SELECTIVE DISTRIBUTION AND ONLINE SALES: the four "TO-DOs" to comply with EU Competition L
Authors: Salomé Cisnal de Ugarte, Gianni De Stefano
The Court of Justice of the European Union (the "CJEU" or "the Court") issued on 6 December 2017 a landmark judgment that will affect distribution and online sales in particular in the consumer goods and digital sectors. The Court confirms that luxury goods manufacturers that use selective distribution systems can restrict their authorised retailers from using third party online platforms in order to protect their products’ aura of luxury. EU competition law (in particular Article 101 of the Treaty on the Functioning of the European Union, hereafter the "TFEU") does not prevent such restrictions, as long as these are aimed at preserving the products’ luxury image, are proportionate to that aim; and are applied in a uniform and non-discriminatory way. Below we assess the main takeaways of the Coty judgment.
The Coty judgment explained out
The Coty judgment results from a request for a preliminary ruling submitted in the context of a dispute between Coty, a supplier of luxury cosmetics in Germany, and Parfümerie Akzente, an authorised reseller or distributor of those products, concerning the prohibition on the use by the latter of non-authorised third-party platforms for internet sales of the contract goods. According to the Court:
A selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not breach EU competition rules when the system relies on (as per the Metro case law) objective, non-discriminatory and necessary criteria for the selection of authorized resellers.
A contractual clause which prohibits authorised resellers within a selective distribution network from using third-party platforms for internet sales of the goods in question (in a discernible manner by the consumer) is permissible when that clause has the objective of preserving the luxury image of the goods, is non-discriminatory and is proportionate.
A third-party platform ban as described above would not constitute a hard-core restriction and could thus still benefit from the EU block exemption if the pertinent conditions as set up by the Court are met.
The Coty judgment focuses particularly on luxury and prestige goods, albeit arguably the underlying rationale might be extended to other goods too. Indeed, when referring to its previous judgment in the Pierre Fabre Dermo-Cosmétique case, the Court observes: "it must also be stated that the goods covered by the selective distribution system at issue in that case were not luxury goods, but cosmetic and body hygiene goods".
In general terms, the compatibility of selective distribution systems with EU competition law rests on the notion that it may be permissible to focus not on price competition but rather on other factors of a qualitative nature. European competition law does not see competition on price as the only possible model. Pricing constitutes a factor that stimulates competition between suppliers of branded goods, namely inter-brand competition, in that they allow manufacturers to organise efficiently the distribution of their goods and satisfy consumers.
This is consistent with the guidance laid down in intellectual property matters, and in particular with the case-law developed in the context of trade-mark law, to which the Coty judgment indirectly refers. The distributor in the selective distribution system can be treated as a trade-mark licensee because both are third parties who require the consent of the proprietor of the trade mark in order to circulate the goods in question. The EU competition law prohibition should not apply in cases where measures taken by the producer/proprietor of the trade mark vis-à-vis the authorised distributor ultimately constitute only the exercise of the right to put the relevant product into circulation for the first time (see the Copad and Coty Prestige Lancaster judgments).
What are the to-dos?
Below are four practical to-dos that companies need to consider for their distribution systems to comply with EU competition rules. Of course, any final assessment would need to be conducted having regard to the particular circumstances of the case, including the industry and the relevant product and geographic market(s), as well as the market position of a given company. The outcomes may vary from one case to another.
To-do No 1: Assess whether the Coty findings apply to your company's selective distribution system
In the Coty judgment the Court holds that the head of a selective distribution network remains generally free to organise that network and, accordingly, the conditions imposed on authorised distributors must be deemed compatible with EU competition law when they satisfy the conditions identified by the Court.
The EU Court had already recognised in the Metro judgment the legality of selective distribution systems, from the competition law perspective, when they are based on qualitative criteria. It has been gradually accepted, notably in the drafting of the EU regulation exempting certain agreements between suppliers and distributors from the EU competition prohibition, that such systems generally have positive effects in terms of competition.
The Court notes that the selective distribution system must meet the following requirements, also known as the Metro criteria:
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;
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; and
the criteria established do not go beyond what is necessary.
