04 décembre 2006
French cosmetics on the internet , a competition law case
L’Oréal, as nine other french cosmetics companies, agreed a few weeks ago to let their distributor sell their products on the internet. Some foreign readers may not fully understand why these cosmetics had not been sold on the internet beforehand, and why now these companies change their practices.
According to European and French Competition rules, preventing internet sales is only possible if there is an ‘objective justification’. The French Competition Authority recently asked these cosmetics companies why they were not selling their products online.
They could have invoked ‘objective’ reasons. But they didn’t. Instead, they offered to change their distribution policy.
This article explains the legal issues involved and questions the latitude left to these companies to organize their distribution network and choose the best way to market and promote their products.
Internet sales allowance
A few weeks ago, ten cosmetics companies agreed to let their distributors sell their products on the internet (1). These companies are among the biggest: Bioderma, Caudalie, Expanscience, Johnson & Johnson, l'Oréal, Lierac, Nuxe, Oenobiol, Rogé Cavaillès and Uriage.
These ten manufacturers decided to adapt their contracts (and practices) to the specificities of on-line sales after the French competition authority, i.e. the “Conseil de la Concurrence”, took the case.
As they used to prohibit completely Internet-based sales or place many restrictions on the distributors for this type of sale, the 'Conseil' suspected that this ‘web ban’ was restricting or distorting competition and thus infringing European and French competition law.
According to European competitive rules, “every distributor must be free to use the Internet to advertise or to sell products” and “an outright ban on Internet or catalogue selling is only possible if there is an objective justification”. (Commission Guidelines on Vertical Restraints, 2000/C 291/01, point 51).
These companies could have argued they had an “objective justification” to remain out of the web. But they did not. Instead, they decided to offer to alter their distribution conditions and present new contracts to the Conseil for agreement.
The legal process is the following one: the Conseil posted on its website the companies’ commitments. It waits until December 14th for interested third parties to comment about the case. Then it analyzes the points developed in these comments and, if it is deemed that these commitments are likely to satisfy the competition concerns the Conseil will close the case. The commitments will subsequently become binding. The decision is expected in January.
Many cosmetics brands are already sold online. So what was the problem with the internet for these ten Companies? Why did they have no-internet strategy?
Because the products we are talking about are not basic cosmetics.
The cosmetics banned from the web by the suppliers are high quality cosmetics. They are so specific that they are exclusively sold through a selective distribution network, in shops where qualified pharmacists (2) can offer personal advice to customers.
These high profile cosmetics are not pharmacies’(3) exclusivity. They can be sold in whatever kind of shop in France, i.e. supermarkets, department stores, pharmacies, parapharmacies etc…provided a pharmacist works on the premises. For these shops to be appointed, they must (among other conditions) employ pharmacists, specially trained to give specific and professional advice on the products.
The issue these companies were facing was not to scale down the quality of professional advice online.
The question was: how could the customers be given a proper and qualified advice through the Web?
A few years ago an appointed distributor of a French cosmetics company called Pierre Fabre (in US, Avene brand) was forbidden to sell its products online. Those products were also cosmetics distributed on the basis of pharmaceutical advice. In 1999, the Versailles Court of Appeal ruled that the website, as it was designed, could not offer the same standards of security, health and products enhancement than a actual point of sale. Advice, ruled the Court, could not be given immediately: there was no “interactive real-time dialogue" with the internet user. Advice could only be given at the e-consumer’s request, which could not permit the pharmacist to evaluate the real needs of the costumer. So the website was depreciating the brand image and thus was affecting the whole network.
Since then, most of the companies distributing this kind of specific products stayed away from the web, and no other ruling overturned the Versailles decision.
The cosmetics companies now allow their products to be sold online, on the condition that their dealers fully accept their requirements. As the European Commission put it: “the supplier may require quality standards for the use of the Internet site to resell his goods, just as the supplier may require quality standards for a shop or for advertising and promotion in general”.
These conditions are aimed at ensuring that the products are sold on the web with the same standards of quality service as in physical points of sale.
What are the commitments of the cosmetics companies?
Exclusion of pure players
Distributors who do not have an approved physical point of sale ("pure players") would not be able to obtain official approval from suppliers, except from Johnson & Johnson. For 9 suppliers out of 10, the presence of pure play merchants could constitute an unfair competition for the other distributors. Pure players would have no obligation to invest money in the shop design, in expensive location lease, nor would they have as much wages and labor costs. They would thus unfairly benefit from the “physical dealers” efforts to display and market the products, i.e. by selling cosmetics to people who have previously sought for advice in “real” shops.
