Distribution online – Platform bans in selective distribution (The Coty case continues)

Manufacturers of brand-name products typically aim to ensure the same level of quality of distribution throughout all distribution channels, offline and online. To achieve this aim, they provide criteria how to resell their products. With the increase of internet sales, the use of such criteria has been increasing as well.

A total ban of online sales to end consumers within the EU is, however, hardly valid because online sales are considered as passive sales (cf. Guidelines on Vertical Restraints 2010, para. 52). Restrictions below a total ban are, however, commonplace (for examples, see the post “eCommerce: restrictions on distributors in Germany”). Yet, it is still not clear how far such restrictions are permissible.

For example, the luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH has set up a selective distribution network and its distributors may sell via the Internet, under the following conditions. They shall

• use their internet store as “electronic store window” of their brick and mortar store(s), thereby maintaining the products’ character as luxury goods, and
• abstain insofar from engaging third parties as such cooperation is externally visible.

The court of first instance decided that tsuch ban of sales via third party platforms was an unlawful restriction of competition under art. 101 Treaty on the Functioning of the European Union (“TFEU”), namely a hardcore restriction under article 4 lit. c Regulation (EU) No. 330/2010 (Vertical Block Exemptions Regulation or “VBER”). The court of second instance, however, does obviously not see the answer that clear. Instead, the court requested the Court of Justice of the European Union (CJEU) to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c VBER (decision of 19.04.2016, ref. no. 11 U 96/14 [Kart]) – see the previous post “eCommerce: restrictions on distributors in Germany”.

On 30 March 2017, the hearing took place before the CJEU:

• Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe.
• France – seat of several luxury brands such as Louis Vuitton, Chanel and Christian Dior –supported Coty.
• The distributor instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Germany also supported this view by emphasizing the importance of online platforms for small and medium-sized enterprises (where, however, the share of distributors using online marketplaces is 62% much higher than in all other Member States, see the Staff Working Document, „Final report on the E-commerce Sector Inquiry“, para. 452).
• Luxembourg – the seat of Amazon – considers a general platform ban to be disproportionate and therefore as anti-competitive (cf. Reuters’ article here).

Interest in the outcome of the Coty case is widespread, as the active participation of the various EU Member States illustrates (in addition to the abovementioned countries, also Italy, Sweden, the Netherlands and Austria). Simply put, the question is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms.

Indications on how the court may decide have just appeared on 26 July 2017, with the Advocate General giving his opinion. The Advocate General proposes that the CJEU answers the questions referred to the court as follows:

“(1) Selective distribution systems relating to the distribution of luxury and prestige products and mainly intended to preserve the ‘luxury image’ of those products are an aspect of competition which is compatible with Article 101(1) TFEU provided that resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers, that the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used, and that the criteria established do not go beyond what is necessary.

(2) In order to determine whether a contractual clause incorporating a prohibition on authorised distributors of a distribution network making use in a discernible manner of third-party platforms for online sales is compatible with Article 101(1) TFEU, it is for the referring court to examine whether that contractual clause is dependent on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary.

(3 The prohibition imposed on the members of a selective distribution system who operate as retailers on the market from making use in a discernible manner of third undertakings for internet sales does not constitute a restriction of the retailer’s customers within the meaning of Article 4(b) of Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) on the Treaty of the Functioning of the European Union to categories of vertical agreements and concerted practices.

(4) The prohibition imposed on the members of a selective distribution system, who operate as retailers on the market, from making use in a discernible manner of third undertakings for internet sales does not constitute a restriction of passive sales to end users within the meaning of Article 4(c) of Regulation No 330/2010.”

The Advocate General’s complete opinion can be found at CJEU’s website here.

The updated overview of the procedure can be found at CJEU’s website here.

Practical Conclusions

1. The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now.
2. The general ban to use price comparison tools shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Asics’ Distribution of Sporting Goods: Ban of Price Comparison Tools anti-competitive & void?!?”. Besides, also the Coty case’s outcome may influence how to see such bans.
3. The Coty case is setting the course for future Internet sales. Depending on the decision of the CJEU, manufacturers of luxury or brand-name products can continue to ban the use of marketplaces like Amazon or eBay for the distribution of their products – or not any more or only under certain conditions. If the court follows the Advocate General’s conclusions, such platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see above).
4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
5. For details on distribution networks and antitrust, please see my article „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016, p. 278–283.