Caudalie’s selective distribution system
Caudalie is a French high-end brand of cosmetic products that require specially-adapted marketing conditions and highly-qualified advice. To ensure its luxury image, Caudalie operates a selective distribution system for its products in some Member States, based on both qualitative and quantitative criteria. One of the noteworthy qualitative criteria has been the prohibition on Caudalie’s selective distributors of affixing labels on the front side of Caudalie products and the prohibition on using posters/signs containing words such as "discount", "prix barrés", "prix cassés" or "remise x%". Since 2013, Caudalie has also introduced specific qualitative criteria for online sales in its online distribution contracts.
Caudalie has communicated recommended resale prices to its distributors. Although its standard online distribution contract has provided that the distributor is free to set its own resale prices, the contract has specified that the distributor should refrain from implementing promotional initiatives likely to depreciate the brand image of the products. Caudalie’s sales representatives have been in charge of checking that the contractual requirements, in particular the quality requirements, are respected in the physical outlets. As far as internet distributors have been concerned, monitoring is carried out by Caudalie SAS’s e-retail department. In practice, Caudalie has only allowed for a maximum percentage of rebate to be applied to its recommended prices. If Caudalie has been informed of and/or observed the application of higher rebates than those it has authorised, then it has asked the distributors concerned to adapt their pricing policy. Distributors who have continued not to respect the pricing policy imposed by Caudalie have been called to order, or even excluded from the selective distribution network.
Caudalie’s standard online distribution contract and specific e-retail instructions have further provided that the selective distributor may only deliver products in the country in which its website is located, unless otherwise agreed upon by Caudalie. Moreover, to ensure that online sales are only made to end consumers, distributors may not accept orders from those consumers for more than a certain amount of Caudalie products with the same reference.
Complaints against Caudalie
The BCA’s objections have concerned, on the one hand, (1) the imposition of a minimum resale price, particularly the fixing of the maximum level of rebates that the distributor may grant on the Caudalie-recommended selling price to the consumer, and, on the other hand, (2) the limitations on active and passive sales for selective distributors with an online presence in a Member State other than that of the end users.
(1) The imposition of a minimum resale price through a maximum level of discount
While the terms of Caudalie’s distribution contracts allow the selective distributors to freely set their retail prices, the BCA’s investigation has shown that Caudalie has required its distributors to apply a maximum percentage of discount on the recommended prices. When selective distributors have applied higher rebates, Caudalie would call them to order and even imposed penalties upon them if those distributors refused to change their prices after such a call to order.
In particular, Caudalie has contractually prohibited its distributors from advertising rebates. The BCA’s College found that the usefulness of rebates is negated when it is impossible to communicate the granting of such rebates. If the consumer is not informed in advance of the advantage resulting from a rebate policy, then he or she is not encouraged to buy the products that are most advantageous for him/her. Consequently, by preventing its selective distributors from using the usual marketing techniques relating to the display of rebates, Caudalie has considerably reduced each distributor's interest in applying rebates when it cannot inform its customers.
In light of the above, the College concluded that Caudalie imposed a minimum resale price on its selective distributors present on the Belgian market.
(2) Territorial restrictions on active and passive sales
The BCA’s College has recalled that a selective distribution contract may impose requirements aimed at ensuring the quality of the product, but has stressed that these requirements must be proportionate to the legitimate objective pursued. In the context of a selective distribution agreement, a supplier may require its distributors to resell products in the territory of the selective distribution network only to end-users or authorised resellers. According to point 52 of the Guidelines on Vertical Restraints (the “Vertical Guidelines”), online sales are considered as passive sales. According to Article 4(c) of Regulation 330/2010 (the “VBER”), the restriction of passive sales to end-users by the members of a selective distribution system constitutes a hardcore restriction. The same goes for restrictions of active and passive sales to buyers established in Member States outside the geographic area of the selective distribution network.
During the investigation, it became apparent that Caudalie acted in breach of these principles as (i) it undertook to limit active and passive sales by selective distributors with an online presence established in a Member State other than that of the end users they sell to, and (ii) it prohibited distributors from selling more than an imposed maximum amount of Caudalie’s product to an end consumer. Such restrictions inevitably limit the ability to supply customers established in Member States outside the geographic area of the selective distribution network, as well as passive sales to final consumers and authorised distributors. The BCA’s College further argued that these restrictions were disproportionate to the objectives that a supplier may legitimately pursue to ensure compliance with proportionate qualitative conditions imposed on its distributors in a selective distribution network.
