UK: Competition News June 2016

The Paris Court of Appeal compromises the lawfulness of selective distribution networks

Only a few months after its decision rendered in the Caudalie case (see our April Newsletter), the Paris Court of Appeal adopts, in a decision dated May 25, 2016, an interpretation which is, to say the least, questionable of the notion of hardcore restrictions, rendering unlawful Coty's selective distribution network in the cosmetics and luxury perfumes sector.

Coty had brought proceedings before the Paris Commercial Court against a site selling online certain of its perfumes under license which had not been approved by the brand. Quite classically, the Commercial Court ordered the site to cease all sales of Coty perfumes.

Against all expectations, the Court of Appeal overturned the Commercial Court's judgment on the grounds that the approved distributorship agreement entered into between Coty and its distributors is unlawful because it contains provisions which constitute "black clauses" (or hardcore) within the meaning of the block exemption regulation on vertical agreements (Regulation 2790/1999).

Thus, according to the Court, a clause which expressly provides the possibility to sell to members of works councils or communities, provided they go individually as direct consumers to the stores to make the purchases, is unlawful. For the Court of Appeal, this clause is hardcore in that it excludes sales to purchasing agents (i.e. works councils and communities) acting on behalf of final users. This interpretation by the Court is surprising in that it disregards the main objective of this clause, i.e. the fight against the risk of parallel sales in the case of grouped or large purchases. Moreover, this clause does not in any way prevent sales to final users.

Furthermore, the clause which provides for the prohibition of reselling to non-approved retailers is considered unlawful because Coty does not demonstrate that it has a selective distribution system covering all the territories of the European Union. This reasoning seems to be in contradiction with the guidelines on vertical restraints which provide on this precise issue that the supplier is entitled to prevent an approved distributor from selling to a non-approved distributor established in a territory where this supplier does not yet sell the contractual products. Indeed, there is no obligation for a supplier to cover the entire Union territory through a selective distribution network for it to be lawful.

Finally, the clause which prohibits active sales of a new contractual product into a Member State where Coty has not offered it for sale, during a period of one year from the first launch of the product, is ruled unlawful. However, this type of clause is expressly accepted by the guidelines on vertical restraints. It is provided therein that, when it comes to testing a new product in a limited territory, the supplier can require the designated distributors to sell the new product on the test market to limit their active sales outside this market during the time necessary to introduce the product.

Thus, by ruling that these clauses are unlawful based on an inaccurate interpretation of the exemption regulation and guidelines, the Court of Appeal compromises Coty's selective distribution network, in that it authorizes non-approved retailers to offer for sale Coty products to the detriment of approved retailers and the luxury image which Coty wishes to defend.

Let us hope that the French Supreme Court, or the French Competition Authority if the matter is referred to it, will swiftly provide clear answers to the aforementioned problematic issues, since the very impermeability of the selective distribution system, although it has been protected by competition rules for several decades, is now at stake.

The Paris Court of Appeal confirms that different procedural choices regarding the non-contestation of grievances can lead to a more severe penalty for the parent company

By decision of November 18, 2014, the French Competition Authority sanctioned AGS Martinique (AGS) and its parent company, Mobilitas, for market-sharing practices concerning the relocation of soldiers assigned to Martinique. The subsidiary AGS was fined €142,600 whereas the parent company Mobilitas was fined €158,450, with €142,600 as joint liability with its subsidiary.

Mobilitas then lodged an appeal against this decision before the Paris Court of Appeal. In addition to contesting the imputability of its subsidiary's practices to it, Mobilitas asked the Court to reduce the fine to €142,600. According to it, as a parent company, it could not receive a more severe penalty than its subsidiary, as its liability cannot exceed the latter's liability.

Although the Court first recognized the principle according to which the penalty of a parent company cannot exceed that of the subsidiary for the same practices, it however ruled that the procedural choices of each of these companies, such as the decision not to contest the grievances, are circumstances such as to justify different penalties.

The Court considered in particular that although Mobilitas did not contest the practices of which its subsidiary was accused, it did contest the fact that these practices could be attributed to it as parent company. However, the non-contestation of grievances concerns not only the reality and qualification of the practices, but also their imputability. By contesting the imputability of the practices, Mobilitas de facto waived the procedure of non-contestation of grievances and accordingly could not claim the 10 percent reduction obtained by its subsidiary for non-contestation of grievances. The fact that the parent company and the subsidiary made different procedural choices is simply the illustration of the procedural autonomy of each company being sued, without in any way calling into question, according to the Court, the presumption of decisive influence of the parent company over its almost wholly-owned subsidiary.

This decision thus recalls that the parent company cannot claim to benefit from the fine reduction obtained by its subsidiary if it does not itself waive the grievances made against it. It must make its procedural choices with full knowledge of the facts, measuring the chances of success of contesting the presumption of decisive influence over its subsidiary, presumption which is difficult to rebut.

Ab Inbev / SAB Miller: a merger under strict surveillance

On May 24, 2016, the European Commission authorized the takeover of SAB Miller, the world's second largest brewer, by AB Inbev, sector leader. Although the decision has not yet been published, the press release already reveals several interesting elements.

First, the operation was authorized subject to AB Inbev selling practically all SAB Miller's business in Europe. Thus, the following brands will have to be sold: Peroni, Groslch, Pilsner Urquell. Other more confidential brands may also be sold (such as Meantime). This again poses the question of the relevance of the commitments when they empty the operation of a substantial part of its content.

Secondly, the press release shows the Commission's eminently national approach of the markets. Both the effects of the operation and the commitments were assessed on a national basis.

Finally, it would seem that the Commission has refused to take into consideration the competitive pressure of craft breweries, whose current expansion seems at first sight to constitute a growth factor in the sector, to the detriment of industrial groups.

These first elements will need to be confirmed when the Commission publishes the decision, which should occur within a few months.

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