France: Paris Court Of Appeal Imposes Penalty Of € 500,000 On Online Platform Which Displayed Coty's Products Without Being Part Of Selective Distribution Network

On 28 February 2018, the Paris Court of Appeal (the "Court") released its judgment in an appeal related to a dispute between Coty France ("Coty"), a producer of branded luxury cosmetics including, in particular, perfumes, and Showroomprive.com, an online platform specialised in the sales of branded fashion products (the "Platform"). The Court ruled in favour of Coty and imposed a penalty of € 500,000 on the Platform.

The background to the ruling is a case brought by Coty in 2013 against the Platform for selling Coty products online without being part of Coty's selective distribution network. In response, the Platform claimed that the selective distribution network was anticompetitive and therefore illegal. By judgment of 17 November 2015, the Commercial Court of Marseille found the selective distribution network to be lawful and imposed a penalty on the Platform of € 25,000 for the moral prejudice caused by the Platform's behaviour in harming Coty's brand image.

The Platform appealed against the judgment, arguing that Coty's selective distribution agreement contained a number of anticompetitive clauses, including: (i) a prohibition of resale on third-party platforms; and (ii) the mandatory requirement for authorised distributors to have a physical point-of-sale, in effect excluding online-only retailers from the network.

In examining the contentious clauses, the Court affirmed, in line with the ECJ's ruling in Coty (see VBB on Competition Law, Volume 2017, No. 12, available at www.vbb.com) and established case law, that a selective distribution system for luxury goods aimed primarily at preserving their luxury image does not infringe Article 101(1) TFEU, provided that: (i) resellers are chosen on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion and (ii) the criteria laid down do not go beyond what is necessary. The Court also held that a specific clause in a selective distribution agreement is lawful under Article 101(1) TFEU where it fulfils these conditions. As it was not disputed that the first set of conditions was fulfilled, the Court focused on examining whether the clauses in question went beyond what was necessary to preserve the luxury image of Coty's products.

Third-party platform ban. Citing the ECJ's ruling in Coty, the Court held that the third-party platform ban, which is to be distinguished from an absolute ban on internet sales, is lawful under Article 101(1) TFEU. In so holding, the Court noted that, in the context of luxury goods, it is appropriate to include such a ban to avoid the image of the luxury goods being undermined by an online environment over which the manufacturer has no control given the absence of a contractual relationship with the third-party platform.

Physical point-of-sale requirement. As regards the physical point-of-sale requirement, the Platform argued that the requirement was not necessary. The Court, however, disagreed and found the clause lawful under Article 101(1) TFEU and appropriate to preserve the luxury image of the products in question without going beyond what was necessary to achieve that goal.

First, although the Platform was specialised in the resale of branded products, the Court nonetheless concluded that the Platform could not preserve the luxury aura of Coty's products taking into account that the range of products it offered for sale was too general, and that its business model was based on selling branded products at a discount. The Court therefore, in effect, took the view that it was legitimate to exclude this particular online-only platform from the network.

Second, and of more general application, the Court underlined that the requirement to have a physical outlet was necessary for the preservation of the aura of luxury of the products. In this respect, it pointed to the ability given to customers as a result of this requirement to test perfumes and benefit from personalised advice, pointing out that authorised retailers often had their own websites on which customers who chose not to make use of these services could buy the products. It went on to note that online and in-store sales are complementary rather than substitutable, and allowing online-only resellers into the system may discourage investments in the physical outlets necessary to preserve the luxury image of Coty's products. The Court was not persuaded by the argument raised by the Platform that some of Coty's French retailers were active online in the UK and Belgium without having any physical outlets in these countries.

The Paris Court of Appeal upheld the judgment under appeal, but increased the penalty from € 25,000 to € 500,000 by extending its scope to cover not only moral prejudice suffered (i.e., the damage to Coty's brand image) but also the unfair commercial practices and free-riding ("parasitisme") engaged in by the Platform. 

The principal point of interest of the ruling is its analysis of the physical point-of-sale requirement, and the generally applicable grounds on which the Court considered that it fell outside Article 101(1) (in particular, the need for consumers to be able to test products if they so wish, as well as free-riding concerns). The Court also considered that the particular platform at issue was not compatible with the luxury image of Coty's products (interestingly, in part because of its pricing policy) but it is not clear whether this was a necessary underpinning to its conclusion on the physical point-of-sale requirement. In any event, such a restriction would be exempted under the Vertical Agreements Block Exemption if the 30% market share threshold were to be respected, regardless of whether there would be an objective justification.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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