practice.

All in all, one can conclude that an agreement that does not meet the Metro I conditions is not necessarily restrictive by object. In fact, most of the time it will escape scrutiny altogether.

Suppose that the selective distribution system is set up to sell running shoes, as opposed to luxury handbags. Why would that difference mean, in and of itself, that the agreement is restrictive by its very nature?

Often, the aim of the selective distribution system is to convey and preserve a certain brand image. Brand image is particularly important for luxury products. But it is crucial for other manufacturers too.

This point is accepted in the case law on franchising agreements, where the preservation of the uniformity and reputation of the system is accepted as a legitimate aim, irrespective of whether the franchise relates to the sale of fast food or high-end cars.

Against this background, it appears that one cannot simply assume that the object of the agreement changes simply because the nature of the product changes. If the object of the agreement (say, the preservation of the brand image) is the same, the conclusion must also be the same: the agreement will not restrict competition by its very nature.

Suppose now that the selective distribution system introduces a quantitative element, which would for instance be the case if there was a limitation in the number of outlets entitled to sell the product.

It is not necessarily the case that such a restraint has an anticompetitive object. It may well be linked to the preservation of a brand image (the image that a supplier seeks to convey may suffer if there are outlets in every corner) or may instead seek to tackle free-riding concerns (another legitimate aim, and the key one in Cartes Bancaires).

Again, it would be necessary to evaluate the objective purpose of the quantitative restraint in the relevant economic and legal context. One cannot mechanically conclude that it is restrictive by its very nature on the basis of a single paragraph in Pierre Fabre, without due regard to the overall case law.

As is true of the previous instalment, one can draw two lessons from this discussion.

The first lesson is that the ancillary restraints doctrine is a safe harbour that allow firms to escape the prohibition altogether. It is just the first, early stage of the analysis under Article 101(1) TFEU, not the end of it.

Thus, if the doctrine does not apply (for instance, because the Metro I conditions are not met), the analysis must continue in the usual way: that is, by ascertaining whether the restraint has, as its object or effect, the restriction of competition.

The second lesson to draw is that one must always consider the relevant economic and legal context when evaluating the object of agreements. One cannot conclude that a clause restricts competition by its very nature on the basis that it does not meet the Metro I conditions.

One must bear in mind, on this last point, that there were several ambiguous passages in Pierre Fabre and that Coty already clarified some of them. The ambiguity in paragraph 39 will soon be addressed, too.