ECJ approves the use of selective distribution systems to protect luxury images of products in Coty decision

On 6 December 2017, the European Court of Justice (ECJ) handed down its preliminary ruling in Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH. The ECJ confirmed that a supplier of luxury goods may prohibit authorised retailers from selling its products on third party platforms, such as Amazon and eBay. This ruling brings much needed certainty for manufacturers seeking to protect the ‘luxury image’ of their luxury and prestige products through selective distribution systems.

Background

A selective distribution system is one in which a supplier agrees to supply only approved distributors who meet certain qualitative and/or quantitative criteria and the distributors agree to supply only end users or other approved distributors within the network.

The question as to whether such schemes are compatible with competition law was once considered settled law. In the Metro case¹ in 1977, the ECJ confirmed that, notwithstanding the inherent restrictions of selective distribution schemes, such systems may be considered to be compatible with Article 101 of the Treaty on the Functioning of the European Union (TFEU) where the following criteria are met:

1. the properties of the product necessitate a selective distribution system;
2. resellers are chosen on the basis of objective criteria of a qualitative nature which is determined uniformly for all potential resellers and applied in a non-discriminatory manner; and
3. the restrictions do not go beyond what is necessary.

This ruling encouraged manufacturers of luxury and prestige products such as perfumes and cosmetics to set up selective distribution systems to protect their brands. But in 2011 in the Pierre Fabre case² the ECJ appeared to restrict this approach stating: “the aim of maintaining a [prestige] image is not a legitimate aim for restricting competition and cannot therefore justify a finding that a contractual clause pursuing such an aim does not fall within Article 101(1)TFEU”. This was in the context of a contractual clause which imposed a complete ban on online sales in respect of certain cosmetic goods. Nonetheless, the judgment created significant uncertainty for manufacturers, distributors and indeed the national courts as concerns the legitimacy of restrictions imposed through selective distribution systems.

Preliminary ruling in the case of Coty

The main proceedings in the Coty case relate to an appeal at the Higher Regional Court Frankfurt a. M. concerning a restriction preventing luxury products being sold on third-party platforms (for example Amazon, eBay). Given the lack of certainty about the legitimacy of such restrictions to protect a ‘luxury image’, the Higher Regional Court Frankfurt a. M. asked the ECJ to make a preliminary ruling on the following key points:

1. Do selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to protect a “luxury image” for the goods constitute an aspect of competition that is compatible with Article 101(1) TFEU?
2. If yes: Does it constitute an aspect of competition that is compatible with Article 101(1) TFEU if the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party platforms discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case?
3. Is Article 4(b) of Regulation 330/2010 to be interpreted as meaning that any prohibition on engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of the retailer’s customer group “by object”?
4. Is Article 4(c) of Regulation 330/2010 to be interpreted as meaning that a prohibition on engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of passive sales to end users “by object”?’

ECJ decision

In its preliminary ruling, the ECJ³ responded positively to both the first two questions, clarifying that the use of selective distribution systems for products with a luxury image is (still) permitted under Article 101(1) TFEU. Consistent with the Opinion of Advocate General Nils Wahl⁴ the ECJ found that a luxury image is a product-characteristic which necessitates selective distribution. The ECJ reasoned that consumers of luxury products associate these products with a particular “aura of luxury” which enables them to distinguish them from similar goods and, therefore, that an “impairment” to that aura of luxury is likely to affect the actual quality of the goods. The ECJ considered that the characteristics and conditions of selective distribution systems can help to preserve the quality of luxury products and ensure the proper use of such goods.

The ECJ referred to the case of Pierre-Fabre, and clarified that the finding in that case that the need to preserve the ‘prestigious image’ of cosmetic and body hygiene goods was not a legitimate requirement for the purpose of justifying a comprehensive ban on online sales, was limited solely to the goods at issue and the contractual clause in question.  The ECJ emphasised that in any event there was not an absolute ban on online sales in Coty because under the terms of the selective distribution system resellers were allowed to sell their products via own online shops and third-party undertakings that were not discernible to the public.

Applying these principles, the ECJ endorsed the prohibition on internet sales by discernible third-party platforms, such as Amazon and eBay, as an adequate instrument to promote competition. The Court reasoned that the prohibition of online sales via discernible third-party platforms directly influences the luxury image of the product when viewed from a consumer perspective. The ECJ considered that provided resellers are chosen on the basis of objective criteria of a qualitative nature which is determined uniformly for all potential resellers and applied in a non-discriminatory manner, imposing a prohibition on online sales via discernible third party platforms does not go beyond what is necessary to protect the luxury image of the product. This was provided the restrictions were limited to what was ‘necessary’ as required by the Metro judgment.

The ECJ considered the third and fourth questions put to it by the Higher Regional Court Frankfurt a. M. and stated that in neither case would the use of a selective distribution system that was not compatible with Article 101(1) TFEU amount to a restriction by ‘object’ – i.e. there would need to be a detrimental effect on competition to be found for the conduct to be prohibited.

Practical implications for business

The ECJ’s ruling primarily affects manufacturers of luxury products that have set up or are setting up a selective distribution system. While national courts maintain discretion to assess protected goods on a case-by-case basis, the ruling nonetheless provides helpful guidance for companies as to what is / is not permissible.

The key takeaways from the Coty case are:

1. a selective distribution system to distribute luxury products must be necessary to protect the luxury image of the product;
2. the restrictions inherent in the system must be consistent with the aim of protecting that luxury image and should go no further than is necessary to achieve this aim;
3. the restrictions imposed on distributors should be equivalent for online sellers and ‘brick and mortar’ sellers and must be applied in a non-discriminatory manner;
4. restrictions on sales via discernible third-party platforms to protect a luxury image are permissible provided that this does not give rise to a de facto prohibition on online sales;
5. it is arguably permissible to restrict sales via discounters or retailers which primarily operate on a secondary market;
6. the requirements of the selective distribution system should be assessed regularly to ensure they remain fit for purpose.

For advice on the issues raised by this ruling, please contact us.