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Selective Distribution Systems and Bans on Sales of Luxury Products via Online Market Platforms: Initial Thoughts on the CJEU’s Coty Judgment

The Court of Justice of the European Union (CJEU) confirmed in a short judgement of 6 December 2017 that a prohibition imposed on authorized distributors from using third party platforms for the sale of their luxury products is in line with European competition law provided certain conditions are met. This judgment also ends an ongoing debate and confirms that selective distribution systems are indeed permissible if they are used to preserve and enhance the luxury image of a product. This outcome is not surprising to those familiar with the Court’s case law and is welcomed by companies running selective distribution networks to market their luxury products. However, the judgement is specific to the facts at hand and bans relating to online platforms will have to be reviewed on the basis of the merits of each case and of the products concerned.

The facts

Coty Germany is a leading supplier of luxury cosmetics and sells certain brands over a selective distribution network. Parfuermie Akzente has been an authorized distributor of Coty brands and have sold Coty products through brick and mortar shops, its own online shop as well as via third party online platforms. Coty’s internet policy provided that

the authorized retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorized’.

These provisions were supplemented by rules providing that

            ‘the authorised retailer is entitled to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an “electronic shop window” of the authorised store and the luxury character of the products is preserved’.

The new rules prohibit the use of a different business name and also the recognisable engagement of a third-party undertaking which is not an authorised retailer of Coty Prestige. A footnote to that clause states that

            ‘accordingly, the authorized retailer is prohibited from collaborating with third parties if such collaboration is directed at the operation of the website and is effected in a manner that is discernible to the public’.

Selective distribution systems compatible with EU competition law

It is settled case law that selective distribution systems which are based on objective, qualitative criteria, which are proportionate and applied uniformly and in a non-discriminatory way do not breach the anticompetitive agreements prohibition provided that the product in question necessitates such network in order to preserve the quality and ensure its proper use.

With regard to the use of selective distribution of luxury goods the Court confirms that a system that is established with the purpose of preserving the luxury image of a product is compatible with competition law.

The Court makes explicit reference to its judgment in Pierre Fabre Dermo-Cosmetique and clarifies that this case did not establish a ”principle by which the preservation of a luxury image of a good can no longer be such as to justify the use of a selective distribution system”. In that case the Court had to deal with an absolute ban on online sales which was held not to be proportionate to achieve the preservation of the prestigious image of cosmetic and body hygiene goods.

Prohibition of third-party online sales platforms in selective distribution

Online sales restrictions have been in the spotlight for some time and there has been considerable divergence of views in relation to restrictions on sales via third party platform across the EU. This case concerns restrictions relating to luxury products (see further below) and its wider application will have to be assessed carefully. The Court in its judgment makes clear that a clause such in that case amounting to a prohibition on authorized distributors to use in a discernible manner, third party platforms for internet sales of luxury products is permissible provided that three conditions are met:

  1. The clause has objective of preserving the luxury image of the goods in question,

  2. is applied in a uniform and non-discriminatory manner, and

  3. is proportionate.

As the judgment is a preliminary ruling in which the CJEU answers questions on law submitted by a referring national court, it will be for the referring court in Germany to apply the CJEU’s guidance to the facts of the case. However, the CJEU does conclude that the clause appears to be lawful.

Luxury goods

The Court held that in order to determine the luxury quality of a product not only material characteristics but also its allure and prestigious image are relevant. This is a helpful clarification and assist the self-assessment of companies. While this may be limited to truly prestigious products, like luxury cosmetics in the case at hand, the question will be what other goods fall within this category. Might a sufficiently high price tag itself justify inclusion? The German competition authority has openly expressed concerns of a wide interpretation of this requirement and has for long considered platform bans problematic and it can be expected that the last word on what luxury products mean has not been spoken.

No customer or passive sales restriction

When concluding that the selective distribution network did not contain so-called hard-core restrictions it followed the Opinion by Advocate General Wahl. He concluded that restrictions as the ones imposed by Coty were closer to methods by which the products can be sold (paras 137, 138 of his Opinion). In his view Coty was not restricting online sales per se, i.e. was not imposing a passive sales restriction in that regard, rather, it was determining the way in which products were sold over the internet. This affected only one of a number of ways Coty’s products could be sold over the internet and did not amount to market portioning or allocating customers. In addition, as authorized distributors were free to advertise via the internet on third-party platforms and to use search engines customers were able to find the online offer of authorized distributor using such search engines.

Wider implications

The question will be whether parts of the judgment dealing with luxury products can be applied to other categories of products sold through selective distribution systems, i.e. products that require quality control and protection of their image? Some of the findings may well apply more widely, in particular those relating to hard-core restrictions and proportionality.

The court states that the absence of a contractual relationship between the manufacturer and the third party platform is increasing the risk that the manufacturer is unable to effectively enforce and “check the conditions” in which goods are sold. The Court finds that the contractual obligation on the distributor to ensure compliance is not sufficient to attain the defined objective.

Further, the Court finds that third party platforms are a sale channel for “goods of all kind” and concludes that goods that are not typically sold on those platforms or have a distinctive character suggests that sales over dedicated internet sides of the distributor may help the preservation of their status.

Finally, the Court finds that absent an absolute ban on online sales and with distributors being free to sell over their own online shops, a third party platform restriction does not go beyond what is necessary to attain the objective of preserving the luxury image of a good.

Overall this judgement clarifies the law on selective distribution of luxury products across the EU. How this judgement will be applied by national courts and competition authorities, in particular to products that do not squarely fall within the definition of luxury, however, will have to be seen.

Copyright © 2017, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Oliver Heinisch, Sheppard Mullin, Antitrust Regulation Lawyer, Fair International Competition Attorney,
Partner

Oliver Heinisch is a partner in the Antitrust and Competition Practice Group in the firm's London office.

Mr. Heinisch advises on all areas of EU, UK and German competition law with a focus on international cartel and abuse of dominance procedures including related antitrust litigation matters as well as merger control law. He has substantial expertise in advising on the interface between intellectual property and competition law mainly in the context of complaint cases, investigations of competition authorities and intellectual property...

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