On December 6, 2017, the European Court of Justice (“the Court”) handed down its preliminary ruling in the Coty case confirming that a manufacturer operating a selective distribution system of luxury goods is allowed to prohibit online sales via third-party platforms such as Amazon under certain conditions. The judgment was delivered in the context of a dispute between Coty Germany GmbH, a supplier of luxury cosmetics established in Germany, and Parfümerie Akzente GmbH, an authorized distributor of those goods, concerning the prohibition, under a selective distribution contract between Coty Germany and its authorized distributors, of the use by the latter, in a discernible manner, of third-party undertakings for internet sales of the contract goods. Coty brought an action before the German courts, which on appeal referred the question to the Court.
Constraints on Selective Distribution Networks Are Allowed Under Certain Conditions
The Court first confirmed that a selective distribution system aiming at preserving the luxury image of its goods is not incompatible with Article 101 TFEU as long as the resellers are chosen on objective and uniformly expressed criteria and these criteria do not go beyond what is necessary.
The Court confirmed the principle in Pierre Fabre that given their characteristics and nature, luxury goods may require the implementation of a selective distribution system in order to preserve their quality. The Court, however, distinguished Pierre Fabre where the goods were not luxury goods but cosmetic and body hygiene goods and indicated that the assessment of the necessity should be made on a case-by-case basis, by analysing the specific quality of the goods at issue.
In Coty, the Court further stated that in order to determine whether a selective distribution system was justified, not only should the characteristics of the goods be taken into account, but also their allure and prestigious image “which bestow on them an aura of luxury.” That “aura” is essential as it enables customers to distinguish luxury goods from others. Moreover, the establishment of a selective distribution system contributes to the value of the reputation of the goods by ensuring that the goods are displayed in a manner that enhances their value. For the Court, selective distribution systems contribute to sustaining the aura of luxury surrounding these goods, and are therefore compatible with Article 101 TFEU.
In relation to the question of whether banning the use of third-party platforms for the internet sale of luxury goods is compatible with Article 101 TFEU, the proportionality of the contractual clause in light of the objective of preserving the luxury image of the goods in question is key.
In Coty, the authorized distributors were allowed to sell via their own websites as long as they had an electronic shop window for the authorized store and the luxury character of the good was preserved, and were also allowed to sell via third-party platforms such as Amazon in the specific case when the use of such platforms was not “discernible” to the consumer. The authorized resellers were therefore prohibited from displaying a different business name or a recognisable engagement of a third-party undertaking which was not an authorized retailer of Coty.
The Court first indicated that a prohibition of the kind in Coty was an appropriate means for preserving the luxury image of the goods. The prohibition provided a guarantee to the supplier that such goods would be exclusively associated with the authorized distributors, and enabled the supplier to check that the goods would be sold online in an environment that corresponded to the qualitative conditions that it had agreed with its authorized distributors. The Court also considered that prohibiting the sale of goods on the marketplace fully contributed to the preservation of the luxury image of the goods.
As to whether the prohibition went beyond what was necessary, the Court considered the specifics of the case and distinguished the case from Pierre Fabre, where the resellers were completely prohibited from selling online. Given that, in Coty, the authorized distributors were allowed to sell via their own websites and through third-party platforms as long as the logo from the platform was not displayed, the clause solely applied to a specific use of sales on the internet and did not contain an absolute prohibition. Therefore, the Court concluded that the prohibition did not go beyond what was necessary to preserve the luxury image of those goods.
Online Marketplace Bans Are Not a Hardcore Restriction
Interestingly, the Court concluded that even if the national court were to consider that the clause fell under 101(1) TFEU, the clause would still be justified by Article 101(3) and should benefit from exemption Regulation 330/2010.
Regarding the hardcore restriction, the Court decided that the prohibition at issue did not constitute a restriction of the distributor’s customers or a restriction of passive sales to end users (articles 4(b) and 4(c) of Regulation 330/2010 respectively). The reason was that the authorized distributors were allowed to advertise on third-party platforms under certain conditions and use online search engines. As highlighted by AG Wahl in his opinion, the prohibition did not prevent those online distributors from being referenced on the internet.  Therefore, their potential customers were still able to access, via the internet, the offer of the authorized distributors, for example, by using search engines. Customers could still find the online offer through those means and would therefore not be restricted by the prohibition.
Therefore, the Court concluded that the prohibition was not a hardcore restriction and did not amount to a restriction of the distributors’ customers or a restriction of passive sales to end users.
The judgment is in the line with the Commission’s position in the Final Report of the e-commerce Sector Inquiry. The final report acknowledged the increasing importance of online marketplace for resellers, but recalled that distributors’ own online shops are still the main distribution channel, being operated by over 90% of the distributors surveyed. According to the Final Report, while the retailers’ own online shops remain the most important online sales channel for retailers, the use of marketplaces has increased over time. Marketplaces play a more important role in some Member States such as Germany (62 % of the respondent to the SI retailers use marketplaces), the United Kingdom (43 %) and Poland (36 %) compared to other Member States such as Italy (13 %) and Belgium (4%). Also, marketplaces are more important as a sales channel for smaller and medium sized retailers while they are of lesser importance for larger retailers.
As a consequence, the Coty judgment will trigger different reactions across the EU from a variety of relevant actors: while manufacturers of luxury goods will applaud the decision, others will argue that it also hinders distributors’ ability to sell their goods online, and that consumers will face fewer choices and less competition when buying online.
It should be noted that the judgment was limited to the assessment of luxury products. The Court did not provide for a general test to be applied on selective distribution networks, nor did it define the scope of luxury goods. Sellers will have to demonstrate on a case-by-case analysis that the nature of their products deserves the same level of protection as luxury goods in the Coty case, to preserve its image of prestige and the goods’ quality. As a consequence, there might be some discrepancies at a national level in the interpretation of luxury products or in the appreciation of the proportionality test. It remains to be seen where this line will be drawn by each national court and enforcement agency.
The Federal Cartel Office (“FCO”) in past decisions concerning selective distribution systems for branded sports articles took the view that the total ban of online platforms in these cases fell under Article 101(1) TFEU and qualified it as hardcore restriction pursuant to Article 4 (c) of the Block Exemption Regulation on Vertical Agreements. The FCO further took the view that the conditions for an individual exemption were not met. The FCO President Andreas Mundt, in a first reaction to the Coty judgment, stated that “we are still assessing the judgment. Prima facie we see however only limited impacts on our decision practice. The ECJ obviously made great efforts to limit its statements to the area of real prestige products where the aura of luxury is the essential part of the product itself. The FCO in its decision practice so far dealt with manufacturers of branded goods outside the luxury area. Such manufacturers according to our first assessment still do not have carte blanche for per se restrictions of their dealers with respect to the use of sales platforms.”