The long-awaited judgment of the Court of Justice of the European Union (“CJEU”) of 6 December 2017 in Coty clarified the conditions under which a producer operating a selective distribution system may restrict their authorised dealers in offering products on the Internet through third-party platforms. The CJEU upheld the Advocate General’s opinion, admitting that selective distribution systems may be used to restrict sales through online marketplaces such as Amazon or eBay, if this is essential for preserving the luxury character of products sold.
COTY’S SYSTEM OF SELECTIVE DISTRIBUTION
Coty is one of the biggest cosmetics manufacturers. It brings products of more than 70 brands to individual markets worldwide, using a selective distribution system. Selective distribution systems use selective (qualitative or quantitative) criteria to restrict the number of authorised distributors and resale options. The producer lays down the conditions (criteria) for entering the distribution system; only distributors who meet and adhere to these conditions may distribute a given product. The same applies to Coty’s distribution system. Authorised Coty sellers must meet a range of requirements related to, in particular, the strengthening of the luxury image of Coty products. This includes in particular requirements for the equipment of brick-and-mortar shops or marketing activities of dealers. In addition, each brick-and-mortar shop is subject to prior authorisation by Coty.
Authorised dealers may also offer products via the Internet. An amendment to the Internet distribution contract stipulated, however, that the dealer is not permitted to use a different name or engage a third party undertaking which has not been authorised for online sales. In 2012 the amendment was reviewed to explicitly prohibit online sales under a different commercial name as well as discernible use of services by third parties that are not dealers authorised by Coty. At the same time, dealers were made to present the products in a way preserving their luxury character.
PROCEEDINGS BEFORE NATIONAL COURTS
Parfümerie Akzente, one of long-time authorised dealers, was selling Coty products in its brick-and- mortar and internet shops. Online sales were conducted directly through its own e-shop but also via the amazon.de platform. After the revision of the amendment Parfümerie Akzente refused to accept changes relating to internet sales and continued offering Coty products in a discernible manner also via the amazon.de platform.
Coty filed a lawsuit at a national court by which it sought a ban for Parfümerie Akzente to offer its products via the amazon.de platform. The lawsuit was dismissed by the court of first instance due to non-compliance of the amendment to the distribution agreement with Art. 101 of the Treaty on the Functioning of the European Union (“TFEU”) and national competition legislation. In its decision the court relied mainly on the CJEU judgment in Pierre Fabre Dermo-Cosmétique [Judgment C – 439/09 of 13 October 2011], in which the CJEU concluded that the de facto ban on internet sales is a “hard-core” restriction of competition while maintaining a prestige image of the distributed products is not a legitimate aim which could justify such restriction of competition.
Coty appealed against the decision of the court of first instance. The appellate court approached the CJEU with a question for preliminary ruling on the compatibility of Coty’s contractual terms with competition law.
The CJEU based its decision [Judgment C‑230/16 of 6 December 2017] on the opinion of the Advocate General Nils Wahl [Opinion of the Advocate General in Case C‑230/16 delivered on 26/07/2017] who emphasised that competition is protected not only in terms of price but also other factors such as preserving a specialised sales network. This is particularly the case of high-quality or high-tech products. Selective distribution systems enable a more efficient product distribution, promote the development and preservation of brand images and spur competition among producers of branded goods owing to more efficient distribution of products.
The CJEU considered whether selective distribution systems focused on preserving the luxurious image of products are covered by the prohibition of anti-competitive agreements stipulated in Art. 101(1) TFEU. Referring to constant case law, the CJEU stressed that selective distribution systems did not have to fall within the scope of the ban of anti-competition agreements in general, provided three conditions were met.
First, a selective distribution system is required by properties of products in order to preserve their quality and ensure their proper use.
Second, producers have to be selected based on objective qualitative criteria applied to all producers in a uniform and anti-discriminatory manner.
The last condition is proportionality of the given criteria, i.e. such criteria should not go beyond what is necessary to achieve the objective pursued.
If all conditions are met a selective distribution system may be necessary in the case of high-quality or luxury products for preserving specialised shops and specific services.
It will be up to the national court to assess whether in the present case the aforementioned conditions were met. In this context the CJEU reminded that the quality of luxury products is not given only by their material characteristics, but also by their prestigious nature and image which give them aura of luxury. Therefore, an impairment of that aura of luxury is likely to affect the actual quality of those goods.
