A retailer’s ability to make sales via the online channel can play a pivotal role in maintaining and increasing profitability. But friction can result where the retailer’s desire to maximise sales in the online arena conflicts with the brand’s desire to control the online activity of its resellers.
While it is important to ensure that any differences between the parties are ironed out at a commercial level, depending on market share, it may also be desirable to ensure that the compromise reached does not fall foul of applicable competition laws.
Selective distribution is one business model which is commonly used by fashion brands attempting to influence the internet sales of their wholesale customer.
Selective distribution occurs when:
- the brand limits the distributors who are authorised to sell the branded products to those who meet specified criteria; and
- the distributors agree only to supply end users or other approved distributors.
The European Court has recently considered whether a brand can lawfully impose on its distributors through a Europe-based selective distribution system an outright ban from selling online. The case concerned Pierre Fabre Dermo-Cosmétique SAS, the company behind the Klorane, Ducray, Galéne and Avène cosmetic brands sold in France and other countries within Europe.
While the distribution contracts at issue were not so bold as to state outright that distributors were prohibited from selling online, they did state that sales must be made in a physical space with a qualified pharmacist present at the point of sale to give advice and information to the consumer. These amounted to a de facto exclusion of all forms of internet selling.
The European Court’s judgment confirms that:
- such clauses will restrict competition if when looked at in their legal and economic context and having regard to the nature of the products in question, they are not objectively justified. Among Pierre Fabre’s justifications for the restrictions was their view that the clauses were required to maintain the prestigious image of their products. The European Court rejected this, stating that maintenance of a prestigious image is not a ‘legitimate aim for restricting competition’;
- selective distribution contracts containing de facto prohibitions on internet selling will not benefit from the safe harbour afforded under EU competition law;
- however, such a contract may still be permissible if, generally, it has pro-competitive effects.
In this case the European Court has confirmed the prevailing view that an outright ban on internet sales will infringe European competition law unless the provision is objectively justified. For fashion brands, this objective justification is likely to be very difficult to show and, depending on their market share and that of their customers or suppliers, they should approach cautiously any restrictions on internet selling.