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EU: The Coty Judgment on selective distribution systems and the prohibition to sell through internet platforms.

On December 6, 2017 the European Court of Justice finally issued the decision on the famous “Coty Case” (Case C-230/16 – Coty Germany GmbH v. Parfümerie Akzente GmbH), which has been under discussion for a certain period, also during the 2017 IDI Conference.

Fabio BORTOLOTTI - 14.12.17
Country expert

This judgment constitutes an important step towards a clarification of the compatibility of selective distribution agreements with the EU rules on competition, with particular reference to luxury products sold on the internet.

In particular, the Court rejected the position expressed by a number of national courts and antitrust authorities according to which the Pierre Fabre judgment of 13 October 2011 would have affirmed in general terms that the aim of maintaining a luxury image of the products does not justify the restrictions of competition implied in a selective distribution network.

 

1.         FACTS

The case concerned a dispute between Coty Germany GmbH (hereafter “Coty”), a leading supplier of luxury cosmetics in Germany, and Parfümerie Akzente GmbH (hereafter “Parfümerie Akzente”), an authorized distributor of those products, which was part of Coty selective distribution network in Germany.

Parfümerie Akzente had for many years distributed Coty goods, as an authorized distributor, both at its brick-and-mortar locations and over the internet. Internet sales were carried out partly through its own online store and partly via the platform “amazon.de”.

Pursuant to Coty's selective distribution agreement, the use of a that type of distribution system is justified by the luxury image of the Coty brand: “the character of Coty Prestige’s brands requires selective distribution in order to support the luxury image of these brands”. Accordingly, the admission to the network is subject to express authorization by Coty and to the compliance with specific standards fixed by the manufacturer.

A dispute arose between the parties concerning the refusal by Parfümerie Akzente to accept a modification of the contractual conditions proposed by Coty, prohibiting sales on the Internet through third parties’ platforms discernible to the public, like for instance "amazon.de".

The question of the lawfulness of such clause was brought before Regional Court of Frankfurt am Main, Germany, which decided: (a) that the objective of maintaining a prestigious image of the mark could not, in accordance with the judgment of 13 October 2011, Pierre Fabre Dermo-Cosmétique, justify the introduction of a selective distribution system which, by definition, restricts competition, and (b) that the above clause also constituted a hardcore restriction under Article 4(c) of Regulation No 330/2010.

 

Coty appealed before the Higher Regional Court of Frankfurt, Frankfurt am Main, which decided to stay proceedings and to refer the following questions to the Court for a preliminary ruling:

1)      Do selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure a “luxury image” for the goods constitute an aspect of competition that is compatible with Article 101(1) TFEU?

2)      Does it constitute an aspect of competition that is compatible with Article 101(1) TFEU if the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case?

3)      Is Article 4(b) of Regulation No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of the retailer’s customer group “by object”?

4)      Is Article 4(c) of Regulation No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of passive sales to end users “by object”?

 

2.         THE DECISION OF THE COURT

2.1       First question

The Advocate General Wahl, in his opinion, clearly explained the main reason from which originated the first question.

Particularly, the sentence contained in paragraph 46 of the Pierre Fabre decision (pursuant to which: “the aim of maintaining a [prestige] image is not a legitimate aim for restricting competition and cannot therefore justify a finding that a contractual clause pursuing such an aim does not fall within Article 101(1) TFEU”) had been interpreted by some national Courts and antitrust authorities (also including the Regional Court, Frankfurt am Main, Germany - which decided in first instance on the Coty case in Germany) as affirming in general terms that selective agreements for luxury products fall under the prohibition of Article 101(1) TFEU.

The Advocate General insisted on the importance to clarify that such interpretation cannot be accepted, since it would imply a complete overturn of the traditional case-law developed starting from the old “Metro cases”, without a real reason for deviating from such case-law and also in contrast with the established case-law of the ECJ on the protection of trademarks.

