France: control by the supplier of online resales by its distributors

Resale prices maintenance on the internet is unlawful while ban on resale on third-party platforms seems to be a new lawful option

In a nutshell

On December 3, 2020 the French Competition Authority (the FCA) :

• reiterated clearly the illegality of behavior aimed at imposing resale prices, especially in e-commerce and then condemned Dammann Frères, a French manufacturer of premium teas, to a € 226,000 fine for imposing minimum online resale prices maintenance on its distributors
• extended the right of ban on resale on third-party platforms from selective distribution of luxury products to quite common commercial relations, and then rejected the alleged illegality of this ban.

Between “recommended” and “imposed” resale prices: a dangerous game to play

Article L 442-6 of French Commercial Code prohibits «imposing, directly or indirectly, a minimum character at the resale price of a good, at the price of a service or at a commercial margin”. The FCA has ruled that, under the pretext of communicating recommended prices to its distributors, Dammann Frères has in fact imposed resale prices on them, failure to comply with these prices being punishable by retaliations (removal or reduction of the amount of discounts granted to them, delay in deliveries, removal of their contact details from the list of distributors presented on its website, disruption of supply, or even termination of commercial relations).

The supplier justified – vainly – this practice by its will to preserve the image and the positioning of its products but above all to avoid excessive price differences between resales by distributors on the internet and those carried out by network stores (where dealers had more latitude in setting prices).

The restriction of competition resulting from resale price maintenance can be obvious when contractual stipulations directly fix the price; but it can be deduced from a set of indices which is characterized according to a method strictly applied by the FCA :

• the supplier communicates its (recommended) resale prices to distributors,
• the latter apply them significantly and,
• a “price policing” system is put in place to prevent the price agreement from being questioned by deviant distributors. This mechanism results in price monitoring by the supplier (or even by other distributors, etc.),
• this leads to pressure, or even retaliation, to force distributors to align their prices upwards, such as delivery delays, supply disruptions, removal of discounts, etc.

There is a fine line between a price surveillance mechanism and a price constraint mechanism. This legal insecurity has been criticized and the European Commission could provide, on the occasion of the upcoming reform of the European block exemption regulation on vertical restraints, additional advice on the circumstances in which recommended resale prices should be qualified as imposed resale prices. The reform expected in 2022 could even go further by highlighting the pro-competitive effects of resale price maintenance.

Ban on resale on third-party platforms: a serious option to consider

With regard to the ban on the resale of its products on third-party platforms, openly imposed by Dammann Frères, the FCA took a rather liberal and innovative approach by applying the rules of the Coty case law (ruling of 6 12 2017, Coty Germany GmbH, C 230/16) to decide ultimately that there is no need to prosecute and therefore to fine. If this approach is confirmed later on by French courts, it will have a considerable impact on suppliers ‘policy who seek to control and restrict the terms of resale of their products on third-party platforms such as Amazon or e-Bay.

In this case, the FCA noted that the tea manufacturer’s market share was less than 30% and that this restriction did not constitute a hardcore restriction. Indeed, the FCA noted that this practice (i) did not prohibit distributors from selling products online nor from marketing themselves through third party websites (advertising and use of search engines) and (ii) did not constitute a restriction on the number of distributors, as the prosecution file did not evidence the number of customers of these platforms amongst the group of online buyers.

The FCA’s decision is therefore extends the Coty case law according to which the supplier of a selective distribution network for luxury products can prohibit the resale of its products on third-party platforms in order to preserve the image of its products (see our comments Here).

The FCA had already extended the Coty case law to technical products in a decision of 24 October 2018 (n ° 18-D-23), concerning the practices of the company Stihl, leader in mechanized garden equipment (mainly confirmed on appeal, Paris court of appeal 17 10 19), where the FCA, in a premonitory manner, stated: “it is important to specify that the analysis carried out by the Court of justice in the Coty ruling for the online marketing of luxury products seems likely to be extended to other types of products ”(see our comments Here).

The FCA is now going even further because, even though Dammann Frères teas are “high-end” positioned, they are neither luxury products nor even distributed through a selective distribution network.

Key takeaway

As part of its relations with its distributors, the supplier must ensure:

• not to stipulate any express minimum resale price clause;
• not to implement a system, nor tolerate practices, of commercial retaliation against distributors deviating from the minimum «recommended» prices (or even threaten them to do so);
• not to prohibit them from selling the products online or from advertising online;
• carefully examine the possibility of prohibiting them from reselling its products on third-party platforms.