Manufacturers of Luxury Products May Ban Online Sales of Authorised Distributors Through Third-Party Platforms
On 6 December 2017 the Court of Justice of the European Union (Court) delivered its long awaited judgment (read here full text of judgment) in case Coty Germany GmbH v Parfümerie Akzente GmbH based on a request for a preliminary ruling by the Higher Regional Court, Frankfurt am Main, Germany.
The requesting court asked the Court about the interpretation of Article 101(1) TFEU and of Article 4(b) and (c) of Regulation (EU) No 330 / 2010 (the Verticals Block Exemption Regulation, "VBER") in the context of a clause in a selective distribution agreement for the sale of luxury products containing a prohibition imposed on the distributor not to sell the contract products through non-authorised third-party internet platforms.
The Court ruled that a supplier of luxury products can prohibit its authorised distributors from selling those products through a third-party internet platform, such as Amazon, provided certain conditions are met.
The dispute arose between Coty Germany GmbH ("Coty"), a leading supplier of luxury cosmetics in Germany, and Parfümerie Akzente GmbH ("Parfümerie Akzente"), an authorised distributor of those products. Coty sells luxury cosmetic goods in Germany via a selective distribution system in order to preserve their luxury image. To transport and maintain that image Coty imposes a number of qualitative requirements on the sales outlets used by its authorised distributors relating, most notably, to their environment, décor and furnishing.
In addition to sales of the contract products in the brick and mortar locations Coty allows its authorised distributors to sell the contract products online, provided that they use their own electronic shop window or non-authorised third-party platforms on condition that the use of such platforms is not discernible to the consumer. The distribution agreements, therefore, expressly prohibit the distributors from selling the contract products online via third-party platforms which operate in a discernible manner towards consumers.
Key points transpiring from the judgment
Ruling in favour of Coty the Court's main findings are as follows:
A selective distribution system for luxury products, designed primarily to preserve the luxury image of those products, is not caught by the competition prohibition contained in Article 101(1) TFEU, provided the following cumulative conditions are met (according to the Metro case law): (i) resellers are 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, (ii) that the characteristics / properties of the contract products necessitate such a selective distribution system in the sense that such a system constitutes a legitimate requirement, having regard to the nature of the products concerned, in order to preserve their quality and to ensure their proper use, and, finally, (iii) that the criteria laid down do not go beyond what is necessary.
As regards the second criterion (necessity) the judgment makes clear that the characteristics / properties of the products concerned lie not only in the physical / material qualities (e.g. high-technology quality products, such as complex high-fi systems), but also in the luxury image of the products. The "aura of luxury" surrounding these products is an essential aspect of the products that enables consumer to distinguish them from other similar goods. Any impairment to that luxury image is likely to affect the actual quality of these goods.
Next, and importantly, the Court finds that it is compatible with Article 101(1) TFEU for a supplier of luxury goods, that has set up and designed its selective distribution network, primarily, to preserve the luxury image of those products, to include a clause in its selective distribution agreement prohibiting its authorised distributors from using, in a discernible manner, third-party internet platforms for the sale of the contract products, provided (i) that clause has the objective of preserving the luxury image of the products in question, (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will now be for referring court in Germany to establish whether these conditions are met.
Finally, the judgment makes clear that limiting the use of third-party internet platforms, in circumstances such as those at issue in the case, neither restricts the territory into which, or the customers to whom, an authorised distributor may sell Coty products (Article 4(b) VBER) nor passive sales to end-users (Article 4(c) VBER), opening the way for such clause to be theoretically exempted under the VBER.
The judgment is a welcome clarification on how to treat the restriction of internet sales through third-party internet platforms within the selective distribution context. Rather than keeping all channels of e-commerce open for all companies it acknowledges that under certain conditions the aim of preserving a brand image in the selective distribution context can be a legitimate justification for a sales ban through third-party internet platforms, such as Amazon or eBay.
The judgment is notably in direct contrast with the views taken and frequently advocated by Germany's Federal Cartel Office and judgments delivered by some German courts over the past years that consider such restrictions to be hardcore (by-object) restrictions under the VBER. It, therefore, comes as no surprise that also the German court that ruled in first instance in this matter (Regional Court, Frankfurt am Main) found originally against Coty and ruled that the clause infringed Article 101(1) TFEU (and §1 of the German Act Against Restrains of Competition). (Wrongly) relying on the Court's judgement in Pierre Fabre Dermo-Cosmetique of 2011, it considered that the need to preserve a luxury image does not justify the introduction of a selective distribution system. In addition, when assessing the agreement in question, it concluded, first, that the clause at issue constitutes a hardcore restriction under the VBER (Article 4(c)) making the entire agreement fall outside of the VBER and, second, that the exemption conditions laid down in Article 101(3) TFEU are not met.
It needs noting, however, that the Coty judgment is limited to the distribution of luxury goods (because of the facts in the proceedings before the national court). How to define "luxury products" or how to interpret the notion of "luxury image" will be a matter left for the national competition authorities and courts in the specific case.