European Union: EU Advocate General Wahl Opines In Coty That A Ban Imposed By A Luxury-Goods Supplier On Sales By Authorised Retailers Over Third-Party Online Marketplaces Does Not Infringe The Competition Rules

Last Updated: 4 October 2017
Article by Andrzej Kmiecik

Most Popular Article in Belgium, October 2017

On 26 July 2017, the non-binding opinion of Advocate General Nils Wahl was published in proceedings involving Coty Germany GmbH ("Coty"), a producer of branded luxury cosmetics, and Parfümerie Akzente GmbH ("Parfümerie Akzente"), a retailer which was a member of Coty's selective distribution system. The Higher Regional Court of Frankfurt referred questions related to the use of selective distribution for luxury goods and the ban on the use of online platforms in selective distribution agreements for a preliminary ruling by the Court of Justice of the European Union (the "ECJ") (see VBB on Competition Law, Volume 2016, No 4, available at www.vbb.com).

By way of background, under the terms of its selective distribution agreement, Coty prohibits authorised retailers, when making internet sales, from using a different name or from engaging an unauthorised third party in a manner discernible to the public. This in practice prevents authorised retailers from selling Coty's products on online platforms such as eBay and Amazon.com. Parfümerie Akzente violated this prohibition by selling Coty's products on Amazon's online marketplace and Coty initiated legal proceedings. The Frankfurt Court referred the matter to the ECJ for a preliminary ruling, asking:

  • first, whether selective distribution systems for luxury goods that primarily serve to ensure the luxury image of the goods comply with Article 101(1) TFEU;
  • second, whether an undertaking can impose a general prohibition on authorised retailers from engaging third party undertakings discernible to the public to handle online sales regardless of whether the manufacturer's legitimate quality standards are violated; and
  • third, whether such a prohibition constitutes a "restriction of competition by object" under Articles 4(b) or (c) of the Vertical Agreements Block Exemption Regulation ("VABER"). 

Selective distribution systems for luxury products

As to the first question, although the use of selective distribution for luxury products had been endorsed subject to certain conditions in earlier case law of the EU Courts, doubts had been expressed as to whether such an approach was still valid in the light of the more recent Pierre Fabre ruling of the ECJ (where the Court had stated that the prestige image of products could not justify a restriction of competition).

In essence, AG Wahl adopts a positive view of the practice of selective distribution, influenced by the economic literature, which he sees as generally having either pro-competitive or at least neutral effects on competition. Acting within the constraints of the long-established case law (based on Metro SB v. Commission), which makes AG Wahl's extensive intermediate reasoning of greater interest than his necessarily more formalistic conclusion, he reaffirms that the use of selective distribution for high quality products in general, including for luxury and prestige products, is justified by the characteristics of the products. He notes in this respect that the relevant characteristics of the products to consider include not only their physical characteristics, but also the perception which consumers have of the products, in particular the aura of luxury which prestige products enjoy and which distinguishes them from other products. Finding inspiration in the Court's case law concerning trade marks (in particular the ruling in Copad, where the Court held that, in certain circumstances, a licensee could violate a licensor's trade mark rights where the licensee permits the resale of licensed luxury products in discount stores), he notes that an impairment of this aura of luxury may adversely affect the quality of the products themselves in the eyes of consumers. Selective distribution, which enables the network head to ensure that its products are only sold in outlets which enhance their value, thus serves to protect the image, and therefore the quality, of the products, which otherwise would be undermined if sold in an inappropriate retail environment. The protection of the brand image of these products is therefore, in his view, a legitimate goal of selective distribution. As selective distribution systems favour and protect the development of a brand, they in turn also constitute a factor that stimulates inter-brand competition between suppliers of branded goods.

AG Wahl rejects the view that the ECJ intended to reverse this approach in Pierre Fabre, a ruling which, he emphasises, concerned the legitimacy of a prohibition on internet sales in the context of selective distribution as opposed to the legitimacy of the use of selective distribution.

Finally, relying primarily on (but broadening to some extent) the principles outlined in Metro, he concludes that the use of selective distribution for luxury and prestige products, when mainly intended to maintain their luxury image, complies with Article 101(1) provided that three cumulative conditions are satisfied:

  • resellers are selected on the basis of objective criteria of a qualitative nature which are determined uniformly for all potential resellers and applied in a non-discriminatory manner;
  • the use of selective distribution is justified by the nature of the products in question including the prestige image; and
  • the criteria defined must not go beyond what is necessary.

