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Luxury brands such as designer handbags and high-end cosmetics often depend on exclusivity to maintain their image. Some manufacturers fear that making these products available on the Internet will dilute the brand they’ve worked so hard to cultivate.

However some distributors 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 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 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.

“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 adds.

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. 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 the Advocate General’s recommendations 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.

Regulation Requirements

In European antitrust 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 to be unlawful without any required analysis of its effect on the market.

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

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.

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.

Maintaining Status Quo

In June 2010, the European Commission revised its Guidelines on Vertical Agreements so that certain sales restrictions are allowed, but total bans on online sales are not. 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.”

For this reason experts in Europe say that Maz?k’s opinion in Pierre Fabre only reinforces the current anti-competition law. “The Advocate General’s opinion basically just says the commission was essentially right,” Carlin says.

Though his opinion reinforced the EU’s block exemption regulations, Maz?k left room for further challenges, saying the issue should be decided case-by-case.

In order to 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 Pierre Fabre, for example, Maz?k reasoned that product information and advice that can accompany online product listings are sufficient to 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, that’s basically up to the supplier,” Carlin says. “Europe has gone in totally the opposite direction partly because the whole EU construct is built on the notion of a single, internal market.”

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

“It’s a little different perspective here,” he says. “There’s a 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 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.”