On Wednesday the 6th December 2017, the European Court of Justice ("the Court") delivered its long-awaited Coty judgment on the ability of brand-owners to restrict dealers selling on market places. The judgment will be welcomed by luxury brand-owners. The Court concluded as follows:
- Luxury brand owners are able to use the protection of the luxury image of their products as the sole justification for implementing a selective distribution system, provided that the criteria imposed for entry into the system are objective, applied uniformly and in a non-discriminatory manner. The court is reasonably firm about the ability to use a selective system as a means to protect a luxury image. This is a welcome departure from some statements to the opposite effect in the Pierre Fabre case and in the more recent Confederation of Watch Repairers (CEAHR) case, and will be a relief for luxury brand owners. Pierre Fabre, a 2011 Court judgment, made some sweeping conclusions that the aim of maintaining a prestigious product image was not a legitimate reason for restricting competition, the effect of which seems to have been softened by this Coty judgment;
- A restriction preventing distributors of luxury products in a selective distribution network from selling on third party online platforms is not a hardcore restriction. As such, it can benefit from the verticals agreement block exemption1. That means authorised distributors can be prevented from selling on Amazon, Ebay and similar platforms, and national competition regulators will not be able to take action against such restrictions (provided the agreement complies with the other requirements of the block exemption). The reasoning behind the judgment would suggest that the principle is of general application, and could apply to any distribution network and any products. However, the judgment itself is limited only to luxury goods in a selective distribution network, and we imagine that this will be a point of debate going forward; and
- Even outside the safety of the block exemption, a supplier may prohibit members of a selective distribution system from selling its products on third party platforms in order to preserve the luxury image of its products – that means luxury brand owners operating a selective distribution system can always limit their distributors to selling online only via the distributors' own websites (provided they ensure the criteria are objective, non-discriminatory and applied uniformly).
This is an important judgment which will be warmly welcomed by owners of luxury brands. What some may consider disappointing is that the Court chose not to adopt the broader stance of the Advocate General ("AG") who had recognised the importance of brands more generally, not just luxury brands. Instead, the court strictly limited the entirety of its judgment to the distribution of luxury brands in a selective system, leaving residual uncertainty for other brand owners. Particularly in the context of the block exemption further analysis is needed whether the judgment and its reasoning is linked in substance to the selective distribution of luxury products or may be applied also to other goods and/or distribution systems. It is also worth noting that the discussion on the definition of "luxury product" remains wide open. That means we can expect further cases in this area going forward.
The background to the Coty case and the precedent cases in Germany
In the context of a dispute between Coty Germany GmbH ("Coty") and its distributor, Parfümerie Akzente GmbH ("Akzente"), the higher regional court in Frankfurt am Main (Oberlandesgericht Frankfurt am Main) referred a series of questions to the Court for a preliminary ruling (Case C-230/16). Coty had tried to impose on Akzente a restriction which required it to sell only via Akzente's own physical stores and website, meaning it could not sell on third party platforms. Akzente refused, arguing that the restriction was anti-competitive, and the dispute ended up in court in Frankfurt am Main.
The referring court asked several questions relating to selective distribution, including on general prohibitions preventing authorised resellers selling on third party platforms.
Those questions arose after a string of high profile cases regarding online platform bans, in which the German competition authority ("BKartA") condemned inter alia online platform bans in the selective distribution networks of well-known brands such as Asics and adidas. In those cases, the BKartA proposed a simple "either-or" solution:
- Either the platform ban was not caught by Article 101 of the Treaty on the Functioning of the EU (which is the prohibition on anticompetitive agreements, or its German equivalent Sec. 1 ARC) because the Metro criteria were met (although these criteria were understood very narrowly), that is if: (1) the properties of the product in question necessitated its distribution by pre-selected ("authorised") retailers only, which in practice was limited to luxury products; (2) such retailers were selected based on objective criteria of qualitative nature; and (3) such qualitative criteria were applied in a non-discriminatory manner, did not go beyond what was necessary to preserve the high quality of the goods in question and were proportionate (Case C-26/76, Metro SB-Großmärkte v Commission);
- Or the platform ban was considered as a non-justifiable "hardcore" restriction of customers and/or sales to end-users. This had two consequences – firstly the whole agreement could not benefit from verticals agreements block exemption and secondly the competition authority would presume that the platform ban had an anti-competitive effect, pushing the burden onto the supplier to prove that it did not.
Advocate General WAHL's opinion
Back in July, AG Wahl's opinion suggested that this either-or approach is too restrictive and took the view that (1) the Metro criteria, which establish when a selective distribution system is justified, should not be limited to luxury products and (2) restrictions of online platform sales may be justified and cannot be considered as a hardcore restriction.
AG Wahl recommended that the Court put an end to the strong tendencies amongst national competition authorities (most notably in Germany) to unduly broaden the reach of hardcore restrictions of competition. He also highlighted the importance of brands generally, and that new forms of internet sales should not necessarily take precedence over brand protection – a position that had become prevalent in Germany particularly. You can read our team's full analysis of the opinion here.
Whilst the Court has followed the AG opinion on the specific questions referred, it did not adopt the same broad stance that AG Wahl had taken on brand protection more generally. The AG opinion and the Commission's e-commerce sector inquiry report do still provide some comfort for those including third party platform restrictions for non-luxury products and products outside selective distribution networks. However, it is likely that this case will not be the final word and that further cases will follow in this area.
Bird & Bird's worldwide competition team is renowned for its work advising on the competition law rules around the international distribution of products. If you have any questions on what the Coty judgment means for you please contact one of the authors below, or your usual Bird & Bird competition team contact.
1 This is the safe harbour which the Commission has put in place to give businesses comfort that their agreements do not infringe competition provided they meet certain conditions