Luxury brands, such as designer handbags and high-end cosmetics, often depend on exclusivity to maintain their image. Making these products difficult to come by – by way of price or location – is integral to the idea being sold. Some manufacturers fear that making these products available on the Internet will dilute the brand they’ve worked so hard to cultivate.

In Europe, home of well-known luxury brands such as Louis Vuitton, however, distributors of some products want to increase sales by offering the products online, and in June 2010, the European Commission issued guidelines essentially forbidding manufacturers from banning online sales of their products. A March 3 opinion from European Court of Justice (ECJ) Advocate General Jan Maz?k reinforces this reality, particularly for cosmetics and personal care product manufacturers.

The case, Pierre Fabre Dermo-Cosm?tique SAS v Pr?sident de l’Autorit? de la Concurrence and Ministre de l’?conomie, de l’Industrie et de l’Emploi involves French cosmetics company Pierre Fabre , which, in 2006, was among the subjects of an investigation by France’s Conseil de la Concurrence (Competition Council). In 2008, the company was found to infringe on both EU and French prohibitions on restraints of trade by requiring distributors to sell its products only in brick and mortar stores with a trained pharmacist present. Pierre Fabre appealed to the Cour d’appel de Paris (Court of Appeals), but the court did not rule. Instead it requested an opinion from the ECJ on whether Pierre Fabre’s ban on Internet sales of its products indeed infringed on Article 101 of the Treaty on the Functioning for the European Union (TFEU), which prohibits agreements that could inhibit free competition in the market. Article 101 is analogous to Section 1 of the Sherman Act in the U.S.

Pierre Fabre’s defense of the ban relied heavily on health and safety justifications. The company is best known for shampoos that are sold only in pharmacies where a qualified pharmacist is present, a provision it argues is necessary due to the scientific nature of its products, which warrant the availability of professional on-site support.

“There is a notion built into EU law that says a supplier must allow its goods to be sold online, as a general rule,” explains Brussels-based Baker & McKenzie Partner Fiona Carlin. Exceptions are allowed only in very limited circumstances, where a blanket ban on Internet sales is required for health or safety purposes, she added.

Though Pierre Fabre attempted to make a health and safety case for its ban, Maz?k dismissed this, calling the claims “objectively unfounded” and emphasizing that they would need to be justified by public law, which they were not. Finding none of the company’s justifications valid, Maz?k issued a recommendation that the ECJ find Pierre Fabre’s ban anti-competitive by object. Though the ECJ won’t issue a ruling for several months, the court upholds advocates general’s recommendations in more than 80 percent of the time.

For American companies doing business in the EU, the long-term implications of Pierre Fabre remain to be seen, as experts expect further litigation in the event that the ECJ upholds the advocate general’s recommendation.

Restriction Requirements

In European anti-trust law, a key distinction is made between a restriction by object and a restriction by effect. Restriction by object, which would apply to price fixing and cartel behavior, is comparable to a per se violation of antitrust laws, meaning the behavior is determined unlawful without any required analysis of its effect on the market. If a ban is found to be anti-competitive by object, the authorities investigating the conduct aren’t required to show that the agreement or practice has harmed competition.

“As soon as [investigators] show that there is a restriction by object, by and large, the analysis stops there,” explains Yves Botteman, a partner in Steptoe & Johnson’s global competition law practice. “They don’t have to look into whether it has resulted in prices being higher or the choice or quality of products being lower as a result of this conduct.”

In the EU, exemptions known as vertical restraints can protect certain dealers and distributors from prohibitions under Article 101. In order to qualify for such exemptions, manufacturers must meet two criteria. First, distributor agreements cannot include restrictions by object and second, market share cannot exceed 30 percent. Botteman says advocate general’s opinion relates specifically to how restrictions that do not benefit from the automatic exemption are handled.

“If you are above the market share threshold of 30 percent or if you include in your agreement hardcore restriction of competition, you are basically subject to the enforcement of Article 101,” he says. “You’ll need to embark into a review of the agreement and general rules. The fact that you include a hardcore restriction of competition in an agreement and the percent of the market share that you have raises potential concerns from an antitrust perspective in Europe.”

By contrast, restriction by effect requires analysis of both the perceived negative effect on competition and benefits that the practice may generate. Botteman says restriction by effect is usually found in contracts and agreements that relate to the trademarks fixed to a certain product.

Maintaining Status Quo?

In June 2010, the European Commission revised its Guidelines on Vertical Agreements. Under the latest guidelines, certain methods of restriction of sales are allowed, including a requirement that only brick and mortar dealers sell online (which would exclude online-only sellers), minimum sales targets for in-store sales, a fixed fee to support the sales effort in in-store sales and standard for the use of websites. The Commission also addressed the issue of banning online sales completely. The guidelines call the Internet a “powerful tool” and say that “in principle, every distributor must be allowed to use the internet to sell products.”

“We call it a block exemption regulation,” Carlin says. “In the regulation adopted in June [2010], the commission explicitly said an outright ban on online sales is a hardcore restriction of competition, which means there’s a presumption that the restriction of online sales is unlawful.”

For this reason experts in Europe say that the Advocate General’s opinion in the Pierre Fabre case only reinforces the current anti-competition law.

“Basically, all it does is reiterate the current state of the law,” Carlin says. “The European Commission last June adopted a block exemption regulation and guidelines, which governs the dos and don’ts of distribution agreements in Europe. The Advocate General’s opinion basically just says the commission was essentially right.”

Though his opinion in reinforced the EU’s block exemption regulations, the Advocate General also left room for further challenges to the rule, saying that an agreement isn’t necessarily a restriction by object simply because it doesn’t comply with the EU Block Exemption on Vertical Restraints. Such assessments, rather, should be made case-by-case.

In order to successfully justify a ban on Internet sales, however, a company would have to meet a high burden of proof that the harm to the consumer caused by allowing Internet sales was significant and could not be alleviated without a ban. In the Pierre Fabre case, for example, Maz?k reasoned that product information and advice that can accompany online product listings are sufficient to inform and ensure a quality customer experience. This is a blow for luxury brands that argue in-person expertise is essential to customer service.

The American Way

While U.S. antitrust law and European competition law are similar in most ways, the subject of online sales marks a distinct difference in approach.

“The United States takes a very laissez faire approach and if suppliers want to make their goods available online or don’t want to make their goods available online, that’s basically up to the supplier,” Carlin says. “Europe has gone in totally the opposite direction partly because the whole European Union construct is built on the notion of a single, internal market across the 27 EU member states.”

Carl Hittinger, chair of DLA Piper’s Philadelphia litigation department says the commission’s rule probably wouldn’t go over well in the U.S. He says he expects the case to be litigated in the states as U.S companies seek a consistent rule.

“I think it’s going to be litigated because a lot of those international companies can’t afford to have different rules in Europe versus the United States even though that sometimes occurs,” he says.

Hittinger points to the Supreme Court’s stance on resale price maintenance, which allows retailers to prevent distributors from charging lower prices and degrading the value of the product.

“It’s a little different perspective here,” he says. “There’s a little recognition of manufacturers’ ability to control things within the distribution chain and price, as well as outlets.”

Still, Hittinger says American companies should be mindful of the European rules and the effect they might have on business operations in Europe, at least for the time being.

“American companies are going to have to seriously look at this situation in Europe to determine whether or not it’s going to have impact upon their sales over there,” he cautions. “[Companies] have no choice but to sell their products [in Europe], but what they’re really trying to get is some consistency in the different markets to make sure they’re doing things in a consistent way.”