The Court of Justice of the European Union (CJEU) recently handed luxury brand owners a victory against on Line marketplaces in their much anticipated decision in the case of Coty Germany v Parfumerie Azkente GmbH. The CJEU ruling means that brand owners can, under certain circumstances, prohibit authorised distributors from selling luxury goods on third-party platforms.

Facts of the Case

Coty Germany GMBH (“Coty”) is one of the world’s leading beauty companies boasting a brand portfolio including, Calvin Klein and Marc Jacobs. Parfümerie Akzente GMBH (“Parfümerie Akzente”) had been an authorised distributor of Coty’s luxury cosmetics for many years, both in shops as well as online.

As the Coty brands carry with them an air of luxury, Coty utilise a selective distribution contract which allows them to retain control over the environments in which their products are sold in physical stores, such as the décor and furnishing of the sales locations, as well as the advertising presentation. These require, for example, that the ceilings, furniture, walls and lighting are of the kind to promote the luxurious image of their brands. Coty sought to amend all of its selective distribution contracts in 2012 to extend this control to online sales and to prohibit distribution of its products on third party sites, such as Amazon and eBay. Parfümerie Akzente refused to sign the amendment and so Coty brought an action before the Regional Court of Frankfurt to prohibit Parfümerie Akzente from distributing their products on “amazon.de”.

The Regional Court rejected Coty’s application, finding that the restriction infringed competition rules (Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”). Coty appealed and the appellate court, the Higher Regional Court of Frankfurt, requested a preliminary ruling from the CJEU.

The main issues for the CJEU were whether selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure a “luxury image” for the goods amount to a breach of competition law / is compatible with it. Essentially does a restriction by a luxury brand owner on use of on line sales platforms by its distributors breach those rules?

CJEU ruling

In agreement with the prior advisory opinion of Advocate-General Wahl, the CJEU held that selective distribution systems for luxury goods are compatible with Article 101(1) but only where: 1. The agreement is designed, primarily, to preserve the luxury image of those goods/ the product in question must be of such nature that it requires selective distribution; 2. resellers are chosen on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion; and 3. the criteria laid down does not go beyond what is necessary. Here the CJEU hinted that the Coty provision would comply with these as it had the goal of ensuring that the goods would be exclusively associated with the authorised distributors. It required distributors to meet certain standards, to “support the luxury image” of the Coty brands, and so should fall within the parameters of the above restrictions.

A loss to on line platforms (and distributors who use them) is a gain to brands and their protection.

The CJEU ruling is a definite blow for on line market places which wish to sell such niche brand products on their sites. While it remains to be seen how it will be interpreted by individual Member States and there are still uncertainties about where the limits of “luxury” lie, given the CJEU provided no definition in their ruling, they will need to be cautious of falling foul of it. There is also a possibility that the decision could even be interpreted as extending in application beyond luxury goods?

On line market places like Amazon and eBay will understandably not be pleased. They may therefore try to invoke courts in EU National Member States to challenge attempts to ban sales in individual cases as to whether these meet the criteria. This makes it all the more important for both suppliers and distributors to audit and stress test their existing agreements to ensure that the necessary safeguards are in place to meet the criteria.

Take Home Point

That said the take home point must be that this decision will, in principle, allow brand owners to put in place agreements to preserve and protect the prestige image of their brands and in turn the intellectual property rights in those. Brands are all about creating a particular image exclusively associated with the products concerned and their origin. Price is not the only way to compete and the distinctiveness that branding can offer must also be another valid and effective way to do so. It would follow therefore that attempts by Brand owners to maintain a distinctive and exclusive image for their products should not necessarily affect competition in the market and breach the rules.