Coty Germany is a beauty and luxury cosmetics supplier with more than 77 mainstream brands, including Calvin Klein, Chloé, Covergirl, Marc Jacobs and Rimmel.
To maintain a luxury image, Coty operates a selective distribution system under uniform terms. This means that Coty only permits certain distributors to sell selected branded products.
The authorised distributors may sell the luxury products online, but must sell only through an electronic shop window of the authorised distributor. In practice, this means that Coty can prevent authorised distributors from selling the products on Amazon or eBay.
Parfümerie Akzente, a Coty authorised distributor, refused to comply with these restrictions and used the Amazon.de website to sell Coty products. Coty brought legal proceedings seeking to prevent these online sales. The German Court of First Instance refused Coty’s claim on the grounds that:
- Coty’s selective distribution network was unjustified, and
- the restrictions on online sales constituted a hardcore restriction of competition which could not benefit from any individual exemption or exemption under the EC’s Vertical Agreements Block Exemption Regulation
Coty appealed this decision and the German Higher Regional Court referred certain questions in the case to the CJEU.
In its judgment, the CJEU:
- accepted that an “aura of luxury” is essential to distinguish luxury brand products from other similar products. As a result, luxury brand products may require a selective distribution system to preserve this “aura of luxury”
- outlined that luxury brands, including Coty, may prohibit authorised distributors in a selective distribution system from using a third party online platform, in a discernible manner, to sell the brand's products
- clarified its ruling in the Pierre Fabre case, where the CJEU considered that preserving an image of prestige was not a sufficiently legitimate reason for restricting competition
The court outlined that the need to preserve the prestige of Pierre Fabre’s cosmetic products did not justify a total ban on online sales. The prohibition imposed by Coty on its authorised distributors is not in itself contrary to Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). Whether a prohibition breaches Article 101(1) of the TFEU depends on if that prohibition:
- is necessary to preserve the image of the luxury products
- is determined in a uniform fashion
- is applied without distinction, and
- does not go beyond what is necessary
The CJEU considered that the prohibition on using third-party platforms in a discernible manner does not constitute a hardcore restriction of competition under Articles 4(b) or (c) of the Vertical Agreements Block Exemption Regulation (330/2010) because the provisions that restrict the sales channels do not limit:
- the customers to whom the distributor can sell, or
- the territory in which these sales may be made
The Coty judgment clarified how product suppliers can apply a restriction on online sales through third-party online platforms within the selective distribution system.
The judgment also acknowledges that the aim of preserving a brand image in the selective distribution system can be a legitimate justification for banning sales through online platforms such as Amazon or eBay.
Importantly, the Coty judgment’s application is limited to the distribution of luxury products. How to define "luxury products" or how to interpret the concept of "luxury image" will be for national competition authorities and courts to determine in each specific case.