Introduction

On 12 July 2018 the Frankfurt Higher Regional Court ruled on the appeal procedure in Coty (11 U 96/14 (Kart)). The court held that the third-party platform ban agreed by luxury cosmetics manufacturer Coty in the selective distribution agreement with the perfumery Akzente was permissible.

The judgment comes after the European Court of Justice (ECJ) – in an abstract manner – declared third-party platform bans in the selective distribution of luxury goods permissible under competition law.(1) It largely corresponds to the sailing instruction of the ECJ ruling and also contains:

  • further explanations on the admissibility of third-party platform bans; and
  • helpful indications for determining the luxury character of products.

Coty's third-party platform ban

Coty has defended its selective distribution system explicitly by referring to the luxury image and the prestige character of its brands. As regards online sales, Coty Germany's authorised dealers are prohibited from using a different name for their online shops. Such third-party platform bans prohibit dealers from openly engaging third parties and thus prohibit sales via internet marketplaces such as Amazon or eBay.

Selective distribution: Metro criteria

According to the ECJ's so-called Metro case law, the organisation of a purely qualitative selective distribution network does not fall under the cartel prohibition if certain criteria are fulfilled. The selective distribution system is then an element compatible with the competition. To this end:

  • the nature of the product in question requires a selective distribution network (eg, to maintain its quality and ensure its correct use);
  • the selection of resellers must be based on objective qualitative criteria which are uniformly defined and applied indiscriminately to all potential resellers; and
  • the criteria laid down must not go beyond what is necessary.

Legal uncertainty and ECJ referral

The lawsuit between Coty and Akzente was popularised among competition lawyers after the Frankfurt Senate, in its 19 April 2016 decision, had involved the ECJ to clarify several disputed issues relating to:

  • selective distribution;
  • the Metro case law; and
  • third-party platform bans.

The lawfulness of such third-party platform bans has been the subject of numerous discussions and divergent court rulings in recent years. One reason for this was the ECJ's 2011 judgment in Pierre Fabre (C-439/09). At the time, the court had made it clear – with reference to cosmetics – that "the aim of maintaining a prestigious image is not a legitimate aim for restricting competition". The Federal Cartel Office had interpreted this statement as though the preservation of a luxury image could no longer justify selective distribution systems and platform bans as such. This led to considerable uncertainty among luxury and brand manufacturers.

ECJ clarification

Upon referral by the Frankfurt Higher Regional Court, the ECJ has removed this uncertainty with its 6 December 2017 judgment (C-230/16) – at least for luxury goods. The ECJ clarified that a selective distribution system to preserve a luxury image falls outside the scope of Article 101(1) of the Treaty on the Functioning of the European Union.

According to the judgment, a selective distribution system for luxury goods which primarily serves to preserve the luxury image of such goods is lawful when considering the other Metro criteria. The ECJ underscored that the quality of luxury goods is not only the result of their material characteristics, but also of their prestigious image. Any impairment to that image of luxury is thus likely to affect the actual quality of those goods.

The ECJ further held – at least as regards luxury goods – that a third-party platform ban, even if in a specific case it were unnecessary to ensure a certain image, was not a hardcore restriction within the meaning of Articles 4(b) or 4(c) of the Vertical Block Exemption Regulation and can thus be exempted. There, it represents neither a restriction of the customer group nor a restriction of passive sales to end consumers. If the market share of the supplier and its retailers does not exceed 30%, a selective distribution agreement for luxury goods containing a third-party platform ban can thus benefit from the regulation's protection.

ECJ sailing instruction implemented

Since the ECJ had to decide on only the legal questions submitted to it in an abstract manner, the Frankfurt Higher Regional Court still had to decide the legal dispute in concreto based on the ECJ's response. The judgment was in line with the ECJ's sailing instruction – and goes even further.

