On December 6, the Court of Justice of the European Union (CJEU) delivered its final ruling in the Coty case. This is a landmark judgment, since it will have a strong impact on the internet sales strategies of all those companies that, in order to preserve the quality of their products and ensure their proper use, want to use a selective distribution system. In this regard, it has to be recalled that from the perspective of EU competition law, selective distribution is a distribution system where the supplier undertakes to sell the contract goods or services only to retailers which meet specified qualitative criteria and where these retailers undertake to sell such goods only to final consumers or to other authorised retailers within the territory reserved by the supplier to operate that system.
The facts of the case
Coty Germany is a company which sells luxury cosmetics in Germany via a selective distribution network. Coty justifies its selective distribution system in order to support the luxury image of its brands.
Now, according to Coty’s selective distribution contract, as amended in 2010, authorised retailers can sell on the internet only through their online shops and not through third-party undertakings which are not part of Coty’s selective network, including platforms like Amazon.
Parfümerie Akzente, an authorised distributor of Coty’s products for many years, refused to sign the 2010 amendments to the selective distribution contract and started selling Coty’s products via Amazon.de. As a consequence, Coty sued Parfümerie Akzente before the national Court of first instance. The Court of first instance ruled in favour of the Parfümerie Akzente, having considered the online marketplace ban imposed by Coty as a hardcore restriction of competition standing outside the safe harbour provided by the Vertical Block Exemption Regulation (VBER).
However, the Court of second instance decided to stay the proceeding and to refer some questions to the CJEU.
Question 1: does a selective distribution system for luxury goods comply with EU competition law?
Already in past cases (COPAD), the CJEU had the chance to stress that selective distribution may enhance competition, since it allows manufacturers to emphasise the qualitative aspects of their products and to meet the demand of higher-end consumers. This is particularly true for luxury goods, whose “aura” may be safeguarded by means of specific qualitative criteria imposed to retailers.
However, some conditions have to be respected under established case law: 1) the criteria to access the selective network shall be objective and of a qualitative nature; 2) they shall be applied uniformly to all potential retailers, without discriminations; 3) the characteristics of the product shall necessitate such a network in order to preserve its quality and ensure its proper use; 4) the qualitative criteria shall not go beyond what is necessary.
Question 2: in the context of a selective distribution system for luxury goods, is an online marketplace ban compatible with EU competition law?
On this point, the CJEU is of the view that this clause is consistent with the specific characteristics of the selective distribution system, as it provides the supplier with a guarantee that, in the context of online sales, its luxury products will be exclusively associated with the online shops of the authorised retailers.
In this regard, the CJEU recognizes that internet platforms like Amazon or E-Bay constitute a sales channel for goods of all kinds, and that this circumstance might deteriorate the brand equity and the image among consumers of luxury goods sold therein. The absence of a contractual relationship between the supplier and internet marketplaces would prevent the supplier from enforcing against these platforms the qualitative criteria imposed on its authorised retailers, and this might frustrate the entire purpose of having a selective distribution in place.
In conclusion, the CJEU refers to the final report of the e-commerce sector inquiry carried-out by the Commission to argue that more than 90% of the surveyed retailers own online shops and, therefore, the online marketplace ban would not have a foreclosure effect toward the internet channel of sales.
Question 3: does an online marketplace ban entail a hardcore restriction of competition law under the VBER?
The referring Court asks whether the abovementioned prohibition may entail a restriction of the end users to whom authorised retailers can sell the products or a restriction of authorised retailers’ passive sales to end users. These conducts are considered by-object breaches of EU competition law.
The CJEU explains that an online marketplace ban does not prevent customers of third-party internet platforms from buying the products. Indeed, insofar as authorised distributors are allowed to advertise via the internet on third party platforms and search engines, customers of third-party internet platforms will be able to find the online offer of authorised distributors. Further to this, the online marketplace ban does not prohibit the use of the internet as a means of marketing the contract goods, so it does not amount to a restriction of passive sales as defined in Pierre Fabre.
The main outcome arising from Coty is that manufacturers of luxury goods may legally prevent their authorised retailers – in the context of a selective distribution system – from selling the contract goods on online marketplaces like Amazon, E-Bay or Alibaba. However, restrictions on the right of the authorized distributors to advertise their products on internet platforms or search engines is likely to entail a breach of competition law.
Moreover, in light of the wording employed by the CJEU, it seems that the online marketplace ban complies with EU competition law regardless of the luxury nature of the goods. Therefore, the conclusions expressed by the Court should apply also to non-luxury goods subject to selective distribution, upon condition that the market shares of the manufacturer or retailers do not exceed the 30% threshold provided by the VBER.