Prohibitions on engaging third party undertakings discernible to the public to handle online sales (i.e., online third-party marketplaces)

This is a question that AG Wahl felt was closely linked to the first issue. Therefore, the starting point of the analysis is that selective distribution systems based on obligations of a qualitative nature do not infringe Article 101(1) TFEU, provided that the Metro-based criteria set out above are met. AG Wahl considers that the objective of preserving the image of luxury and prestige products is always a legitimate objective in the context of selective distribution. He therefore considers that the head of a selective distribution network may, for this purpose, prohibit its distributors from using third undertakings in a discernible manner to sell over the internet.

This prohibition is, in his view, likely to improve the luxury image of the products by ensuring that retailers supply services of a certain level when the contract products are sold, thereby preserving the guarantees of quality, safety and identification of origin of the products. He also considers that such a prohibition helps combat counterfeiting and makes it possible "to guard against the phenomena of parasitism", i.e., the prohibition ensures, by preventing free-riding, that the investments and efforts made by suppliers and authorised distributors to improve the image and quality of the products do not benefit other undertakings.

Although AG Wahl acknowledges that third party platforms are capable of ensuring that the products are presented for sale in an appealing manner, he importantly concludes that an absolute ban on the use of platforms is nonetheless proportionate as a network head has no contractual link with, and consequently no control over, third party platforms used by its retailers.

AG Wahl distinguishes the facts of the case from Pierre Fabre. Whereas Pierre Fabre involved an absolute ban on online sales by authorised retailers, which was found to restrict Article 101(1), Coty permitted its retailers to sell online through their own websites and only prohibited them from selling over internet platforms. Referring to the results of the Commission's e-commerce sector inquiry, he notes that sales by retailers over their own online stores are in practice the preferred method for retailers to sell online, even if marketing through third party platforms is of increasing significance. Therefore, he concludes that, in the present stage of development of e-commerce, the contested prohibition on sales over platforms does not represent a substantial restriction of internet sales.

Even if the Metro criteria were not met, AG Wahl concludes forcefully that a ban on engaging third party undertakings discernible to the public to handle online sales does not imply a sufficient harm to competition so as to constitute a restriction of competition by object within the meaning of Article 101(1) TFEU.  Instead, an effects analysis would be required to determine if it infringes Article 101(1) TFEU.  Even if Article 101(1) TFEU is infringed, a separate assessment would be needed to assess whether the prohibition could meet the exemption requirements of Article 101(3) either on an individual assessment or under the VABER.

Application of the VABER

AG Wahl concludes that the restriction imposed by Coty would be exempted under the VABER as it does not represent a hardcore restriction. Although he makes a distinction between a hardcore restriction under the VABER and an object restriction under Article 101(1) (in the sense that a hardcore restriction is not necessarily an object restriction under Article 101(1)), he acknowledges that the criteria to be applied in determining the existence of both are similar.

He finds no reason to conclude that the clause at issue constituted either a restriction on sales to particular territories or customers within the meaning of Article 4(b) of VABER or a restriction of passive sales to end users within the meaning of Article 4(c) VABER. In addition to repeating earlier analysis concerning the positive purpose of the restriction, he notes that no particular customer group or market could be identified to which users of platforms would correspond. He also opines that these provisions of the VABER do not catch mere restrictions on the methods by which products are sold, which may be key quality criteria in the context of selective distribution. The fact that authorised retailers are permitted to cooperate with third parties to advertise over search engines is a further factor demonstrating that the prohibition does not prevent customers accessing authorised retailers online.

Conclusion

The opinion is of considerable importance. It will be music to the ears of luxury brands, and very disappointing for online platforms such as Amazon and eBay as it suggests that restrictions imposed by brands applicable to sales over online platforms will be very difficult to challenge.  More broadly, it represents a very positive endorsement of selective distribution, which could be significant even where the qualitative requirements of the Metro case law are not met.

The opinion is also in keeping with the Commission's approach. In particular, Paragraph 54 of the Commission's Guidelines on Vertical Restraints provides a basis for legitimate bans on sales through online marketplaces: "where the distributor's website is hosted by a third party platform, the supplier may require that customers do not visit the distributor's website through a site carrying the name or logo of the third party platform". AG Wahl's approach is also consistent with the results of the Commission's e-commerce sector inquiry (see VBB on Competition Law, Volume 2017, No. 5, available at www.vbb.com) which outlined that a marketplace ban does not generally amount to a de facto ban on the use of the internet as a means of marketing and is exempted by the VABER.

It remains to be seen if the ECJ will fully endorse the approach of the Opinion.

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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