EU Court of Justice allows restrictions on third-party websites in distribution of luxury products
On 6 December 2017, the European Court of Justice delivered its long-awaited judgment in Coty Germany.
Coty is a supplier of luxury cosmetics in Germany. It sells its products via a selective distribution network, in order to protect the luxury image of its brands. One of the measures through which Coty sought to safeguard that luxury image was to introduce a restriction on online sales preventing Coty’s distributors from using third-party websites in a discernible manner. According to the restriction, the distributors are only allowed to sell Coty’s products on the Internet via their own e-shop or via a third-party insofar as the involvement of that third party is not discernible to the public.
One of Coty’s distributors however refused to approve the restrictions in its distribution contract and sold Coty’s products via Amazon.de, a well-known online sale platform. Coty brought an action before the German courts, seeking an injunction to stop its rogue distributor from using that platform. The case was eventually referred to the European Court of Justice.
Selective distribution systems are allowed for luxury products, in order to preserve the luxury image of the brand
First, the Court reiterates that a selective distribution system of luxury products, aimed at preserving the prestige or luxury image of the brand and products, is allowed under EU competition law, provided the distributors are selected on the basis of objective qualitative criteria, which are uniformly and non-discriminatorily applied and which are proportional to the aim pursued.
The Court clarifies in that regard that paragraph 46 of its judgment in Pierre Fabre, which states that “the aim of maintaining a prestigious image is not a legitimate aim for restricting competition”, should not be understood as a general statement on selective distribution of luxury products, but rather in the specific context of that case, i.e. in the context of a complete ban on Internet sales.
The Court further emphasises that the quality of luxury goods is not just the result of their material characteristics, but also of “the allure and prestigious image which bestow on them an aura of luxury, that that aura is essential in that it enables consumers to distinguish them from similar goods and, therefore, that an impairment to that aura of luxury is likely to affect the actual quality of those goods”.
Restrictions on online sales can be valid in certain circumstances
Next, the Court addresses the specific question of the validity of the prohibition under the Coty selective distribution system of online sales of the luxury contract products on third-party websites in a discernible manner (e.g. via Amazon).
On the appropriateness of such a prohibition the Court states:
- First, “the obligation imposed on authorised distributors to sell the contract goods online solely through their own online shops and the prohibition on those distributors of using a different business name, as well as the use of third-party platforms in a discernible manner, provide the supplier with a guarantee, from the outset, in the context of electronic commerce, that those goods will be exclusively associated with the authorised distributors.” The Court stresses that such an association is precisely one of the objectives of a selective distribution system.
- Second, “the prohibition enables the supplier of luxury goods to check that the goods will be sold online in an environment that corresponds to the qualitative conditions that it has agreed with its authorised distributors”.
- And third, “given that those platforms constitute a sales channel for goods of all kinds, the fact that luxury goods are not sold via such platforms and that their sale online is carried out solely in the online shops of authorised distributors contributes to that luxury image among consumers and thus to the preservation of one of the main characteristics of the goods sought by consumers”.
On the proportionality of the measure, the Court notes that, contrary to Pierre Fabre, there is no absolute ban on online sales. Under the restrictions imposed by Coty, distributors are still permitted to sell the contract goods online both via their own websites which preserve the luxury character of the goods, and via unauthorised third-party platforms, provided that the use of such platforms is not discernible to the consumer.
No limitation of the group of customers to which the distributor can sell
Finally, the Court assesses whether the restrictions imposed by Coty limit the group of customers to whom authorised distributors can sell the luxury goods at issue or whether it restricts authorised distributors’ passive sales to end-users. In that respect, the Court observes that the restrictions imposed by Coty do not prohibit the use of the Internet as a means of marketing the contract goods. Moreover, the distributors are allowed to advertise via the Internet on third-party platforms and to use online search engines, with the result that the online customers are usually able to find the authorised distributors’ online offer.
In conclusion, in the context of selective distribution of luxury products, restrictions such as the ones in Coty, can be exempted on the basis of the Vertical Block Exemption Regulation, and be allowed under EU competition law.
Three things to take away from the Coty case
- Brand image can be considered part of a product’s quality, in particular for luxury products. The question remains to what extent similar arguments apply for non-luxury products?
- In a selective distribution system, a supplier of luxury products, may limit online sales of its authorised distributors to sales made (i) via their own e-shop and (ii) via a third-party insofar as the involvement of that third party is not discernible to the public.
- Allowing a supplier in a selective distribution system to impose certain restrictions on online sales and online platforms may incentivise suppliers to opt for selective distribution of their products.
The full text of the Court’s judgment and the AG’s opinion can be found here.