Similarly as the Advocate General, the CJEU stated that the judgment in Pierre Fabre Dermo-Cosmétique is not applicable on the case at hand. Pierre Fabre imposed a duty on sellers to have a pharmacist always present during the sale of its products. In this way it de facto completely ruled out the possibility of online sales. However, in general the judgment did not concern the selective distribution system and its compatibility with Art. 101(1) TFEU. The clause in the contract which de facto absolutely banned internet sales of the products could not have been justified by the necessity to preserve the prestige image of the products. However, this does not mean that selective distribution systems focused on preserving the luxury image of a product should automatically fall within the ban on anticompetitive agreements pursuant to Art. 101(1) TFEU.
The CJEU commented also on the very ban on discernible use of third-party platforms for the online sale of products imposed on sellers under the selective distribution system from the perspective of its compatibility with Art. 101(1) TFEU. According to the CJEU such ban may be justified in relation to the distribution of luxury products. In the absence of such ban producers of luxury products would no longer have any guarantee that their products will be exclusively associated with authorised distributors and, consequently, that the qualitative criteria agreed with these distributors will be adhered to. Thus, the CJEU concluded that this ban may be excluded from the scope of Art. 101 TFEU, as it may support the luxury image of the products and consequently competition on the basis of qualitative criteria. It is up to the national court to verify that in the present case the conditions for the use of a selective distribution system were met.
However, with this reservation, the CJEU finds the obligation imposed by Coty admissible, as the purpose of the clause was to provide protection to the prestige and luxury image of Coty products. The clause was applied to all approved distributors uniformly and in a non-discriminatory fashion. Moreover, according to the CJEU the ban is also reasonable and does not go beyond what is necessary to preserve the luxury image of products. As a matter of fact there is no contractual relationship between the manufacturer and third-party platforms, which would allow the manufacturer to require from the platforms to adhere to the same qualitative criteria as the authorised distributors. A manufacturer that cannot verify the conditions under which its products are sold is exposed to the risk that the online presentation of its products will be threatened which could adversely affect their luxury nature. CJEU primarily focused on the question, whether conditions for establishing a selective distribution system were fulfilled (with the final consideration of this question being left up to the national court) and the luxury nature of the products as such. In this connection the Advocate General went even further by concluding that the disputed clause at the same time allowed providing protection against such phenomena as counterfeiting and freeriding which may lead to restriction of competition themselves.
In the opinion of the CJEU the main difference as compared with the situation dealt with in the judgment in Pierre Fabre is that as a consequence of Coty’s conduct an absolute ban on internet sales was not imposed on the distributors, as they were still able to pursue online sales via their own e-shops or via third-party platforms but not in a discernible way. According to the CJEU the ban imposed on distributors under Coty’s selective distribution system does not even constitute a substantial restriction of internet sales, at least with the present state of development of e-commerce. In reaching this conclusion the CJEU similarly as the Advocate General Wahl relies primarily on the results of the Commission’s e-commerce sector inquiry. The conclusions made by the Commission indicate that despite growing popularity of third-party platforms, individual distributors’ own internet shops still remain the most popular distribution channel for sales over the Internet. Thus, platforms such as amazon or eBay are currently not a necessary distribution channel, and therefore the ban imposed by Coty does not go beyond what is necessary to preserve the luxury nature of the products.
In conclusion, the CJEU also commented on the question of whether Coty’s restriction of online sales by distributors can be regarded as a restriction of customer group or passive sales to end-users forming a part of “hard-core restrictions” within the meaning of a block exemption for vertical agreements [Commission Regulation No 330/2010 of 20 April 2010]. In this connection the CJEU concluded that in the case at hand Coty’s ban cannot be interpreted as a restriction of the customer group or as a restriction of passive sales. This is, among others, due to the fact that it is not possible to define a priori to which customer group third-party platforms correspond. The clause does not exclude online sales as such but only one of many methods of approaching customers over the Internet.
COMMENTARY ON PRACTICAL REPERCUSSIONS OF THE JUDGMENT
The CJEU judgment is undoubtedly an important milestone for the selective distribution system participants selling products online, in particular for their producers. They can now restrict the sales of their luxury goods via third-party online platforms.
However, it should be noted that the conclusions of this judgment will not apply unconditionally or in general. First of all, such ban is conceivable only in relation to goods which deserve special treatment, for example because of their luxury character. It will be necessary to consider the restriction of sales via online platforms also with regard to the present state of development of e‑commerce for a particular product in a particular country. If the sales of a particular product via third-party online platforms become the prevailing or almost exclusive distribution method, their restriction may equal to restriction of internet sales which falls within the prohibition imposed by Art. 101(1) TFEU. Therefore we recommend to manufacturers and importers to analyse the applicability of the conclusions contained in the judgment in the case Coty to their own situation in relation to a particular product and territory on which it should be distributed.