Coty judgment[1] – balancing brands and online sales

The European Court of Justice (ECJ) has confirmed that appropriate restrictions within a selective distribution system to protect a luxury brand and the environment for its sale in an online context do not breach the competition rules.

The ECJ concludes that selective distribution systems (i.e. which set specified criteria for selection of those permitted to sell the goods) that are primarily designed to preserve the luxury image of those goods do not breach the competition rules. Further, within the context of such a system, a ban on the use of third party platforms (such as online marketplaces) to sell the goods will not breach the competition rules provided it:

• has the objective of preserving the luxury image of the goods
• is set down uniformly and applied without discrimination
• is proportionate to the (legitimate) objective pursued.

While the German court which referred these legal issues to the ECJ for determination must decide whether Coty's ban on third party platforms does in fact meet these conditions, the ECJ ventured its view that it does. Importantly, it indicated that the restriction is proportionate. In the absence of a direct contractual relationship between supplier and third party platform, a ban on use of third party platforms by distributors is an effective means of ensuring that the online environment in which a supplier's products may be sold corresponds to the quality requirements it imposes on distributors.

The ECJ judgment also confirms that the third party platform ban is neither a restriction on customers nor a restriction on passive sales, such as would amount to a hardcore restriction removing the benefit of block exemption under VABE[2], because it does not ban all Internet sales and customers are able to purchase via the websites of authorised distributors. Absolute bans on Internet sales continue to be unacceptable restrictions.

Comment

The ECJ's judgment finally resolves the uncertainties raised by its earlier decision in Pierre Fabre[3]. The ECJ clarifies that it did not intend to set out a general statement of principle on selective distribution systems in that earlier judgment. The Pierre Fabre decision was specific to the circumstances of the case, with the ECJ taking the view that the need to preserve the (non-luxury) image of the products at issue was not a legitimate requirement justifying a complete ban on Internet sales. By contrast, the ban in Coty is not absolute as authorised distributors are permitted to sell via their own websites or via third party platforms that are not visible or discernible to end-users and, subject to meeting certain conditions, to advertise on third party sites.

The Coty decision deals only with selective distribution systems for luxury goods and the German Competition authority has been quick to say that it will have limited impact on its investigations, as the ECJ went to some lengths to restrict its judgment to genuinely prestigious products. However the judgment may have implications for selective distribution systems for other types of goods, where selective distribution is justified under the competition rules because the nature of the goods requires the use of such a system.

The ECJ's analysis that a third party platform ban in a selective distribution system for luxury goods does not amount to a hardcore restriction under VABE can logically be extended to (justifiable) selective distribution systems for non-luxury goods – all goods (whether luxury or not) that qualify for selective distribution should be treated in the same manner. The ECJ's conclusion that the third party restriction is not a hardcore restriction carries with it the implication that it is not a restriction by object within Article 101(1)). If the same reasoning cannot be applied to non-luxury goods it should, at the very least, be arguable that an effects-based analysis should apply in these cases. However a definitive answer on this (and full comfort on third party platform bans in selective distribution systems for non-luxury products) may well require a further reference to the ECJ.