No webcams
In its previous contracts, L’Oreal used to require from the webmaster to install a webcam so that the pharmacist can judge the skin condition of the customer. This is no longer required. One can guess the Conseil deemed this equipment was unnecessary for the advice to be given.
Website requirements
Uriage requires the approved distributor's website to be “exclusively dedicated to providing advice on and selling skincare products sold on the basis of pharmaceutical advice”. Its products won’t be sold along with common and basic cosmetics. This provision excludes general e- parapharmacies unless they create dedicated websites.
The website is seen as an internet window of the shop. Nuxe explains it is a "complement to the approved physical point of sale”. Some suppliers thus expect the site to “indicate that the distributor is officially approved by [them] and show the address of the physical point(s) of sale, accompanied by a photograph depicting the outlet”.
For the same reason, customers must be guaranteed as good advice they would benefit from a pharmacist as at a physical point of sale (Oenobiol).
The websites must be “of a quality, technical design and appearance that comply with” the brand image (Caudalie) or must endorse a general presentation that reflects the image” of the brand (Oenobiol). For Caudalie, “devaluing (i.e. depreciating) terms such as "discount" must not be used”.
"Q&A" section or hotline
The website must include a "Q&A" section dedicated to questions submitted to the Consultant Pharmacist via e-mail addresses (J&J), or a hotline (Caudalie), or even a telephone advisory service accessible via a free phone or standard rate telephone number (Uriage).
These services have to be provided during contractually predetermined hours. Expanscience chose from 8 am to 8 pm, Caudalie chose 9am to 6pm, Monday to Friday, except public holidays etc.
Answers are to be given from "immediately wherever possible” (J&J) to “within 72 hours” (Nuxe)…
Language
Some companies such as L’Oreal require the distributor to speak and understand each language used on the website ("in which the site is published"). Expanscience requires the internet dealer to “provide responses in French and/or English and/or Spanish to any questions submitted to its website in French and/or another language”.
Protection from parallel imports
In a selective distribution network, distributors are prohibited from reselling outside the network. To fight against such practices and avoid parallel imports that result, some companies prohibit the distributor from responding to orders for more than a certain number of identical products: 3 for Liérac, 10 for Johnson & Johnson…What is really expected from suppliers is the distributor to “refrain from complying with any order for products which appears abnormal (in terms of frequency or quantity) for an end consumer” (Nuxe).
Some companies also prohibit products to be shipped to countries outside the European Economic Area (EEA) or outside the European Union (EU).
This is the third internet related proceeding
This is the third time the competition authority brought forward an Internet commerce case. First, in July 2006, the Conseil de la Concurrence required the watchmaker Festina to let its distributors sell online. But Festina squarely refused to accept pure play merchants as distributors.
Second, in October 2006, three hifi material and home cinema manufacturers – Bose, Focal and Triangle - agreed to have their products sold on the web but Focal insisted on making mandatory for the customer to go to a physical shop before being allowed to buy online its highest quality products. Most of the Focal products can be sold directly through the web except the most exclusive ones for which the customer must first go to a shop where he would be able to receive customized and technical advice and purchase a hifi system on the spot. But if he chooses not to and needs time to make his decision, he does not have to go back to the shop. He is then allowed to purchase the items online.
These cases seem to be part of an “Electronic wave”, aimed at making the manufacturers remember that an outright ban on Internet selling is forbidden except if there is an objective justification.
Now the question is, as no suppliers already opposed the Conseil, which products could be left out of the internet trade? Which would have an ’objective justification’ to be left out of the web trade?
Regarding competition law rules, the answer can only be given on a product by product basis. The above-cited decisions only concern the very products they talk about: watches by Festina, Hifi system by Triangle, Cosmetics by L’Oréal…They cannot be regarded as general statements.
Products subjected to such exception are likely to require professional and customized advice such as highly technical, prestigious or hazardous products. But this is only pure guessing.
However, for suppliers as for law practitioners, this is not just an abstract question. The answer could affect several distribution networks. This “everybody online” principle also raises concerns about the suppliers’ freedom to choose the best way to market and promote their products. As far as competition law is concerned, they seem to have a very limited breathing space.
Celine Marchand
(1) Conseil de la Concurrence, Procedural notice, November 14th 2006
(2) In France, pharmacists have a Bachelor of Pharmacy (BPharm) degree. They can work in “pharmacies” but also in other kind of shop. In that last case, they can’t sell drugs, as drug selling is a “pharmacies’” monopoly.
(3) « Pharmacies » are drugstores. In France, they have drug selling monopoly (OTC, BTC or POM).