The Court of Justice of the European Union (CJEU) has ruled on 6 December 2017 that suppliers may prohibit the sales of their products via third-party online platforms such as Amazon or eBay to preserve the luxury image of their goods (1). Such restrictions do not infringe the EU prohibition on anticompetitive agreements in Article 101(1) of the Treaty on the Functioning of the EU (TFEU) provided that the well-established legal conditions for the operation of a selective distribution system are met. In light of divergent approaches at the national level in Europe, the long-awaited judgment gives comfort to luxury goods suppliers that impose online sales platform restrictions as part of their selective distribution systems. The European Commission (Commission) has stated that “the judgment will facilitate a uniform application of competition rules across the EU”.
A selective distribution system that is designed to preserve the luxury image of goods is compatible with EU competition law. The CJEU accepted that any impairment to the “aura of luxury” is likely to affect the quality of those goods from a consumer’s perspective.
A ban on the discernible use of third-party online platforms by authorised resellers (as opposed to using a third-party platform as an invisible host for the reseller’s own website) can be lawful. A key basis of this finding is that the absence of a contractual relationship between a supplier of luxury goods and the platform renders the supplier unable to require the platform to observe legitimate quality criteria for sale of the goods.
The CJEU undertook a detailed analysis of the platform ban and concluded that such a ban can be proportionate to the goal of preserving the luxury image of goods. The immediate reaction of the German Federal Cartel Office was that the judgment’s effect is limited to luxury goods and will not affect its enforcement in other sectors. This interpretation is questionable. However, it illustrates that there may remain a divergence in the approaches taken by national competition authorities and courts in the EU. At a minimum, businesses will need to be able to justify the use of such clauses based on the characteristics of the specific goods in question.
The CJEU’s 2011 judgment in the Pierre Fabre case – which had found an outright ban on online sales to be unlawful and also suggested that preserving the luxury image of goods was not an appropriate reason for selective distribution – only applied to its specific facts (2). In particular, the goods in that case were body and hygiene products of a non-luxury character.
In addition, a platform ban does not amount to a “hardcore” or “by object” infringement and hence may be exempted (if needed) by the EU’s Vertical Block Exemption Regulation (VBER). The CJEU’s conclusion on this issue was in the context of a selective distribution system. The finding does, however, raise the prospect that bans on the discernible use of third-party online platforms could also be exempted by the VBER in other types of (non-selective) distribution systems.
The CJEU’s judgment aligns to the position of the Commission. The Commission’s Guidelines on Vertical Agreements allow suppliers to impose quality standards on resellers for use of the internet or third-party online platforms, including the requirement to have a brick and mortar shop. In its recent e-commerce sector inquiry report (click here for our briefing), the Commission confirmed its view that marketplace bans do not constitute a “hardcore” restriction so can benefit from the VBER as they do not, in practice, amount to an absolute ban on online sales.
Some national competition authorities and courts have deviated from the Commission’s position, taking a more restrictive approach. Court cases in Germany and France in particular have viewed marketplace bans as incompatible with the EU prohibition on anticompetitive agreements in Article 101(1) TFEU. This position was largely inspired by the CJEU’s 2011 judgment in Pierre Fabre, in which an outright ban on online sales in a selective distribution agreement was considered a restriction of competition “by object”. However, not all national competition authorities and courts have taken such an approach with French and Dutch courts apparently moving in the opposite direction in 2017 (3).
Beauty products manufacturer, Coty supplied its luxury beauty products through a selective distribution system that contractually required authorised resellers to satisfy certain criteria to preserve the luxury image of its brands. Under the system, online sales were permitted provided they were made through an “electronic shop window” of the authorised store that preserved the luxury character of the brands. However, use of a different business name and engagement of unauthorised third-parties was prohibited, including collaborations with third-parties where these were directed at the operation of the website in a manner that was discernible to the public.
In light of these provisions, Coty brought proceedings before the German courts in 2012 to stop its long-term authorised reseller, Perfümerie Akzente GmbH, from selling its products online via the Amazon.de platform. The Regional Court found that the platform ban infringed EU competition laws and was therefore unenforceable. Coty appealed the decision to the Higher Regional Court which made a reference to the CJEU.
In reaching its conclusions, the CJEU reaffirmed the general principles that a selective distribution system will fall outside the scope of the prohibition on anticompetitive agreements under Article 101(1) TFEU if: (i) the characteristics of the products necessitate selective distribution to ensure their quality and proper use; (ii) resellers are chosen according to objective, qualitative criteria that are applied uniformly and in a non-discriminatory manner; and (iii) the criteria do not go beyond what is necessary to protect the quality of products in question (i.e. they must be proportionate).
Suppliers should find comfort in the CJEU’s decision but should nonetheless carefully review such bans to ensure they are proportionate with the overall objective of preserving quality or brand image in accordance with qualitative criteria.
The CJEU’s judgment is legally binding in the EU and national competition authorities across the EU will have to fall in line with its approach. This means that previous decisions in Germany and France may have lesser force in the future, particularly in light of the clarified scope of the Pierre Fabre judgment. However, some national competition authorities may still argue that such bans are not proportionate. In a preliminary comment on the judgment, the German Federal Cartel Office stated: “At first glance, we see only limited effects on our decisional practice,” noting that the judgment relates to luxury products (4). The German competition authority’s initial view is therefore that its case law, which relates to a wider selection of goods, such as branded sporting and leisure goods, remains unaffected by the CJEU’s judgment.