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Article: March 2018: EU Litigation Update

March 01, 2018
Business Litigation Reports

The CJEU’s Coty Judgment Provides Guidance on Online Platform Bans for the Distribution of Luxury Goods and Beyond. On December 6 2017, the Court of Justice of the European Union (“CJEU”) adopted its longawaited ruling in Case C-230/16, Coty Germany GmbH v. Parfümerie Akzente GmbH (“Coty”). The Coty judgment clarified that a prohibition imposed by suppliers of luxury goods on the members of their selective distribution system of making sales through unauthorised third-party online platforms complies with Article 101 of the Treaty on the
Functioning of the European Union (“TFEU”), to the extent that such a restriction: (i) aims at preserving the luxury image of the products; (ii) applies uniformly to all distributors; and (iii) does not go beyond what is necessary to attain its objective. The CJEU also provided guidance as to the nature of such restrictions, clarifying that, were they to fall within the scope of Article 101(1) TFEU, they would not form “by object” restrictions of competition.

Background of the Case. The Coty case concerns a selective distribution agreement entered into between leading luxury cosmetics supplier Coty and one of its distributors, Parfümerie Akzente, for the sale of luxury cosmetic products in Germany. Coty sought to revise the agreement to include a provision according to which “the authorized retailer is entitled to offer and sell the products on the internet, provided, however, that internet sales activity is conducted through an ‘electronic shop window’ of the authorized store and the luxury character of the products is preserved” (Coty, ¶ 15). Coty also sought to include a clause prohibiting Parfümerie Akzente from using a different business name and from engaging a third-party undertaking, which is not an authorized retailer of Coty (Coty, ¶ 15).

Parfümerie Akzente refused to accept those amendments, and sold Coty’s products via Amazon’s German website, Coty brought an action before the German district court of Frankfurt am Main. The district court dismissed the action and concluded that, in the light of the CJEU’s ruling in Case C-439/09, Pierre Fabre Dermo-Cosmétique (“Pierre Fabre”), the objective of maintaining the prestigious brand image of a luxury product through a selective distribution system does not justify the inclusion of a hard-core restriction under Article 4(b) or 4(c) of the Vertical Block Exemption Regulation (“VBER”).

Coty appealed that decision to the Higher Regional Court of Frankfurt, which, in turn, sought a preliminary ruling from the CJEU pursuant to Article 267 TFEU. The Higher Regional Court of Frankfurt essentially asked whether:

  1. A selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods complies with Article 101(1) TFEU;
  2. Article 101(1) TFEU must be interpreted as precluding a contractual clause that prohibits authorised 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 online sale of the contract goods; and
  3. Assuming that such a prohibition forms a restriction of competition in the sense of Article 101(1) TFEU, whether such a prohibition constitutes a “by object” restriction of customers, within the meaning of Article 4(b) VBER, or a restriction of passive sales to end users, within the meaning of Article 4(c) VBER.

The key takeaways and practical implications of the Coty judgment are the following:

Online Platform Bans Which Aim to Preserve the Image of Luxury Goods are Compatible with Article 101(1) FJEU Provided That They Meet Certain Criteria. The CJEU clarified that an online platform ban applied in the context of a selective distribution system of luxury
goods, which is designed, primarily, to preserve the luxury image of those goods is compatible with Article 101(1) TFEU provided that the criteria set out in the CJEU’s ruling in Pierre Fabre are met, namely, that: (i) resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion; (ii) the characteristics of the product in question necessitate such a network in order to preserve the product’s quality and ensure its proper use; and (iii) the criteria laid down do not go beyond what is necessary to attain their objective (Coty, ¶ 58).

The CJEU also affirmed that the nature of luxury products necessitates their sale through a selective distribution system in order to preserve their image, which creates the aura of luxury that is essential for customers to distinguish luxury products from other types of products (Coty, ¶ 25, citing Case C-59/08 Copad, ¶ 28). The CJEU left some scope for interpretation because in the absence of a relevant question by the referral court, it did not define the term “luxury product.”

The CJEU also clarified previous case law on selective distribution, by stating that the Pierre Fabre judgment did not seek to establish a statement of principle prohibiting platform bans in selective distribution systems. Rather, in Pierre Fabre, which concerned a complete ban of online sales of non-luxury products (namely, cosmetics and body hygiene products), the CJEU concluded, based on the facts of that case, that the need to preserve the image of the products in question did not justify the restriction imposed (Coty, ¶ 35).

The CJEU ultimately concluded that a prohibition on using, in a discernible manner, third-party platforms for the internet sale of luxury goods, like the one imposed by Coty, did not go beyond what is necessary in order to preserve the luxury image of those goods. The CJEU noted, inter alia, that in Coty there was no absolute restriction of online sales; rather, authorised distributors were permitted to sell the contract goods online both via their own websites (as long as they had an electronic shop window for the authorised store and the luxury character of the goods is preserved), and via unauthorised third-party platforms when the use of such platforms is not discernible to the consumer (Coty, ¶ 53). In this regard, the CJEU also referred to the Commission’s E-commerce Sector Inquiry, according to which, despite the increasing importance of third party platforms in the marketing of distributors’ goods, the main online distribution channel is the distributor’s own online shops (Coty, ¶ 54).

Online Platform Bans for the Selective Distribution of Luxury Goods Are Not “Hardcore Restrictions” of Competition. The CJEU ruled that online platform bans, such as the one at issue in Coty, do not amount to hardcore restrictions of competition, and, in particular, customer restrictions under Article 4(b) VBER or passive sales restrictions under Article 4(b) VBER, to the extent that: (i) online platform bans do not prohibit the use of the internet as a means of marketing the contract goods; (ii) it does not appear possible to circumscribe, within the group of online purchasers, third-party platform customers; and (iii) distributors can still advertise the products on thirdparty online platforms and use online search engines (Coty, ¶¶ 65-68).

The Coty Ruling May Have Implications on Selective Distribution Systems for Non-Luxury Goods. Under a strict interpretation, the Coty ruling would appear to apply only to cases concerning luxury goods. However, that judgment may have implications for the assessment of restrictions in selective distribution systems for the sale of non-luxury goods.

Pursuant to the CJEU’s findings in Coty, and in light of the fact that the VBER does not distinguish between luxury and non-luxury products, an online platform ban imposed by a non-luxury product supplier on the members of its selective distribution system, which does not meet the Pierre Fabre criteria, and thus falls within the scope of Article 101(1) TFEU, would not be considered a “by object” restriction on competition. This means that such a restriction could benefit from the block exemption under the VBER, provided that each of the supplier’s and its distributors’ market shares are less than 30% (Article 3 VBER).