The ECJ’s Coty Ruling: When may a Supplier Prevent an Authorized Distributor from Selling Its Products Through a Third-Party Online Platform?

In this December 2017 judgment, the European Court of Justice (ECJ) established that a supplier of luxury cosmetics distributing its products via a selective distribution system (“SDS”) is entitled to prevent its distributors from reselling online through third party platforms.

The facts

Coty is a supplier of luxury cosmetics selling certain brands under an SDS with which it seeks to maintain the luxury image of those brands. Coty wished to amend its distribution agreements by allowing its authorized retailers to offer and sell their products online, provided that the internet sales activity was conducted through an “electronic shop window” of the authorized store and the luxury char-acter of the products was preserved and, at the same time, by precluding authorized distributors from selling in a discernible manner though third-party platforms. One of the practical effects of such an amendment would be the exclusion of online sales though third party platforms such as Amazon.

Selective retail distributor Parfümerie Akzente refused to sign the amendment, which led Coty to seek in Court an order prohibiting the distributor from selling Coty’s products via the platform “amazon.de”. The Frankfurt Regional Court dismissed that action on the grounds that the contractual clause at issue was a restriction of competition contrary to Article 101 (1) TFEU. On appeal, the Frankfurt Higher Regional Court referred the issue to the ECJ.

The ECJ’s assessment

The ECJ began by dealing with the question of whether or not a selective distribution system for luxury goods, which is designed, primarily, to preserve the luxury image of those goods, is compatible with Article 101(1) TFEU.

For the ECJ, such a system is compatible with Article 101(1) TFEU provided 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 require such a network in order to preserve its quality and ensure its proper use; and, finally, that
(iii) the criteria laid down do not go beyond what is necessary (conditions which are well established in the case law ever since the ECJ’s judgment in Metro).

In what concerns the issue of whether the clause at stake – preventing authorized distributors from using, in a discernible manner, third-party platforms for the online sale of the contract goods – contravenes Article 101(1) TFEU, the ECJ considered that a clause designed to preserve the luxury image of the goods in the context of an SDS which is, in itself, justified by the need to preserve the luxury image of the products concerned is lawful provided that the criteria referred to above are met.

The ECJ also found that the prohibition imposed by Coty is appropriate for preserving the luxury image of those goods in particular taking into account that:

(i) It guarantees that, in the context of electronic commerce, those goods will be exclusively associated with the authorized distributors;
(ii) It enables the supplier to check that the goods are sold online in an environment that corresponds to the qualitative conditions that it has agreed with its authorised distributors.

In addition to the above, the prohibition at issue was considered not to go beyond what is necessary for the attainment of the objective pursued – the preservation of a luxury image for the goods – taking into consideration, in particular, that the clause at issue does not contain and absolute prohibition imposed on authorized distributors to sell the contract goods online (but merely limits internet sales via third party platforms that operate in a discernible manner towards consumers).

On the other hand, even if the prohibition at issue were considered to restrict competition within the meaning of Article 101(1) TFEU, it might still benefit from an exemption under Regulation N.o 330/2010 (the Vertical Block Exemption Regulation, hereinafter “VBER”), which in practice amounts to a presumption of legality of the agreement.

Indeed, the Court considered that the clause at stake did not restrict the customers to whom authorized distributors can sell the luxury goods at issue (prohibited under Article 4(b) of the VBER nor the authorized distributors’ passive sales to end users (prohibited under Article 4(c) of the VBER), both of which are hardcore restrictions that prevent a distribution agreement from benefiting from the exemption. In order to reach that finding, the ECJ took into account, in particular, the fact that the clause did not prohibit the use of the internet as a means of marketing the contacts goods (as occurred in the Pierre Fabre case) and also that the limitation introduced by the clause does not affect a specific group of customers, which means that the distributors bound by such obligation do not lose access to clients or to a specific market.

Comment

The judgment brings about an important clarification on how authorized distributors can, in the context of an SDS, sell online. The judgment is also expected to put an end to some controversy generated with the interpretation and implementation of the Court’s findings in Pierre Fabre.

Under the latter, it became clear that an absolute ban on sales via the Internet constitutes a hardcore restriction of competition, but doubts remained as to how far a company could go to protect the prestigious image of its brands.

In Coty, the Court clarified that certain limitations to online sales applied in the context of an SDS system the purpose of which is to preserve de luxury image of the products distributed are permitted and may even escape the prohibition of Article 101(1) TFEU though under strict criteria.

The fact that the nature of the products concerned and the characteristics of the SDS played a relevant role in the ECJ’s assessment raises the question of whether a similar conclusion could be drawn if the products involved did not require, by their nature, an SDS system or if the SDS system in place were not purely qualitative. In practical terms, however, the relevance of this question may be limited.

Indeed, in its important to bear in mind that the ECJ also considered that the limitation imposed by Coty did not constitute a hardcore restriction for the purposes of both Article 4(b) and 4(c) of the VBER, which means that the exemption conferred by the VBER should be able apply to the different types of distribution agreements covered by the VBER even in the presence of a such a clause. The VBER, in turn, covers selective distribu tion regardless of whether it is qualitative or quantitative and regardless of whether the products at stake require by their nature selective distribution; it also cover non-selective distribution, provided that in any case the market shares of the parties to the agreement do not exceed the 30% threshold.

Companies should be alerted to the need for a careful legal review the content of their distribution agreements, in order to check if all relevant criteria are complied with and if their agreements allow for a coherent application of requirements in the context of offline and online distribution.