Coty Germany GmbH v Parfümerie Akzente GmbH

CJEU decides that preserving luxury image of products in selective distribution agreements is not contrary to competition law
The Oberlandesgericht Frankfurt am Main (the Higher Regional Court) asked the CJEU whether a contractual clause, which prevented the sale of luxury products by authorised distributors on third-party online platforms, was lawful under competition law. The CJEU decided that such a clause is lawful.

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Case Background

In this case, Coty Germany, which sells luxury cosmetic items, and its distributor ‘Parfümerie Akzente’ were in dispute over a contractual clause preventing the distributor from selling the luxury goods on third-party online platforms. This case concerned Coty Germany seeking to prevent sales by Parfümerie Akzente on ‘amazon.de’. The interpretation of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and Article 4(b) and 4(c) of the Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU were the subject of the request for a preliminary ruling.

The contract between Coty Germany and Parfümerie Akzente

Coty justifies its selective distribution agreements by stating that the character of Coty’s brands requires selective distribution in order to support the luxury image of the brand. The contract, inter alia, states that physical locations (eg.shops) must be approved by Coty Germany and that the location, selection of goods, advertising and sales presentation must highlight and promote the luxury character of the Coty brand.

The contract has a supplemental agreement which states that ‘the authorised retailer is not permitted to use a different name or to engage in third-party undertaking which has not been authorised’.

Following Regulation No. 330/2010 coming into force, Coty Germany revised both the selective distribution network contracts and supplemental agreement. These amendments allowed authorised retailers to offer and sell the products on the internet, provided that the internet sales activity is conducted through an ‘electronic shop window’ of the authorised store and the luxury character of the products is preserved. The use of a different business name and engagement of a third-party undertaking such as Amazon which is not an authorised retailer of Coty was expressly prohibited.

Parfümerie Akzente refused to sign the amendments. Coty Germany brought an action seeking an order prohibiting Parfümerie Akzente from distributing products bearing the Coty brand via the online platform ‘amazon.de’.

Questions for the CJEU

The Oberlandesgericht Frankfurt am Main was not sure whether the contractual agreement was lawful under EU competition law. It referred the following questions to the CJEU for a preliminary ruling:

1. Do selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure ‘luxury image’ for the goods, constitute an aspect of competition that is compatible with Article 101(1) of the TFEU?
2. Does it constitute an aspect of competition that is compatible with Article 101(1) of the TFEU if the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging in third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case?
3. Is Article 4(b) of Regulation No. 330/2010 to be interpreted as meaning that a prohibition on engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at retail level of trade constitutes a restriction of the retailer’s customer group ‘by object’?
4. Is Article 4(c) of Regulation No. 330/2010 to be interpreted as meaning that a prohibition on engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at retail level of trade constitutes a restriction of passive sales to end users ‘by object’?

The decision

Question 1:
The CJEU, referring to Pierre Fabre Dermo-Cosmetique C-439/09 EU:C2011:649, held that a selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not breach the prohibition on agreements, decisions and concerted practices laid down in Article 101(1) TFEU, provided that the following conditions are met:

i) Resellers 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;
ii) The characteristics of the product in question must necessitate such a network in order to preserve its quality and ensure its proper use; and
iii) the criteria laid down must not go beyond what is necessary.

The CJEU, referring to Copad C-59/08 EU:C2009:260, stated that the quality of such goods relates to the allure and prestigious image which bestow on them an aura of luxury, in addition to their material characteristics. If that aura is damaged, then it is likely to affect the quality of the goods.

The CJEU concluded that the characteristics and conditions of a selective distribution system may, in themselves, preserve the quality and ensure the proper use of such goods. Therefore, luxury goods may require the existence of a selective distribution system in order to ensure that this outcome is achieved.

Question 2:
The contractual clause in issue in this case has the objective of preserving the image of luxury and prestige of the goods in question and is lawful under Article 101(1) TFEU provided that the conditions referred to above are met. The question to consider is whether the prohibition on internet sales via third-party platforms is proportionate in light of the objective pursued.

The CJEU highlighted that the prohibition clause in issue provided Coty with a guarantee that the internet sale of its goods would be exclusively associated with the authorised distributors. The prohibition is such as to preserve the quality and luxury image of those goods. It also enabled Coty to check that the goods will be sold in an appropriate online environment, reflecting the qualitative conditions that it has agreed with its authorised distributors.

In reaching its conclusion on question 2, the CJEU specifically highlighted the following points. If an authorised distributor does not comply with the conditions of quality, the supplier will be able to take action based on the contractual relationship. However, there is no such contractual relationship between the supplier and a third-party platform, which prevents the supplier from being able to request compliance with its quality conditions. Where sales are taking place through a platform that is not a member of the selective distribution system, there is a risk of the deterioration of the presentation of the online goods, which could harm the luxury image of those items. Online platforms sell various goods. The fact that luxury goods are not sold on such platforms adds to the luxury image among consumers and preserves that characteristic.

The CJEU concluded that the prohibition on authorised distributors to use third-party platforms for the internet sale of the goods in question, is appropriate to preserve the luxury image of those goods and did not go beyond what was necessary. It also stated that the prohibition was proportionate, as there was not an absolute prohibition on internet sales; it simply prevented sales via third-party online platforms. Therefore, Article 101(1) does not preclude a contractual clause which prohibits authorised distributors in a selective distribution system for luxury goods, designed to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for the internet sale of the goods. The following conditions apply:
i) The clause must have the objective of preserving the luxury image of those goods;
ii) the clause must be laid down uniformly;
iii) it must not be applied in a discriminatory fashion; and
iv) it must be proportionate in light if the objective pursued.

Questions 3 and 4:
The prohibition in this case neither restricts the customers to whom authorised distributors can sell within the meaning of Article 4(b) of Regulation No 330/2010, nor does it amount to a restriction of authorised distributors’ passive sales to end users, within the meaning of Article 4(c) of that Regulation. The reasons for this decision were outlined as follows:
• The clause in issue does not prohibit the use of the internet as a means of marketing the goods;
• it is not possible to circumscribe third-party platform customers; and
• subject to certain conditions, the contract allows authorised distributors to advertise on third-party platforms and to use search engines. Therefore, customers are usually able to find the authorised distributors online.

Comment

The CJEU was not asked to define ‘luxury’ so it will be interesting to see whether companies will try to push the boundaries of the meaning of ‘luxury’ in order to establish selective distribution systems. This judgment focused on the fact that the goods were luxury, therefore it is unlikely that selective distribution agreements will be lawful in cases other than those concerning luxury goods.

Judgment Date: 6 DECEMBER 2017

Link to judgment:

Coty Germany GmbH v Parfümerie Akzente GmbH - CJEU decides that preserving luxury image of products in selective distribution agreements is not contrary to competition law

 

 

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