Luxury brands: The tale of selective distribution systems and online platform restrictions
In the much awaited Coty preliminary ruling, the European Court of Justice (the "ECJ") has confirmed that, subject to certain conditions, luxury goods manufacturers can employ selective distribution systems to preserve the luxury image of their products and can prohibit their authorised distributors from utilising third-party online sales platforms.
Background to the ECJ Ruling
There have been diverging views across Member States' courts and competition authorities and some controversy as to the compatibility of some selective distribution arrangements with EU competition law and, in particular, the restrictions on certain forms of online selling. Luxury brands will welcome the recent ruling as giving them greater legal certainty and consistency for their operations across the EU. However, there is already debate as to whether the ruling only applies to luxury goods and, indeed, what constitutes luxury goods.
The preliminary ruling was sought by the German courts following a dispute between Coty Germany, which sells luxury cosmetics in Germany, and one of its authorised distributors under its selective distribution system, Parfümerie Akzente, which sells these products both in its brick-and-mortar stores and online.
Coty's selective distribution system sets out various requirements in relation to the environment, décor and furnishings of its authorised distributors' sales locations. Online sales are permitted, provided that this online activity takes place through "an electronic shop window" of the authorised store and "the luxury character of the products is preserved". However, the use of a different business name and the recognisable engagement of a non-authorised third party are prohibited.
Coty brought legal action against Parfümerie Akzente for selling its products via 'amazon.de'. The German court had dismissed the case on the basis that the marketplace restriction was unlawful under German competition law and under Article 101(1) of the TFEU. Coty then appealed and the German court sought a preliminary ruling from the ECJ.
Validity of Selective Distribution Systems:
The ECJ had been asked whether, and to what extent, selective distribution systems relating to luxury and prestige products and designed mainly to preserve these products' 'luxury image' are compatible with Article 101(1), i.e. do not infringe the prohibition on anti-competitive agreements and arrangements.
The ECJ reconfirmed that Article 101(1) does not prohibit a selective distribution system, provided that:
- resellers are chosen on the basis of objective criteria:
- of a qualitative nature;
- laid down uniformly for all potential resellers;
- and not applied in a discriminatory manner;
- the characteristics of the relevant product necessitates such a network to preserve its quality and ensure its proper use;
- and the criteria do not go beyond what is necessary.
The ECJ also highlighted that the quality of luxury goods arises from not only their material characteristics, but also from their allure and prestigious image and that this "aura of luxury" is essential for consumers to be able to distinguish these goods from similar products. Thus, luxury products, given their characteristics and nature, may require a selective distribution system in order to preserve their quality and to ensure their proper use.
Consequently, the ECJ held that, provided the conditions set out above are met: "A selective distribution system designed, primarily, to preserve the luxury image of those goods is therefore compatible with Article 101(1) TFEU".
The Prohibition on Using Market Platforms:
The ECJ was asked to consider the legality under Article 101(1) TFEU of a prohibition on authorised distributors, under a selective distribution system designed to preserve the luxury image of the relevant products, from "using, in a discernible manner, third-party platforms for the online sale of the contract goods".
The ECJ reiterated that a selective distribution system was justified to preserve the products' luxury image and confirmed that a specific contractual provision designed to preserve the luxury image of these goods was compatible with Article 101(1), provided that the criteria set out above were met. Although the ECJ held that it was for the referring German court to determine whether the criteria were met, it did make a number of observations and points of interpretation.
The ECJ pointed to the fact that it was common ground that the third-party platform prohibition had the objective of preserving the luxury and prestige of the relevant products and that the German court had viewed the restrictive clause to be objective, uniform and applied without discrimination to all authorised distributors. The remaining questions for the referring court to determine were, therefore, whether the prohibition was proportionate to the legitimate objective and did not go beyond what was necessary.
The ECJ observed that restricting the authorised distributors to only selling online through their own online shops and not via third-party platforms or marketplaces ensures that the products are exclusively associated with the authorised distributors and that the supplier can check that its products will be sold online in a way which meets the qualitative criteria. It noted that the supplier does not have a contractual link with the third-party platforms to ensure that they comply with the requirements and protect the luxury image. The ECJ also noted that the fact that luxury products are not sold via these platforms, but only via authorised distributors' own websites, also contributes to preserving the luxury image.
The ECJ highlighted that the restriction did not impose an absolute ban on online sales. It also noted that the European Commission, as part of its e-commerce sector inquiry, had established that, although third-party platforms are becoming increasingly important for marketing distributors' goods, their main online distribution channel remains their own online shops. In the absence of a contractual link between the supplier and these platforms, the ECJ did not consider a restriction on using such platforms, if they did not comply with the selective distribution criteria, as affording as effective protection.
Thus, the ECJ has given the referring court a clear steer that it considered the restriction satisfied the conditions so as to be compatible with Article 101(1).
Hard Core Restriction:
The ECJ was also asked to consider, if the market platform prohibition did fall within the Article 101(1) prohibition, whether it constituted a hard core restriction which would take the arrangement outside the benefit of the exemption and safe harbour offered by the Vertical Restraints Block Exemption. The ECJ confirmed that it did not constitute such a restriction.
As mentioned above, this judgment does provide some clarity for luxury brand suppliers, but it also does not give them carte blanche to impose any restrictions on their authorised distributors.
It does leave open the question of what constitutes a luxury product and potentially whether selective distribution arrangements for other products, which fall short of any luxury threshold, will be treated differently. There was some focus on the European Commission's findings that the use of online platforms is far less prevalent than distributors' own online shops. However, these finding also indicated that their importance is increasing and varies considerably across Member States. For example, Germany has the highest usage of such platforms and this raises the question of whether this leaves some room for differing national approaches.