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Insight

Suppliers of luxury goods are given a welcome assurance

David Bond
14/12/2017
In its recent decision in Coty Germany GmbH v Parfümerie Akzente GmbH, the Court of Justice of the European Union (CJEU) has concluded that if a supplier of luxury products operates through a "selective distribution network" it can prevent its authorised distributors from selling those products on unauthorised third party internet platforms such as Amazon. The case is important as it confirms the status of selective distribution networks and lays out the conditions that must be met to enable a supplier to take advantage of some of the restrictions that can be imposed within such a network.

Summary

In its recent decision in Coty Germany GmbH v Parfümerie Akzente GmbH, the Court of Justice of the European Union (CJEU) has concluded that if a supplier of luxury products operates through a "selective distribution network" it can prevent its authorised distributors from selling those products on unauthorised third party internet platforms such as Amazon.  The case is important as it confirms the status of selective distribution networks and lays out the conditions that must be met to enable a supplier to take advantage of some of the restrictions that can be imposed within such a network.

Background

Coty Germany supplies luxury cosmetics and, in order to maintain its luxury image, it supplies certain products through a selective distribution network in which every distributor must meet specific criteria designed to maintain that luxury image. One term of its distribution agreement expressly prohibited its distributors from selling Coty's luxury goods online "via third party platforms which operate in a discernible manner towards consumers".  One of Coty's authorised distributors, Parfümerie Akzente, challenged the legality of this prohibition.

What is a selective distribution network?

A selective distribution network is one means by which a supplier can control how its distributors sell its products within the EU, without infringing EU competition laws.

Suppliers of technically complex products (such as electrical products requiring demonstration) or luxury products (such as designer handbags and high end cosmetics) can adopt a selective distribution network to restrict the resale of their products only to approved dealers. The rationale for using such a network is that these types of products can only properly be resold to consumers by retailers with specific knowledge and expertise using appropriately trained staff, or that the sale must be from premises that are in keeping with the luxury nature of the products.

A key element of a selective distribution network is that the supplier may prevent its distributors from reselling the products to other dealers outside the network, on the basis that their knowledge or retail environment does not meet the supplier's criteria.

Therefore within a selective distribution network, the supplier may decide to supply its products only to those distributors that meet its selective criteria and those distributors themselves might agree to re-sell the products only to end users and other authorised dealers.

In this case, Coty's use of a selective distribution model was based on the belief that their products were luxury goods and could therefore legitimately be distributed through a selective network.  Therefore one of the first issues to be decided by the CJEU was whether Coty's products really were luxury.

Luxury goods?

The CJEU concluded that "luxury goods" were not just products which had certain material characteristics but also products that had the allure and prestigious image which affords them an aura of luxury. It was considered that an impairment of that aura would likely affect the actual quality of the goods.

The CJEU's conclusion

In summarising the case, the CJEU provided their opinion on two distinct elements.

1.  Are selective distribution networks a permitted means under EU competition law to preserve the luxury image of products?

The CJEU confirmed that selective distribution networks are permitted for such purpose, stating "that a selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not breach the prohibition of agreements, decisions and concerted practices laid down in EU law, provided that the conditions are met:"

Those conditions were as follows:

  • distributors must be selected on the basis of objective criteria of a qualitative nature;
  • those criteria must be applied equally to all potential distributors and not applied in a discriminatory fashion; and
  • those criteria must not go beyond what is necessary.

So the CJEU re-confirmed the status and legitimacy of selective distribution networks, but what about the restriction on an authorised distributor selling those luxury products on a third party internet platform, in this case Amazon Germany?

2.  Does a restriction on selective distributors using unauthorised third party internet platforms to distribute luxury products breach EU competition law?

The CJEU confirmed that such practices did not breach EU competition law, concluding that "the prohibition of agreements, decisions and concerted practices laid down in EU law, does not preclude a contractual clause, which prohibits authorised distributors from using, in a discernible manner, third party platforms for internet sales of the goods in question provided that the following conditions are met"

The conditions were as follows:

  • That the clause has the objective of preserving the luxury image of the products in question;
  • It is laid down uniformly and not applied in a discriminatory fashion; and
  • It is proportionate in light of the objective pursued.

Outcomes

This case serves two primary purposes. First, it re-confirms the status of selective distribution networks generally, confirming the criteria that should be used when establishing them. Second, and more importantly in today's digital world, it sheds some light on what continues to be a difficult area – the extent to which a supplier can restrict its distributors from making use of the internet, in this case, third party internet platforms.

Relevance to suppliers

When setting up a distribution network in Europe many suppliers find the rules imposed by European law confusing, with specific rules relating to a wide range of practices including resale price maintenance, exclusive territories, the use of transactional websites, etc.

As a result, suppliers tend to take one of three approaches:

  • they are often unware of the complex restrictions imposed by EU law and therefore impose restrictions on their distributors which unknowingly breach EU competition law, exposing the supplier to financial and commercial penalties; or
  • they may have some awareness that EU competition law prohibits certain restrictions but they are not fully aware of what they are permitted to do, so they err on the side of caution, imposing no or very few restrictions on their distributors, resulting in the supplier having little or no control over how its products enter the market; or, ideally
  • they are aware of the controls they can impose on their distributors, while remaining compliant with EU competition law, and their distribution networks are set up accordingly.

The Coty case provides an opportunity for all suppliers to re-visit their European distribution models, whether that it is to ensure their current restrictions are enforceable or to introduce new restrictions that suppliers had previously thought were incompatible with European law. Whatever the need, please do get in touch with your usual contact at Fieldfisher if you would like any advice relating to the distribution of products within the EU and how this case might impact on your business.

The ECJ's press release can be found here and the full judgment can be found here.

Co-authored by Hannah Black.

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