Imagine, you have bought or received a beautiful (expensive) Swiss watch, let's say a Rolex. After some time, the clockwork is not running as smoothly as before and you want to have it serviced and repaired. Chances are that your local watchmaker will not be able to do it for you. This local watchmaker is unlikely to be part of Rolex's 'selective repair system' and will therefore not be able to obtain the parts to fix the watch. Instead, the watch will have to be sent to Switzerland, with all the associated (extra) costs. As far as the Conféderation Européenne des Associations d'Horloges Réparateurs (CEAHR) is concerned, these selective repair systems - like the ones several luxury Swiss watch brands, including Rolex, Audemars Piguet and Patek Philippe, are using – are contrary to European competition rules. CEAHR says the watchmakers are abusing their dominant position
Back in 2004, CEAHR already filed a complaint with the European Commission. The Commission dismissed the complaint in first instance owing to lack of interest to the European Union. The General Court annulled that decision, considering that the Commission has wrongly not included all the relevant (legal) facts and circumstances in its decision. The Commission subsequently continued its investigation into the complaint, only to subsequently dismiss the claim again. The Commission deemed it unlikely that it would establish an infringement of article(s) 101 and/or 102 of the Treaty on the Functioning of the European Union (TFEU) after a more in-depth investigation. The CEAHR appealed this decision. This time, the Court agreed with the Commission. In its judgment of 23 October 2017, the General Court agreed with the Commission's opinion that the Swiss watchmakers' conduct was not contrary to European competition rules.
Selective repair systems
Some (luxury) Swiss watchmakers refuse to supply parts for their watches to independent watch repairers. They repair the watches themselves and use a 'selective repair system', which only includes repairers who meet certain (strict) quality criteria. These criteria relate to training, experience, tools and suitability of the business premises, among other things. The exact conditions may vary per brand. Once authorised repairers have been admitted to a selective repair system, they will receive spare parts and will be permitted to repair the watches in question.
In breach of article 102 TFEU - abuse of dominant position?
Given the substantial investments necessary to enter those markets, the Commission does not rule out the possibility that the Swiss watchmakers have a dominant position on the markets for repair services and spare parts. As the watchmakers also include independent repairers, who meet the objective quality criteria mentioned above, they cannot be accused of keeping the market exclusively to themselves. There still is competition among authorised repairers, especially when those repairers are capable of repairing watches of multiple brands. According to the Commission, the refusal to supply spare parts does not qualify as an abuse. The General Court concurred with the Commission's view.
In breach of article 101 TFEU – infringement of the prohibition of cartels?
The General Court confirmed that a selective distribution system – and by analogy a selective repair system – is not contrary to article 101 TFEU, if the conditions imposed on retailers/repairers are objectively justified, non-discriminatory and proportional. The General Court has emphasised that maintaining a prestigious image is no justification for maintaining a selective repair system. However, the purpose of guaranteeing the quality and the correct use of the products and combating illegal counterfeits, are legitimate grounds for justifying selective repair systems. According to the General Court, the Commission made a thorough examination of whether the systems in question are capable of achieving those objectives and do not go beyond what is necessary.
CEAHR had presented the argument that a comparison should be made with the motor vehicle sector. In that sector restrictions on selling spare parts to independent repairers are considered to be 'hardcore restrictions' (where the block exemption is not applicable). According to the Commission, this comparison cannot be upheld due to the following distinctive factors: (i) the motor vehicle sector is subject to specific regulations, (ii) in the motor vehicle sector, spare parts can be supplied directly to end users, (iii) the after sales services in the prestigious watches sector is a less profitable market and (iv) in the watches sector, it is less important to have several repair centres close to consumers, because it is easier to ship watches than vehicles for repair . However, this argument may also meet with some criticism. For example, the judgment does not prove that aftersales services in the watches sector are less profitable. The question arises how relevant it actually is, if the restrictions (perhaps to a lesser extent) will still lead to a price increase for consumers. Furthermore, shipping the product to a faraway location will, in principle, lead to an increase of the repair price for consumers. It is also unclear why the fact that there are specific regulations in place should justify a stricter regime. This is circular reasoning.
The criteria imposed by the Swiss watchmakers, in the context of their selective distribution systems, seem unusually strict. The question arises, whether (all) these strict criteria are actually necessary and proportional to achieve the objectives (safeguarding the quality, correct use and combating illegal counterfeits). Especially if these criteria result in hardly any independent repairers entering the market. It is remarkable that the General Court has stressed more than once that CEAHR has failed to support its arguments in this context and to submit proof or provide an explanation. Perhaps it is a lost opportunity. It remains to be seen, whether the General Court would have come to the same conclusion if presented with another (more extensive) body of facts and better substantiation. However, this judgment provides parties, who (wish to) maintain a selective distribution system and intend to extend it to the repairs market, with additional ammunition.
All things considered, it looks like the reasonable course adopted earlier with regard to selective distribution systems will continue with this General Court judgment, or will at least be applied to selective repair systems. Please also check out our previous article on the judgment of the Court of Amsterdam with regard to Nike's selective distribution system. It is interesting that the Court of Amsterdam (in brief) had come to the conclusion that - based on the conclusion of the Advocate-General in the Coty case before the European Court of Justice – protecting Nike's brand image was a legitimate justification for maintaining Nike's selective distribution system. In the current case, the General Court has ruled that maintaining the prestigious image of watches does not provide justification for maintaining a selective repair system. The quality of the repair service does.