Lawmakers and regulators across the globe are not back down from their focus on competition in the marketplace. While big tech has firmly taken center stage, other efforts have been underway, as well, from the Federal Trade Commission’s move to block mergers between buzzy direct-to-consumer brands and consumer goods conglomerates in the U.S. to national governments in Europe and the European Commission, alike, exhibiting increased scrutiny when it comes to anti-competitive restraints in agreements between companies and their authorized – and unauthorized – distributors.
In that same vein, French skincare brand Caudalie is at the heart of a probe by the Belgian Competition Authority (“BCA”) after the regulator received a complaint from a Belgian store owner that his Caudalie supplier was imposing a strict pricing policy on his subsequent – and authorized – sale of the company’s products. Fast forward to November 20, 2020, and the Belgian competition prosecutor submitted a proposal for a decision in the matter.
According to the proposal, the prosecutor asserted that the minimum resale price requirement that Caudalie has imposed upon the distributor within its selective distribution network, and the Paris-based brand’s limitation of online sales by its distributors to consumers established in another EU member state run afoul of Article IV.1 of the Code of Economic Law, and Article 101 of the Treaty on the Functioning of the European Union (“TFEU”), the latter of which bars agreements that aim to “restrict, prevent or distort competition within the EU and [that] have an effect on trade between EU member states.”
In accordance with the competition law rules as set out in the EU Vertical Agreements Block Exemption Regulation (“VBER”) and the corresponding the Guidelines on Vertical Restraints, ALTIUS attorneys Carmen Verdonck and Nina Methens state that “distributors must always be allowed to freely determine their sales prices, and any agreements between a supplier and its distributor, which directly or indirectly establish a fixed or minimum price or price level to be observed by the distributor when reselling a product to its customers (such as a maximum discount level) are strictly forbidden, as they artificially encourage higher pricing.”
Moreover, VBER and the Guidelines also require that companies that maintain a selective distribution system may not prevent distributors operating at the retail level “from engaging in active and passive sales towards end users.” In other words, Verdonck and Methen assert that “distributors must be free to sell, both actively and passively, to all end users,” including online. Should a company run afoul of any of these rules, it is “considered to be a hardcore vertical restriction” that does not benefit from VBER’s safe harbor. (VBER establishes the conditions in which a vertical agreement may be considered an exemption under Article 101(3) of the TFEU). Therefore, such an agreement will likely be considered to run afoul of competition law, and be invalid.
For Caudalie specifically, the prosecutor’s proposed decision will now go before the BCA’s Competition College for consideration in furtherance of what Verdonck and Methen say may be the start of another long legal battle for Caudalie. After all, “This is not the first time that Caudalie has had to defend itself in competition law cases,” they note, pointing to its relatively recently-resolved 5-year-long legal battle with eNova, the operator of online platform 1001pharmacies.com.
In that case, Caudalie filed suit against eNova in April 2013 after it discovered that its products – from its Beauty Elixir serum and Vinoperfect Brightening Solution to its Resveratrol-Lift Cream and Instant Detox Mask – were being sold on the company’s online marketplace site. Responding to Caudalie’s complaint, eNova argued that Caudalie’s selective distribution agreements, which explicitly provided that its products could only be sold online by its authorized distributors on their own websites (and thus, not on third-party platforms, such as eNova or Amazon), violated EU competition law, which prohibits such sweeping bans unless they can be objectively justified.
In July 2018, following a decision from the French Supreme Court, the case went back before the Paris Court of Appeal for s second time. This time around, the appeals court held that the marketplace ban in Caudalie’s selective distribution agreements was, in fact, valid. Guided by the Court of Justice for the European Union’s December 2017 decision in the Coty v. Parfümerie Akzente case, in which the court determined that luxury brands may restrict the sale of their goods on third-party online platforms by way of selective distribution systems in order to preserve the quality of their products, the court sided with Caudalie.
Just as in the Coty case, the Paris Court of Appeal determined that Caudalie’s marketplace ban was necessary in order to preserve the luxury image of it products. “Given the absence of any contractual relationship that would oblige 1001pharmacies.com and eNova to comply with Caudalie’s quality requirements, and given the fact that 1001pharmacies.com was displaying Caudalie’s products in close proximity to products that had no connection with the cosmetic sector (e.g., fire alarms and video surveillance cameras), the court held that such ban was necessary and proportionate to preserve the products’ luxury image,” Reed Smith stated in a client note at the time.
While eNova attempted to argue that Caudalie’s application of selection criteria was discriminatory as Caudalie had not initiated proceedings against other platforms, the court was unpersuaded, as Caudalie was able to show that it had initiated proceedings against Amazon on the same basis, as well. As such, the Paris Court of Appeal confirmed the lower court’s decision, and ordered that eNova immediately and permanently refrain from offering Caudalie products on its site.
The timing of the newly-initiated Caudalie proceedings in Belgium is striking, as the European Commission is currently in the midst of assessing the rules contained in VBER and the corresponding Guidelines on Vertical Restraints, which are slated to lapse in 2022. “The rules that currently apply to resale price maintenance and active and passive sales are on the commission’s radar,” according to Verdonck and Methen, who note that “their concrete application may consequently be adapted or further elaborated on in the commission’s ongoing assessment process,” which could come as a welcome development for luxury brands that are increasingly seeking to limit how and where their products are sold.