By Jonathan Parker and Calum Warren
The Court of Justice of the European Union (CJEU) has handed down its much-anticipated judgment in Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH (Coty). The case concerns the legality of a prohibition of sales on third-party platforms discernible to the public within Coty Germany’s selective distribution system. The CJEU stated that selective distribution for luxury goods is compatible with Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) provided that both:
- Distributors are chosen on the basis of objective criteria of a qualitative nature applied uniformly to all potential distributors in a non-discriminatory fashion
- The criteria do not go beyond what is necessary
The CJEU addressed the specific issue of the prohibition on discernible third-party platform sales within Coty Germany’s selective distribution system. The court stated that this type of restriction is a justified and proportionate means of protecting the brand image of luxury goods and does not amount to a “hardcore” restriction within the meaning of the EU Vertical Restraints Block Exemption Regulation (VBER). The CJEU’s judgment provides important clarifications on the use of selective distribution for luxury goods and the EU courts’ assessment of such distribution.
Coty Germany sells luxury cosmetics in Germany. The company markets certain brands via a selective distribution system, permitting authorised distributors to sell its products via the internet, provided distributors make such sales through an “electronic shop window”. The selective distribution agreement prohibits authorised distributors using a different business name, as well as the recognisable engagement of a third party. In line with this agreement, Coty Germany sought to prohibit one of its authorised distributors, Parfümerie Akzente, from distributing goods via “amazon.de”. The national court of first instance dismissed Coty Germany’s action, holding that the contractual clause at issue was contrary to Article 101 TFEU and its national equivalent. Coty Germany brought an appeal before the Higher Regional Court of Frankfurt. The court then requested a preliminary ruling from the CJEU in relation to the compatibility with Article 101 TFEU of a selective distribution system for luxury goods and, more specifically, the prohibition on the use of third-party platforms for the internet sale of such goods.
The key points in the CJEU’s reasoning are as follows:
- As a general matter, selective distribution systems fall outside the Article 101 TFEU prohibition, provided that distributors are chosen based on objective criteria of a qualitative nature applied uniformly to all potential distributors in a non-discriminatory fashion and the criteria do not go beyond what is necessary (thus upholding the criteria first laid down by the CJEU in Case 26/76 Metro in 1977).
- Luxury goods may require the use of selective distribution in order to preserve the quality and ensure the proper use of such goods. The quality of luxury goods flows not just from their material characteristics, but also from the allure and prestigious image, which bestow on them an aura of luxury. An impairment of that aura of luxury will likely affect the actual quality of those goods. The judgment in Case C-439/09 Pierre Fabre does not affect this conclusion, as Pierre Fabre concerned an absolute prohibition on online sales in respect of cosmetic and body hygiene goods.
- The prohibition on sales on discernible third-party platforms is necessary and proportionate to preserve the quality and ensure the proper use of the luxury goods in question. The prohibition ensures that the luxury products in question were exclusively associated with the authorised distributor and that the supplier will have recourse against the authorised distributor in the event of non-compliance based on the contractual link between them. By contrast, in the absence of a contractual relationship with a third-party platform, the supplier has no means to ensure compliance with the qualitative conditions imposed within the system. In addition, the prohibition was not absolute, and permitted sales via the authorised distributor’s own website and through third-party platforms not discernible to the consumer.
- The restriction of a specific channel of internet sales does not amount to a restriction of a specific customer group or of passive sales — so-called hardcore restrictions — within the meaning of Article 4(b) and 4(c) of the VBER. First, the court believes that circumscribing third-party platform customers within the group of online purchasers would not be possible. Secondly, consumers will usually be able to find authorised distributors’ offers online, since the clause at issue is not an absolute ban on online sales and marketing and authorised distributors are permitted, under certain conditions, to advertise on third-party online platforms and to use online search engines.
The Coty judgment clarifies that the preservation of a luxury image can justify the use of selective distribution and the prohibition of sales to distributors, such as third-party platforms that are not admitted to the system. The judgment also clarifies the CJEU’s judgment in Pierre Fabre in 2011. Accordingly, the use of selective distribution is justified, provided distributors are chosen on the basis of objective and non-discriminatory criteria that are necessary and proportionate to protect the luxury quality and brand image of the products in question.
Similarly, the CJEU’s further clarification that the prohibition on sales to discernible third-party platforms does not amount to a hardcore restriction under the VBER is significant. Particularly because the general position that selective distribution systems that do not contain hardcore restrictions are exempted under the VBER where the market shares of the supplier and the distributor are below 30%.
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