The European Court of Justice allows bans on online platform sales within selective distribution systems for luxury products

On 6 December 2017, the European Court of Justice ruled that producers of luxury products can legitimately prohibit their authorized resellers, in a selective distribution system, from selling via online platforms.

There can be little doubt that this decision will have significant effects on the structure of distribution networks in the luxury goods sector. The importance can be clearly seen from the findings of the Commission in the e-commerce sector[1] which reported the ever-growing recourse of retailers to online trade via market platforms in this industry.

What is more difficult to determine is if the Decision will have effects on the wider EU regime on vertical agreements. An opening seems to have been created. Whilst the impact on the luxury industry would be enough to say that Coty is a landmark judgement, the potential that lies in this opening, considering the traditional rigid stance of EU antitrust in the field of vertical restraints, suggests much more: the debate has already started on how wide the opening is.

1. Background

The reference to the European Court arose in the context of the dispute between Coty Germany GmbH (“Coty”), a supplier of cosmetic luxury products,[2] and one of its authorized retailers in Germany (Parfümerie Akzente GmbH). At issue was the provision in the distribution agreement that, with the express purpose of preserving the luxury image of the brands supplied by Coty, prohibited the retailer from any online sales on marketplaces, irrespective of whether the sales platforms met the same quality criteria imposed in relation to online sales by authorized distributors (i.e. via their own websites).

On the basis of this contractual prohibition, Coty brought an action asking the court to stop the retailer from selling its products on the platform. The first instance judge rejected the claim on the ground that a prohibition of sales by means of marketplace platforms constitutes a restriction of competition under Article 101 TFEU.

Coty appealed to the Frankfurt Oberlandesgericht, which in turn requested a preliminary ruling from the European Court of Justice. The questions referred were aimed, in essence, at clarifying whether: (i) the protection of the luxury image of the distributed goods constitutes a legitimate reason to set up a selective distribution system; (ii) the generalized ban on online sells via marketplace platforms violates Article 101 TFEU and represents a restriction of competition ‘by object.’[3]

2. The Opinion of the Advocate General Wahl

The 26 July 2017 Opinion of Advocate General Wahl (“AG”) sided with Coty. The AG addressed the matter by first observing that a selective distribution system for luxury goods directed at preserving the image of the goods falls outside the scope of Article 101(1) TFEU altogether, provided that the three criteria set out by the Court of Justice in Metro[4] are respected. These criteria provide: (a) the traded goods, due to their high quality or technological nature, require a selective distribution system in order to preserve their quality and to ensure that they are correctly used; (b) the resellers shall be appointed on the basis of objective criteria applied uniformly and in a non-discriminatory manner; (c) these criteria shall not go beyond what is necessary.

The main point underlying the AG’s reasoning is the idea that competition can be stimulated not only via price, but also by means of qualitative factors, including, the image of prestige that products can suggest to potential buyers.

On the basis of this argument, the AG stated that the ban on sales via online platforms could be considered legitimate and proportionate. First, such a restriction may increase qualitative competition since it protects the image of prestige of the products. Second, it prevents parasitism by non-authorized retailers that may benefit from the investments and efforts made by the supplier and authorized retailers to promote and preserve the luxury image of the contractual products.

3. The judgment of the ECJ

Following the advice of the AG, the Court of Justice held that:

  • A selective distribution system of luxury products aimed at safeguarding their prestigious image is lawful provided that: (a) the authorized resellers are chosen on the basis of objective and qualitative criteria laid down uniformly for all the potential retailers and not applied in a discriminatory manner; (b) the product in question must require such a distribution system in order to preserve its quality and ensure its correct use; (c) the criteria must not go beyond what it is necessary to achieve the objective pursued;[5]
  • The ban imposed on authorized resellers not to sell its luxury products through online marketplaces is proportionate and adequate to preserve their image of luxury since:
  • It ensures the supplier that the products are exclusively associated to the authorized retailers and thus, it represents a restriction coherent with the specific characteristics of a selective distribution system;
  • The supplier will be able to verify that the goods are sold in an online environment corresponding to the qualitative criteria agreed with its authorized retailers; conversely, the absence of a direct contractual relationship between the supplier and the online platforms does not allow the supplier to require the platforms the fulfillment of the qualitative criteria;
  • The fact that luxury goods are not sold via such platforms, that constitute a sales channel for goods of all kinds, but solely in the online shops of authorized distributors, contributes to that luxury image among consumers and thus to the preservation of one of the main characteristics of the goods sought by consumers.

At the same time, the Court underlined that an absolute ban on online selling, including a ban on trading on the resellers own website, is not, in principle lawful unless based on objective justifications.

4. Implications

The judgment of the Court clearly sets out the basic principle that bans imposed upon retailers (within a selective distribution system aimed at preserving the image and aura of luxury of the contractual goods) to sell via online marketplaces is definitely compatible with antitrust law.

However, the decision leaves unaffected important elements of uncertainty in this field. Since the Court carefully limited its reasoning to the distribution of luxury goods only, future disputes will arise as to whether a distribution agreement is in relation to a “luxury product”, what is the meaning of luxury, the extent of its boundaries and so on.

This will, in particular, be the likely consequence of a restrictive interpretation of the judgment, according to which only if, and to the extent, the luxury nature of the product is ascertained may the antitrust compliance be invoked of a general ban of sales via online marketplaces.

This restrictive approach has already been adopted by the Bundeskartellamt, the national competition authority more proactive in attacking bans on online sales, which recently stated: “the Bundeskartellamt’s decisional practice relates to brand manufacturers outside the luxury industries. Our preliminary view is that such manufacturers have not received carte blanche to impose blanket bans on selling via platforms … At first glance, we see only limited effects on our decisional practice.

A wider reading of the decision, expanding its reasoning outside the luxury field (despite the fact that luxury is undoubtedly the specific object of the Coty judgment) cannot be excluded.

There is a constant tension between the desire of producers to protect their image on one hand, and the implementation by competition authorities of strict standards for the protection of competition and consumer choice on the other side. In the Coty decision the Court is more inclined than usual to give more weight to producer interests. More so, if one considers that at stake are investments and efforts aimed at the creation of such a value as, using the Court’s precise words, “the allure and prestigious image which bestow on [the products] an aura of luxury”. If it is legitimate to prevent consumer from enjoying the advantages of online marketplaces for the purpose of preserving the luxury aura of the products, why should it not be lawful to impose the same ban, for example, in the field of high-technology goods? Or, more generally, in relation to all situations where intensive investments are required?

The old argument (included in the AG’s opinion, but not used by the Court) comes back to centre stage. To what extent should online platforms be able to free ride? Online platforms are the modern version of the discounters of the age of Metro. Should top-quality retailers, who have spent money and effort to promote certain qualities of their products be fatally exposed to the attractiveness, for consumers who have already been able to receive information, make comparison amongst alternative offers etc, of generalist, less supportive resellers, but with lower prices. In the long run, the argument concluded, the best retailers disappear, and consumers suffer.

Is this the economic and logic rationale underlying the Coty case? The question cannot be discarded. What is certain is that different and conflicting applications can be foreseen in different Member States.

The first national decisions will then be of crucial importance in determining the effective scope and relevance of the principles laid down in Coty.