The question of whether those conditions are fulfilled must be assessed factually, taking account of the interests of consumers for those specific goods.
In the Coty case the Court focuses on the selective distribution system as applied to luxury and prestige goods. As noted above, when referring to its previous judgment Pierre Fabre Dermo-Cosmétique, the Court observes: "it must also be stated that the goods covered by the selective distribution system at issue in that case were not luxury goods, but cosmetic and body hygiene goods". The Court later notes: "it is common ground that the contractual clause at issue in the main proceedings has the objective of preserving the image of luxury and prestige of the goods at issue".
On the other hand, previous EU case law has also clarified that a sector may be suitable for a selective distribution system irrespective of whether the products concerned are "luxury" products. For example, it may be possible for a producer to operate a selective distribution system where this is in the context of a sector covering the production of high quality and/or technically advanced consumer durables, such as consumer electronics or cosmetics.
A careful assessment of the relevant goods and markets is therefore necessary to determine whether the findings in the Coty judgment for selective distribution systems may apply to a company, specific industry and goods.
Companies have to consider whether the properties of their products necessitate a selective distribution system. In the Coty judgment the Court notes in this context that the quality of luxury goods is not simply the result of their material characteristics, but also of the "allure and prestigious image which bestows on them an aura of luxury. That aura is an essential aspect of those goods in that it thus enables consumers to distinguish them from other similar goods". Therefore, any impairment to that aura of luxury is likely to affect the actual quality of those goods.
To-do No 2: Third-party internet platform bans should be implemented in a uniform, non-discriminatory and proportionate manner
In the Coty judgment the Court finds that EU competition law does not preclude a contractual clause which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that certain conditions are met. Given the absence of any contractual relationship between the supplier and the third-party platforms enabling that supplier to require those platforms to comply with the quality criteria which it has imposed on its authorised distributors, an authorisation for those distributors to use such platforms subject to their compliance with pre-defined quality conditions cannot be regarded as a hard-core violation of competition law.
The Court requires that any third-party internet platform ban within a selective distribution system would have to:
fulfil the objective of preserving the luxury image of the goods in question. The Court notes that it is common ground that a third-party internet platform ban has the objective of preserving the image of luxury and prestige of the relevant goods (though note the to-do No 1 above);
be laid down uniformly and not applied in a discriminatory fashion; and
be proportionate in light of the objective pursued. In particular, the Coty case does not involve a total ban on Internet sales (as in Pierre Fabre Dermo-Cosmétique, see below): authorized distributors can still use their own websites to sell products and the Internet to advertise the same products.
In the event that a competition law authority or court were to conclude that the clause at issue is caught by the EU prohibition (for example, because it is discriminatory), then that clause could still benefit from the EU block exemption regulation. The EU block exemption creates a presumption of legality for vertical agreements depending on the market share of the supplier and the reseller (the supplier's and the distributor's market share must each be 30% or less) a
The Coty judgment notes that the prohibition on the use, in a discernible manner, of third-party platforms for internet sales does not constitute a restriction of customers nor a restriction of passive sales to end users, these being hard-core restrictions which are automatically excluded from the benefit of the EU block exemption. It would still remain to be seen whether the market shares of the supplier and the purchaser are below the relevant market share thresholds, and the outcome of such market definition assessment may be different from one Member State to the other as we will see further below.
Finally, companies engaged in distribution in Europe should be aware of the EU legislator's plans regarding third party platforms. For instance, the European Commission has recently issued an Impact Assessment entitled "Fairness in platform-to-business relations". The Commission outlines three policy options to regulate online platforms: (1) a soft law approach to stimulate industry led actions; (2) targeted legislation in parallel with EU competition law, and (3) a detailed regulatory framework to be applied in conjunction with EU competition law. This third option would involve an EU regulator for online platforms.
To-do No 3: Carefully assess the inclusion of other restrictions that would be subject to strict scrutiny
A company should be aware of all possible clauses that may be subject to strict competition law scrutiny, being considered for example restrictions ‘by object’ within the meaning of Article 101 TFEU or hard-core restrictions that cannot benefit from a block exemption. While it is not possible to offer an exhaustive list of all the possible restrictions (as they depend on the specific facts of each case), there is a general rule of thumb that EU enforcers follow. Restrictions on the distributor's freedom to decide "where" and "to whom" it may sell will generally be considered hard-core (re)sale restrictions. On the other hand, under EU competition rules the supplier has the possibility to agree with the distributor "how" its products are to be sold (both offline and on-line). There can be significant nuances in certain Member States, as we will see below.
