The recent landmark Coty judgment allows luxury brands to restrict the use of online e-commerce platforms to protect the prestige of their brand. Bernadine Adkins of Gowlings discusses the case.
Luxury is the exception to the rule
The European Court of Justice (CJEU) today handed down its highly anticipated judgment on the legality of a brand owner's restriction of online sales through third-party platforms. Agreeing with the much-discussed Advocate-General Opinion handed down in July 2017, the CJEU held that EU law does not prevent luxury brands from restricting the use of online e-commerce platforms in order to protect the prestige of their brand.
The CJEU judgement arises from a dispute between a luxury cosmetic supplier in Germany, Coty Germany GmBH and one of its authorised distributors, Parfümerie Akzente GmbH. Parfümerie Akzente distributed Coty's products in physical stores and online. Online sales were made through Parfümerie Akzente's own website and the amazon.de marketplace. Coty's selective distribution contract provided that distributors must meet certain standards, which Coty considered necessary to "support the luxury image" of its brands. This included, for example, a provision that "the décor and furnishing of the sales location, the selection of goods, advertising and the sales presentation must highlight and promote the luxury character of Coty Prestige's brands."
Coty sought to amend their contracts in 2012 to include a provision that, amongst other things, prohibited its authorised distributors from selling Coty's products on websites bearing the name of a third-party. Parfümerie Akzente refused to accept the proposed amendments and Coty consequently brought an action in the German courts seeking an order to prohibit Parfümerie Akzente from selling Coty's products on amazon.de.
The Regional Court of Frankfurt rejected Coty's application, finding that the restriction infringed Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU"). Coty appealed this decision and the appellate court, the Higher Regional Court of Frankfurt, requested a preliminary ruling from the CJEU on whether the restriction by a luxury brand owner on the use of online platforms infringes Article 101 TFEU.
Selective distribution and Article 101
The case law of the European courts provides that purely qualitative selective distribution arrangements are compatible with Article 101 TFEU. This is in accordance with various CJEU judgments that have held price is not the only facet to competition. Moreover, there is case law to suggest that luxury cosmetic products are the type of product where selective distribution criteria are necessary. For example, in Groupement d'achat Édouard Leclerc it was held that the distinctive "luxury image" of luxury cosmetic products was important in the eyes of consumers and, therefore, it was in customers' interests that such products "are appropriately presented in retail outlets and that their luxury image is preserved in that way". The CJEU has held that selective distribution systems can, in themselves, preserve the quality – and ensure the proper use of – luxury goods.
To be considered 'purely qualitative', the criteria used in the selective distribution arrangement must:
- be necessary given the nature of the product (this involves consideration of whether the arrangements are necessary to preserve the quality of the product and/or ensure its proper use);
- be applied uniformly and in a non-discriminatory fashion; and
- not go beyond what is necessary.
Where these criteria are not met, selective distribution arrangements will infringe Article 101(1) TFEU unless they benefit from specific exemption under Article 101(3) TFEU, or under the vertical agreements block exemption regulation, Regulation 330/2010 ("VABER"). At the time of the first instance judgment of the Regional Court of Frankfurt, there was considerable confusion as to whether selective distribution agreements infringed Article 101(1) TFEU. In so finding, the Regional Court of Frankfurt held that, relied on the CJEU's judgment in Pierre Fabre , the objective of preserving a brand image does not justify the introduction of a selective distribution agreement. In addition, that court held the clause restricting online sales via third-party platforms bearing the name of that third-party, was a 'hardcore' restriction under the VABER so could not benefit from exemption under the VABER. Further, the Regional Court of Frankfurt held that the restriction did not meet the requisite criteria to benefit from specific exemption under Article 101(3) TFEU.
It was in this context that the Higher Regional Court of Frankfurt asked the CJEU to consider whether:
1) the use of selective distribution systems by luxury brand owners, which aim to protect to "luxury image" of their goods, is compatible with Article 101(1) TFEU;
2) a general prohibition on the use of third-party online platforms "discernible to the public" by distributors is compatible with Article 101(1) TFEU (if indeed selective distribution systems which aim to protect a "luxury image" are compatible with Article 101(1) TFEU);
3) prohibiting the use of third-party online platforms by distributors is a restriction "by object" contrary to Article 4(b) of the VABER because it restricts the consumers groups that can be sold to be retailers; and
4) prohibiting the use of third-party online platforms by distributors is a restriction "by object" contrary to Article 4(c) of the VABER because it restricts the level of passive sales to end users.
