Selective Distribution Systems In EU Competition Law - C-230/16 ...

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Judgment of 6 December 2017, Coty Germany, C-230/16, EU:C:2017:941

I. Legal Context

Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’) prohibits all anti-competitive agreements, decisions and concerted practices which distort the single market. However, some restrictive agreements may produce objective economic advantages that counterbalance the adverse effects of the restriction of competition. Those agreements can be subject to the exception from Article 101(3), provided that they fulfil the four cumulative criteria mentioned therein. Vertical agreements containing vertical restraints can benefit from a block exemption, provided that they satisfy the conditions of Article 101(3) TFEU. Article 2(1) of Regulation 330/2010 provides: Pursuant to Article 101(3) [TFEU] and subject to the provisions of this Regulation, it is hereby declared that Article 101(1) [TFEU] shall not apply to vertical agreements. The Court had to rule whether the organisation of a selective distribution network for luxury goods is illegal under Article 101(1) TFEU. Moreover, it had to ascertain if under Article 101 TFEU a contractual clause, which prohibits authorised distributors in a selective distribution system to sell products via Amazon and other online marketplaces to preserve their ‘aura of luxury’ is allowed. Finally, it had to rule whether such clause constitutes a restriction of distributors’ customers, within the meaning of Article 4(b) of the Regulation or a restriction of passive sales to end users, within the meaning of Article 4(c) of that Regulation. The Court ruled that a selective distribution system at issue is in a compliance with Article 101(1) TFEU as long as its primary objective is to preserve the luxury image of those goods and that resellers are selected on the basis of objective criteria of a qualitative nature, prescribed uniformly and applied in a non-discriminatory manner and that the criteria do not exceed the necessity. Furthermore, it ruled that the contractual clause at issue is not precluded under Article 101(1) TFEU provided that it meets the aforementioned conditions. Lastly, the Court held that such restriction does not constitute a restriction of customers within the meaning of Article 4(b) of that Regulation, nor a restriction of passive sales to end users, within the meaning of Article 4(c) of that Regulation.

II. Facts

Coty Germany (‘Coty’) is a luxury cosmetics brand selling its products in Germany. The undertaking promotes particular brands on the basis of a selective distribution contract through a selective distribution network. Parfümerie Akzente, as an authorised distributor, has for many years sold Coty Germany goods at brick-and-mortar locations and via the Internet. Online sales are carried out both via its own online shop and through the marketplace ‘amazon.de’. Coty’s selective distribution system is justified by it in the following way: the character of Coty Prestige’s brands requires selective distribution in order to support the luxury image of these brands. Every sales location has to be approved by the brand and has to meet various requirements. A clause on internet sales provided that the authorised retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorised. Subsequently, it was adjusted due to the entry into force Regulation 330/2010, to the following wording: the authorised retailer is entitled to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an “electronic shop window” of the authorised store and the luxury character of the products is preserved. Parfümerie Akzente rejected the changes and subsequently Coty brought legal charges against it. Coty sought a judgement preventing Parfümerie Akzente from selling Coty’s products via ‘amazon.de’. The national court dismissed Coty’s claims because the clause was contrary to German competition law or Article 101(1) TFEU. It ruled that the intention of protecting an aura of luxury of the brand could not justify a selective distribution system which by its very nature restricted competition. In the Court’s view it constituted a hardcore restriction under Article 4(c) of Regulation 330/2010. According to the Court the clause was not entitled to benefit from individual exemption due to the fact that it was not proven that such a restriction produced efficiencies that outweighed the detriment for competition. The Court took the view that the prohibition at issue was unnecessary, on the grounds that there existed less restrictive means to achieve the objective. Coty appealed before a Higher Regional Court. The Court referred preliminary questions to the Court of Justice, since it was unsure whether the clauses were lawful under EU competition law.

