A selective distribution system consists of a supplier selecting distributors based on specific, pre-determined criteria while committing to sell the products or services in question only to selected distributors. These distributors commit not to sell such products or services to unauthorised distributors within the territory operating a selective system. According to the current Vertical Block Exemption Regulation ("VBER") such a restriction (covering both active and passive sales) is exempted from the application of Article 101(1) TFEU (subject to certain market share thresholds). However, sales to end users, whether active or passive, cannot be restricted.
For a while, the case law of the European Court of Justice ("ECJ") and the VBER seemed to point to different directions: in Pierre Fabre (C-439/09), the ECJ stated that in the absence of objective justification, agreements constituting a selective distribution system are to be considered as ‘restrictions by object’, whereas the VBER did not classify setting up a selective distribution system as a hard core restriction. In Pierre Fabre, the aim of maintaining a prestigious image was not considered a legitimate aim for prohibiting internet sales and the requirement of physical sales outlet was considered a restriction by object. In 2016, the ECJ amended its stance in Coty (C-230/16) and stated that luxury brand owners can use the protection of the luxury image of their products as the sole justification for implementing a selective distribution system. By consequence in Coty, the supplier was allowed to prohibit its distributor from selling its products on third-party platforms (in this case Amazon) to ensure quality and brand image.
Even though a Competition policy brief regarding the implications of the Coty judgement was published by the Commission in April 2018, the different national interpretations of Coty have led to uncertainty regarding the lawfulness of banning sales on third-party platforms with respect to products other than luxury products. Some national competition authorities have suggested a narrow interpretation, whereas, for example according to Nils Wahl, the Advocate General in Coty (currently a judge of the ECJ), Coty should be applicable to high-quality products also.
The ECJ has the chance to clarify whether the restrictions are allowed also for high-quality products when it responds to a reference for a preliminary ruling in Visma (C-306/20). In Visma, one of the questions is whether the lawfulness of market-sharing conditions applies to all legally justifiable distribution systems, whether selective or exclusive.
The issues described above were also recognized in the Commission’s Evaluation of the VBER. We will keep you informed on how the above-mentioned developments evolve in the coming month as the Commission continues its consultation process and publishes a draft of its updated VBER.
For more information please contact Päivi Tammilehto.