Suppliers of luxury goods can restrict online sales on (discernible) third-party platforms, says the Court of Justice

The European Court of Justice (ECJ) handed down yesterday its much awaited ruling in Coty Germany GmbH (C-230/16). It has clarified that a supplier of luxury goods can include a clause in selective distribution agreements prohibiting authorised distributors from selling those goods through non-authorised third-party platforms in a discernible manner, in order to preserve the luxury image of the goods, provided that three conditions are met:

• distributors are chosen on the basis of objective criteria of qualitative nature (in this case, the objective of preserving the luxury image and prestige of the goods)
• the criteria are laid down uniformly and not applied in a discriminatory fashion (i.e. they apply equally to all authorised distributors)
• they are proportionate in light of the objective pursued (i.e. appropriate and that do not go beyond what is necessary to attain the objective)

The facts

The case relates to a dispute in the German courts between Coty Germany (a supplier of luxury cosmetics) and Parfümerie Akzente (an authorised distributor of Coty products under its selective distribution network). Coty included provisions in its distribution agreement which allow authorised distributors to sell Coty products online through their own websites, or through non-authorised third-party platforms provided the use of those platforms is not “discernible” to the consumer (i.e. consumers are not aware the platforms are being used). However, the agreement also contained a clause prohibiting distributors from using third party platforms in a discernible manner. Parfümerie Akzente was using amazon.de to sell some Coty products and Coty started proceedings with a view to enforcing the prohibition clause. The issue for the ECJ was whether the clause was compatible with EU competition law.

Application of the criteria

The ECJ ruled that it was ultimately for the German court to determine whether the three criteria were met in this case. However it did go on to give the German court a clear steer.

It noted that the first two criteria were met: the German court considered that the clause had the objective of preserving the luxury image of the Coty goods and, on the evidence before the ECJ, the clause was objective, uniform and applied without discrimination. The question was therefore whether the clause was proportionate (i.e., appropriate to and did not go beyond what was necessary to preserve the luxury image of the goods) – in the ECJ’s opinion the answer was yes. It noted the following:

• the clause provides Coty with a guarantee that, for online sales, the goods would be exclusively associated with the authorised distributors
• the sale of Coty goods via a platform which does not belong to the selective distribution system may risk “deterioration of the online presentation of those goods which is liable to harm their luxury image and thus their very character”, in particular, because the supplier cannot request compliance with quality conditions (as there is no supplier-platform contractual relationship) and the platforms sell “goods of all kinds”
• there is no absolute prohibition on online sales – distributors are still able to sell Coty goods through their own websites or using a third-party platform where it is not discernible to the consumer (the ECJ noted in this regard the European Commission’s findings in its e-commerce sector inquiry that, despite the increasing importance of third-party platforms, the main distribution channel for over 90% of distributors is their own online shops).
• an alternative to the clause would be to allow the use of online platforms subject to their compliance with the criteria imposed by Coty on authorised distributors – but given the lack of contractual relationship between Coty and the platforms (and therefore the difficulty in requiring compliance), this was not as effective as the prohibition
• the system does not prevent authorised distributors from advertising on platforms (and from using search engines)

The ECJ draws an interesting distinction between this case and its earlier ruling in Pierre-Fabre Dermo-Cosmetic (case C-439/09). It states that Pierre-Fabre Dermo-Cosmetic, where it considered that the need to preserve the prestigious image of cosmetic and body hygiene goods did not justify a comprehensive prohibition of online sales of such goods, did not seek to establish “a statement of principle according to which the preservation of a luxury image can no longer be such as to justify a restriction of competition, such as that which stems from the existence of a selective distribution network, in regard to all goods, including in particular luxury goods […]”. In this respect, the facts of the current case differ from Pierre-Fabre Dermo-Cosmetic as the characteristics of the goods to be preserved by the selective distribution network are “luxury” goods – not cosmetics/body hygiene goods –  and the contractual clause in question did not restrict all types of online sales of the contract goods but only sales via third-party platforms which operate in a discernible manner towards consumers.

Finally, the ECJ ruled that should the German court find that the clause did not meet the criteria and was restrictive of competition under the EU competition rules, it may nevertheless benefit from an exemption under the Vertical Agreement Block Exemption Regulation. In particular, the ECJ noted that the clause does not amount to a restriction of customers of the authorised distributors, or a restriction of passive sales to end users, which would render the exemption inapplicable to the selective distribution contract.

What does it mean for companies?

This is a helpful ruling for suppliers of luxury goods which use selective distribution systems. Provided they are careful to ensure the three criteria are met, they can restrict their authorised distributors from selling online via third-party platforms without falling foul of EU competition rules. That being said, the Coty system does not prevent authorised distributors from advertising on third-party platforms (and from using search engines), and therefore consumers should be able to easily find their distributors’ products online. Even more, the ECJ ruling could be read as inviting platforms and suppliers to enter into contractual relationships to open such channel to the selective distribution of luxury goods (as happened, for example, in the 2015 French Adidas antitrust investigation which ended with commitments).

Importantly, the ruling does not give suppliers the green light to restrict online sales via platforms more generally (cf. Pierre Fabre Dermo-Cosmetic judgment). The ECJ was considering the prohibition specifically in the context of luxury goods and a selective distribution system. Any reading of the ruling outside these parameters may be viewed unfavourably by competition authorities (in fact the head of the German competition authority has already stated as much).

The ruling leaves open a number of questions. In particular, the ECJ seems to imply that, beyond the qualitative distribution sales environment, the name of the platform (as opposed to the distributor’s own name) is a criterion which justifies the prohibition in order to preserve the quality and luxury image of the goods. Yet, the ruling is unclear as to why and how the name of the platform in itself is a qualitative issue for the purposes of preserving such an environment. Further, the ruling suggests that a platform selling “goods of all kinds” would be incompatible with the quality image of luxury goods, but yet in practice, luxury goods can be found in corners of large bricks and mortar stores which sell all types of products (albeit often generally in an overall luxury environment).

Online selling restrictions are currently a major enforcement priority for both the European Commission and national authorities, although agencies have not always been aligned on what is and is not permitted under the competition rules. It is hoped that the outcome of decisions such as the Commission’s on going investigations into Guess, Nike, Sanrio and Universal Studios, together with rulings such as Coty, will provide some much needed consistency for businesses. In the meantime, suppliers are advised to think very carefully about both the nature and characteristics of their products, and of the restriction, before introducing any sort of contractual limitation on online sales with distributors.