Brand Owners Can Restrict Online Sales To Preserve Luxury Image, says ECJ
The European Court of Justice (“ECJ”) has provided an interesting decision in the recent case of Coty Germany GmbH (“Coty”) v Parfümerie Akzente GmbH (“Parfümerie Akzente”). The case confirms that luxury manufacturers can restrict sales of their products via online marketplaces, in order to preserve the luxury image of the goods.
The Relevant Law
The case comes as a result of a request by the Higher Regional Court of Frankfurt, to the ECJ, for a preliminary ruling regarding the interpretation of Article 101(1) of theTreaty on the Functioning of the European Union (“Article 101(1)”) and Article 4(b) and (c) of Commission Regulation (EU) No 330/2010 (the “VABE”).
Article 101(1) states that:
The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market.”
Article 2 of the VABE contains a block exemption for Article 101(1) and applies to vertical agreements between parties, which satisfy certain market share thresholds and do not contain hardcore restrictions. Article 4(b) (restriction of the territory or customers into which the distributor may sell the goods or services) and Article 4(c) (restriction of active or passive sales) of the VABE are hardcore restrictions which remove the benefit of the block exemption.
Coty sells luxury cosmetics and operates via a selective distribution network of which Parfümerie Akzente has been an authorised distributor for many years. Parfümerie Akzente sells Coty brands over the internet, including sales via its own online store and via third-party platforms.
Following the entry into force of the VABE, Coty revised the selective distribution system contract by providing that authorised retailers were entitled to offer and sell the products on the internet, provided the internet sales were conducted through an “electronic shop window” of the authorised store and the luxury character of the products preserved. Also contained in the revised contract, was a term prohibiting the use of a different business name as well as the recognisable engagement of a third-party undertaking which is not an authorised retailer of Coty.
Parfümerie Akzente refused to sign the amendments to the selective distribution contract and Coty brought an action before the national court of first instance, seeking an order prohibiting Parfümerie Akzente from distributing Coty’s products via an online marketplace.
The national court at first instance took the view that the contractual clauses in question were contrary to Article 101(1) and the objective of preserving a luxury image could not justify the introduction of a selective distribution network which restricted competition. In the view of the court, the clause also constituted a hardcore restriction under Article 4(c) of the VABE.
Subsequently, Coty appealed to the Higher Regional Court of Frankfurt which requested a preliminary ruling on the interpretation of Article 101(1) and the VABE.
The key questions to be answered were:
- Whether selective distribution systems which have as their aim preserving a “luxury image” for goods are compatible with Article 101(1);
- Whether selective distribution systems which prohibit distributors from engaging third-party undertakings, discernible to the public, to handle internet sales is compatible with Article 101(1); and
- Whether a prohibition on engaging third-party undertakings, discernible to the public, to handle internet sales, imposed on members of a selective distribution system, was a hardcore restriction under either Article 4(b) or Article 4(c) of the VABE.
- The ECJ held that a selective distribution system, with an objective of preserving the “luxury image” of goods, complies with Article 101(1) to the extent that distributors are chosen on the basis of objective criteria. The criteria must be laid down uniformly for all potential distributors, be applied in a non-discriminatory fashion and must not go beyond what is necessary.
- The court also determined that a contractual clause which prohibits authorised distributors in a selective distribution system from using, in a discernible manner, third-party platforms for the internet sale of luxury goods, is not contrary to Article 101(1). Provided the clause has the objective of preserving the “luxury image” of those goods, is laid down uniformly, is not applied in a discriminatory fashion and is proportionate in light of the objective pursued, then it is compatible.
- Finally, the court held that a prohibition in a selective distribution system from using, in a discernible manner, third-party platforms for the internet sale of the luxury goods does not constitute a restriction of customers within Article 4(b) of the VABE, or a restriction of passive sales to end users, within the meaning of Article 4(c) of the VABE.
This judgment has consequences for both luxury and non-luxury goods manufacturers. Luxury goods manufacturers will welcome the judgment, as they are now able to operate tighter controls over where their goods are sold online without breaching EU competition law. In terms of non-luxury goods manufacturers, the judgment indicates that banning online sales on certain platforms does not constitute a hardcore restriction for the purposes of the VABE.
In addition to the above, the ECJ did not (unsurprisingly as it was not asked to) define “luxury”. It is therefore left open to interpretation by the national courts, which will inevitably lead to further developments on this area in due course.
The effects of this judgment remain to be seen and it will be interesting to see whether manufacturers move quickly to review their distribution contracts in light of this judgment, in order to give them greater control over how their goods are sold on the internet.
Sam O'Neil wrote this post.