December 18, 2017
On 6 December 2017, the European Court of Justice (the “ECJ”), delivered a landmark Judgment in the Coty Case,[1] issuing a Preliminary Ruling in response to a series of questions posed by the Higher Regional Court of Frankfurt am Main in Germany.[2] In its Ruling, the ECJ confirmed that the manufacturer of ‘luxury’ goods was permitted to require distributors of its products that formed part of a so-called “selective distribution network” to refrain from selling its luxury goods on certain online marketplaces such as Amazon and eBay, at least insofar as such a requirement was directed towards the support of the luxury nature of its product. While the ECJ Ruling undoubtedly constitutes a major victory for the luxury goods industry, there continue to remain a number of open issues as to enforcement policy which suggest that the precedent leaves as many implementation questions open as it closes doctrinal disputes.
The case arose from a dispute between the German operations of luxury perfume producer Coty and one of the distributors in its selective distribution network, Parfümerie Akzente. Coty sought to prevent Parfümerie Akzente from selling the contract luxury goods over the online platform ‘Amazon.de’. In doing so, Coty did not go so far as to prohibit the sale of such products over the Internet via the retailer’s own online store (‘electronic shop window’), nor did it impose any additional problematic constraints on its ability to sell via the more traditional “bricks and mortar” distribution chain. However, Coty did seek to prohibit sales via third party websites, given its concern that such third party online sales diminished the premium quality otherwise associated with its products and brand by consumers.
When Parfümerie Akzente did not accept the imposition of such a restriction by Coty, it brought a case against the reseller, which it lost at first instance. On appeal, the Frankfurt Higher Regional Court was unsure whether the contractual prohibition was compatible with Article 101(1) of the Treaty of the Functioning of the European Union (‘TFEU’)[3] and the so-called Vertical Block Exemption Regulation (‘VBER’).[4] Article 101(1) TFEU inter alia prohibits horizontal and vertical anti-competitive agreements and concerted practices. While the VBER exempts from the prohibition of Article 101(1) TFEU those vertical agreements between a supplier and its selected resellers where the market shares of those parties fall below 30%, such an exemption does not extend to an agreement which contains a so-called ‘hardcore’ restriction of competition.[5]
In hearing the appeal, the Frankfurt Court sought guidance from the ECJ in relation to a number of legal questions which related to the interpretation of EU competition law, including whether:
In its Judgment, the ECJ largely followed the Opinion of Advocate General Wahl, who delivered his Opinion in the Case in July 2017.[6]
As regards the first question, the ECJ reiterated the principle that a vertical distribution agreement did not violate Article 101(1) TFEU as long as the so-called ‘Metro criteria’ were fulfilled.[7] The satisfaction of these criteria requires that: resellers be entitled to distribute the goods on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and applied in a non-discriminatory fashion; the characteristics of the product in question necessitate the use of such a network in order to preserve their quality; and, finally, the criteria laid down do not go beyond what is necessary.[8]
The ECJ confirmed that the quality of luxury goods was to be determined ‘by the allure and prestigious image which bestow on them an aura of luxury‘ and that the creation and maintenance of this aura was essential insofar as it allowed consumers to distinguish them from similar goods. An impairment of that aura of luxury was also likely to affect the actual quality of the goods in the eyes of the consumer.[9] Establishing a distribution system that ensured that the products were presented in a way that is reflective of their value was thus also considered to contribute to their special aura.[10] Based on this logic, the ECJ concluded that a selective distribution system might be necessary to preserve the contract product’s luxury image, and was hence compatible with Article 101(1) TFEU.[11]
Importantly, the ECJ dismissed the argument that the Pierre Fabre Case suggested a different approach. In Pierre Fabre, the Court took the view that a specific clause banning online sales was incompatible with competition law rules, given that it imposed an outright ban on all sales of the manufacturer’s product over the Internet.[12] The situation in Coty was different, as it concerned the fundamental legality of a selective distribution system with regard to luxury products. Moreover, Pierre Fabre concerned cosmetic and body hygiene products, namely, non-luxury products that might not be associated with luxury in the consumer’s mind. The need to preserve the goods’ prestigious image was therefore found to not constitute a legitimate requirement for the purpose of justifying a comprehensive prohibition on sales via the Internet.[13]
As regards the second question, the Court held that the clause banning sales over third party platforms had to be measured against the ‘Metro criteria’. The question at issue was whether such a ban was appropriate to preserve the luxury image of the goods in question and whether it went beyond what was necessary in the circumstances to achieve this objective.[14]
As regards the appropriateness criterion, the ECJ stated that an obligation to sell only through the retailers’ own online shops provided the supplier with a guarantee that the sold goods would only be associated with the authorized retailer, which would in turn help to preserve the quality and luxury image of those goods.[15] This was true also in light of the fact that, on online market platforms, all kinds of goods were sold.[16] Moreover, only the direct contractual relationship with the retailer enabled the supplier to enforce quality conditions; if goods were to be distributed over third party platforms, there would be no such relationship.[17]
Given that distributors were generally still allowed to sell online through their own webshops (which still constituted the main online distribution channel and were operated by over 90% of distributors), the prohibition was also found to be proportional, in that it did not go beyond what was necessary to achieve the object of preserving their luxury image.[18] Accordingly, the ECJ responded to the second question by concluding that the outright platform ban did not violate Article 101(1) TFEU in the circumstances, given the widespread availability of luxury goods through online means.
