On 6 December 2017, the European Court of Justice in Luxembourg rendered its decision in Case C-230/16, Coty Germany, answering the question to what extent EU competition law is opposed to a prohibition imposed on authorized retailers in a selective distribution system for luxury products to sell via third-party online marketplaces. The outcome is squarely in favour of the owners of high-end brands, while it also provides opportunities for other brand owners.
The case at hand regards a contractual clause in the selective distribution agreements entered into between Coty Germany, a supplier of luxury cosmetics, and the retailers that were admitted to its selective distribution system. This contractual clause allowed the authorised retailers to offer and sell Coty's products on the internet, provided, however, that that their internet sales activities were conducted through an “electronic shop window” of the authorised retailer and provided that the luxury character of the products was preserved. The use of a different business name and also the recognisable engagement of a third-party undertaking which is not itself an authorised retailer of Coty Germany, were expressly prohibited. Based on this contractual clause, Coty Germany sought to prohibit one of its authorised retailers to sell products on an online marketplace.
Questions to the ECJ
The case came before the Oberlandesgericht Frankfurt am Main, which addressed the ECJ in order to seek clarification:
- Whether a selective distribution system for luxury goods designed primarily to preserve the luxury image of those goods, can comply with the cartel prohibition laid down in Article 101(1) TFEU
- Whether Article 101(1) TFEU precludes a contractual clause which prohibits authorized retailers in a selective distribution system from using, in a discernible matter, third-party platforms for the online sale of the contract goods; and, if yes
- Whether such contractual clause amounts to a 'hardcore restriction' within the meaning of article 4 of the EU Block Exemption for Vertical Agreements, more precisely whether it restricts the customers to which distributors can sell the luxury goods at issue or whether it restricts authorised distributors' passive sales to end users
Preserving the aura of luxury
The ECJ, citing primarily from its judgement in the intellectual property case Copad (case C-59/08), notes that the quality of luxury goods is not just the result of their material characteristics, but also of the allure and prestigious image which bestows on them an aura of luxury. The characteristics and conditions of a selective distribution system can, in themselves, be beneficial to preserving the quality of such goods. This justifies the use of a selective distribution system to ensure that the goods are displayed in sales outlets in a manner that contributes to the reputation of the goods at issue and that enhances their value, provided that the conditions for using a selective distribution system as laid down in previous judgements are met: the quality criteria should be determined uniformly for all and applied in a non-discriminatory manner to all potential resellers and should not go beyond what is necessary. In this respect, the Court held that the brand owner has an interest in ensuring that its products do not get associated with non-authorized third parties. Also, the absence of a contractual link between the brand owner and third-party platform providers makes it difficult for the brand owner to ensure that the third-party provider observes the same quality conditions as are imposed on authorized retailers. Sales via discernible, non-authorized third-party platforms therefore pose a risk of deterioration of the online presentation of the goods, which may harm their luxury image and thus their very character.
No absolute ban on online sales
The ECJ distinguishes its previous judgement in the Pierre Fabre case (case C-439/09) on the facts. In that judgement, the Court held that a comprehensive prohibition of internet sales of cosmetic and body hygiene products was caught by Article 101(1) TFEU. The Court observes that the European Commission's recent E-commerce Sector Inquiry conformed that even if the importance of third-party platforms in the marketing of goods is increasing, the main on-line channel for distributors is still their own online shops. As the restrictions applied by Coty Germany did not restrict this possibility and also allowed online advertising and the use of online search engines, the Court considers that these restrictions are proportionate to the goal they serve.
On the basis of these considerations, the Court answers the Oberlandesgericht's first question in the affirmative: selective distribution systems relating to the distribution of luxury goods, that are mainly intended to preserve the ‘luxury image’ of those goods, are compatible with Article 101(1) TFEU, provided the above-mentioned conditions are met. In answer to the second question, the Court considers that the contractual clause at issue appears to be lawful in relation to Article 101(1), which ultimately is for the national court to decide.
No "hard-core" restriction of competition
In answer to the Oberlandesgericht's third and fourth questions, the Court considers that the contractual clause at issue can moreover not be construed as a "hard-core" or "by object" restriction of competition, in particular not as a restriction of the customers to which distributors can sell, or as a restriction of passive sales to end users in the sense of article 4 of the EU Block Exemption for Vertical Agreements. In this regard, the Court recalls that the restriction serves a legitimate purpose and that it is proportionate, as it does not prohibit use of the internet as a means of selling contract products, but only one specific kind of internet sale and as there appears to be no less restrictive way to single out third-party platform customers within the group of online purchasers.
Owners of high-end luxury brands will be relieved with the Court's answers to the first two questions. As long as their selective distribution system meets the criteria specified by the Court, an online market place ban is not caught by Article 101(1) TFEU at all and does not require specific justification. But the implications of this judgement seem to go much further. In cases in which the luxury nature of the goods at issue is debatable, the supplier of the goods wanting to impose a ban on reselling via online marketplaces could still argue that its selective distribution system meets the criteria set by the Court, which would place the restriction outside of the scope of Article 101(1) TFEU. Perhaps more importantly, however, such a supplier may seek to rely on the Court's analysis that a ban on the use of discernible third-party online platforms in a selective distribution system is not a 'hardcore' restriction of competition. As long as market shares remain below 30%, such a restriction will therefore benefit from the safe harbour provided by the EU Block Exemption for Vertical Agreements. Outside the scope of the block exemption, moreover, it would have to be established that the ban on the use of third party online platforms has an actual restrictive effect on competition, now the Court has unequivocally placed this type of restriction outside of the "by object" box.
It will be interesting to see how national competition authorities, some of which have taken a fierce stance against restrictions of online sales, will interpret this judgement and whether they will seek to argue that it should not be relied on outside the context of high-end luxury goods. In this regard, we have probably not seen the last case on this subject. The outcome of future cases will depend on the specific facts of the case at hand, but there seems no doubt that the Coty Germany judgment will have a prominent place in the further debate on online sales restrictions.