European Union: German Court Applies Criteria Set By The ECJ In Coty

Last Updated: 24 September 2018
Article by Andrzej Kmiecik

On 12 July 2018, the Higher Regional Court of Frankfurt (the "Court") handed down its judgment in a dispute between Coty Germany GmbH ("Coty"), a supplier of cosmetics, and Parfümerie Akzente, a member of its selective distribution system. The Court found that, within the framework of a selective distribution system, a contractual provision prohibiting the recognisable engagement of third parties (in particular sales platforms) by authorised retailers for the purpose of making online sales does not constitute a hardcore restriction within the meaning of Article 4(b) and (c) of the Vertical Agreements Block Exemption Regulation ("VABER"), as long as the manufacturer does not prohibit the use of price search engines or price comparison sites. As part of its analysis under Article 101(1) TFEU, the Court also affirmed that Coty's products enjoy a luxury image, although this factor was not relied on in the Court's finding that the prohibition at issue was exempted under the VABER. For a summary of the judgment based on the press release, please see VBB on Competition Law, Volume 2018, No. 7, available at www.vbb.com.

The reasoning of the recently published judgment provides some interesting insights concerning: (i) whether products enjoy a luxury image; and (ii) whether the manner in which a supplier allows its products to be sold or promoted calls into question whether a selective distribution system for luxury products containing a platform prohibition meets the requirement of the case law that the supplier's quality criteria should be applied in a non-discriminatory manner. These factors are particularly important where it is necessary to individually assess whether a selective distribution system is compatible with Article 101(1) TFEU, rather than the simpler assessment of whether the system is covered by the VABER. Of additional interest are the doubts expressed by the Court concerning the prior finding by the Court of Justice of the European Union ("ECJ") in its Coty ruling that, in the context of an individual assessment under Article 101(1) TFEU, the platform prohibition was proportionate to the objective pursued.

Luxury image

The Court considered whether Coty's products enjoyed a luxury image in assessing whether the requirement of the Article 101(1) case law was met that the nature of its products must justify the use of selective distribution.

In this regard, the Court acknowledged that, in general, consumer perception is important to assess whether a product has a luxury image. However, the Court rejected Parfümerie Akzente's request that it should gather evidence concerning the actual perception of consumers as it considered there were sufficient other indications that Coty's products had a luxury image. In this respect, the Court noted that the luxury image of a given product is actively created by the producer through marketing and the positioning of the product in a high-quality market segment. The Court recognised that a separate sub-market exists for luxury cosmetics, which are distinct from and not interchangeable with mass-market cosmetics, and that, in the present case, Coty deliberately positioned the products concerned as luxury cosmetics by means of a separate distribution channel. While the Court stressed that a producer's view that it needs to put such a selective distribution system in place in order to establish or maintain a luxury image is not sufficient to justify such a system, Coty's positioning and distribution of the products indicated that the products concerned were luxury products. Against this background, the Court considered that the gathering of evidence on consumer perception would only have been necessary if Parfümerie Akzente had brought forward concrete evidence showing that consumers do not associate the products with a luxury image, which it had failed to do.

Parfümerie Akzente also challenged the luxury image on the basis that not all products distributed through Coty's selective distribution system were high-priced, but the Court found this irrelevant, stating that the mere fact that certain products in a product line are not high-priced does not affect the luxury image associated with the overall product line.

Non-discriminatory application

As part of its Article 101(1) assessment, the Court also considered whether the quality criteria set by Coty were applied uniformly and without discrimination as is required by the case law.

Parfümerie Akzente made claims that this condition was not met, all of which were rejected by the Court. Among these claims, Parfümerie Akzente pointed to the fact that Coty sold its products in airports and on board aircraft and, as a result, in the same environment as low-price products. In rejecting this claim, the Court stated that it is still common practice in the industry to make what were formerly known as "duty free sales". Even though nowadays air travel is no longer perceived as something "special" per se, access to duty free shops is necessarily linked to the purchase of a flight ticket, which distinguishes sales in duty free shops from sales in an environment accessible to all outside an airport or online. Therefore, the luxury image of the products was not threatened by airport sales, even if the products were on very rare occasions offered in a "shabby environment".

In addition, Parfümerie Akzente argued that allowing retailers to display Coty's products on the Google-Shopping website while prohibiting sales on www.amazon.de was discriminatory. However, the Court followed Coty's reasoning that there was a decisive difference between the two platforms: while argued that allowing retailers to display Coty's products on the Google-Shopping website while prohibiting sales on www.amazon.de was discriminatory. However, the Court followed Coty's reasoning that there was a decisive difference between the two platforms: while www.amazon.de hosts actual sales, Google-Shopping redirects customers to the online shop windows of the authorised retailer, which are subject to Coty's quality requirements.

Proportionality of the platform ban

The Court also questioned the assessment of proportionality made by the ECJ as part of its Article 101(1) TFEU analysis, without ultimately ruling against it.

The ECJ had held that the platform ban is proportionate in the light of the legitimate objective pursued, i.e., that it is appropriate for preserving the luxury image of Coty's products, and that it does not go beyond what is necessary to achieve that objective. In finding that the platform prohibition at issue in the main proceedings did not go beyond what is necessary for the attainment of the objective pursued, one factor emphasised by the ECJ was that Coty did not prevent retailers from selling through their own online stores and that, as is apparent from the E-commerce Sector Inquiry, sales through own online stores remains the main online distribution channel used by distributors (being operated by over 90% of the distributors surveyed) despite the increasing importance of third-party platforms. The ECJ further stated that, given the absence of any contractual relationship between Coty and the third-party platforms (which it could use to require those platforms to comply with the quality criteria imposed on its authorised distributors), an alternative of allowing those distributors to use such platforms subject to their compliance with pre-defined quality conditions cannot be regarded as being as effective as the platform ban.

Expressing doubts concerning the ECJ's reasoning, the Court envisaged arrangements that would be less restrictive towards the authorised retailer without disproportionally impairing the legitimate interest of Coty. It noted that Coty had conceded that platforms capable of sufficiently preserving the luxury image of the products in question could be developed. Furthermore, the Court found that platforms could be designed in a way that leaves no doubt to the end user that the sale is being made by an authorised retailer and not by the platform operator. It would then be for the authorised retailer to ensure that its presence on the third-party platform satisfies the qualitative criteria. Even if control of compliance with the quality requirements of the selective distribution system would be more difficult for a supplier with respect to sales on platforms, this could be made easier by, e.g., contractually obliging the retailer to disclose to Coty the third-party platforms through which it was selling Coty's products. The Court further stated that the ECJ did not appear to have taken into consideration that, particularly in Germany, distribution via platforms plays a far more important role than in other EU Member States.

However, since the ECJ in its ruling assessed the validity of the specific clause used by Coty which prohibited sales on third-party platforms, the Court questioned the competence of a national court to review such assessment and therefore did not decide on the proportionality of the restriction. Instead, it concluded that a prohibition on selling Coty's products concerned on third-party platforms was, in any event, exempted by the VABER.

The Court refused Parfümerie Akzente the right to appeal its judgment. This decision is currently being challenged before the Federal Court of Justice.

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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