23 Feb 2018
Highest EU Court Rules in Favour of Restrictions on the Use of Internet Platforms for “Luxury” Goods
On 6 December 2017, the Court of Justice of the European Union (the ECJ or the Court) handed down its judgment in the notorious Coty case. The Court ruled that producers of luxury goods can restrict internet sales, if the restriction is "appropriate and ... [does] not, in principle, go beyond what is necessary to preserve the luxury image of the goods." This judgment is highly relevant to Hong Kong traders of luxury goods, who may face restrictions on online marketplaces as a result of the ruling.
The present case concerns a dispute between Coty Germany GmbH (Coty), a producer of branded luxury cosmetics, and Parfümerie Akzente GmbH (Parfümerie Akzente), a member of its selective distribution system. According to the terms of Coty’s selective distribution agreement, authorised retailers were prohibited from either using a different name or from engaging an unauthorised third-party in a manner discernible to the public in relation to internet sales.
Parfümerie Akzente breached this agreement by selling Coty products online through Amazon. This conduct gave rise to a dispute before a German Court, which referred questions for a preliminary ruling to the ECJ.
Concerning the use of selective distribution systems for luxury goods and the platform restriction, the Court essentially held that:
- the nature of luxury products justifies the use of selective distribution under EU competition rules to preserve their luxury image, provided that the system itself meets certain conditions established by case law;
- a prohibition on selling luxury goods on third party online platforms in a manner discernible to consumers is in principle compatible with EU competition law where it is intended to ensure the luxury image of those goods; and
- a prohibition on selling those goods on third party online platforms in this manner is, in any event, exempted by the Vertical Agreements Block Exemption Regulation (VABER).
The key issue in the ECJ’s analysis was whether the characteristics of a luxury product necessitate the use of selective distribution in order to preserve its quality and ensure its proper use. It appears that the ECJ considered “prestige” to be an essential element of luxury and that luxury and prestige products are equivalent. In deciding that this condition is met, the ECJ equated the luxurious image of a product with a product’s quality.
Under established EU case law, quality is a key element in justifying the use of selective distribution. Referring to the “aura of luxury” that surrounds luxury goods, the ECJ noted that the quality of such goods is not simply the result of material characteristics, but also of the “allure and prestigious image” of the goods in question. The protection of that “aura” may therefore justify the prohibition of sales through unauthorised resellers which is achieved through the use of selective distribution, and which ensures that the products are only displayed in sales outlets in a manner which contributes to their reputation in the eye of the consumer.
The ECJ confirmed previous case law holding that a selective distribution system for luxury goods does not infringe EU competition law provided that: (i) resellers are chosen on the basis of objective criteria of a qualitative nature, (ii) the restriction is laid down uniformly for all potential resellers, (iii) the restriction is not applied in a discriminatory fashion; and (iv) the criteria laid down are proportionate to the goal of protecting the luxury image of the goods and no more restrictive than necessary.
Then, the Court assessed the lawfulness of a specific clause in a selective distribution system for luxury and prestige goods, namely the prohibition on authorised retailers from engaging third-party platforms for online sales of luxury goods. Most of the ECJ’s analysis focused on the proportionality requirement. The Court concluded that the platform ban appeared to be appropriate in light of the legitimate objective of preserving the products’ luxury image for the following reasons:
- Together with the authorised distributors’ obligation to sell through their own online shops using their own business name, the ban is viewed as a “coherent” means of guaranteeing that the goods are associated exclusively with authorised distributors, which is precisely one of the objectives of such a selective distribution system (which makes such a system an appropriate means by which to preserve the luxury and quality image of luxury goods);
- The ban enables the supplier to ensure that its goods are sold online in a manner that meets its qualitative requirements because, where there is no contractual relationship between the supplier and third party platforms (i.e., where the platforms are not themselves authorised distributors), the supplier cannot take action against a third-party platform which does not meet the quality conditions set by the supplier to preserve the product’s character; and
- As all kinds of goods are sold through platforms (i.e., not just luxury goods), ensuring that luxury goods are sold only in the online shops of authorised distributors contributes to their luxury image.
Furthermore, the ECJ found that the platform ban appeared not to go beyond what is necessary to realise the appropriate objective of protecting the luxury image of the products for three reasons:
- First, the ban did not amount to an absolute prohibition on online sales since authorised distributors can sell via their own websites and via unauthorised third-party platforms whose use is not discernible to the consumer;
- Second, the results of the e-Commerce Sector Inquiry indicate that distributors’ own online shops - rather than platforms - are in practice the main online distribution channel used by distributors (used by over 90% of distributors surveyed); and
- Third, because there is no contractual relationship between the supplier and unauthorised third-party platforms enabling the supplier directly to require such platforms to comply with the quality criteria imposed on authorised distributors.
Initial reactions to the ruling have been varied, with the President of the Bundeskartellamt (Germany’s competition authority) discounting the ruling’s significance for non-luxury products, and with the European Commission expressing its intention to consider its implications for online-related restrictions other than platform restrictions.
A lobby group representing technology companies, including Amazon and eBay, said that the ruling doesn't give a "carte blanche" for manufacturers to impose absolute bans for all goods. The Computer & Communications Industry Association said the judgment did not help development of the EU's digital single market or small firms' abilities to create jobs and expand their businesses online.