Protecting the 'aura of luxury' online
As a matter of EU competition law, the EU Court of Justice has clarified that (subject to three specific conditions) manufacturers and suppliers of 'luxury' products operating a selective distribution system may restrict their retailers from selling their products through third-party on-line platforms, such as Amazon, eBay and others. In this context, luxury products are those which have a 'prestige image'. The principles might also apply to cosmetic and body-hygiene products.
Coty; controlling its distribution channel
Coty Germany GmbH (“Coty”) is a leading supplier of luxury cosmetics in Germany. It markets its products through a selective distribution network of authorised retailers. The shops of the authorised retailers must comply with a number of requirements in terms of décor, furnishing and ambience. Coty's retailers can also sell Coty products through their own website, or a third party website through a discernible electronic shop window, provided the luxury character of the products is preserved. The Coty retailers are prohibited from selling the products using a different business name.
In 2012, Coty brought a claim before the German courts seeking an order preventing its long-term authorised retailer, Parfümerie Akzente GmbH (“Akzente”), from selling Coty goods through Amazon.de. The lower German court held that the restriction breached EU competition law and was therefore unenforceable. Coty appealed this decision to the Frankfurt Supreme Regional Court, which made a reference to the European Court of Justice (the ECJ).
The ECJ confirmed that Article 101 TFEU does not prohibit an on-line platform restriction of the type used by Coty where it is used as part of a selective distribution system for the sale of luxury products, provided that the restriction:
- has (genuinely / demonstrably) the aim of preserving the luxury image of the products;
- is applied equally across all retailers, who are members of the selective distribution system without discrimination between them; and
- is appropriate and proportionate for preserving the luxury image of the products.
The ECJ, despite stating that it was for the national court to determine whether these criteria were met in Coty's case, undertook that assessment itself; perhaps to ensure there was little scope left for the interpretation of its decision.
The ECJ found on the first condition that it was common ground between Coty and the retailers that the clause had the objective of preserving the luxury image and prestige of the Coty products. The ECJ referred to its existing case law on the importance of the protection of the allure and prestigious image of products, which bestow on them an aura of luxury and that that aura is essential as it enables consumers to distinguish them from similar goods; therefore, an impairment to that aura of luxury is likely to affect the actual quality of those goods and justifies the restriction.
On the second condition, the ECJ held the clause was objective and applied to all authorised retailers uniformly and without discrimination.
Finally, on the third condition, the restriction was an appropriate and proportionate measure for preserving the luxury image of the products.
In relation to the proportionality of the restriction under the third condition, the ECJ held that the restriction did not go beyond what was necessary to preserve the luxury image of the products. The ECJ assessment on this point was based on the findings of the Commission’s e-commerce sector inquiry that the main distribution channel for online sales was the distributors’ own online shops, which were operated by over 90% of the distributors surveyed; the restriction was also justified in the absence of a direct contractual relationship between the manufacturer and the operator of the platform; that would mean that the retailers could use such platforms without the manufacturer being able to verify their compliance with the agreed product quality conditions.
Importantly, the ECJ also found that an on-line platform restriction of the type imposed by Coty did not amount to a restriction on “passive sales”, which is deemed to be a “hard-core restriction” under the EC's Vertical Agreements Block Exemption Regulation (VABER) and would have taken away the safe harbour protection afforded under it (provided of course the other conditions of VABER are met).
The reasoning of the ECJ was that the restriction: (i) did not amount to a complete ban on retailers to sell online; (ii) the class of consumers which purchase online could not practically be identified and excluded from buying from authorised online resellers; and (iii) consumers had multiple means to access the products e.g. through online searches through the retailers' own websites.
The ECJ assessment of the clause amounting to a restriction on passive sales is useful and is an important refinement of the Commission’s position under the 2010 Guidelines on Vertical Restraints.
The ECJ judgement is very important to manufacturers of luxury products and offers them a lawful possibility to control the sale of their products protecting their prestigious image whilst preserving the benefit of the safe harbour under the Vertical Agreements Block Exemption Regulation for their distribution system. It remains an open question as to what is the ambit of the "aura of luxury" and whether other branded products with an upmarket image could also benefit from this ruling.
If you wish to discuss any aspect of the above please contact:
Ian Holyoak, Partner
Tel: 01392 687682
David Thomson, Partner
Tel: 01392 687656
Michael Papadakis, Senior Associate
Tel. 020 7788 6315
 As per EUCoJ ruling in C-439/09 Pierre Fabre Dermo-Cosmétique SAS, judgment of 13 October 2011.