Yesterday, in a judgment that was highly anticipated by both manufacturers of luxury goods as well as internet distribution platforms such as Amazon, the European Court of Justice (ECJ) clarified in the Coty v. Parfümerie Akzente case1 that manufacturers may, under certain conditions, prohibit distributors in a selective distribution system from selling their products via third-party online platforms.

Background

Coty is a manufacturer of luxury cosmetics supplied through a selective distribution network. Coty allows its distributors, including Parfümerie Akzente in Germany, to sell its products on the internet through their own “electronic shop window.” However, Coty prohibits the use of online third-party platforms such as Amazon to sell its products in a discernible manner on the market. Nonetheless, Parfümerie Akzente sold Coty products on amazon.de, and Coty sought to enforce the prohibition.

The German courts further referred the case to the ECJ to provide guidance on the compatibility with Article 101(1) TFEU of (a) selective distribution systems aimed at distributing luxury goods while preserving a luxury image of the goods and (b) clauses preventing online sales via discernible third-party platforms.

Endorsement of Selective Distribution Systems for Luxury Goods

Following its established case law,2 the ECJ confirmed that manufacturers of luxury goods should be allowed, subject to certain criteria, to make use of selective distribution systems to preserve the brand quality and image of the product. The ECJ notes that the allure and prestigious image of luxury goods bestow on them an aura of luxury, which contributes to the actual quality of such goods. In this context, a selective distribution system which seeks to ensure the contract goods are displayed in a manner that enhances their value is compatible with Article 101(1) TFEU provided that:

(i) distributors are chosen on the basis of objective criteria of a qualitative nature;

(ii) such criteria are laid down uniformly for all potential distributors and applied in a non-discriminatory fashion; and

(iii) the criteria do not go beyond what is necessary.

This judgment also fully dismisses the debate regarding the legality of selective distribution systems for luxury goods, which stemmed from the ECJ’s earlier Pierre Fabre judgment that was seen by some commentators as undermining the ability to apply a selective distribution system purely on the basis of it being a luxury product. The ECJ clarified that the Pierre Fabre judgment is to be read strictly in the context of an overall comprehensive prohibition of internet sales imposed on the selective distributor, which was not the issue in the Coty case.

Prohibition on Use of Online Third-Party (Marketplace) Platforms

Having found that the use of a selective distribution system is acceptable for luxury goods, the ECJ went on to hold that a prohibition on distributors’ use of third-party platforms in a discernible manner is, in principle, proportionate and therefore compatible with Article 101(1) TFEU.

The ECJ noted that the restriction ensures that the goods will be exclusively associated with the authorised distributors and the fact that luxury goods not being sold on third-party platforms contributes to their luxury image, both of which are consistent with the purpose of the selective distribution scheme. Further, the restriction allows the supplier to ensure that the goods are sold online in accordance with the agreed qualitative conditions set out in the distribution agreement. In light of the lack of any contractual relationship between the supplier and a third-party platform, the ECJ considered that even a requirement on distributors to only use platforms meeting specified criteria would not be as effective as the prohibition at issue.

As distributors are still permitted to sell online through both their own websites and via unauthorised third-party platforms used in a way that is not discernible to the end customer, the prohibition on the discernible use of third-party platforms by distributors was therefore found to be legitimate and proportionate. Importantly, in contrast to an outright ban on online sales, the judgment confirms that such restrictions do not constitute a restriction of competition “by object” contrary to Article 101(1) TFEU.

Looking ahead

The case will now be sent back to the German court for a factual determination on the basis of the three conditions listed above. The ECJ’s judgment confirms the approach adopted by most national competition authorities in Europe, with the notable exception of Germany which submitted observations in the case in support of Parfümerie Akzente (see also the judgment of the German court in the Asics case in April this year). The judgment is also consistent with the Commission’s Vertical Guidelines and findings in its Final Report on the E-commerce Sector Inquiry published earlier this year.

Implications for suppliers and distributors moving forward:

  • The judgment enhances the scope of control that suppliers have over their distributors in Europe, in particular making clear that they can impose restrictions on how their products are sold online in order to preserve a luxury image.
  • Third-party marketplace platforms are not entirely excluded from the market by this judgment. As in the present case, they may still be utilised by distributors in a non-discernible manner. Further, there is nothing in the judgment to suggest that the platforms themselves could not be appointed as authorised distributors, bringing them into the selective distribution system.