III. Analysis

Selective distribution agreements undoubtedly affect competition in the internal market according to the Court of Justice. Notwithstanding, such agreements are not prohibited by Article 101(1) TFEU provided that the distributors are selected based on objective criteria of a qualitative nature, uniform for all potential resellers and not administered in a discriminatory manner and it is necessary for such products to maintain their quality and proper use and the criteria do not go above what is necessary. The Court emphasised that quality of luxury items is not resulting only from their physical characteristics but also from an aura of luxury which is crucial for customers to differentiate from them from similar goods. Thus, damage to the aura of luxury is probable to influence the actual quality of those goods. The Court took the view that a selective distribution system might maintain the quality and safeguard the proper use of such goods. The contractual clause prohibiting distributors to use, in a discernible manner, of third-party online platforms for sale of the goods, has the aim of maintaining the aura of luxury and prestige of the goods. The prohibition imposed on the authorised retailers has to be appropriate and necessary. The Court noticed that such clause guarantees the producer that those goods will be solely associated with the authorised retailers. The clause allows the luxury goods supplier to control whether the goods are sold in a way that is related to the qualitative conditions agreed upon with distributors. Such third-party platforms distribute all kinds of goods, the sale of luxury items entirely through online stores of authorised distributors contributes to the aura of luxury and consequently sustains one of the most fundamental characteristics of the goods sought by consumers. Having said that, the Court ascertained that the clause was appropriate. With regards to necessity, it was observed that the clause does not enclose an absolute prohibition to sell the goods online. Selling the goods online via distributors’ websites, provided that they have an electronic shop window for the authorised shop and the luxury image if the goods is maintained, and via unauthorised third-party platforms provided that the use of them is not discernible to the consumer, was allowed. In the Court’s view such prohibition did not go beyond what is necessary. The vertical agreement containing vertical restraints could benefit from a block exemption under Article 2 of the Regulation 330/2010 provided that the market share thresholds from Article 3 of that Regulation were not exceeded and such restriction does not constitute a hardcore restriction from Article 4 of the Regulation. The Court had to determine whether such clause hampers the customers to whom authorised distributors can sell the goods or whether it impedes passive sales of authorised distributors to end users. Firstly, the clause does not hinder online sales and furthermore it does not delimit, within the group of online buyers, third-party platform clients. The Court noted that authorised distributors were allowed to market through online third-party platforms and to use search engines which resulted in enabling customers to find online offer of an authorised distributor using such engines. In the light of aforementioned considerations, the Court took the view that the prohibition at issue does not constitute a restriction of the customers of distributors, within the meaning of Article 4(b) of Regulation 330/2010, nor a restriction of authorised distributors’ passive sales to end users, within the meaning of Article 4(c) of that Regulation.

IV. Practical significance

The ruling ends a dispute between the European Commission and some courts of the Member States and competition authorities on the treatment of third-party platform prohibitions. Banning the use of third-party platform was considered an appreciable restriction of competition by these national courts. The Court of Justice does not act in accordance with this interpretation and endorses the line of reasoning introduced by the Commission. The judgment highlights the link between the nature of the products and objective justification theory.[1] The decision confirmed the possibility for the luxury industry to engage in particular selective distribution systems without violating European Union competition law. According to the European Commission the preliminary ruling provides more clarity and legal certainty to market participants that had been facing diverging views on the legality of their distribution practices…The judgment will also facilitate a uniform application of competition rules across the EU[2]. Producers of luxury goods that have set up or are setting up a selective distribution system and internet distribution platforms are predominantly affected by the ECJ’s judgement. The ruling serves as a practical guidance for companies on what is lawful in a such system. Undoubtedly, the decision is beneficial to the luxury products industry since it permits undertakings to control the goods’ distribution to a greater degree and to preserve the aura of luxury. The ruling has also a positive impact on distributors of luxury products since it allows producers thereof to restrict online sales only if the conditions are necessary and reasonable for maintaining the aura of luxury. However, luxury might be hard to define and may encourage mass-market brands to preclude sales on online platforms.

[1] Frank Wijckmans, Coty Germany GmbH v Parfümerie Akzente GmbH:Possibility in Selective Distribution System to Ban Sales via Third-Party Platforms, Journal of European Competition Law & Practice, 2018, Vol. 9, No. 6.

[2] European Commission, Competition Newsroom, 6 December 2017.

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