On 25 April 2016, the European Court of Justice (“ECJ”) has published a request of the Higher Regional Court of Frankfurt (“Court”) with which the Court has asked for guidance on the legality of online platform bans in selective distribution systems under European law. The Court is currently reviewing the legality of restrictions imposed by perfume and cosmetic maker Coty, Inc. (“Coty”) on its authorized (offline) distributor Parfümerie Akzente GmbH (“Akzente”) to sell products via third party platforms on the internet.
For the very first time, a European precedent on long-debated restrictions for online sales comes into sight. The ECJ's decision may therefore have far-reaching consequences for selective distribution systems in general and third party platform bans in particular.
- Brief summary of the case
The dispute involves perfume maker Coty and Akzente, which is one of its authorised distributors. Coty has asked the Court to prohibit Akzente from selling Coty products via “Amazon.de”.
In 2012, Coty introduced new terms and conditions for its selective distribution system. According to these new rules, distributors like Akzente were inter alia effectively prohibited from selling Coty products on online platforms. Coty claims that Akzente breached the conditions of their selective distribution system by selling perfume products through “Amazon.de”.
In July 2014, the Regional Court of Frankfurt dismissed Coty's complaint arguing that the 2012 terms and conditions infringe German/European antitrust rules and are thus unenforceable.
Coty appealed this decision to the Court which now asked the ECJ for guidance on whether such online sales bans infringe European competition law.
The Court's reference order can be accessed here (in German). The ECJ's case number is C-230/16 Coty Germany.
- Subject matter of the reference order
- The internet and the rapid growth of online sales have shaken up traditional distribution systems and relations between high-street dealers and manufacturers of branded goods. While manufacturers try to protect their distributors from low-cost competition and free-riding by restricting online sales, distributors increasingly want to make use of the commercial opportunities of the internet and mobile commerce.
- This conflict has been at the heart of a legal debate about online sales restrictions in selective distribution systems. While it is acknowledged that a selective distribution system may be permissible provided that the nature of the goods require a selective distribution to ensure they are properly distributed, there is considerable legal uncertainty for manufacturers and distributors surrounding the permissibility of online sales restrictions. With its referral, the Court now takes a decisive step to clarify underlying legal issues by requesting guidance on the following questions:
- Is protection of a “luxury image” a legitimate reason for a selective distribution system?
- Is it permissible to impose on distributors an outright ban on sales via third party platforms regardless of whether the distributor failed to meet legitimate quality criteria set by the manufacturer?
- Is it an intended restriction of a customer group if distributors are prohibited from selling products on online platforms such as Amazon or ebay?
- Does a sales ban on internet platforms result in a restriction of “passive sales”?
- With the first limb, the Court seeks guidance on whether the protection of a luxury image itself meets the requirements for a permissible selective distribution system (Question 1).
- If this is assumed, there are inconsistent rulings by German courts on whether third party platform bans are excessive for ensuring that the branded goods are distributed under appropriate conditions (Question 2).
- In case the ECJ confirms in its response to Questions 1 and 2 that Coty's selective distribution system is not in line with competition law, the Court seeks to clarify further whether – based on the European Vertical Block Exemption Regulation – a justification of such terms and conditions would be possible (Questions 3 and 4).
- Impact of the referral
The referral to the ECJ (interestingly, a similar request from France's Cour de cassation is already pending before the ECJ – see here) has significant practical relevance for the future relationship between manufacturers and distributors. Many manufacturers implemented a selective distribution system to prevent that their luxury brand image is damaged through incompatible distribution practice channels. Insofar it is also widespread practice that suppliers impose certain restrictions on “their” retailers in relation to sales via online platforms (e.g., prohibiting sales via Amazon or ebay).
Whilst the ECJ may contribute to a – much needed – clarification in relation to the permissibility of such restrictions, it cannot be excluded that substantial revisions of existing and future distribution agreements between suppliers and distributors might be required depending on the outcome of the decision of the ECJ.