In his opinion in the Coty case published on 26 July 2017, Advocate General Wahl concludes that a restriction imposed on an authorised retailer (in the context of a selective distribution system) not to use third party platforms for online sales does not infringe Article 101(1) TFEU (the prohibition on anticompetitive agreements) provided that the following conditions are met: the restriction is justified by the nature of the products concerned, it is applied on the basis of objective criteria in a non-discriminatory manner and the restriction does not go further than necessary. In addition, the Advocate General considers that this type of restriction which is based on qualitative criteria is likely to improve competition. It protects the luxury image of the products concerned, by ensuring that they are sold in the qualitative environment stipulated under the selective distribution network. It also prevents free riding from other businesses on efforts and investments made by the supplier and its authorised distributors.
The opinion will be welcomed by suppliers of branded and luxury goods, who have increasingly expressed concerns over the potential erosion of the image of their products as a result of the recent growth in online sales, in particular on third-party online platforms such as Amazon and eBay. Whereas it is clear from the case law (Pierre Fabre Case C-439/09) that an absolute ban on online sales qualifies as a restriction by object and is not permitted under Article 101 TFEU, there has long been uncertainty over the extent to which restrictions which limit the ability of retailers to sell on online marketplaces raise concerns under competition rules. The issue has been considered at Member State level in a number of cases and has resulted in conflicting approaches with the European Commission itself taking a more favourable approach to such bans in certain circumstances. Given the uncertainty and divergence in approaches around the EU, guidance by the Court of Justice of the EU (CJEU) on this point has been eagerly awaited. The judges are not bound by the Advocate General's opinion when issuing final judgment, which is expected by the end of this year.
1. Background to the case
Coty, one of the leading suppliers of luxury cosmetics in Germany, operates a selective distribution system in order to protect the luxury image of its brands. In order to become an authorised retailer the bricks and mortar store of a distributor needs to meet certain requirements which relate to the environment, decor and furnishing of the store. Authorised retailers are permitted to sell the products online, through an electronic shop window of the authorised store, which ensures that the luxury character of the products is also preserved for online sales.
When one of Coty's authorised retailers, Parfumerie Akzente, started to sell the products concerned through the online marketplace Amazon.de, Coty challenged its conduct before the German courts seeking an order to prevent Parfumerie Akzente from continuing its sales on Amazon.de. When the case reached the Higher Regional Court in Frankfurt, the court decided to put the question before the CJEU as to whether a ban on sales on online marketplaces, in the context of a selective distribution system, is legitimate under Article 101(1) TFEU.
Coty was not the first case on the issue of online marketplace bans, but the German competition authority and German courts have so far not applied a consistent approach to this type of restriction. Sportswear manufacturers ASICS and Adidas, and headphones manufacturer Sennheiser, have all been prohibited by the German Federal Cartel Office from restricting the ability of members of their respective selective distribution networks to sell on marketplaces such as Amazon Marketplace. In a case involving backpack manufacturer Deuter, the Frankfurt court on the other hand concluded that a restriction on sales via Amazon Marketplace was legal (see our ebulletin here). The judge in the Coty case therefore decided to seek clarification from the CJEU as to the correct approach to this type of restriction under the EU competition rules.
2. The Advocate General's Opinion
In response to the first question put to the CJEU, whether a selective distribution system that is aimed at protecting the luxury image of the products concerned is compatible with Article 101(1) TFEU, Advocate General Wahl reiterates the case law regarding selective distribution as set out in Metro SB v Commission, which establishes that a selective distribution system will not be caught under Article 101 TFEU where the system relates to the distribution of luxury products and is aimed at protecting that luxury image, provided the following conditions (referred to as the 'Metro criteria') are met:
- Such a distribution system is justified by the nature of the products in question
- Distributors are selected on the basis of non-discriminatory, qualitative criteria relating to the suitability of their premises or their technical ability to handle the goods
- These criteria do not go beyond what is necessary
The Advocate General also sees this case as an opportunity for the Court to clarify its position in the Pierre Fabre case which has been interpreted inconsistently by some national competition authorities and national courts. In Pierre Fabre the CJEU held that the goal of protecting the luxury image of certain goods does not in itself justify a restriction on competition. Parfumerie Akzente and the Luxembourg government intervening in this case argue that the CJEU in Pierre Fabre overturned the approach in the earlier Metro case, whereas according to the Advocate General the reasoning in Pierre Fabre should be seen as specific and limited to the facts of the case, which dealt with an absolute ban on online sales (as opposed to a ban on some online sales channels such as third party marketplaces, which is at issue in Coty).
