On 6 December 2017, the ECJ rendered the much anticipated judgment in the Coty case. The judgement particularly provides clarification with regard to the question of whether or not a supplier of luxury goods is allowed to prohibit authorised retailers from selling its products via third-party branded online platforms such as Amazon or eBay. According to the court, in the context of a selective distribution system, a ban of online sales of luxury products via third-party branded platforms is competition law compliant subject to specific conditions. The judgment, however, is case specific and no carte blanche. Online sales prohibitions relating to third-party branded platforms remain to be reviewed on the basis of the merits of each case and of the specific products concerned.
What is it all about?
Coty is one of Germany’s leading suppliers of luxury cosmetics. It sells some of its products by way of a selective distribution network, in particular authorised distributors. The latter must meet a number of requirements when selling Coty’s products, be it offline or via the internet.
With regard to online sales, Coty introduced in 2012 a provision in its distribution contracts according to which the retailer’s online shop shall appear as an „electronic shop window” of the authorised shop, thereby preserving the luxury character of its goods. Furthermore, a supplemental agreement on internet sales provided that “the authorised retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorised”, i.e. a clause that explicitly prohibits the use of third-party branded platforms such as Amazon or eBay.
Parfümerie Akzente, one of Coty’s authorised retailers for many years, sold Coty’s products both in its brick and mortar locations as well as online. Notably, it has sold Coty’s products both via its own online store and via Amazon. In response to Parfümerie Akzente’s refusal to agree on the above mentioned supplemental agreement, Coty brought an action before the German courts seeking an order prohibiting Parfümerie Akzente from distributing its products via Amazon.
It is in this context that the Regional Supreme Court of Frankfurt am Main, Germany, requested a preliminary ruling from the Court of Justice of the European Union (ECJ) in order to determine whether a restriction of sales via third-party branded online platforms as implemented by Coty is compatible with the competition law of the European Union.
The judgment in brief
The ECJ’s judgment in the case C-230/16 Coty Germany v Parfümerie Akzente followed the argumentative lines drawn by Advocate General Nils Wahl in his non-binding opinion of 26 June 2017 (see MLL-News of 31 August 2017).
The following three statements of the ECJ are central:
Firstly, the ECJ held that that Article 101(1) of the Treaty on the Functioning of the European Union (TFEU), which inter alia prohibits anti-competitive vertical agreements, must be interpreted as meaning that a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods complies with that provision to the extent that, additionally, the Metro I criteria as introduced by the ECJ in the case C-26/76 Metro I are met, i.e. the authorised distributors are chosen on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential distributors and applied in a non-discriminatory fashion and that the criteria laid down do not go beyond what is necessary.
With reference to its Copad v Dior judgment, the ECJ particularly reiterated that the quality of luxury goods is not just the result of their material characteristics, but also of the allure and prestigious image which bestow on them an aura of luxury, that this aura is essential in order to enable consumers to distinguish them from similar goods and, therefore, that an impairment to that aura of luxury is likely to affect the actual quality of those goods.
Secondly, the ECJ held that, within a qualitative selective distribution network, a ban of sales of luxury products via third-party branded online platforms in principle does not restrict competition subject to specific conditions, i.e. that such ban has the objective of preserving the prestigious image of the specific luxury goods, that it is laid down uniformly and not applied in a discriminatory fashion, and that it is proportionate in the light of the objective pursued.
With regard to the ECJ’s Pierre Fabre judgment and in particular to its much debated paragraph 46, the ECJ clarified that this decision must be read against its specific case facts, i.e. the de facto ban of all online sales possibilities which will still be unlawful under Article 101(1) TFEU unless it can be justified for economic efficiency reasons (see MLL-News of 17 October 2011, in German). The Pierre Fabre ruling may therefore not be construed in a way that every single restriction of online sales does necessarily fall under the prohibition of agreements according to Article 101(1) TFEU.
Thirdly, the ECJ ruled that a ban of sales of luxury products via third-party branded online platforms does not constitute a hardcore restriction under Article 4 of Vertical Block Exemption Regulation (VBER) of the European Union. Concretely, the ECJ ruled that Article 4 VBER must be interpreted as meaning that, in circumstances such as those at issue in the Coty proceeding, the prohibition of sales of luxury products via third-party branded online platforms imposed on the retailers of a selective distribution system for luxury goods does neither constitute a restriction of customers, within the meaning of Article 4(b) VBER, or a restriction of passive sales to end users, within the meaning of Article 4(c) VBER. In case the VBER’s market share thresholds are not exceeded, such a ban would, in principle, be block exempted or would otherwise require an effects analysis case by case.
No carte blanche!
The Coty judgment puts an end to the ambiguous case law by national competition authorities in the European Union with regard to the assessment of online platform bans under EU competition law.
Owners of luxury brands will welcome the Coty judgment. However, it is no carte blanche for any product manufacturer. An important point that remains to be discussed lies in what may qualify as a ”luxury” product. In that regard, luxury brand owners that wish to benefit from the Coty judgment are well advised to maintain a coherent story with regard to their product’s allure and prestigious image which bestows them an aura of luxury as well as to invest in the objective of preserving such luxurious image.
It is to be expected that the Swiss Competition Commission and appellate courts will take the ECJ’s judgment in that matter into consideration for its own decision-making. Therefore, the ECJ’s decision in the case at hand will also have a relevant impact on Swiss competition law.