Luxury brands can control sales over third party websites
The Court of Justice of the European Union (CJEU) has issued a decision which has been welcomed by producers of luxury goods, as it allows luxury brands to control the distribution of their luxury products over the internet. In order to maintain perceived exclusivity, in certain circumstances it is not anti-competitive for them to prevent distributors selling their products on third-party websites and online platforms, such as Amazon and eBay.
The case was initiated by US company Coty, an owner of luxury and high-end brands such as Calvin Klein, Chloé, Hugo Boss, Gucci, Miu Miu and Tiffany & Co.
To safeguard the luxury image of its brands, Coty uses a selective network of distributors. Their distribution contracts contain various clauses to preserve the high-end luxury status of the brands, for instance the distributors must make sure their shops adhere to luxury standards of location, decor and furnishing. Furthermore, Coty only allows online sales via the distributor's own "electronic shop window" – and prohibits the distributors from using third-party websites.
Legal proceedings were initiated when Coty's distributor Akzente sold Coty's brands via 'amazon.de'. The case was eventually referred to the CJEU, to consider whether Coty's selective distribution network and provisions preventing distributors from selling Luxury products freely in the online marketplace are in violation of EU competition law.
Following settled case law, in which luxury brands were already allowed to use selective distribution systems in the offline marketplace, provided that they were intended to preserve the luxury image of their goods, the CJEU concluded that contracts which prohibit authorised resellers from using, in a discernible manner, third-party platforms (such as Amazon and eBay) for internet sales, is not in breach of fair competition, provided that:
(a) such contract has the objective of preserving the luxury image of the goods;
(b) such contract is laid down uniformly and not applied in a discriminatory fashion;
(c) such contract is appropriate in the light of the objective of preserving the luxury image.
The Court did not provide any guidance as to what products would qualify as "luxury goods" but did clarify that the quality of luxury goods is not simply the result of their material characteristics, but also the allure and prestigious image which bestows on them an aura of luxury. Such aura is considered as an essential aspect of those goods and any impairment to that aura of luxury is said to likely affect the actual quality of the goods.
The CJEU further commented that in their opinion, as far as Coty's contracts were concerned, the criteria were met. It was acknowledged that the lack of a contractual relationship between Coty and the third-party platform could be problematic in case Coty wanted to enforce their luxury standards upon them. Furthermore, marketplace bans do not generally amount to a de facto prohibition on selling online or restrict the effective use of the internet as a sales channel irrespective of the markets concerned. Also, it does not restrict the territory into which the distributor can sell, nor does it prevent the distributor from selling to any particular customer group.
Distributors completely at the mercy of suppliers?
Could this decision now serve as an incentive for brands to impose such requirements on their distributors? Although the decision may motivate more brands to try and control their distributors in a similar way, a selective distribution network and an online-platform ban may not be something that non-luxury brands would even strive for given that online platforms can help drive sales.
Further, what was acceptable for Coty to impose on its distributors may not be acceptable for non-luxury brands. By definition, non-luxury brands do not have a luxury image which needs to be safeguarded or could be impaired. The question when a brand should qualify as a "luxury brand" is an open one.
Whether you are a (luxury) brand owner or otherwise active in the online marketplace, there are lessons to be learned:
- Luxury brands are allowed to lay down quality requirements on their distributors and their methods of distribution, provided that these requirements have the objective of preserving the luxury image of the goods.
- Retailers of luxury brands may be required by their suppliers to create their own "online shop-window" (or by a third party in a non-discernible manner) if they wish to offer these brands to the public online. For many small and medium-sized retailers, online marketplaces are important sales channels and the decision may therefore be considered as setback for them.
- The decision may be seen as a setback for third-party platforms like Amazon and eBay as luxury brands are now able to prohibit the sales of their products on such marketplaces.
The question what qualifies as "luxury" however remains.
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.