Caudalie Fined In Belgium In The Context Of The Implementation Of Its Selective Distribution Network
By Nicolas Hipp
On 6 May 2021, the Belgian Competition Authority (BCA) fined the high-end skincare products supplier Caudalie €859,310 for breaching competition law by imposing to its authorized distributors minimum resale prices and illegal limitations of online sales.
Caudalie submitted commitments to the BCA concerning the conditions that Caudalie can impose on distributors to safeguard the integrity of its distribution network and protect its brand image. The BCA’s decision made these commitments legally binding and considered them as mitigating circumstances justifying a decrease of the amount of the fine.
Selective distribution systems (SDS) are agreements between a supplier and one or more distributors that specify selection criteria which have to be met by a company before it can be admitted into the system as ‘authorized distributors,’ and prevent the resale of the product to non-authorized distributors.
SDS are considered a restriction of competition under EU competition law (also applicable in Belgium). However, the EU Vertical Block Exemption Regulation (VBER) acts as a safe harbor, exempting certain agreements from the application of EU competition law. This exemption applies to SDS, provided that they satisfy the VBER requirements and contain no ‘hardcore’ restrictions. The luxury and fashion industry heavily relies on the provisions of the VBER, as it gives legal certainty when implementing SDS. SDS are a particularly useful tool for brands to preserve the quality of the distribution system and the reputation of the brand.
The SDS of Caudalie could not benefit from the VBER’s safe harbor as it imposed hardcore restrictions on its authorized distributors. In particular, Caudalie imposed minimum prices, which are equivalent to fixed prices in terms of severity, and limited passive (i.e., reacting to unsolicited orders) and active sales (i.e., actively approaching potential clients) online. The restriction of cross-border active and passive sales is considered a hardcore restriction of competition, and EU antitrust authorities consider online sales restrictions a form of restrictions of passive sales. The presence of hardcore restrictions in an agreement removes the benefit from the VBER to the whole agreement and exposes the breaching company to significant fines.
This decision of the BCA occurs at a pivotal moment where the VBER is being reviewed by the European Commission, the EU antitrust authority. During this review process, stakeholders noted that the VBER should be adapted to reflect current market trends in e-commerce and that the online sales channel does not need the same level of protection as ten years ago, when the VBER was adopted. In that regard, stakeholders notably considered that the concept of active and passive sales should be clarified and that brands should benefit from more flexibility in the context of resale pricing strategies. As the European Commission is expected to publish a first draft of a revised VBER in Q2 2021, it remains to be seen whether the voice of stakeholders, including the luxury and fashion industry will be properly reflected. In particular, the luxury and fashion industry would like the updated rules to ensure more flexibility for brands and adequate brand protection in order to offer a true omnichannel experience for consumers. This also entails the recognition of the importance of fully preserving the value of the brick-and-mortar sales channel against free riding. Once the draft revised VBER will be published, the European Commission will consult again stakeholders before the publication of the new rules in May 2022.