26 January 2018 by Robert Bell
A European court allows luxury manufacturers to restrict where wares are sold
The ability of luxury goods manufacturers to use a selective distribution system and ban their retailers from using online marketplaces, such as eBay and Amazon, was upheld by the Court of Justice of the European Union (CJEU).
Bans of this nature have been a contentious issue in the European Union for some time, with concerns heightened by the EU Commission’s ecommerce inquiry findings last year. This highlighted that between a quarter and a third of all retailers in selective distribution networks in France and Germany were subject to bans not to use these online marketplaces.
At the beginning of December, the landmark judgment in Coty (Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH) helped clarify the law. Luxury goods manufacturers are permitted to ban such sales, subject to certain conditions.
These conditions are that the principal object of the ban is to preserve the luxury image of the goods, that it is applied in a uniform and non-discriminatory way, and that it is no wider than necessary to protect the brand image of the goods in question.
Under the EU competition rules it is settled law that selective distribution systems do not infringe EU competition law – Article 101 of the Treaty for the Functioning of the European Union (TFEU), which prohibits anti-competitive agreements – provided that resellers were chosen on the basis of objective criteria of a qualitative nature.
These criteria should relate to the technical qualifications of the reseller and staff and the suitability of the trading premises. Such conditions should be laid down uniformly for all potential resellers and not applied in a discriminatory fashion.
As a result, most selective distribution systems based on qualitative criteria fall outside Article 101(1) TFEU and are not regarded as restrictive of competition – although the inclusion of certain quantitative terms, such as obligation to purchase a minimum quantity of goods, can infringe.
“National competition authorities and courts in the EU have taken different positions on the use of third-party online marketplaces”
The EU Commission has also introduced a vertical agreements block exemption (VABE) regulation – Commission Regulation 330/2010 – which exempts certain common restrictive agreements, like selective distribution agreements, as long as certain conditions are met.
In particular, they must not include hardcore restrictions of competition, such as restrictions on what customers a retailer may serve (Article 4(b) of the VABE), or a restriction of passive sales to end users (Article 4(c) of the VABE).
If they do the VABE ceases to apply and the agreement or clause must be assessed on an individual basis under the competition rules.
It was generally assumed that a ban on retailers using online marketplaces could be permissible if it was necessary to protect the brand image of the goods concerned. This was corroborated by the EU Commission‘s guidance on the application of the VABE.
As stated in paragraph 54: ‘[A] supplier may require that its distributors use third-party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors’ use of the internet.
‘For instance, where the distributor’s website is hosted by a third-party platform, the supplier may require that customers do not visit the distributor’s website through a site carrying the name or logo of the third-party platform.’
Contrasting the above, in recent years a number of developments have queried this position. The increase in ecommerce has greatly boosted the importance of online channels for retailers.
In particular, online marketplaces were attractive to smaller retailers, which, with limited investments and effort, could become visible and sell products to a large customer base and in multiple member states.
The EU Commission, as supported by the CJEU, has been strict in dealing with blanket restrictions imposed by manufacturers on their retailers selling on the internet, which could constitute serious restrictions of competition.
Furthermore, such restrictions would be regarded as hardcore restrictions and cause the VABE to cease to apply. There was a worry that restriction on retailers using third-party online marketplaces could fall within this definition.
Further complicating things, national competition authorities and courts in the EU have taken different positions on the use of third-party online marketplaces, whether for luxury or non-luxury goods.
“The EU Commission has been strict in dealing with blanket restrictions imposed by manufacturers on their retailers selling on the internet”
In Germany and France authorities have criticised restrictions that exclude third-party marketplaces, emphasizing the need to keep all channels of online distribution available.
In the Netherlands, the courts have been more willing to protect manufacturers’ interests in preserving their brand image through the use of online marketplace restrictions. This is more consistent with the EU Commission’s position under the VABE guidelines.
The recent case concerns Coty Germany, a leading supplier of luxury cosmetic products in Germany. Coty operates a selective distribution network for these products. Under such an agreement it appointed retailer, Parfümerie Akzente to distribute Coty products in its stores as well as online.
However, in March 2012 Coty decided to amend its selective distribution agreement, adding that Parfümerie Akzente was permitted to sell Coty products online so long as such sales were made via an agreed ‘electronic shopfront’ and that the luxury nature of the products was preserved.
In addition it stated that it was forbidden for the authorised retailer to make use of unauthorised third parties for internet sales of the contract goods. Parfümerie Akzente refused to agree to these amendments and Coty brought an action before the regional tribunal of Frankfurt.
At first instance the German tribunal held that the amendment infringed Article 101(1) TFEU, but Coty appealed to the superior regional tribunal of Frankfurt which stayed the proceedings and referred the matter to the CJEU.
The main question before the CJEU was whether it was permissible to ban a retailer from using a third-party online marketplace irrespective of whether the manufacturer’s legitimate quality standards were contravened in the specific case.
Second, the court was asked whether these types of clause would amount to hardcore restrictions under Article 4 of the VABE, meaning the VABE would cease to apply.
In its decision, the court confirmed that a selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not breach Article 101(1)TFEU provided:
Also, that clauses in a selective distribution network with the above characteristics that aim to preserve the luxury image of the contractual products fall outside of Article 101 TFEU.
It distinguished this type of clause from an outright ban on online sales which had been considered and condemned in the prior case of Pierre-Fabre (C-439/09 Pierre Fabre Dermo-Cosmétique SAS judgment of 13 October 2011).
The court in this case concluded that the conditions appeared fulfilled, as the authorised distributors were allowed to sell the contractual products online via an intermediary, as well as on their own internet sites, so long as they were a ‘shop window’ of the authorised seller that satisfies the criteria agreed to preserve the luxury image of the products.
“It was forbidden for the authorised retailer to make use of unauthorised third parties for internet sales of the contract goods”
However, in the final analysis it was for the referring court to verify that the necessary conditions were met.
Even if a ban on the use of online marketplaces restricted competition the court held it would not constitute a hardcore restriction under the VABE. The CJEU observed that the clause in question is not an outright ban on internet sales.
Authorised distributors could advertise using internet intermediaries on approved third-party platforms as well as using search engines, such that consumers almost always found the authorised distributors’ online shop.
This case clarifies two points. Luxury goods manufacturers in a selective distribution system can ban their retailers from using third-party online marketplaces – although one issue still for debate is how widely one defines luxury goods.
Secondly, it clarified that for both luxury and non-luxury goods manufacturers’ bans on online marketplaces are not hardcore restrictions under the VABE. The consequence of that is as long as the market shares of the parties fall below 30% of their respective markets, these bans are likely to be fully enforceable under competition law.
However, confusion is still present for those non-luxury goods manufacturers which cannot take advantage of the VABE (because they are above the 30% threshold). Their attempts to ban retailers from these sites are likely to still be subject to possible enforcement action in many member states as restrictions of competition.