Finally, the ECJ ruled that, with regard to the third question, the ban on sales over a particular platform did not constitute a hardcore restriction.[19] In this regard, the ECJ Ruling runs counter the 2015 Decision of the German Cartel Office (Bundeskartellamt) in the Asics Case, in which it was found (as later confirmed by the Higher Regional Court of Düsseldorf) that a ban on third party platforms, even if required in the context of a selective distribution network, violated both the terms of Article 101 TFEU and the relevant VBER provisions.[20]
The ECJ Ruling, which now forms part of the corpus of German law, at first glance appears to sit uncomfortably against the decision-making of the Bundeskartellamt and the Regional Court’s Judgment in Asics. However, the positions can be reconciled because the ratio decidendi of the Coty Case is limited only to ‘luxury products’. It was the particular nature of these products which led the ECJ to rule that a platform ban was justified, given that the ‘luxury aura’ of these products might be otherwise compromised. By comparison, the running shoes in the Asics Case were merely considered to connote a particular level of quality.
Thus, it would appear that the Rulings of the ECJ and the German authorities may be reconciled by reference to the distinction drawn between luxury goods and other goods.[21] However, the Advocate General had explicitly held that both luxury and quality products could, subject to the satisfaction of the “Metro criteria”, justify the use of a distribution system which is compatible with Article 101(1) TFEU. The ECJ took a narrower approach, having focused solely on the ‘luxury’ character of Coty’s products as the only determinant of whether the online platform restriction was legal. It hence remains unclear whether the Ruling can also be applied merely to higher ‘quality’ products that fall short of more widely understood notions of ‘luxury’.
It seems the ECJ has missed the opportunity to draw a more explicit line between those products which can benefit from a selective distribution system and those that cannot. One can hardly argue that luxury products, which usually require heavy investments in marketing, skilled staff, breadth of selection of product ranges and décor, do not justify favourable treatment under EU competition rules.[22] Having said that, where does one draw the line between Coty’s luxury cosmetics products and the supposedly unluxurious beauty creams considered in the Pierre Fabre Case (especially given that beauty is supposed to be in the eye of the beholder)? Why not include ‘quality’ products, too, where manufacturers try no less to preserve the reputation and uniform brand image of their products?
Is the narrow exception of ‘luxury’ – which is favourable to manufacturers of luxury products but which is opposed by the online platforms that sell a wide range of goods – prone to generating arbitrary distinctions being drawn by national court judges faced with resolving competitive law disputes in the context of selective distribution? Surely, having provided the rationale for why the contract in Coty was not anti-competitive, the question needs to be asked why the category of exemption could not be wide enough to embrace all goods with serious connotation of ‘quality’, which can often be established by reference to a higher price. In a world where increasing market penetration is based on the uniqueness of a product, one would think that the ‘quality’ dimension should in principle justify the same treatment as that of ‘luxury’.[23]
By not following the Advocate General’s more expansive view, the ECJ may have succeeded in narrowing the exception to the general rule against sales prohibitions, but may have inadvertently opened up a hornet’s nest of fine distinctions needing to be made by national judges across the EU. Perhaps it is the case that the Judgment, which is notable for its brevity, may be more helpful in theory than in practice for those operating selective distribution systems in the EU.
[1] C-230/16 Coty Germany [2017] EU:C:2017:603. See here: http://curia.europa.eu/juris/document/document.jsf?text=&docid=197487&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=954093. For the press release, see here: https://curia.europa.eu/jcms/upload/docs/application/pdf/2017-12/cp170132en.pdf.
[2] According to Article 267 TFEU, national courts can refer abstract questions of European Union law to the European court, which then provides a response. It is then up to the referring national court to interpret and apply to the facts of the particular case the statements of legal principle set forth by the ECJ in its Ruling.
[3] For the relevant provision, see here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E101:EN:HTML.
[4] Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. See here: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32010R0330&from=EN.
[5] “Hardcore” restrictions include provisions such as absolute sales ban based on territory or customer identity, Resale Price Maintenance, and so forth, whose anti-competitive effects are so significant that it would be unlikely for the restrictions to be justified by reference to the exemption criteria listed in Article 101(3) TFEU.
[6] See Opinion of July 26, 2017, available at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=193231&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=654963.
[7] Case C-230/16, supra at para. 24.
[8] See Case C‑26/76 Metro SB-Großmärkte [1977] EU:C:1977:167, especially at para. 20.
[9] Case C-230/16, supra at para. 25.
[10] Case C-230/16, supra at para. 27.
[11] Case C-230/16, supra at para. 29.
[12] See Case C‑439/09 Pierre Fabre [2011] EU:C:2011:649.