In its decision, the European Court confirms such position by explaining that in the Pierre Fabre case the Court did not refer to luxury goods, but to “cosmetic and body hygiene goods” and only stated that the need to preserve the prestigious image of such goods was not sufficient for justifying an absolute prohibition of the sale of those goods on the internet.

By contrast, the Court confirmed that it cannot be inferred from such judgment that paragraph 46 thereof sought to establish a statement of principle according to which the preservation of a luxury image can no longer be such as to justify a restriction of competition, such as that which stems from the existence of a selective distribution network, in regard to all goods, including in particular luxury goods.

Therefore, answering to the first question, the Court reconfirmed the previous case-law (mainly Case 26/76 Metro SB-Groβmärkte v. Commission; Case 31/80 L’Oréal; and Case 439/09 Pierre Fabre Dermo-Cosmétique), stating that a selective distribution system is not prohibited by Article 101(1) TFEU, to the extent that:

resellers are chosen on the basis of objective criteria of a qualitative nature, determined uniformly for all potential resellers and not applied in a discriminatory fashion;

the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally,

the criteria do not go beyond what is necessary.

 

 2.2       Second question

In order to answer to the second question, the Court evaluated the consistency of the disputed clause (i.e. “the obligation imposed on authorized distributors to sell the contract goods online solely through their own online shops and the prohibition on those distributors of using a different business name, as well as the use of third-party platforms in a discernible manner”) with the abovementioned requirements and came to the conclusion that:

 

from the documents submitted to the Court the clause appears to be objective and uniform and applied without discrimination to all authorized distributors;

as regards the second requirement, the Court mainly considered that the sales through third parties’ platforms cannot guarantee the maintenance of the same “quality conditions” set forth by the manufacturer; moreover, the absence of a contractual relationship between the supplier and third-party platforms means in fact that the supplier cannot require the compliance with the quality conditions that it has imposed on its authorized distributors; finally, such ban is appropriate to preserve the luxury image of those goods;

the clause does not go beyond what is necessary, because authorized distributors are permitted to sell the contract goods online both via their own websites, as long as they have an electronic shop window for the authorized store and the luxury character of the goods is preserved, and via unauthorized third-party platforms when the use of such platforms is not discernible to the consumer.

The Court therefore concluded that Article 101(1) TFEU must be interpreted as not precluding a contractual clause, such as that at issue in the main proceedings, which prohibits authorized distributors in a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for the internet sale of the contract goods, on condition that that clause has the objective of preserving the luxury image of those goods, that it is laid down uniformly and not applied in a discriminatory fashion, and that it is proportionate in the light of the objective pursued, these being matters to be determined by the referring court.

 

2.3       Third and fourth question

The two last questions regard the issue whether the prohibition to sell on the internet through third-party undertakings, imposed on the members of a selective distribution system for luxury goods, constitutes a hardcore restriction under Regulation 330/2010 which would exclude the benefit of the block exemption for agreements containing such clause.

In fact, according to position expressed by the Frankfurt Regional Court, such prohibition would imply a restriction of the customers to whom the distributor may sell and a restriction of passive sales, considered as hardcore restrictions under Articles 4(b) and 4(c) of the Regulation.

The Court clearly rejected this view stating that the prohibition imposed on the members of a selective distribution system for luxury goods, which operate as distributors at the retail level of trade, of making use, in a discernible manner, of third-party undertakings for internet sales does not constitute a restriction of customers, within the meaning of Article 4(b) of that regulation, or a restriction of passive sales to end users, within the meaning of Article 4(c) of Regulation 330/2010.

The Court came to such conclusion, by considering that, the clause at issue - unlike the clause referred to in the Pierre Fabre case - does not prohibit the use of the internet as a means of marketing the contract goods; moreover, it seems not possible to circumscribe, within the group of online purchasers, third-party platform customers; and finally, it appears that the authorized distributors are, under certain conditions, left free to advertise via the internet on third-party platforms and to use online search engines, with the result that customers are usually able to find the online offer of authorized distributors by using such engines.