As for the second question, whether a restriction imposed on authorised retailers in a selective distribution system which prevents them from selling on third-party online platforms is caught under Article 101(1) TFEU, the Advocate General concludes this is closely linked to the first question and should be analysed in a similar way. It is a qualitative restriction in the context of a selective distribution system, and provided the so called Metro criteria are satisfied, the restriction will not be in breach of Article 101(1) TFEU.
According to the Advocate General, this type of restriction is justified by the nature of the products concerned, if it is applied in a non-discriminatory manner and the restriction does not go further than necessary. In addition, the Advocate General considers that the restriction is likely to improve competition based on qualitative criteria. It protects the luxury image of the products concerned, by ensuring that they are sold in the qualitative environment stipulated under the selective distribution network. It also prevents free riding from other businesses on efforts and investments made by the supplier and its authorised distributors.
Unlike in the Pierre Fabre case, where an absolute ban on online sales was imposed, Coty only required its authorised distributors not to sell the relevant products on third-party online platforms, regardless of whether or not the qualitative criteria imposed on its authorised distributors were met. They were not prevented from online sales from their own internet sites.
The CJEU was also asked to consider whether, should the restrictions at issue be held to infringe Article 101(1) TFEU, they constitute a restriction of the more serious "by object" type and should be seen as hardcore restrictions under the Vertical Agreements Block Exemption Regulation (VABER). The Advocate General concludes that this type of restriction does not constitute a restriction by object and qualifies neither as a restriction on the customers to whom the distributor may sell, nor as a restriction of passive sales, which would be prohibited under VABER.
3. The EU Commission's approach
The Advocate General's opinion is very much in line with the EU Commission's approach set out in its Vertical Agreements Guidelines and the Commission is in fact intervening in the case recommending that the CJEU follows this approach. Under paragraph 56 of the Guidelines any restriction on online sales in a selective distribution system is likely to be considered to be hard-core, unless it is equivalent to a 'bricks and mortar' restriction imposed on the distributors. Nonetheless, Paragraph 54 specifically covers a ban on sales via third party internet platforms and provides that a supplier may require quality standards for the use of the internet site to resell its goods, just as a supplier may require quality standards for a shop, which may be relevant in particular for selective distribution. It goes on to say that "a supplier may require that its distributors use third party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributor's use of the internet. For instance, where the distributor's website is hosted by a third party platform, the supplier may require that customers do not visit the distributor's website through a site carrying the name or logo of the third party platform".
The Commission has also considered restrictions on sales via online marketplaces in the context of its recent e-commerce sector inquiry which was completed in May 2017 (see our e-bulletin here). The aim of this sector inquiry was to examine prevailing market trends in the e-commerce sector and identify potential barriers to competition in e-commerce markets. The Commission concluded, based on the findings of its inquiry, that a marketplace sales ban does not amount to a de facto absolute ban on online sales and should not be seen as a hardcore restriction of competition. While it does not condone all marketplace bans the Commission takes the view that each restriction must be considered on its specific facts.
4. Comment In response to the growth in online sales suppliers are increasingly turning to selective distribution models in order to allow them to exercise some form of control over the online sales of their products, often to prevent sales on certain online platforms. Provided the selective distribution system is legitimate and satisfies the Metro criteria, the opinion in the Coty case does seem to offer support for this approach. The opinion is a ringing endorsement of selective distribution systems, recognising that competition on price is not the only type of competition that should be protected, in particular not to the detriment of other legitimate requirements such as the need for trade in highly technical and specialised products.
However, the opinion is remarkably tight-lipped on the interesting point as to why a prohibition to use third-party platforms cannot be viewed as a restriction of passive sales under Article 4(c) VABER. As this was the main reason why the local court in Frankfurt had dismissed Coty's claim in the first instance before the case moved up to the higher regional court and the CJEU, it is surprising that the Advocate General does not provide any other arguments except that a restriction to use third-party platforms is not an absolute ban on online sales and, therefore, not a restriction of passive sales.
Also, the opinion may leave the back door open for national competition authorities to come to different conclusions. The importance of third-party online platforms varies between Member States and they are particularly relevant in Germany where they represent an important retail tool for small and medium sized companies. Their role is also likely to increase in future and in a fast moving online retail environment it may well be necessary to keep the assessment of restrictions such as a ban on sales from these platforms in order to protect the luxury image of the products concerned under regular review.