In a ruling on 25 May 2016 the Court of Appeal in Paris held that the selective distribution system of Coty Prestige France, the exclusive licensee for a number of well-known luxury perfume brands, was incompatible with EU competition law. The online distributor iloveparfums.com was therefore entitled to sell Coty's products on its website at discounted prices.
The issue of online sales restrictions in the context of a selective distribution system is a topical one. It is now widely accepted that although the qualitative criteria in a selective distribution system can require distributors to maintain a 'luxury environment' for the products concerned, this cannot include a full ban on online sales. Precisely what amounts to permitted online quality standards remains unclear and two cases involving selective distribution networks and online sales restrictions are currently before the Court of Justice of the EU (CJEU), awaiting clarification on this point. One of the cases involves Coty in Germany, where the German Court has asked the CJEU for guidance on the legality of restrictions imposed by Coty on its authorised distributor Parfumerie Akzente GmbH to sell products via third party online platforms (see our e-bulletin here). Another case involves a reference by the French Cour de Cassation, in which a former authorised distributor for Samsung products is now trying to prevent Amazon from selling Samsung products in a number of EU Member States.
1. Background to the case
Coty Prestige holds worldwide exclusive licences for the production and distribution of a number of perfume brands including Calvin Klein, Balenciaga, Chloe, Jill Sander and many others. Its French subsidiary distributes these luxury products through a number of distributors in France, under a selective distribution system.
In February 2010 France Télévision ran a short commercial on an online site, www.iloveparfums.com, during which the owner of the website described its origin and its activities. Coty subsequently discovered that some of its brands were sold on this website at reduced prices with discounts of up to 70%. It brought infringement procedures against both the television station and against Marvale LLC (Marvale), the founding company of the iloveparfums.com website.
In January 2014 the Commercial Court in Paris confirmed that Coty France's selective distribution system was legitimate and that Marvale, who was not an authorised distributor, had engaged in unfair competition by selling Coty's products on its website. France Télévision was ordered to pay €20,000 in damages for having promoted Marvale's website and Marvale was ordered to pay €100,000 in damages and to refrain from selling Coty's perfumes on the iloveparfums.com website.
2. Paris Court of Appeal
France Télévision and Marvale brought an appeal against this decision, arguing that Coty France's selective distribution system was incompatible with EU competition law because the distribution agreements contained a number of restrictions which infringed EU competition rules. The Court of appeal examined the agreements' compliance with the EU vertical agreements block exemption Regulation and identified a number of restrictions which it considered 'black listed' clauses under the Regulation:
- A restriction as to certain end-users to whom the authorised distributors were not allowed to sell
- A restriction as to the territory into which the authorised distributors were allowed to sell the contract goods
- A prohibition on sales to unauthorised distributors in territories where a selective network was not in operation
According to the Court of Appeal, Coty France was therefore not operating a legitimate selective distribution system, and it was not in a position to accuse Marvale of unfair competition and unfair advertising when selling the products in question on its website at discounted prices. In response to Coty's claims that Marvale was free-riding on the financial investments made by its authorised distributors, the Court of Appeal held that Coty had submitted no evidence to that effect.
3. Compatibility of selective distribution systems with EU competition rules
EU Commission decisions and European case law have developed a set of principles which must be satisfied in order for a selective distribution system not to be caught by Article 101(1) TFEU, the prohibition on anti-competitive agreements. First, the nature of the products in question should be such as to justify a selective distribution regime. Second, distributors must be selected on the basis of non-discriminatory qualitative criteria, and third, these criteria should not go beyond what is necessary to protect the quality/image of the goods.
The vertical agreements block exemption Regulation allows for a restriction to be imposed on authorised distributors preventing them from selling to unauthorised distributors (but sales between authorised distributors must always be permitted). Restrictions relating to the territory into which the authorised distributor can sell or as to the end-users to whom they may sell should not be imposed in a selective distribution system.
A number of recent cases on selective distribution involve online sales restrictions and the extent to which those restrictions are qualitative and necessary to protect the quality and image of the products distributed. Many of these cases are dealt with by the national competition authorities and national courts, which has resulted in diverging outcomes. In Germany, for example, the Regional Court of Frankfurt held that German backpack producer Deuter was permitted to ban its authorised retailers from selling on online market places such as the Amazon market place. In the Asics case however, the German Federal Cartel Office (FCO) confirmed that a ban on the use of third party platforms and a prohibition on the use of price comparison websites are in breach of EU and German competition law (see our e-bulletin here). Guidance by the CJEU should hopefully provide some welcome clarification on this issue and result in greater consistency in these cases across the EU.