Coty case: some restrictions on internet selling are allowed
The Court of Justice of the EU (CJEU) has ruled in Coty v Parfümerie Akzente (C-230/16) that suppliers of luxury goods can restrict authorised distributors in their selective distribution system for luxury goods from selling those goods through unauthorised third party online platforms such as Amazon and eBay, if:
- distributors are chosen on the basis of objective criteria of a qualitative nature;
- the criteria are applied uniformly and in a non-discriminatory fashion;
- the criteria do not go beyond what is necessary; and
- the restriction is proportionate in the light of preserving the luxury image of the goods.
Coty Germany is a luxury cosmetics supplier (its brands include Marc Jacobs, Calvin Klein and Chloe). In order to preserve its luxury image, Coty distributes certain brands through a selective distribution network i.e. it sells products to distributors that are chosen based on specific criteria such as their décor and environment.
Authorised distributors are permitted to sell the goods online, provided that they use their own electronic shop window or non-authorised third party platforms, on the condition that the use of such platforms is not discernible to consumers. They are expressly prohibited from selling goods online via third party platforms which operate in a discernible manner towards consumers.
Parfümerie was one such authorised distributor. In dispute was a contractual clause that prohibited Parfümerie from distributing Coty goods through Amazon Germany.
On the question of whether this clause infringed EU competition law, the German court referred the following issues to the CJEU.
1. Whether selective distribution systems that aim to create a 'luxury image' for goods are compatible with EU competition law
The CJEU clarified that a selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods does not breach EU competition law, provided that the following conditions are met:
- resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all resellers and applied in a non-discriminatory way; and
- the criteria laid down must not go beyond what is necessary.
The CJEU noted that it is fundamental that an essential aspect of the quality of luxury goods comes from their aura which enables consumers to distinguish them from other similar goods.
2. Whether prohibiting members of a selective distribution system from engaging third-party undertakings to handle internet sales infringes competition law, irrespective of whether legitimate quality standards are contravened
The CJEU asked whether the restriction in the clause was proportionate for the objective of preserving the luxury image of the goods. The CJEU found that such a restriction guaranteed that the goods were associated with authorised distributors, preserving the perceived quality of the goods. The restriction did not go beyond what was necessary: the clause did not have a blanket restriction on online sales on third party platforms but restricted only sales via third party platforms where the use was discernible to the consumer.
3. Whether such a restriction is interpreted as a restriction of the retailer's customer group and/or of passive sales to end users 'by object'
The CJEU found there to be no restriction on either customers or on passive sales to end users. The clause did not prohibit use of the internet as a marketing method, nor did it circumscribe third party platform customers. It also allowed, in certain circumstances, authorised distributors to advertise via the internet on third party platforms and to use online search engines, so that customers could still find online offers of authorised distributors.
This judgment will provide comfort to luxury brand owners who find their goods being resold on discount websites. It must be noted though, that the CJEU has not provided a carte blanche for blanket bans on third party online selling. The German competition authority has stated that the judgment will have "only limited effects", as the ruling was limited to luxury products and does not affect other sectors. The judgment also leaves room for national authorities to define precisely which products are accurately classed as 'luxury'.
Co-authored by Madeeha Husain Anthony and Chris Eykel