EU General Court says that restriction to supply watches spare parts is valid if within the limits of a lawful selective repair network

In a judgment handed down on 23 October 2017 (Case No T-712/14), the General Court of the European Union (General Court) ruled that a group of Swiss watch manufacturers’ refusal to supply unauthorised independent watch repairers with spare parts did not infringe articles 101 and 102 of the treaty on the functioning of the European Union (TFEU).

Importantly, the watch manufacturers had properly implemented their selective distribution systems in line with competition law and had applied their criteria accordingly.  While this case demonstrates the control that selective distribution can give to manufacturers, including over spare parts, it is therefore also a useful reminder that a successful system must comply with competition law.

Background

Breaking with past tradition of repair only by independent repairers, watch manufacturers have progressively set up their own repair systems, integrating authorised independent repairers and in-house repair networks. In these systems, independent repairers who wish to become authorised repairers are required to meet criteria relating to their training, experience and equipment. Spare parts can only be secured from manufacturers by authorised repairers, who are prevented from reselling spare parts to unauthorised repairers.

In 2004, a group of unauthorised independent watch repairers complained to the European Commission that the watch manufacturers’ refusal to supply spare parts in the context of these selective repair systems was a breach of EU competition law. The repairers alleged that since there were no alternative sources for most of these spare parts, such a practice threatened to drive independent repairers out of business.

In a decision given on 10 July 2008 (Case No COMP/E-1/39097), the Commission rejected the complaint, but its decision was quashed in a judgment of the General Court given on 15 December 2010 (Case No T-427/08), which requested further investigation from the Commission. In its second decision given on July 29th, 2014, the Commission finally rejected the repairers’ complaint. 

On October 7th, 2014 a professional association of independent watch repairers lodged an appeal before the General Court to repeal this decision. The repairers argued that the Commission had committed errors in its assessment of manufacturers’ selective repair systems under EU competition law. Specifically, they argued that the selective repair systems, together with the refusal to supply spare parts were not objectively justified, were discriminatory and were disproportionate.

In its judgement, the General Court rejected these arguments and confirmed that the systems complied with EU competition law.

What does it mean in respect of Article 101 TFEU?

Based upon the conditions applicable to selective distribution systems pursuant to case-law, the General Court ruled by analogy that repairers have to be chosen “on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, that the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally, that the criteria laid down do not go beyond what is necessary“. The General Court specified that it was not necessary to verify that repair systems do not have the effect of eliminating all competition in the market.

In such a context, the General Court ruled that the selective repair systems under examination were objectively justified, non-discriminatory and proportionate, given the need to take into account the increased complexity of prestige watch models, the maintenance of high and uniform quality repair services and the prevention of counterfeiting. The repairers’ failed to evidence the opposite and their arguments were mainly rejected as unsupported.

Subject to the compliance of such selective repair systems with case-law requirements, as applicable to selective distribution systems, refusal to supply in such a context could not be regarded as infringing article 101 TFEU.

What does this mean in respect of Article 102 TFEU?

Without actually affirming the existence of a dominant position, the European Commission had considered in this case that the watch manufacturers benefited from strong market power, but had not abused such a power by refusing to supply spare parts to unauthorised repairers. This was because the selective repair systems under examination had not had the effect of eliminating all competition in the market.

The General Court approved this analysis and considered that the Commission might use its assessment on article 101 TFEU as “an indication which, in conjunction with other elements, was capable of establishing that it was unlikely that selective repair systems had the effect of eliminating all competition within the meaning of the case-law relating to Article 102 TFEU“.

In this respect, the General Court reasserted that demonstrating an abuse requires there being a risk of all effective competition being eliminated. The General Court ruled that there was no risk in this case: competition existed between the authorised repairers and also between the watch manufacturers and those repairers, who had the opportunity to repair watches from several brands.

Comment?

Notably, in this case all repairers were accepted into the systems in the event they satisfied the selective criteria and there was no evidence that any compliant independent repairer would be prevented from entering the selective repair systems.  This last rule appears to be fundamental to selective systems permitted under EU competition law.

The General Court’s judgment therefore serves as a useful reminder of the criteria that need to be satisfied to justify a selective repair network.