The College concluded that Caudalie’s policies of limiting the passive sales of its products intended or likely to be intended for the markets of other Member States, as well as passive and active sales to buyers established in a Member State outside the geographic area of the selective distribution network constituted, given Article 4(c) of the VBER, hardcore restrictions of competition by object within the meaning of Articles IV.1 CEL and Article 101(1) TFEU.
The BCA’s College further considered that it had no evidence to rebut the presumption that these infringements did not fulfil the cumulative conditions of Articles IV.1 § 3 CEL and 101 § 3 TFEU.
Admissibility of evidence and composition of the investigation file
Next to the two substantial infringements discussed above, the BCA’s decision has also addressed two issues of a procedural nature, related to (i) the admissibility of recordings of electronic communications between Caudalie and Newpharma and (ii) the composition by the BCA of the investigation file following the dawn raids carried out by the French Competition Authority at Caudalie’s premises in France.
While Caudalie argued against the legality of these two investigative practices, the BCA has confirmed that these practices were conducted in line with Belgian and European law and judicial precedents.
Commitments offered by Caudalie
Caudalie offered three sets of commitments to the BCA to address the competition concerns found against it. The commitments made public in the BCA’s decision of 6 May 2021 consist of Caudalie submitting, within two months of the decision and subject to the BCA’s Prosecutor General’s approval, a draft communication intended for its authorised distributors, clarifying (i) Caudalie's requirements concerning the preservation of its brand image and insisting on the freedom of its authorised distributors to determine their own resale prices and to apply promotions on Caudalie products, and (ii) the measures that Caudalie could take to protect the integrity of its network, to preserve its brand image and to ensure a quality service to consumers without infringing competition rules.
The BCA’s College has decided to make these commitments binding upon Caudalie, although it has considered that given the serious nature of the infringements, the commitments offered were not of such a nature to conclude that there were no further grounds for action by the BCA. Therefore, a fine has also been imposed. However, when calculating the fine the College explicitly referred to the commitments offered as mitigating circumstances and has reduced the fine by 5% and set the final amount at EUR 859,310.
In recent years, competition authorities have been increasingly scrutinising vertical restrictions such as resale price maintenance and restrictions on active and passive sales. While decisions by competition authorities provide guidance on the practical application of the competition law rules, the VBER and the Vertical Guidelines, it sometimes remains difficult to understand or infer the extent to which a practice can be considered as a restriction of competition, particularly due to the sensitive information made confidential in these decisions and therefore not available to third parties. The two sets of commitments made binding upon Caudalie discussed above could be used to facilitate the development of guidance on qualitative obligations that are aimed at protecting the supplier's brand image while being compatible with competition law. Although the communications from Caudalie to its distributors as approved by the BCA are confidential, such communications would provide greater clarifications for undertakings as to what practices and policies can or cannot be considered as infringing the competition law rules. In our opinion, it would be an interesting path for the BCA to publish generalised guidelines available for all market players based on Caudalie’s communications as approved and reviewed by the BCA.
It is noteworthy that the decision is not only addressed to and the fine not only imposed on Caudalie Belgium SRL, which is the undertaking participating directly in the infringement, but also on two other undertakings in the Caudalie group, namely (i) Caudalie SAS, which is the entity with which the selective distribution contracts have been concluded, who has overseen the monitoring of online websites in Belgium and who sent Caudalie Belgium the list of sales outlets to be closed in the event of non-compliance with the distribution contract, and (ii) Caudalie International Holding, in its capacity as the parent company of Caudalie Belgique SRL and Caudalie SAS.
Finally, the European Commission is currently assessing the rules contained in the VBER and the Vertical Guidelines, which are due to lapse by May 2022. The rules currently applying to resale price maintenance and active/passive sales are particularly ‘under the radar’ and their concrete application may consequently be adapted or further specified upon the Commission’s proposed revised rules.
 Caudalie has, for example, blocked the orders of a selective distributor because that distributor did not respect the minimum imposed resale price. The ultimate penalty was the termination or non-renewal of the selective distribution agreement.