European Court Clarifies Prohibition of Third Party Platform Sales for Luxury Goods
On 6 December 2017, the European Court of Justice (ECJ) issued its judgment on online platform sales bans for luxury goods in selective distribution systems in Coty (C-230/16).
The ECJ ruled that luxury goods manufacturers can block their selective distribution system distributors from selling their products on online third party platforms:
- If the system is primarily designed to preserve the luxury image of certain goods; and
- If its resellers are chosen on the basis of:
- objective criteria
- of a qualitative nature
- that apply uniformly and
- in a non-discriminatory fashion to all resellers and
- do not go beyond what is necessary.
The ECJ’s judgment will be of interest to luxury goods manufacturers with selective distribution systems (which meet the above criteria) that wish to restrict third party platform Internet sales which may harm the online luxury image of their brands.
The judgment follows its 2011 judgment in Pierre Fabre (C-439/09). In that case, the ECJ ruled that a blanket ban on Internet sales in a selective distribution system for cosmetics and personal care products amounted to a by object restriction of competition. By object restrictions by their very nature have such a high potential for negative effects on competition that it is unnecessary to demonstrate any actual or likely anti-competitive effects on the market.
The Coty judgment refers to a 2009 judgment on luxury goods, Copad (C-59/08). In that case the ECJ found that the setting up of a selective distribution system which aims to ensure that the contract goods are presented in a manner that enhances their value, contributes to the reputation of the goods and sustains the aura of luxury surrounding them.
Coty allows its products to be sold through its authorised distributor’s own website (which preserves the luxury image), and through unauthorised third party platforms which the customer cannot identify as being third party. Its products may not be sold through third party online platforms which operate “in a discernible manner towards consumers.” In practice, this means that the distributors cannot use online platforms where customers would be able to tell that the products were being sold on a third party website. Coty’s distributor sold Coty products both through its own website and an online third party marketplace, which Coty objected to.
In Coty, the ECJ concludes that the ban imposed by Coty is not an absolute prohibition, as was the case in Pierre Fabre. The ECJ finds that the sale of luxury goods via online platforms which do not belong to the selective distribution system involves a risk of deterioration of the online presentation which is liable to harm their luxury image and their very character. The ban allows Coty to check that its goods are sold online in an environment that corresponds to the quality-based conditions it has agreed to with the authorised distributors. It cannot impose quality criteria on a platform with which it does not have a contractual relationship. Finally, the fact that luxury goods are not sold online via third party platforms reinforces their luxury image. The ban therefore does not go beyond what is necessary for the aim of preserving the luxury image and the prohibition on discernible third party platforms appears to be lawful.
Finally, the ECJ concludes that a ban such as that imposed by Coty is not a hardcore restriction of competition. Although it restricts a certain kind of Internet sale, it does not restrict the distributors’ customers from buying the products or restrict the distributor from making passive sales to end users of the products.
The Coty judgment is interesting for a number of reasons.
- It confirms that luxury goods manufacturers with selective distribution systems are in a special position regarding restrictions on internet sales through online platforms. The Advocate General – a legal officer tasked with offering an impartial Opinion on each case before the ECJ – in Coty advocated a wider approach not restricted to luxury goods.
- In its final report on the E-commerce Sector Inquiry in May 2017, the European Commission found that the inquiry did “not show that absolute marketplace bans generally amount to a de facto prohibition to sell online. Marketplace bans should not therefore be equated to a de facto prohibition to sell via the internet.” The Commission did not limit this to luxury goods, suggesting that, combined with the Advocate General’s Opinion, a future widening of the application of the ECJ’s judgment may be possible.
- The Coty case is the first in which the ECJ refers to the Commission’s E-commerce Sector Inquiry. The Inquiry found that 90% of the distributors surveyed operate their own online shop and that it is their main distribution channel, despite the increasing importance of third party platforms. The ECJ finds that this supports its conclusion that Coty’s prohibition does not go beyond what is necessary to protect its brand.
- The ECJ has not defined “luxury goods”, leaving open the possibility of further debate on this issue. In Copad, the ECJ referred to them as “high-class goods” and stated that “the aura of luxury emanating from them is essential in that it enables consumers to distinguish them from similar goods.” However, it remains to be seen whether this is enough guidance.
- The judgment could affect the Commission’s ongoing investigations into potential online sales restrictions by certain brands, e.g., Nike’s Barcelona football club merchandise. This will depend on the nature of the alleged infringements and whether these brands operate selective distribution systems, or whether the ECJ’s reasoning could be extended beyond these systems. Of note is a recent judgment by the Amsterdam District Court in the Netherlands, which ruled that Nike’s restriction preventing distributors in its selective distribution system from selling via unauthorised online platforms did not restrict competition because it aimed to preserve the luxury image of its products.
- Coty may have an effect on national competition authority investigations. The head of the German competition authority (FCO) has stated that he sees only limited effects on the FCO’s decisional practice which “relates to brand manufacturers outside the luxury industries.” In particular, the FCO has previously pressured ASICS and adidas – both have selective distribution systems – into changing their business practices regarding sales by distributors through online third party platforms. However, the primacy of EU law means that EU law takes precedence over national law. The ECJ’s judgment means that the FCO may have to change its stance on online third party platform sales bans for luxury goods when it applies EU competition law to these bans in Germany.