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Online marketplace distribution can be restricted by luxury brands according to a groundbreaking decision of the European Court of Justice.
This article is based on an interesting comment from my competition law colleagues on the decision of the European Court of Justice (ECJ) relating to Coty Germany.
What had happened?
The case related to a contractual clause in the selective distribution agreements entered into between Coty Germany, a supplier of luxury cosmetics, and the retailers that were admitted to its selective distribution system. This contractual clause allowed the authorised retailers to offer and sell Coty’s products on the Internet, provided, however, that that their Internet sales activities were conducted through an
“electronic shop window” of the authorised retailer and provided that the luxury character of the products was preserved.
The use of a different business name and also the recognisable engagement of a third-party undertaking which is not itself an authorised retailer of Coty Germany, were expressly prohibited.
Based on this contractual clause, Coty Germany sought to prohibit one of its authorised retailers to sell products on the website amazon.de.
Luxury brands have an interest in preserving the image of their goods
The ECJ held that the quality of luxury goods is not just the result of their material characteristics, but also of the allure and prestigious image which bestows on them an aura of luxury. The characteristics and conditions of a selective distribution system can, in themselves, be beneficial to preserving the quality of such goods.
This justifies the use of a selective distribution system to ensure that the goods are displayed in sales outlets in a manner that contributes to the reputation of the goods at issue and that enhances their value, provided that the quality criteria should be determined uniformly for all and applied in a non-discriminatory manner to all potential resellers and should not go beyond what is necessary.
In this respect, the Court held that the brand owner has an interest in ensuring that its products do not get associated with non-authorized third parties. Also, the absence of a contractual link between the brand owner and third-party platform providers makes it difficult for the brand owner to ensure that the third-party provider observes the same quality conditions as are imposed on authorized retailers. Sales via discernible, non-authorized third-party platforms therefore pose a risk of deterioration of the online presentation of the goods, which may harm their luxury image and thus their very character.
It is possible to restrict online sales by luxury brands
The Court observed that the European Commission’s recent E-commerce Sector Inquiry conformed that even if the importance of third-party platforms in the marketing of goods is increasing, the main on-line channel for distributors is still their own online shops. As the restrictions applied by Coty Germany did not restrict this possibility and also allowed online advertising and the use of online search engines, the Court considered that these restrictions are proportionate to the goal they serve.
On the basis of these considerations, the Court held that selective distribution systems relating to the distribution of luxury goods, that are mainly intended to preserve the “luxury image” of those goods, are compatible with European competition law, provided the above-mentioned conditions are met. On this basis, the Court deemed the contractual clause agreed by Coty Germany compliant with European competition law.
However, the above restriction cannot be interpreted as a restriction “hardcore” or “by object“ that applies also to customers to which distributors can sell or passive sales to end users.
What can luxury brands do now?
An interesting opportunity for luxury brands that in their distribution agreements had not introduced restrictions to online distribution with reference in particular to online marketplace distribution is to renegotiate agreements in order to obtain better protections.
This is particularly relevant since as long as market shares remain below 30%, such a restriction will benefit from the safe harbour provided by the EU Block Exemption for Vertical Agreements. On the contrary, outside the scope of the block exemption, it would have to be established that the ban on the use of third party online platforms has an actual restrictive effect on competition.
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