The CJEU's Coty judgment - initial reactions
New decision clarifying EU law on selective distribution and third party platform bans
On 6 December 2017, the EU Court of Justice (CJEU) gave its judgment in Case C-230/16 Coty Germany v Parfümerie Akzente.
The judgment is perhaps a return to business-as-usual for brands which use selective distribution (SD). But it does leave some practical questions and points of uncertainty.
This article summarises the judgment, then looks at its consequences.
Background
Coty operated an SD system in Germany for its products (including fragrances). The system prohibited Coty’s distributors from selling on third party websites, including amazon.de. A German court asked the CJEU:
- whether an SD system designed to maintain a luxury image was prohibited by Article 101(1) TFEU;
- whether a rule in an SD system which prevented distributors from selling on third party websites was prohibited by Article 101(1); and
- whether a third party website ban was a “hardcore” restriction under the EU Block Exemption for vertical agreements (Regulation 330/2010).
Selective distribution to preserve a luxury image
The CJEU held that an SD system designed “primarily” to preserve the luxury image of luxury goods is compatible with Article 101(1) TFEU, so long as:
- distributors are “chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion”;
- the “characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use”; and
- the criteria “do not go beyond what is necessary” (see paragraphs 24 and 29).
The CJEU acknowledged that it had said, in its 2011 judgment in Case C-439/09 Pierre Fabre, that “the aim of maintaining a prestigious 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.” That needed to be understood in its context:
- the goods at issue in that case were not luxury goods, but rather “cosmetic and body hygiene goods”; and
- the Pierre Fabre judgment was about the lawfulness of a total ban on internet sales, rather than the lawfulness of an SD system as a whole (see Coty at paragraphs 30 to 35).
Banning sales on third party websites
Next, the CJEU held that an SD system designed to preserve the luxury image of luxury goods could prohibit distributors from selling on third party websites, compatibly with Article 101(1).
This was on the condition that the third party platform ban met the same requirements referred to above: in essence, it had to be objective, uniform, non-discriminatory and proportionate.
The CJEU considered, in summary, that a third party platform ban could satisfy those requirements if it permitted the manufacturer to retain control over the “quality conditions” of online sales, in a way which contributed to the maintenance of the luxury image (see paragraphs 40 to 58).
Application of the Block Exemption
Finally, the CJEU held that the third party platform ban in Coty’s SD system was not a “restriction of the customers to whom” distributors could sell Coty products, nor a “restriction on passive sales to end users”, for the purposes of Articles 4(b) and (c) of the Block Exemption.
This was because Coty’s distributors were not prevented from selling to online customers – the distributors could sell on their own websites, and there was no distinct group of “third party platform customers” who were unreachable. The CJEU also took into account the fact that Coty’s distributors were permitted to advertise on the internet, so that customers could reach them by way of search engines (for example).
As a result, the third party platform ban was not a hardcore restriction under Article 4, so that the Block Exemption could apply, as a fall-back, to Coty’s agreements.
Consequences
The Coty judgment confirms that manufacturers which operate SD systems can use forms of control which had recently been brought into question (largely because of the earlier Pierre Fabre judgment).
So the new judgment is a return to business-as-usual. It does, though, give rise to some practical questions.
1. What are “luxury goods”?
The judgment suggests that an SD system designed to preserve a luxury image is only lawful for luxury goods – and that (in the earlier case) Pierre Fabre’s products did not count as luxury goods. So what separates luxury goods from non-luxury goods?
The CJEU said that luxury goods are distinguished from other goods by their “aura of luxury”, which is “bestowed” by their “allure” and “prestigious image” (see paragraph 25). That reasoning is perhaps open to criticism, but it suggests that, in practical terms, factors like brand recognition, price premium and sales locations will separate a luxury item from its non-luxury alternatives.
It follows that brands which currently use SD should not struggle to show that their products are luxury goods, if there are cheaper or sub-premium alternatives which are sold in a wider range of shops. It will no doubt be helpful to phrase SD contracts, and any other documents used in SD systems (such as selection criteria) in terms of the luxury nature and aura of the goods, where relevant.
It might be objected that some of Pierre Fabre’s products could count as luxury goods based on this approach. The best answer is probably that the Pierre Fabre judgment should be treated as confined to its particular circumstances – the CJEU seems to have been very keen to abandon it, on grounds which, again, are perhaps open to criticism.
Finally, the Block Exemption will of course continue to apply to selective distribution agreements where the parties’ market shares are below the thresholds and there are no hardcore restrictions. The definition of selective distribution contained in the Block Exemption makes no reference to the quality or characteristics of the products, which should mean that, for these purposes, their luxury aura or nature is irrelevant.
2. Does an SD system designed for the sole purpose of preserving a luxury image fall outside Article 101(1)?
The CJEU’s judgment refers to an SD system designed primarily to preserve a luxury image, and says that such a system will be lawful on the condition that (among other things) the product in question requires SD “in order to preserve its quality and ensure its proper use”.
This suggests that the SD system in fact needs to be doing something more than simply preserving the product’s luxury image; the system also needs to be designed to ensure that customers use the product correctly.
Yet the products in question in the Coty case were fragrances, and it seems implausible that Coty’s SD system was designed in part to ensure that its fragrances were used properly (“you spray it here; that’s enough”). Sadly the CJEU’s judgment does not explore this point.
Some brands will no doubt be able to argue that their SD systems do in part help customers to use products correctly, or at least purchase the correct product for their intended use – examples might include some sports footwear, consumer electronics or beauty products.
For other products (such as fashion items, or indeed fragrances) this may be more doubtful. SD systems for these products seem more likely to be based solely on brand image, and the Coty judgment leaves an element of uncertainty as to whether these systems will always escape Article 101(1).
Again, though, the Block Exemption should in principle remain available, as noted above.
3. Can an SD system allow sales on some third party websites but not others?
This is an important question in practice, but one which the Coty case does not address.
It seems to follow from the CJEU’s analysis of the Block Exemption that a differential ban on third party websites (banning sales on some but not others) won’t be a hardcore restriction. So where the parties are otherwise able to rely on the Block Exemption (and in particular where the market share thresholds are not exceeded), a differential third party platform ban should be permitted by EU competition law.
Outside the Block Exemption, whether differentiation between third party websites is permissible seems likely to depend on the same questions underlying the SD system as a whole: is it objective, uniform, non-discriminatory as between distributors, and proportionate? Where the system is primarily based on the need to preserve a luxury image, any differentiation between third party websites should at least be based on clear and consistent reasons as to why some sites are allowed and others not.
Jorren Knibbe
Guildhall Chambers
11 December 2017