[13] Case C-230/16, supra at paras. 32 and 34.
[14] Case C-230/16, supra at para 43.
[15] Case C-230/16, supra at paras 44 and 46.
[16] Case C-230/16, supra at para 50.
[17] Case C-230/16, supra at para 48.
[18] Case C-230/16, supra at paras 52-54.
[19] Case C-230/16, supra at para 68.
[20] Decision B2-98/11 Bundeskartellamt v ASICS Deutschland GmbH, Neuss et al. of August 26, 2015. An English language summary can be found here: http://www.bundeskartellamt.de/SharedDocs/Entscheidung/DE/Fallberichte/Kartellverbot/2016/B2-98-11.pdf?__blob=publicationFile&v=2. The full decision can be found in the German language at: http://www.bundeskartellamt.de/SharedDocs/Entscheidung/DE/Entscheidungen/Kartellverbot/2015/B2-98-11.pdf?__blob=publicationFile&v=3. The Judgment of the Higher Regional Court (Case VI-Kart 13/15 (V)) of April 5, 2017 can be found in the German language at: https://www.justiz.nrw.de/nrwe/olgs/duesseldorf/j2017/VI_Kart_13_15_V_Beschluss_20170405.html.
[21] Notably, the Bundeskartellamt’s Chief, Andreas Mundt, has commented that he expects the ECJ’s Ruling to have only a limited effect on the policy of his Office, as its Decisions have thus far involved brand manufacturers outside the luxury industries. See at http://www.wiwo.de/unternehmen/handel/eugh-urteil-zum-online-handel-luxus-muss-nicht-in-die-schmuddelecke/20677432.html.
[22] In this regard, refer to the Study prepared for the European Commission in 2007, which explains how competition for the supply of luxury cosmetics depends critically on non-price elements which add to the aura of the brand: Global Insight, Study of the European Cosmetics Industry, October 2007. Indeed, the possibility that selective distribution networks are more likely to promote non-price elements of competition explains why they are also less likely to produce price volatility; in this regard see Case 107/82 AEG Telefunken v. Commission [1983] ECR 3151 at paras. 33 ff, and Case T-67/01, JCB v. Commission EU.T.2004.3 at paras. 131-133.
[23] Selective distribution networks are also understood to be appropriate for the distribution of highly technical or industrial quality goods, although the rationale for preventing online sales for such products seems more problematic, given the technical knowledge possessed by the average purchaser of such products, e.g., bath fittings. At the other extreme, the view has been expressed by P. Ibanez Colomo that the exception identified in Coty should extend to all products distributed in such networks. See, e.g., blogpost of 6 December 2017 on Coty Case at: https://chillingcompetition.com/.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the authors in the firm’s Brussels office:
Peter Alexiadis (+32 2 554 72 00, [email protected])
Jens-Olrik Murach (+32 2 554 72 40, [email protected])
Balthasar Strunz (+32 2 554 72 25, [email protected])
Please also feel free to contact any of the following practice group leaders and members:
Brussels
Peter Alexiadis (+32 2 554 72 00, [email protected])
Jens-Olrik Murach (+32 2 554 72 40, [email protected])
David Wood (+32 2 554 72 10, [email protected])
London
Ali Nikpay (+44 20 7071 4273, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Charles Falconer (+44 20 7071 4270, [email protected])
Patrick Doris (+44 20 7071 4276, [email protected])
Deirdre Taylor (+44 20 7071 4274, [email protected])
Munich
Michael Walther (+49 89 189 33-180, [email protected])
Benno Schwarz (+49 89 189 33 110, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
Hong Kong
Sébastien Evrard (+852 2214 3798, [email protected])
Kelly Austin (+852 2214 3788, [email protected])
Washington, D.C.
Scott D. Hammond (+1 202-887-3684, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])
D. Jarrett Arp (+1 202-955-8678, [email protected])
David P. Burns (+1 202-887-3786, [email protected])
Cynthia Richman (+1 202-955-8234, [email protected])
David Debold (+1 202-955-8551, [email protected])
New York
Randy M. Mastro (+1 212-351-3825, [email protected])
Eric J. Stock (+1 212-351-2301, [email protected])
Peter Sullivan (+1 212-351-5370, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Dallas
Veronica S. Lewis (+1 214-698-3320, [email protected])
Brian Robison (+1 214-698-3370, [email protected])
Robert C. Walters (+1 214-698-3114, [email protected])
San Francisco
Rachel S. Brass (+1 415-393-8293, [email protected])
Trey Nicoud (+1 415-393-8308, [email protected])
Los Angeles
Daniel G. Swanson (+1 213-229-7430, [email protected])
Samuel G. Liversidge (+1 213-229-7420, [email protected])
Steven E. Sletten (+1 213-229-7505, [email protected])
Jay P. Srinivasan (+1 213-229-7296, [email protected])
Rod J. Stone (+1 213-229-7256, [email protected])
Sarretta C. McDonough (+1 213-229-7227, [email protected])
© 2017 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.