Authored by: Bill Gornall-King and Amir Kousari
On 6 December the Court of Justice of the European Union (‘ECJ’) ruled in the case of Coty Germany GmbH v Parfümerie Akzente GmbH that a supplier of luxury goods can prohibit its authorised distributors from selling those goods via third-party platforms.
Coty Germany sells luxury cosmetic goods in Germany via a selective distribution system. In addition to sales through approved stores, Coty allowed authorised distributors to sell the goods online using an electronic shop window for their approved store where the ‘luxury character’ of the goods were preserved. However, the use of a different business name and the recognisable engagement of a third-party that was not authorised by Coty were expressly prohibited. This meant that authorised distributors could not sell the goods via third-party platforms such as Amazon or eBay.
Selective distribution systems
Simply put, a selective distribution system is a distribution system within which the supplier undertakes to sell goods or services to distributors objectively selected on the basis of specified criteria. Selective distribution systems are typically used for luxury goods as well as technical and complex products.
Criteria for selective distribution systems
In Coty, the ECJ clarified that a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods can be justified provided that:
(a) resellers are chosen on the basis of objective criteria of a qualitative nature, which are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion; and
(b) the criteria do not go beyond what is necessary to achieve that objective.
Restrictions on online sales
The ECJ ruled that where the establishment of a selective distribution system for luxury goods is justified, the supplier can place restrictions on online sales so long as those restrictions are appropriate for preserving the luxury image of those goods and they do not go beyond what is necessary to achieve that objective.
Prohibiting distributors from using third-party platforms outside a selective distribution system to make online sales of luxury goods where the involvement of that third party is discernible to consumers is permissible on the condition that the objective of the prohibition is to preserve the luxury image of the goods.
The ECJ’s reasoning is that sales via third-party platforms outside a selective distribution system involve a risk of deterioration of the online presentation of luxury goods because the supplier is unable to check the conditions under which those goods are sold. The absence of a contractual relationship between the supplier and such third parties prevents the supplier from being able to require, from those third-party platforms, compliance with the quality conditions that it has imposed on its authorised distributors.
Absolute prohibitions on online sales
An absolute prohibition on online sales of luxury goods will almost certainly go beyond what is necessary to preserve the luxury image of those goods, as it reduces the ability of an authorised distributor to sell the relevant products to consumers outside its contractual territory or area of activity. That was the ruling of the ECJ in Pierre Fabre which was relied on by the UK Competition and Markets Authority in finding that an online sales ban imposed by the golf brand Ping had as its object ‘the prevention, restriction and distortion of competition’.
One distinguishing fact in Coty was that authorised distributors were permitted to sell the goods online both via their own websites and via unauthorised third-party platforms provided that their use was not discernible to the consumer.
Impact of Coty ruling on selective distribution systems
Coty clarifies that the use of selective distribution systems for luxury goods can be justified if certain criteria are satisfied. In addition, it establishes that restrictions on sales via third-party platforms can be permissible under competition law so long as the objective of the prohibition is to preserve the luxury image of the goods in question.
Whilst suppliers of luxury goods can take comfort in knowing that they may prohibit sales via platforms such as Amazon and eBay, they must ensure that the characteristics and nature of their goods are sufficient for them to qualify as ‘luxury’ before establishing a selective distribution system for them.
Readers should note that the ruling in Coty was made in the context of selective distribution systems for luxury goods. Whether those restrictions will apply to technical and complex products remains to be seen.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.