Coty Germany GmbH v. Parfumerie Akzente GmbH, European Court of Justice, Case No. C-230/16 (December 6, 2017).

In a recent and anticipated decision issued by the European Court of Justice (the "ECJ" or "the Court"), the Court held that luxury brand owners can, in certain circumstances, prohibit authorized distributors from selling goods on third-party online marketplaces such as Amazon.

A. Background

The Plaintiff, Coty Germany GmbH ("Coty"), sells luxury cosmetics in Germany and has a distribution network of third parties that it uses to market its products in the luxury goods sector by way of selective distribution agreements. The crux of the selective distribution agreements is to support the "luxury image" of Coty’s brands. For example, with respect to the distributor’s retail locations, "the décor and furnishings of the sales location, the selection of goods, advertising and the sales presentation must highlight and promote the luxury character" of Coty’s products. One of its authorized distributors is defendant, Parfumerie Akzente GmbH ("Akzente"), with whom Coty entered into a selective distribution agreement. Azkente has distributed Coty’s products for many years through both its brick-and-mortar locations and online.

In 2012, Coty revised its selective distribution contracts to include a clause in which "the authorized retailer is entitled to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an ‘electronic shop window’ of the authorized store and the luxury character of the products is preserved." Azkente refused to sign the amended agreement, and Coty initiated a legal action before the German court of first instance of Frankfurt am Main (the "district court") seeking an order prohibiting Azkente from distributing Coty’s products through www.amazon.de. In its ruling issued on July 31, 2014, the district court dismissed the action on the basis that it was in violation of anti-competition laws because the objective of maintaining the prestigious brand image of a mark could not justify the use of a selective distribution system.

Coty filed an appeal before the Oberlandesgericht Frankfurt am Main ("Higher Regional Court"), and the proceedings were stayed as the question was brought before the ECJ regarding whether a selective distribution agreement which prevents the distributor from selling the goods in the online marketplace was in violation of governing EU competition law.

B. The ECJ’s Decision

The ECJ concluded that the clause in Coty’s selective distribution agreement is not in violation of governing competition law, assuming the clause meets several conditions. The agreement must be designed to preserve the luxury image and quality of the goods at issue and "sustain[] the aura of luxury surrounding them." The EJC considered the relevant case law and held that selective distribution networks are not prohibited by Article 101 of the Treaty on the Functioning of the European Union ("TFEU") where three criteria are met: (i) resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, (ii) the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use; and (iii) the criteria laid down do not go beyond what is necessary.

The ECJ also highlighted the fact that the absence of a contractual relationship between the supplier of the luxury goods and the third-party online marketplace may be challenging in the enforcement context, as the supplier of the luxury goods is unable to ensure compliance with the quality conditions it has imposed on its authorized distributors. Sales on third-party platforms that are not parties to an agreement runs the "risk of deterioration of the online presentation of those goods which is liable to harm their luxury image and thus their very character."

C. Implications of the Decision

The decision now provides clear guidance to luxury brand owners seeking to maintain greater control of their online distribution channels. Luxury brands, through selective distribution agreements meeting certain criteria, may prohibit their distributors from selling goods through online platforms in order to "sustain the aura of luxury" and maintain exclusivity without violating governing competition laws. The decision was strictly limited to the luxury goods context—though the term "luxury" was not defined—and presumably the online marketplace ban would not be upheld in the non-luxury brand context.