On 26 July 2017, Advocate General (“AG”) Wahl delivered to the Court of Justice of the European Union (“CJEU”) a long-awaited opinion on whether preventing distributors from selling products on online platforms (such as Amazon and eBay) constitutes a breach of European competition law. AG Wahl considers online platform bans in selective distribution networks as an element of competition that may be compatible with Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”) and may even foster competition to the extent that the so-called Metro-criteria are met. This is ground-breaking for two reasons. First, AG Wahl seems to suggest that his reasoning applies not only to “luxury goods” but to branded goods in general. Second, AG Wahl reasons that even if the Metro-criteria are not met in a specific case, platform bans still can benefit from exemption, including under the EU’s Vertical Block Exemption Regulation (“VBER”). The opinion therefore is diametrically opposed to the views taken by some of the national competition authorities (“NCAs”) and courts in the EU Member States, particularly in Germany. Ultimately, this is good news to all manufacturers of branded goods although it remains to be seen whether the CJEU will ultimately follow this opinion.
Online sales have significantly expanded, in various forms. As noted by the EC's final report on its e-commerce sector inquiry, distributors do not only sell contract products on their own websites, they also increasingly sell their products on third-party online platforms such as in Amazon and eBay. Such third-party platforms or “e-marketplaces” are distinct from an (authorised) distributor’s own website in that the brand owner no longer has control over the presentation and image of the goods sold by distributors using his brand. The case at issue thus raises the question of whether a supplier may prohibit resellers within a selective distribution network from making use of such third-party marketplaces.
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 (Oberlandesgericht Frankfurt am Main) lodged a request for a preliminary ruling to the CJEU (Case C-230/16).
The referring court asked several questions relating to selective distribution, some revisiting the legitimacy of selective distribution itself, but especially about general prohibitions on authorised resellers selling on third party platforms.
Those questions arose after a string of high profile cases regarding online platform bans, in which the Bundeskartellamt ("BKA") condemned inter alia online platform bans in the selective distribution networks of well-known brands such as Asics and adidas. In those cases, the BKA (confirmed lately by the Higher Regional Court of Düsseldorf in the Asics case, VI-Kart 13/15 (V) and with regard to price comparison sites) proposed a simple "either-or" solution:
- Either the platform ban was not caught by Article 101 TFEU (or its German equivalent Sec. 1 ARC) because the Metro criteria were met (although even then they 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 block exemption under the VBER 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.
AG Wahl's opinion suggests that this either-or approach is too restrictive and takes the view that (1) the Metro criteria 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.
Key takeaways from AG Wahl's Opinion
The Metro criteria should not be limited to luxury products
AG Wahl considers that the Metro criteria should not be limited to luxury products. He opines that selective distribution networks which prevent authorised distributors from selling products on open platforms may be pro-competitive (and thus outside the scope of Art. 101 TFEU) irrespective of whether the goods in question are “luxury” products. This is because brands in general fulfil a “specific competitive function” of their own, namely to guarantee to consumers a certain quality and common origin of the goods in question. The physical qualities of the products certainly remain characteristics or properties to take into account. However, AG Wahl takes the view that, in line with the relevant EU case-law on trade mark protection, intangible assets such as a brand’s image and the quality that consumers attribute to it are characteristics that may require selective distribution as well – a clear indication that competition is not all about prices. If the CJEU follows AG Wahl’s opinion, this will pave the way for owners of strong brands of all kinds and sectors to implement a selective distribution system and, possibly, impose restrictions of online platform sales on their authorised distributors.
Third-party platforms can be justified under the VBER
More importantly, AG Wahl is very clear in stating that even if the Metro-criteria are not met in the specific case at hand, platform bans still can benefit from exemption. More precisely, they do not constitute a “hardcore” restriction of customers or (passive) sales to end users. As a result, they are eligible for exemption both in and outside the scope of VBER. AG Wahl takes into account inter alia the EC’s findings in the e-commerce sector inquiry according to which authorised distributors generate the majority of their online sales from their own websites – and therefore that users are not specifically restricted from buying those products online. Online platforms are seen merely as a modality amongst others to reach customers via the internet.
AG Wahl considers that the ban on the use of third-party online platforms may be used to pursue a legitimate objective to safeguard the image and trademark of the goods in question. He notes that the goods in question should be sold in an environment which meets the quality requirements imposed by the network. Online platforms may compromise such an environment by displaying their own logos very visibly in all phases of the purchasing of the contract goods. In addition, allowing third-party online platforms to sell the goods in question would enable both, platforms and retailers, to free-ride on the brand owners’ efforts in building and preserving a certain brand image.
All in all, AG Wahl recommends the CJEU to put an end to strong tendencies amongst NCAs and courts across Europe, most notably in Germany, to unduly broaden the reach of “hardcore” restrictions of competition in which the protection of new internet sales models outweighs the protection of brands and their images. Strong brands, as AG Wahl reminds us, fulfil a specific competitive function of their own which is to guarantee to consumers a certain quality and common origin of the goods in question. In economic terms, this reduces transaction costs. If brands are weakened because their owners are deprived of the possibility of securing a uniform product presentation and image (as on online platforms), this will in the long run diminish inter-brand competition (i.e. competition between the brands of different holders). Against this background, overall a (limited) restriction of intra-brand competition (i.e., competition between retailers of one brand), which is the effect of restrictions of online platform sales, seems acceptable competition-wise. Online platforms, with all their welcomed transparency, make us believe that competition is all about prices. However, prices are not the sole factor of “good” competition, as AG Wahl puts it. There is also competition based on quality and service – and this is what AG Wahl’s opinion seeks to protect. It remains to be seen how the CJEU will decide on the issue.