The eagerly anticipated Coty-judgment is out: what does it mean for online distribution?

On 6 December 2017, the Court of Justice of the EU (CJEU) published its long-awaited judgment in the Coty-case (C-230/16). Finding in favour of Coty, the court ruled that selective distribution networks are permissible, subject to complying with certain conditions.

What happened?

The Coty decision is a key landmark in the growing body of case law around restrictions in distribution agreements, particularly restrictions that affect the ability of retailers to sell online.

Supporting the earlier opinion of its Advocate-General, the CJEU has confirmed that:

• Luxury brands can use selective distribution (which allows them to control who sells their products), provided they comply with competition law;
• This includes the ability to restrict selling on third-party internet marketplaces, where the supplier itself does not use this marketplace,
• A restriction on internet marketplaces is distinct from an outright ban on online sales, which cannot be justified on the grounds of protecting a luxury image; and
• Marketplace bans are not a “hardcore” restriction of competition and may benefit from the Vertical Block Exemption or individual exemption from competition law.

In reaching its decision, it was a key factor that the supplier has no contractual relationship with the marketplace and so cannot ensure that its selective criteria are complied with.  The court also recognised that not being available at all on marketplaces may be something that consumers value in brands with an “aura of luxury”.

The decision has been welcomed by the European Commission, which has been supportive of selective distribution and internet marketplace restrictions – within the parameters set by competition law.  However, the German competition authority has been vocal that this decision applies only to luxury brands and that it will continue to pursue these cases in other sectors, seeing access to marketplaces as fundamental to SMEs in particular.

The difference in response from these two leading competition authorities demonstrates the diverging approach in the application of competition law to e-commerce.  The European Commission’s Vertical Guidelines are now out of date in addressing the challenges that brand owners face in the digital environment – and the steps that they take in response.  We are therefore reliant on the competition authorities to create precedent and they do not always agree with each other.

Protecting your brand in the highly competitive online environment while navigating conflicting legal guidance is a real challenge for brand owners, whether or not they have a luxury brand.  Nonetheless, the Coty decision is a useful reminder that there are steps that you can take within the parameters of competition law.

What was the dispute about?

Coty sells luxury cosmetic products in Germany through a selective distribution system, a common arrangement for luxury and electronic goods. In order to protect the luxury image of its products, Coty prohibited its dealers from selling its products using a different business name, or selling them online via a third-party platforms which operate in a discernible manner towards consumers (in this case amazon.de). Coty had sought to enforce this clause against one of its dealers through local German Courts.

At first instance, Coty’s claim was rejected on the basis that the objective of maintaining a prestigious image could not justify a selective distribution system. Coty appealed the decision to the Oberlandesgericht of Frankfurt, which referred the matter to the CJEU in order to assess the legality of the contractual prohibition under EU competition law.

What were the issues for the CJEU to consider?

Is a selective distribution system compatible with EU competition law?

The CJEU considered the compatibility in principle of a selective distribution system designed to preserve the luxury image of goods with Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). The CJEU ruled that a selective distribution system does not violate Article 101(1) TFEU to the extent that:

1. 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 manner;
2. The characteristics of the product require such a distribution system to preserve its quality and ensure its proper use; and
3. The criteria as contractually imposed do not go beyond what is necessary.

The CJEU reiterated that the criterion of what may be necessary in selective distribution is linked to not only the quality of luxury goods, but also to the allure and prestigious image of those goods. As such, the way luxury goods are displayed enhance their value, thus contributing to the reputation of the brand and reinforcing the aura of luxury.

Is a specific clause of this nature permissible?

The second question was whether a specific contractual clause – such as the prohibition on online sales via third-party platforms– is permitted under Article 101(1) TFEU. The CJEU again referred to the objective of protecting a luxury image whilst requiring that the three criteria mentioned above are met. The CJEU found that the clause in question was aimed at preserving the prestigious image of Coty and that the referring Oberlandesgericht already considered that the clause was objective, uniform, and applied to all authorised distributors in a uniform manner.

According to the CJEU, the question is whether or not the particular prohibition on online sales is proportionate to the objective (protection of the brand image). By preventing authorised distributors from using another business name and from selling through third-party platforms where the consumer knows they are buying via a platform, the supplier is guaranteed that its goods will be exclusively associated with its authorised distributors. The CJEU deemed this coherent with the specific goals of a selective distributions system. Furthermore, the prohibition at stake allows the supplier to check whether the presentation of the products matches the qualitative conditions agreed upon with its authorised suppliers. The absence of any contractual bond between the supplier and the third-party platform makes it impossible for the supplier to impose the same qualitative conditions on that third-party platform.

Did the clause restrict customers or passive sales?

The final question for the CJEU was whether or not the contractual clause constituted a restriction of competition law “by object” under Article 4(b) (restriction of customers) and (c) (restriction of passive sales) of Regulation n° 330/2010 (Vertical Block Exemption Regulation or VBER).

Before analysing this question, the CJEU underlined that the referring court only has to undertake a review of compliance with the VBER if it finds that the contractual clause in issue restricts competition. In other words (and as long as the thresholds are met) the 3 criteria mentioned above only come into play if the market shares of the supplier and the authorised reseller exceed 30%.

The CJEU found that third-party platform customers cannot be defined as a specific and different group of customers from the general group of online purchasers. As such, there is no restriction of customers in the sense of Article 4(b) VBER. Furthermore, given that the contractual prohibition does not constitute an outright ban on internet sales, and given that authorised distributors in certain circumstances can sell through third-party platforms and use online search engines, there is no restriction of passive sales in the sense of Article 4(c) VBER.

Reaction from competition authorities

Despite the CJEU upholding Coty’s ability to apply a selective distribution in this case, certain Member States are likely to remain hesitant towards contractual restrictions of online sales in a distribution relationship. The President of the German Competition Authority, Mr. A. Mundt, has already commented on the judgment, stating that manufacturers who do not produce and sell pure luxury products (such as sports goods manufacturers) “have not received carte blanche to impose blanket bans on selling via platforms”.

Whilst this decision will undoubtedly be welcomed by brand owners, this remains a complex area.  It is advisable to seek advice to understand exactly what you are able to do to protect your brand online without falling foul of competition rules.