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Digital Business Lawyer
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AG considers that a supplier of luxury products can ban retailers from selling on third party platforms

One of the most closely watched competition law cases of recent times has been the case of Coty Germany GmbH v. Parfümerie Akzente GmbH. The case is currently before the Court of Justice of the European Union (‘CJEU’) and concerns whether it is possible for a supplier of luxury products operating a selective distribution system to ban its authorised retailers from selling the supplier’s products on third party platforms such as Amazon and eBay. On 26 July 2017, the case reached a significant milestone, with the publication of Advocate General (‘AG’) Wahl’s Opinion on the matter. Paul Stone, Partner at Charles Russell Speechlys, dissects the case, AG Wahl’s Opinion and the wider impact of the case.

According to the AG, a supplier of luxury goods may prohibit its authorised retailers from selling its products on third party platforms such as Amazon or eBay. The basis for the AG’s Opinion is that the purpose of such a prohibition is to preserve the luxury image of the products concerned and so, subject to certain conditions, it is not caught by the prohibition of anti-competitive agreements set out in Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’). In fact, AG Wahl considers that such a prohibition is likely to improve competition based on qualitative criteria.

As well as providing support for bans on sales over third party platforms, the AG’s Opinion also confirms the justifications for using selective distribution systems more generally, indicating that such systems should usually be considered to give rise to beneficial - or at least neutral - effects on competition, in circumstances where they are intended to preserve the luxury image of the products and are based on purely qualitative criteria.

If the final judgment of the CJEU confirms the AG’s Opinion, this is likely to be welcomed by the luxury goods sector and other industries that make extensive use of selective distribution systems for the distribution and retailing of their products.

Background

Selective distribution systems tend to be used by suppliers of luxury and high quality products for the distribution of their products. Under these systems, the supplier selects authorised retailers to sell its products based on specified selection criteria.

Coty is a German supplier of luxury cosmetics and markets them through a selective distribution network of authorised retailers. The stores operated by authorised retailers must meet a number of requirements in terms of retail environment, décor and furnishing. Authorised retailers are also entitled to offer and sell Coty’s products on the internet. However, they are only entitled to do so through an ‘electronic shop window’ of the authorised retailer and on condition that the luxury character of the products is preserved. In addition, authorised retailers are expressly prohibited from making discernible use of unauthorised third parties for internet sales of the products. These clauses were introduced in 2012 as part of amendments to Coty’s standard form distribution contract.

Parfümerie Akzente has been an authorised retailer of Coty’s products for a number of years, both in its bricks and mortar stores and on the internet. Internet sales are made partly through its own online store and partly via the platform ‘amazon.de.’ Parfümerie Akzente did not accept the amendments to the distribution contract introduced in 2012. As a result, Coty brought an action before the German courts seeking an order prohibiting Parfümerie Akzente from distributing the contract products via the platform ‘amazon.de.’

As part of the German court proceedings, the Supreme Regional Court, Frankfurt am Main, decided to make a reference to the CJEU, asking the Court to determine whether the prohibition on selling on the internet though unauthorised third parties is compatible with EU competition law.

The Advocate General’s Opinion

In his Opinion, AG Wahl refers to previous case law in the area of selective distribution, notably Case C-26/76 Metro SB-Großmärkte v. Commission. The AG considers that this case confirmed that the nature and characteristics of luxury goods may require the implementation of a selective distribution system, in order to preserve the quality of those goods and to ensure that they are properly used. He states that this case law is still valid and has not been undermined by more recent cases, such as Case C-439/09 Pierre Fabre Dermo-Cosmétique, where the CJEU held that a complete ban on internet sales could not be justified.

According to the AG, the principles arising from that case law are that selective distribution systems relating to the distribution of luxury and prestige products are not necessarily caught by the prohibition on anti-competitive agreements set out in Article 101 of the TFEU, where they meet three criteria. Those criteria are that:

• the resellers are chosen on the basis of objective criteria of a qualitative nature, which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers;

• the nature of the product in question, including its prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used; and

• the criteria established do not go beyond what is necessary.

Accordingly, in the AG’s view, a provision, whereby Coty prohibits its authorised retailers from using in a discernible manner third party platforms for internet sales of the contract goods, is not necessarily caught by Article 101, where these three criteria are met. As this a matter of analysing the particular arrangements in this case, this would be for the German courts to decide, although he observes that the contested clause did not appear to be caught by Article 101.

AG Wahl goes on to discuss what he considers to be the legitimate basis for the clause. In his view, the clause is likely to improve competition based on qualitative criteria, by ensuring that the luxury image of the products is preserved, through being sold in an environment that meets the qualitative requirements imposed by the supplier. He also considers that the prohibition makes it possible to guard against freeriding, by ensuring that the investments and efforts made by the supplier and other authorised distributors to improve the quality and image of the products concerned do not benefit others who have not made those investments or efforts.

The AG also emphasises that the clause does not impose an absolute prohibition on, or a substantial restriction of, online sales. Coty only required its authorised distributors not to sell the contract products via third party platforms and distributors were free to make use of their own online stores to sell the products. The AG goes on to consider the position, in the event that it were considered that the clause could be caught by Article 101. Based on his assessment of the clause, he does not consider that it would give rise to a restriction of competition “by object.”

He also considers whether, if the clause were found to be caught by Article 101, it would benefit from exemption under the vertical agreements block exemption. He concludes that the clause would not constitute a so-called ‘hardcore’ restriction of competition for the purposes of the block exemption, which would cause the block exemption not to apply. In particular, he does not consider that the prohibition constitutes a restriction of the retailer’s customers or a restriction of passive sales to end users. As a result, he concludes that the block exemption would be capable of applying in this case.

Conclusion

The AG’s Opinion is not binding on the CJEU. However, the final judgment of the Court usually accords with the AG’s view. If the final judgment does confirm the AG’s Opinion, this outcome is likely to be welcomed by the luxury sector and many other sectors that use selective distribution systems. This is particularly so, given that there has been a degree of uncertainty over the status of bans on sales on third party platforms, following conflicting decisions in a number of cases before national competition authorities and courts, notably in Germany.

The European Commission’s view, which was confirmed as part of its E-Commerce Sector Inquiry, is that restrictions on sales on third party platforms should not be regarded as hardcore restrictions of competition. It is interesting to note that the Commission lodged observations with the Court in support of Coty in this case and participated in the hearing, in order to confirm this view.

Paul Stone Partner

paul.stone@crsblaw.com

Charles Russell Speechlys, London

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