The Frankfurt Higher Regional Court had left open whether the Metro criteria had been met and whether Article 101(1) of the Treaty on the Functioning of the European Union even applied. According to the court, the Metro criteria were likely to be met. At the same time, however, the court also indicated that there may be constellations in which the third-party platform ban may not be necessary, regardless of its concrete form. In this context, the court noted that it had probably not considered that platform distribution plays a far greater role in Germany than in other EU member states.

Luxury image

The ruling also contained interesting comments on the question of when products have a luxury image: according to the court, the consumer's view is decisive. Only if consumers perceive and value 'luxury' will it be in their interest to protect a product as such. Essentially, a luxury image is not created by itself, but is largely based on the manufacturer's corresponding marketing activities. Marketing measures can equip a product with a connotation appreciated by customers which goes beyond the purely functional meaning of the product and thus creates product differentiation.

Another basis for establishing a luxury image is to place the products in a high-quality market segment, such as using a distinct distribution channel separate from mass-produced goods. In this context, selective distribution constitutes an element that characterises luxury and prestige. Initially, therefore, it is within the decision competence of the brand owner to formulate a luxury image for certain brands and develop this image through appropriate measures.

The Frankfurt Higher Regional Court further stated that the overall luxury image associated with a product line would not be impaired if individual products from such a product line did not meet the high-price criterion.

Third-party platform bans can be exempted

As a result of the Frankfurt Higher Regional Court's decision, the Metro criteria were deemed irrelevant. In any case, the exemption under Article 101(3) of the Treaty on the Functioning of the European Union and the Vertical Block Exemption Regulation applied. The platform ban does not partition markets or customers – it regulates in which form the trader may sell, not to whom it may do so. Therefore, no hardcore restriction exists. This assessment was made by the court without reference to the luxury image and selective distribution. The court opined that third-party platform bans can therefore be easily exempted.

The court's view corresponds with the opinion of the European Commission and contradicts the Federal Cartel Office's first Twitter reaction to the ECJ's Coty ruling. The tweet stated that the ruling had only a limited impact on its practice and that brand manufacturers had not received carte blanche to issue blanket platform bans. A welcome headwind came from the European Commission.

Following the Coty ruling, the European Commission held that there was no need to distinguish between product categories on the question of whether third-party platform bans are hardcore restrictions within the meaning of the Vertical Block Exemption Regulation (Competition Policy Brief 2018-01). Contrastingly, in Asics (KVZ 41/17) the Federal Court of Justice declared that price comparison tools were undoubtedly unlawful.

Hamburg Higher Regional Court judgment

The Hamburg Higher Regional Court also assumes that third-party platform bans are admissible for non-luxury goods. In its 22 March 2018 judgment, the court ruled that a manufacturer of high-quality food supplements, cosmetics, fitness drinks and toiletries with a market-specific image may effectively prohibit the distributors of its qualitative selective distribution system from selling through certain online sales platforms. The judgment ultimately extended the Coty ruling to non-luxury products (for further details please see "Hamburg court extends ECJ's ruling on third-party platform ban to non-luxury goods").

Relevance for branded products without a luxury image

The Frankfurt Higher Regional Court's judgment reflected the ECJ's highly factual guidelines and narrow framework. Regarding the proportionality of the platform ban in relation to the Metro criteria, the court speculated whether, in view of the ECJ's detailed consideration of the facts – including the concrete clause – it was still authorised to make its own assessment that considered additional arguments. The question remained unanswered as the court resolved the case with reference to the Vertical Block Exemption Regulation.

The Frankfurt Higher Regional Court's assessment is particularly useful for determining the distinction between luxury and non-luxury goods. As mentioned, the interplay between the product category in question, the Metro criteria and the Vertical Block Exemption Regulation is not entirely clear: the Federal Cartel Office and the European Commission have expressed different views on this matter.

For further information on this topic please contact Markus Schoner or Denis Schlimpert at CMS by telephone (+49 40 37 63 00) or email (markus.schoener@cms-hs.com or denis.schlimpert@cms-hs.com). The CMS website can be accessed at www.cms-hs.com.

Endnotes

(1) See the following blog article of 6 December 2017.

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