Author: Alex Haffner
In a much anticipated judgment, the European Court of Justice of the European Union (ECJ) has determined that EU competition law does not prevent luxury brands imposing restrictions on the use by distributors of third party e-commerce platforms. The judgment confirms the opinion expressed by the Advocate General to the court (see https://www.fladgate.com/2017/08/eu-general-court-opinion-delivers-boost-brands-selling-online/) that such restrictions can be permitted where they are necessary to preserve brand image.
The case stemmed from a dispute in Germany between Coty, the luxury cosmetics supplier, and one of its authorised distributors who sold Coty products both in bricks and mortar shops and online. Those online sales were made both via the distributor’s own website and via the Amazon marketplace.
In common with many brands, Coty wished to better regulate online sales. Its standard selective distribution contract therefore provided that authorised distributors could not sell Coty products on websites bearing the name of any third party (including Amazon). The distributor objected to this restriction and Coty brought an action seeking an order to enforce the restriction. Given the importance of the legal issues under consideration, the German court made a reference to the ECJ for it to opine on the application of EU competition law to the situation.
Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits anti-competitive agreements. In principle this includes restrictions on the persons to whom goods are sold under a distribution contract. However, it has been established through case law that qualitative selective distribution systems, that is where a brand owner appoints distributors on the basis of their meeting certain objective criteria as to the way in which the goods are marketed and sold, will be compatible with Article 101 if the system can be shown to be necessary to preserve brand image.
The key questions in the Coty case were whether: (a) the products under consideration were such as would justify a selective distribution system; and (b) the imposition by Coty of a ban on sales by third party platforms was justified in maintaining the legitimate objectives of that distribution system (i.e. to preserve brand image).
In its judgment, the ECJ reaffirmed the position that in considering whether a selective distribution system was necessary, the allure and prestigious image of a product needed to be essential considerations for customers when purchasing the product(s) in question. In those circumstances a selective distribution system was required to maintain the “aura of luxury” surrounding them.
As to the analysis of the prohibition on sales via third party platforms, the ECJ set a three pronged test to determine if such a restriction could be justified as being outside the Article 101 prohibition:
In this case, the ECJ considered that the prohibition was so justified, given in particular that the purpose of it was to provide Coty with a guarantee that its products would be exclusively associated with its authorised distributors. It was also persuaded that Coty needed to be able to check that its products would be sold online in an environment which corresponded to the conditions imposed on its authorised distributors and couldn’t do so in respect of third party platforms, given it had no contractual relationship with them.
The court was also persuaded to reach its judgement by evidence from the European Commission’s e-commerce inquiry which found that most internet sales take place through distributors’ own websites so that online platforms are not as significant a distribution channel overall.
The ECJ has provided a much needed shot in the arm to brand owners who, provided they can demonstrate that a selective distribution system for their products is justified, will be able also to impose controls on online sales where necessary to preserve the image associated with those products.
A relevant question is whether these same principles apply to non-luxury brand owners. However, even here there is light at the end of the tunnel. As part of its assessment of the prohibition imposed by Coty, the ECJ emphasised that it did not regard it as being a per se restriction of competition. This means that, were such a provision to be challenged in the future in respect of any non-luxury brand owner, it would need to be shown that the effect of the prohibition was such as to restrict competition and, if so, that it could not benefit from an exemption under the Vertical Block Exemption or Article 101(3) of the TFEU.
Irrespective, it is important to note that the Coty case draws a clear distinction between arrangements restricting all online sales, which will likely infringe the competition law rules, and those preventing sales via a specific channel, which, at least in the case of luxury brand owners, can now be regarded as a legitimate (and lawful) way of preserving brand image.
Alex Haffner, Partner, Fladgate LLP (email@example.com)