A specific example of a clause that would undergo strict scrutiny would be the outright ban on internet sales that resulted from the clause at issue in the judgment in Pierre Fabre Dermo-Cosmétique. The point in that case was the obligation imposed by a manufacturer of cosmetics and personal care products on its selected distributors to supply evidence that at least one qualified pharmacist would be physically present at their respective outlets at all times. According to the Court, which confirmed the assessment made by the French competition authority, that requirement excluded "de facto" and in absolute terms any possibility that the products in question might be sold by authorised distributors via the internet.
In the Pierre Fabre Dermo-Cosmétique judgment the Court had taken the view that the need to preserve the prestigious image of the cosmetic and body hygiene goods at issue in that case was not a legitimate requirement for the purpose of justifying a comprehensive prohibition of the sale of those goods via the internet. The Coty judgment clarifies that that judgment did not intend to set out a statement of principle according to which the preservation of a luxury image can no longer be such as to justify a restriction of competition, such as that which stems from the existence of a selective distribution network.
More recently, the Competition and Markets Authority (CMA) found that Ping had broken UK competition law by preventing two retailers from selling its golf clubs on their websites.
To-do No 4: Conduct a risk assessment at Member State level as enforcement levels may differ across Europe
This landmark judgment in the Coty case will certainly impact competition law enforcement across Europe. Technically the Court of Justice judgment has the force of res judicata: it is binding not only on the national court on whose initiative the reference for a preliminary ruling was made but also on all of the national courts of the Member States (see the Kühne & Heitz judgment or the European Parliament Briefing entitled "Preliminary reference procedure"). However, Member State authorities will continue to play a key role in enforcing competition rules vis-à-vis companies engaged in distribution in Europe.
First, the Coty judgment does not seem to offer a "carte blanche" for all companies and all circumstances. In fact, the judgment imposes certain conditions that companies will have to follow, as the President of the German cartel office has stated when commenting on the judgment. Second, as noted above, it is unclear whether the Coty judgment findings will be applied only to the luxury and prestige sector or also to other types of consumer and technological goods. Finally, the interpretation of the Coty ruling may not be straight-forward, as has previously been the case with the Pierre-Fabre case (see the French judgment in the Bang & Olufsen case).
Therefore it cannot be excluded that Member States authorities will enforce the Coty judgment findings and more generally the EU competition rules regarding selective distribution systems to different degrees. It is known that the European guidelines drawn up by the Commission, and in particular the Guidelines on vertical restrictions, are not intended to bind the competition authorities and courts of the Member States, but merely describe the way in which the Commission, acting as the European Union competition authority, will itself apply EU competition law (see the Expedia judgment).
For instance, recently the level of enforcement against online platform sales bans has been more intense in certain Member States than in others. We refer to the German cases regarding the sale of schoolbags, rucksacks, and shoes, or the French case regarding television sets. Also, the definition of the relevant markets, and thus the availability of the EU block exemption, may differ from one Member State to the other. For instance, a recent judgment of the German Supreme Court notes that manufacturers' direct sales should be excluded from any market share calculations, which would necessarily increase the market shares of distributors.
Such differences across Europe are due to different market realities. The information obtained in the European Commission e-commerce sector inquiry indicates that the importance of marketplaces as a sales channel varies significantly depending on the size of the retailers, the Member States concerned, and the product categories concerned. The Member States with the highest proportion of retailers experiencing marketplace restrictions are Germany (32%) and France (21%). The findings of the sector inquiry also indicate that the potential justifications and efficiencies reported by manufacturers differ from one product to another.
This means antitrust enforcers will look at the specific circumstances of each case and the outcome will depend on the Member State and/or the industry and specific product involved. Companies are advised to reach out to their legal counsel, and to watch out for cases to be investigated by competition authorities in Brussels and across Europe.