European Court of Justice rules
The CJEU dealt with each of the referred questions in turn and agreed with the reasoning of the Opinion of Advocate-General Wahl that luxury brand owners are permitted to restrict the use of third-party online platforms. The judgment is in line with the European Commission's guidelines on vertical restraints, which say suppliers may require distributors to use third-party online platforms only in accordance with agreed standards. This may include, for example, requiring "that customers do not visit the distributor's website through a site carrying the name or logo of the third-party platform."
Aura of luxury
On the first question, the CJEU re-stated the position and referred to earlier jurisprudence that, when considering whether selective distribution is necessary, it should be noted that the allure and prestigious image of a product are essential considerations for customers when purchasing such goods. Therefore, any impairment of the "aura of luxury" is likely to affect the quality of the goods. The establishment of selective distribution arrangements in order to preserve that aura of luxury is therefore compatible with Article 101(1) TFEU provided the conditions for purely qualitative criteria are met.
In an early indication as to the direction of its ruling, the CJEU added that the display of goods in a sale outlets "in a manner that enhances their value contributes to the reputation of the goods at issue and therefore contributes to sustaining the aura of luxury surrounding them".
The CJEU held that the finding in Pierre Fabre that the aim of maintain a prestigious image was not a legitimate aim for restricting competition, and therefore incompatible with Article 101(1) TFEU, should be confined to its facts. The CJEU distinguished the Coty arrangement for several reasons, namely:
- Pierre Fabre concerned the compliance of a specific contractual clause with Article 101(1) TFEU, not an entire selective distribution system;
- the goods considered in Pierre Fabre were not luxury goods; and
- the clause in Pierre Fabre was a "comprehensive prohibition" of online sales – the arrangement in Coty only prohibited one channel of online sales.
Consequently, the CJEU held that the Pierre Fabre judgment cannot be inferred to "alter the settled case-law of the Court". Therefore, a selective distribution system for luxury goods designed to preserve the image of those goods complies with Article 101(1) TFEU. Compliance with Article 101(1) is subject to the proviso that sellers are chosen "on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion and that the criteria laid down do not go beyond what is necessary."
As regards the second question, in line with the reasoning of Advocate-General Wahl, the CJEU undertook an analysis of whether the prohibition on using third-party online platforms was proportionate to the aim of protecting the luxury image of Coty's products.
The CJEU held that the prohibition in question did not infringe Article 101(1) TFEU for three reasons:
1) the purpose of the obligation imposed on authorised distributors was to provide Coty with a guarantee that its products would be exclusively associated with Coty's authorised distributors in the context of e-commerce;
2) a restriction on the use of third-party platforms enables the supplier of luxury goods to "check that the goods will be sold online in an environment that corresponds to the qualitative conditions agreed with its authorised distributors" in the absence of a contractual relationship between the brand owner and the online platform; and
3) the third-party online platforms in question sell many types of goods so "the fact that luxury goods are not sold via such platforms […] contributes to the luxury image among consumers and thus to the preservation of one of the main characteristics of goods sought by consumers."
E-Commerce Sector Inquiry
In addition, the CJEU cited the preliminary findings of the European Commission's Preliminary Report on the E-Commerce Sector Inquiry as evidence that in the context of online distribution, the main distribution channel is distributors' own online shops. It is interesting that the CJEU chose to cite this report, given it is effectively a policy document produced by the European Commission in the context of its Single Digital Market strategy.
Article 101 (1) TFEU
Departing from the structure adopted by Advocate-General Wahl, the CJEU considered questions 3 and 4 together. The CJEU noted that it would only be necessary to consider the application of the VABER were the referring court to find that the prohibition at issue in the case infringed Article 101(1) TFEU. Agreeing with the findings of Advocate-General Wahl, the Court held that the prohibition on the use of third-party online platforms did not restrict the customers to whom distributors could sell because it was not possible to confine the users of such platforms to a specific customer group.
On the question of the restriction of passive sales, the CJEU held – citing the Opinion of Advocate-General Wahl – that no such restriction of passive sales existed because authorised distributors were nonetheless permitted to advertise via the internet on third-party platforms and use online search engines. This meant that customers could therefore "find the online offer of authorised distributors by using search engines."