EU General Court opinion delivers boost to brands selling online


Author: Alex Haffner, Ben Milloy


You don’t need to be a PR guru to know that branding is all about image. This is never truer than for high-end or luxury brands, which strive to deliver a customer experience that is consistent with, and can be justified by, the price tag. This sensitivity to customer experience is borne out in distributor brands seeking to exercise control over the environment (whether bricks-and-mortar or online) in which their products are sold to consumers.

Unfortunately for distributors, this hankering for control comes up against competition law in the UK and EU, where the imposition of restraints on who can sell products in a distribution chain is considered to be anti-competitive (and therefore illegal).  Mercifully for prestige brands, an exception to this prohibition exists in the form of “selective distribution networks”, which allow brands to control the ultimate seller of their products on the basis of certain qualitative, uniformly applied, criteria (such as requiring all to provide a certain level customer service).

While selective distribution networks have always been contentious, they are well-established in the context of traditional bricks-and-mortar shopping. The position with regard to online sales has not been so clear.  A recent non-binding opinion from the EU General Court (Court), however, has provided some guidance on this issue.

Coty Germany (Coty) is a luxury cosmetic provider, which had set up a selective distribution network.  Parfümerie Akzente (PA) was one of its resellers. In 2012, Coty introduced an amendment to its distribution contracts, aimed at preventing PA and other resellers from carrying out internet sales via third-party providers like Amazon and Ebay. Instead, Coty wanted its resellers to only sell through their own online stores.  PA took issue with this requested amendment and challenged it in the German courts. The German courts then referred a question on the legitimacy of Coty’s request to the Court.

On 26 July 2017, the Court’s Advocate General Wahl issued his opinion (Opinion). He reaffirmed the validity of selective distribution systems relating to luxury and prestige products where they met certain criteria, namely (i) resellers are selected on objective criteria which are applied in a non-discriminatory manner; (ii) the product is such that it requires selective distribution; and (iii) the criteria do not go beyond what is necessary. Significantly, AG Wahl went on to say that, provided that these criteria were met and the product was such as to justify the restriction, selective distribution networks were equally applicable to sales of products online. Indeed, he considered that such requirements could even improve competition and guard against the “phenomena of parasitism” (i.e. where sellers like Amazon and Ebay are able to benefit from the investment that brand owners put into their brands).

The Opinion has attracted attention insofar as it suggests that, despite the very different (and impersonal) sales environment that exists online, the same considerations and justifications for selective distribution agreements in traditional shopping methods can still apply. While influential, the AG’s opinion is not binding on the Court, and it remains to be seen whether the judges will adopt a similar approach when they come to decide the matter in the coming months.  As a rule of thumb, the Court usually does so about 80% of the time.  On this basis, the Opinion seems to provide reasons to be cheerful for brands wishing to control how their products are sold online.

Alex Haffner, Partner (ahaffner@fladgate.com)
Ben Milloy, Associate, (bmilloy@fladgate.com)

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