On 6 December, the European Court of Justice ('ECJ'), confirmed in its judgment in the Coty case that the EU competition rules do not prevent suppliers of luxury branded goods from restricting distributors from selling their goods on 3rd party platforms.
Managing brand image online has been something of a headache in recent years, with differing approaches across the EU Member States and practical guidance from the European Commission ('Commission') limited to ensuring that restrictions imposed on online sales channels should be 'broadly equivalent' to those imposed on bricks and mortar stores. The Commission also launched an E-Commerce Sector inquiry looking into the competitive dynamics of online selling within the EU and published its final report in May 2017 without providing clear and definitive guidance on the marketplace/third party platform issue. Meanwhile, in cases involving Asics, Adidas and Deuter, the German competition authority has taken a relatively strict approach on online selling restrictions.
The ECJ's judgment relates to a case involving Coty (which owns various premium cosmetic brands). The judgment creates a clear, and helpful, precedent for high-end luxury brands operating selective distribution networks. The main doubt that arises from the judgment is that suppliers of consumer branded goods will benefit from it only to the extent that they can demonstrate that they are a 'luxury' brand with sufficient prestige.
The ECJ's judgment comes as a response to four questions on the topic referred by the Higher Regional Court of Frankfurt in the context of a dispute between Coty and one of its distributors Parfumerie Akzente who was selling Coty products on its own website and on amazon.de.
Coty wanted Parfumerie Akzente to sign a supplemental agreement to their selective distribution agreement which contained clauses aimed at restricting online sales on third party platforms to those with an 'electronic shop window', where the 'luxury character of the products is preserved' and prohibiting the use of a different business name or engagement of a third party that is not authorised by Coty Prestige. In effect, theses clauses restricted Parfumerie Akzente's ability to sell through Amazon Marketplace and other internet platforms.
In its judgment, the ECJ made clear that a contractual clause which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question does not breach EU law, provided that the following conditions are met:
a. The object of the clause is preserving the luxury image of the goods in question;
b. The clause is applied in a uniform and non-discriminatory manner; and
c. The clause is proportionate taking into account its objective.
The ECJ recognised that where a supplier has taken precautions to set up a selective distribution system to protect the luxury aura of its goods which 'is an integral part of the goods that enables consumers to distinguish them from other similar goods'; that system could be jeopardised where it cannot control the online platform where its goods are sold because it does not have a direct contractual relationship with that platform.
In this case, Coty's restrictions allowed the distributor to use its own website and those of third parties as long as long as they used an 'electronic shop window' which sufficiently preserved the luxury image and where the use of a different business name was forbidden. The ECJ considered that this restriction did not go beyond what was necessary to preserve the brand image noting that Coty had not completely banned the use of online sales channels or of third party platforms.
This judgment offers much needed guidance and relative harmonisation in the area of third party internet selling but care should still be taken when exploring the use of these types of contractual restrictions as the ultimate decision on whether the conditions for online restrictions are met will be for the national competition authorities and courts to decide.
The Coty case is of relatively narrow application as it focuses on goods sold within a selective distribution system where preserving the 'aura of luxury' of the products in question was paramount to the quality characteristics of the products themselves but does not give further guidance on which products or brands would have a sufficient level of 'luxury' or prestige to warrant such protection. Therefore, this judgment cannot be applied as a 'one size fits all' rule for consumer branded goods sold online through third party distributors. Nevertheless, it is a welcome and potentially very useful development for brand owners that may offer greater scope to control internet trading arrangements.