Coty Germany, a luxury cosmetics supplier, brought a legal action against one of its distributors, Parfümerie Akzente, because they sold Coty products through the online platform Amazon.de. According to Coty, such sales were damaging the luxury image of its products. Coty has therefore banned its distributors from selling Coty products in this way. This week, the European Court of Justice supported Coty in its actions
Coty has established a selective distribution system. Only distributors who meet a number of qualitative criteria are admitted to this system and are allowed to sell Coty products to consumers. The criteria relate to the retailers' brick-and-mortar shops, as well as their online sales. As far as the brick-and-mortar shops are concerned, their interior (furniture and décor) has to emphasise and promote the luxury nature of Coty products. Furthermore, Coty explicitly bans its distributors from visibly using third parties which have not been authorised by Coty, such as the online platform, Amazon.
The latter clause was at the centre of the dispute between Coty and Akzente. Akzente claimed that such clause is contrary to (European) competition law. The German court agreed with this in first instance. On appeal, the German court presented the European Court of Justice with preliminary questions on this subject.
The European Court of Justice has reiterated its previous court decisions and has come to the conclusion that a selective distribution system, designed to protect the luxury image of the products in question, is permitted if (i) distributors/retailers are being selected on the basis of objective qualitative criteria, laid down uniformly and applied without discrimination and (ii) these criteria do not go beyond what is necessary.
The European Court of Justice is of the opinion that the ban under discussion (on offering products for sale through third party (online) platforms) is appropriate and necessary, to achieve the legitimate goal (protecting the luxury image of Coty products). The European Court of Justice comes to this conclusion because, among other things, this ban guarantees Coty that its products will only be associated with authorised retailers. Furthermore, Coty can take action against retailers who do not observe the agreed qualitative conditions, whilst they cannot do that against online platforms (due to the absence of a contractual relationship). According to the European Court of Justice, if luxury products are only sold through the authorised retailers' web shops, this will help to preserve the luxury image of those products.
What defines luxury products?
According to the European Court of Justice, the quality of luxury products is not just the result of their material characteristic features, but also the result of "the allure and prestigious image which bestow on them an aura of luxury". Damage to the "aura of luxury" would probably cause real damage to the quality of the products in question.
In the future, we expect that there will be significant discussion on whether a product qualifies as 'luxury'. Based on current caselaw, a restriction on how luxury products are sold are justified, to the extent proportionate. In this context, the judgment of the Court of Amsterdam regarding the prestigious image of Nike products is interesting (see our previous article). Also interesting in this context is a judgment of the European Court of Justice regarding the Swiss watches case, in which the Court found that the aim of maintaining the prestigious image of the watches, did not justify a selective repair system (see our article on this subject).
No hardcore restrictions
The European Court of Justice also found it important that there is no total ban on selling goods online. The ban (only) relates to sales through third party platforms. Furthermore, the European Court of Justice noted that the recent ecommerce study of the European Commission shows that the distributor's own website remains the most significant online sales channel, despite the emergence of online platforms. Finally, the European Court of Justice held that the ban in question does not qualify as a 'hardcore restriction' as defined in the Block Exemption for Vertical Agreements.
The long-expected judgment has been given a mixed reception. The European Commission was already of the opinion that putting restrictions on the use of online platforms was justified. It therefore welcomes the judgment, which, it says, provides more clarity. Given the Court's emphasis on the luxury image of the products in question, the German Bundeskartellamt, which has previously found that such bans are contrary to competition law, stated that this judgment does not give manufacturers the green light to impose general bans on selling through platforms. The Bundeskartellamt expects the judgment to have little impact on its decision-making practice.
It cannot be denied that the judgments described above provide more munition to justify restrictions on sales through platforms. However the context of the restriction will determine the legality, especially if the parties involved have market shares above 30% and the products are not "luxury".