The Court of Justice of the European Union (the Court) has clarified in its recent judgment in Coty Germany GmbH v Parfümerie Akzente GmbH that suppliers of luxury goods can restrict the online sale of their products through unauthorised third-party internet platforms where the use of such platforms could damage the reputation of the goods.
Details of the case
The judgment arose out of a dispute between Coty Germany (Coty) and its authorised distributor Parfümerie Akzente GmbH (Akzente) concerning Akzente’s attempt to sell goods from Coty’s luxury line, Coty Prestige, through the online platform Amazon.de.
Coty uses a selective distribution system to distribute high-end brands such as Balenciaga, Gucci, Hugo Boss and Marc Jacobs. Selective distribution systems restrict (i) the number of authorised distributors, usually based on criteria linked to the nature of the product, and (ii) the possibilities of resale, including a restriction on sales to non-authorised distributors. Due to these restrictions, selective distribution systems can be caught by the prohibition of anti-competitive agreements contained in Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). In order to avoid being caught by Article 101(1) TFEU, selective distribution systems must meet a number of conditions, including that the nature of the product in question necessitates such a system to preserve the quality of the product and to ensure its proper use.
Coty justified its selective distribution system on the basis that it is required in order to support the luxury image of these brands. The contracts under which its selective distribution system operates contain detailed stipulations as to the conditions under which these goods may be sold. In particular, Coty authorised the sale of its Prestige line via the ‘online shop windows’ of its authorised retailers but sought to prevent their sale online through third-party internet platforms, including Amazon.
European Court of Justice Decision
The Court re-iterated, by reference to previous case law, that a selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not fall within Article 101(1) TFEU if the following conditions are met: (i) resellers are chosen on the basis of objective qualitative criteria which are applied uniformly to all potential resellers without discrimination; and (ii) the criteria do not go beyond what is necessary.
The Court, citing previous case law, confirmed that Coty’s concerns about the reputation of its Prestige goods were legitimate: “the quality of such goods is not just the result of their material characteristics, but also of the allure and prestigious image which bestow on them an aura of luxury, that that aura is essential in that it enables consumers to distinguish them from similar goods and, therefore, that an impairment to that aura of luxury is likely to affect the actual quality of those goods…”.
The Court then examined the restriction of sales through unauthorised third party online platforms. The Court referred to its previous judgment in Pierre Fabre where it had taken the view that the need to preserve the prestigious image of the goods did not justify a complete prohibition of online sales. In this case, the restriction was not a complete ban of online sales but rather a prohibition of sales via third-party internet platforms. The Court held that such a restriction fell outside Article 101(1) TFEU provided the following conditions are met:
the clause has the objective of preserving the luxury image of the goods in question;
- it is laid down uniformly and not applied in a discriminatory fashion; and
- it is proportionate in the light of the objective pursued
The Court considered that the prohibition of third-party platforms for internet sales of those goods is appropriate to preserve the luxury image of those goods and that it does not appear to go beyond what is necessary. The Court noted, in particular, the lack of a contractual relationship between the supplier and the platforms, which means that the supplier is not in a position to require those platforms to comply with the quality criteria which it has imposed on its authorised distributors.
What does the decision mean for suppliers of luxury goods?
While the Court has previously held in Pierre Fabre that a complete ban on online sales is a breach of EU competition law, it has now clarified that a restriction on sales through third-party online platforms such as Amazon, in the context of a selective distribution system for luxury goods, does not breach EU competition law provided that certain conditions are met. The judgment therefore provides welcome clarity for suppliers of luxury goods on the level of control they may exert over their resellers in protecting the reputation of their products.
However, a number of important questions remain. For example, what type of products are considered to be ‘luxury goods’? When is the prohibition on the use of a third-party online platform considered to be proportionate? It may be difficult to justify such a restriction as a proportionate measure when the supplier itself uses third-party platforms for direct sales. In order to avoid competition law concerns, suppliers who are considering imposing restrictions on online sales of their luxury goods to protect the brand image and prestige of their products should:
- consider whether the nature of the product requires a selective distribution system to preserve the quality of the product and to ensure its proper use
- ensure that the distribution system is based on objective qualitative criteria
- apply the distribution system in a uniform and non-discriminatory manner
- explain the luxury nature of the products
- consider whether the limitation of internet sales are necessary and proportionate to preserve the luxury image of the product