Luxury goods suppliers can prohibit their authorised distributors from selling products on third party e-commerce platforms, such as Amazon and eBay.
In a decision highly favourable to exclusive brand-owners, the Court of Justice of the European Union ("CJEU") has confirmed that such restrictions can be compatible with competition laws under certain circumstances.
The CJEU's finding follows the referral of four questions from the Higher Regional Court of Frankfurt, relating to proceedings between Coty Germany GmbH ("Coty") – a seller of luxury cosmetics in Germany – and its authorised distributor, Parfümerie Akzente GmbH.
Coty markets certain brands through a selective distribution network, required "…in order to support the luxury image of these brands…", according to Coty. To preserve these 'Coty Prestige' brands, Coty imposes requirements relating to sales operated in connection with these brands, including approval of the location of bricks-and-mortar establishments, and prescriptive rules on inter alia décor, cleanliness, and signage.
In relation to e-commerce, Coty requires that authorised distributors operate through an 'electronic shop window' of the authorised store, to preserve the luxury character of the products. Coty also prohibits the use of a different business name, or the recognisable engagement of a third-party undertaking which is not an authorised Coty Prestige retailer.
The Higher Regional Court sought clarification on whether such restrictions in selective distribution networks, which primarily seek to preserve the luxury image of goods, are compatible with Article 101(1) Treaty on the Functioning of the European Union ("TFEU"), and whether in particular brand owners are permitted to prohibit generally distributors from engaging third-party undertakings discernible to the public to handle online sales.
The CJEU issued a reminder that, although selective distribution networks necessarily affect competition in the internal market, they will not be prohibited if:
- resellers are chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly and not applied in a discriminatory fashion
- the characteristics of the product in question necessitate such a network to preserve quality and ensure proper use
- the criteria laid down do not go beyond what is necessary.
The CJEU explained that whether a good is 'luxury' should not be limited to its material or physical characteristics, but can also relate to its allure and prestige, or the aura which enables consumers to distinguish it from similar goods. It also restated that selective distribution networks which seek to ensure that luxury goods are displayed in suitable sales outlets in order to enhance their value can preserve their aura of luxury.
As a result, luxury goods may require the implementation of selective distribution networks designed to preserve the quality of such goods and ensure proper use, and such networks could be compatible with Art.101(1) TFEU, as long as they comply with the above criteria.
When determining whether a product should be classified as 'luxury', it is important to consider, first, the nature of the goods bearing the trade mark, the volumes sold and whether the goods are sold regularly to stores in question that are not part of the selective distribution network, and secondly, the nature of the goods which are normally marketed by such stores as well as the marketing methods generally employed in the sector . Thus, whilst a fine fragrance may be regarded as luxury, it is doubtful as to whether consumer goods bearing globally recognised brands – such as Nike running shoes – will be so classified due to the large sales volumes and potential for discounts with such products.
The CJEU also held that a specific contractual clause designed to preserve the luxury image of the goods at issue – such as that in the Coty proceedings relating to the prohibition on using a different name or engaging unauthorised third parties – would be lawful under Art.101(1) TFEU, provided that the criteria quoted above were met.
Whilst ultimately a decision for the referring court, the CJEU suggested – by way of guidance – that restricting Internet sales to a specific portal was objective and uniform, in that the restriction applied without discrimination to all authorised distributors. The restriction also seeks to provide the supplier with a guarantee from the outset that, in the context of e-commerce, the luxury goods will be associated with the relevant authorised distributor – an aim which supported its objective of preserving the luxury image. The restriction also enabled the supplier to monitor and ensure compliance with its contractual obligations. As a result, the CJEU suggested that the restriction was appropriate and, as the clause only applies to sales by third-party platforms which operate in a discernible manner towards customers, it does not go beyond that which is necessary and proportionate.
However, whilst this decision distinguishes the ruling by the CJEU made in Pierre Fabre Dermo Cosmetique (C-439/09), it remains the case that a contractual clause requiring sales of cosmetics and personal care products to be made in a physical space with a qualified pharmacist present is unjustified, in that it constitutes an absolute prohibition on Internet sales. By contrast, the restrictions in Coty simply restricted the platform on which sales may be made, ensuring that sales are not made via websites which emphasise the branding of third parties, such as Amazon or eBay.
Further, when considering agreements between two or more parties, each of which operates at a different level of the production chain (vertical agreements), parties should have regard to the Vertical Agreements Block Exemption ("VBER") which is contained within Regulation (EU) No. 330/2010. This provides that vertical agreements will be exempt from Article 101(1) TFEU where:
- the primary purpose of the agreement is to purchase, sell or resell goods or services
- the parties enter into a vertical agreement (i.e. distribution / franchising / agency agreement between non-competitors)
- the market share of each of the parties to the agreement does not exceed 30%
- there are no hardcore restrictions in the agreement.
In cases where the VBER does not apply, it will then be for the parties to show that the agreement should not be prohibited in line with the requirements outlined above.
In order to maintain a customer base, luxury goods suppliers must aggressively defend their image. In doing so, it is often necessary to regulate the manner and the environment in which goods are distributed. Clearly, this creates a conflict between brand protection on the one hand, and ensuring sufficient competition through the presence of a multitude of authorised distributors on the other. In the particular market of luxury goods, in which exclusivity is regarded as a symbol of status, the CJEU have determined that brand preservation is king. This decision is favourable to those suppliers who wish to operate a selective distribution network in that it clarifies and qualifies the decision made in Pierre Fabre.
Of course, the ability to regulate a selective distribution network is not unfettered and the CJEU clearly suggests that a selective distribution system and restrictions imposed within it must be consistent with the key aim of preserving brand image and go no further than necessary to achieve that aim. Any restrictions must be applied to all relevant distributors in a non-discriminatory fashion and should be reviewed regularly to ensure they satisfy the above criterion.
Furthermore, distributors operating through third party e-commerce platforms should not be disheartened. The comparatively low up-front costs of domain names and web design should not act as a barrier to entry into luxury distribution, providing that the site meets the criteria required by the relevant selective distribution networks rules. Distributors should simply be aware of suppliers' potential requirements and plan to meet them accordingly, if they want a piece of the pie.