Selective distribution agreements which place restrictions on the sale of luxury brands on third-party platforms are permissible as long as certain conditions are met.
What’s the issue?
Article 101(1) of the Treaty on the Functioning of the European Union (TFEU), prohibits agreements that have as their object or effect the restriction of competition. Member State courts have not always been consistent when interpreting this with respect to online sales. A recurring issue has been the treatment of third-party online platforms (online marketplaces) in the context of selective distribution systems.
Coty, a manufacturer of luxury cosmetic products, had introduced a restriction on the sale of its products on third-party platforms into the terms of its selective distribution system. An amendment to their distribution agreement restricted the sale of products through unauthorised third parties and required each point of sale to be approved by the manufacturer. The agreement permitted online sales but only through agreed “electronic shopfronts” which preserved the luxury nature of the products. Essentially, the agreement was intended to prevent the resale of goods through third-party online platforms.
When one of its authorised distributors in Germany, Parfümerie Akzente, refused to sign the amended distribution contract and started listing Coty’s products on amazon.de, Coty applied to the German courts for an injunction. The German national court made a reference to the CJEU, seeking clarity on whether the restrictions in the distribution agreement constituted an infringement of Article 101(1) of the TFEU.
What’s the development?
On 6 December 2017, CJEU handed down its judgment in the case Coty Germany GmbH v Parfümerie Akzente GmbH (C-230/16), largely following the Opinion of Advocate-General Nils Wahl published on 26 July 2017.
The CJEU held that Article 101(1) TFEU is not infringed where a selective distribution arrangement is designed to preserve the luxury image of goods as long as certain conditions are met. Manufacturers must ensure that participating resellers are chosen on the basis of objective criteria of a qualitative nature laid down uniformly for all potential resellers and are not discriminatory; that the characteristics of the product in question necessitate such an arrangement in order to preserve its quality and ensure proper use; and that the criteria laid down do not go beyond what is necessary.
The CJEU held that restricting the sale of goods via online platforms where goods of all kinds are sold, is a legitimate means of preserving the luxury image of those products and reduces the risk of damage to the brand which might occur if there is a lack of oversight of the way in which the products are sold.
What does this mean for you?
The CJEU’s ruling is significant for luxury brands and online platforms alike. While it is never permissible to restrict online sales fully, the Coty judgment has confirmed that in certain circumstances, it may be possible to restrict certain online sales by the authorised distributors within a selective distribution network.
It is, therefore, permissible to prohibit authorised distributors of luxury goods from selling on third-party platforms (such as Amazon and eBay), as long as the authorised distributors are allowed to sell the products on their own websites. In such a selective distribution system, a third-party marketplace ban is likely to be appropriate and necessary in order to maintain and preserve the luxury aura of the products, an image which is important from a consumer’s point of view.
The position is not as clear for non-luxury products, and it seems that a case-by-case analysis would be required to determine whether a restriction of sales on a third party platform might be anticompetitive. For genuine luxury products, however, as long as the relevant criteria are met, third-party market place bans should be enforceable by suppliers.
It is a well-established principle of EU law that an outright ban on online sales will constitute a “hard-core” infringement of Article 101(1). Such a restriction is one of the most serious breaches of competition law, and may lead to fines of up to 10% of worldwide turnover for the parties involved. However, in this case, Coty was not attempting to introduce a blanket ban on online sales; it was instead seeking to limit the platforms on which its products could be sold, in order to maintain its luxury image. Faced with the dilemma of whether a partial online sales ban should also be deemed to be hard-core, the German court referred the issue to the CJEU.
After careful consideration, the CJEU determined that for luxury goods sold through a selective distribution network, it is not a hard-core infringement of competition law for the supplier to prohibit online sales by its distributors on third-party platforms. The Court’s reasoning was as follows.
It is established law that a supplier is able to require that its distributors adhere to certain criteria in order to be admitted to the selective distribution system. This is provided that: (i) the distributors are chosen on the basis of objective criteria of a qualitative nature laid down uniformly for all potential distributors and not applied in a discriminatory fashion; (ii) the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use; and (iii) the restriction is proportionate in light of the objective pursued, i.e. it is appropriate for preserving the luxury image of the products in question and does not go beyond what is necessary to achieve that objective.
It was common ground in the Coty proceedings that the restriction in question was indeed objective, uniform and applied without discrimination to all authorised distributors, and that it had the objective of preserving the image of luxury and prestige of the products at issue. The Court also determined that the prohibition was proportionate in the circumstances as it was appropriate to preserve the luxury image of the products in question and did not go beyond what is necessary for the attainment of the objective pursued.
When determining whether it was appropriate, first the Court considered that a restriction on the use of third-party platforms provided the supplier with a guarantee that, in the context of electronic commerce, the products would be exclusively associated with the authorised distributors, the effect of which is to preserve the quality and luxury image of those goods. Second, the Court considered that the restriction enabled the operator of the selective distribution system to verify that the products were sold in an environment that corresponded to the qualitative conditions that it had agreed in advance with its authorised distributors.
Interestingly, the Court noted that the absence of a contractual link between the supplier and a third-party platform meant that the supplier could not require the third-party platform to comply with the qualitative conditions imposed on authorised distributors in the network and so there was no guarantee that the goods would be sold in the authorised environment on the third-party sites. Finally, the Court remarked that the fact that luxury products were only sold through the online shops of authorised distributors contributed to the luxury image of a brand among consumers, thereby preserving one of the main characteristics of the products sought by the consumers.
As regards to the question of whether the restriction went beyond what is necessary for the attainment of the objective pursued, the Court remarked that the restriction did not constitute an absolute prohibition on online sales and that the distributors were free to sell the products online via their own websites. The Court also noted that, as is evident from the European Commission’s Final Report on the E-commerce Sector Inquiry, despite the increasing importance of third-party platforms in marketing, over 90% of surveyed distributors operated their own online shop which remained their main distribution channel in the context of online distribution.
Finally, and perhaps most importantly, the Court concluded that, despite restricting a specific kind of internet sale, the prohibition did not restrict the customers to whom authorised distributors could sell the products and it did not restrict passive sales to end users. Therefore, the restriction did not amount to a “hardcore” restriction which would remove the benefit of the Vertical Agreements Block Exemption Regulation in instances where the market share thresholds are met.
The matter will now be referred back to the Munich court.