 

3.         Conclusions

In its answer to the first question, the Court of Justice clarifies that selective distribution systems for luxury goods designed, primarily, to preserve the luxury image of those goods complies with Article 101(1) TFEU, to the extent that the conditions established in the Metro judgment (selection based on objective criteria of qualitative nature, determined uniformly an applied in a non-discriminatory fashion which go not beyond what is necessary) are met.

Such statement, which was necessary, in order to overcome the conflict of interpretation of § 46 of the previous Pierre Fabre decision, cannot of course be interpreted in the sense that only luxury goods can justify the compliance with Article 101(1) TFEU. In fact, the issue apparently raised in Pierre Fabre was whether luxury products could benefit of the exemption from the prohibition of Article 101(1) stated in in the case law following Metro. In other words, the issue was whether the principle according to which "the maintenance of a specialist trade capable of providing specific services as regards high-quality and high-technology products" may justify selective distribution, stated in the AEG Telefunken case (Court of Justice decision, AEG – Telefunken, of 25/10/1983, § 33), should also apply to luxury goods.

By giving a positive answer to this question, the Court has confirmed its previous case law according to which all systems of selective distri­bution, in so far as they aim at the attainment of a legitimate goal capable of improving competition in relation to factors other than price, constitute a main element of competition which is in conformity with Article 85(1)”

Secondly, the Coty judgment makes clear that a prohibition of selling on the internet through marketplaces which are recognizable as not being authorized retailers, does not fall under the prohibition of Article 101(TFEU) and does not imply a violation of Articles 4(b) and 4(c) of Regulation 330/2010.

Thus, a selective distribution system for luxury goods containing such a clause which complies with the conditions established in the Metro judgment (selection based on objective criteria of qualitative nature, determined uniformly an applied in a non-discriminatory fashion which go not beyond what is necessary) will not fall under the prohibition of Article 101(TFEU).

If, on the contrary, the selective distribution agreement contains further restrictions, but none of the hardcore restrictions mentioned in Article 4 of Regulation 330/2010, the agreement will benefit from the block exemption, provided the 30% threshold is not exceeded. This means that, for instance, agreements implying a quantitative selection of the members of the network or regarding products which do not justify a selective distribution system will fall under the prohibition of Article 101(TFEU), but will be exempted under the BER, by virtue of the principle according to which all restrictions other that those mentioned in Articles 4 and 5 are exempted.

It remains to be seen whether the principle affirmed by the Court with respect to the clause in discussion should only apply to luxury goods or if it should extend to other situations where the exclusion of third parties' marketplaces is objectively justified.  In fact, it seems reasonable to assume that the reasons given for justifying the lawfulness of such clauses in the context of the distribution of luxury goods, should also apply to other situations where the access of distributors to third parties' marketplaces would prejudice the legitimate goals pursued by the selective distribution system.

It should furthermore be considered that the Court's reasoning concerning the alleged violation of Articles 4(b) and 4(c) of Regulation 330/2010, although mentioning expressly the market of luxury goods, can as well apply to other situations. In fact, the considerations that customers of third-party platforms cannot be circumscribed and that the prohibition of a specific kind of internet sale does not amount to a restriction of customers (§ 66-68 of the judgment), and does not constitute a restriction of passive sales to end users (see § 154-156 of the Opinion of the Advocate General), apply in the same way to products other than luxury goods.

In other words, the Court's reasoning focuses specifically on luxury products, because this was the object of the request for preliminary ruling, but the same reasoning is applicable as well to other products or situations, where the same or equivalent conditions are met.

It is therefore reasonable to conclude that a prohibition to sell through third party platforms, imposed upon members of a selective distribution network, which is necessary to warrant the quality of the conditions of sale (brand image, availability of advice to consumers, etc.), should be considered lawful also with respect to non-luxury goods.

 

The Coty judgment and its possible impact on selective distribution agreements will be included in the program of the 2018 IDI Conference, that will be held in Florence on 8-9 June, 2018.

 

 

 

Fabio Bortolotti, Chair IDI

Silvia Bortolotti, Secretary General IDI

 

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