12 December 2017

Judgment in the Coty case: Prohibition against use of third party's online platform was not unlawful

On 6 December 2017, the European Court of Justice delivered the long-awaited judgment in the Coty case. The ECJ ruled that the cosmetics manufacturer Coty’s prohibition against its distributors’ internet sale via third parties like Ebay and Amazon was not unlawful. The matter preoccupies many businesses and national competition authorities and this judgment brings more clarity about the legal position within the area - especially for high-end brands.

The EC Court of Justice rules that cosmetics manufacturer Coty's prohibition against Internet sale via third parties was not unlawful.

The judgment follows a number of similar cases in Germany, the Netherlands and France. The national authorities in the Netherlands and Germany have decided on or have pending cases concerning whether manufacturers of sports equipment - Nike, ASICS and Deuter Sport - may prohibit its distributors in a selective distribution system from selling the products via third parties’ online platforms. In addition, the French Supreme Court has ruled in a case against the French cosmetics manufacturer Caudalie that it had not been substantiated that a prohibition against sale via third parties’ online market platforms constituted a hardcore restriction.

BACKGROUND

The ECJ’s preliminary ruling in the Coty case (C-230/16) concerns a dispute between Coty Germany and an authorised distributor in Coty’s selective distribution system. Coty is an international supplier of luxury cosmetics sold in for instance Germany. Coty’s selective distribution system contains a prohibition against use of another company name than the distributor’s own name and a prohibition against sale via unauthorised third parties. This means that the distributors cannot sell Coty’s products via third parties’ online platforms. However, Coty’s distributors are entitled to sell the products on the internet if this sale is via the distributors’ own websites, and if the products’ luxury image is maintained.

CAN SELECTIVE DISTRIBUTION SYSTEMS LAWFULLY RESTRICT SALE ON THIRD PARTY PLATFORMS?

In general, the ECJ found that a prohibition against sale via third party platforms in a selective distribution system for luxury goods was not contrary to article 101 of the TEUF when :

  • The clause has the objective of preserving the luxury image of those goods;
  • The clause is laid down uniformly and not applied in a discriminatory fashion; and
  • The provision is based on the product’s characteristics and is therefore necessary proportionate in the light of the objective pursued.

The ECJ repeated the criteria laid down in case law concerning selective distribution systems which are established to ensure the products’ quality or correct use. This means that a prohibition against sale via third parties’ online platforms must first and foremost live up to the general criteria concerning selective distribution. The ECJ also determined that the prestigious image of luxury products may be a quality parameter which may justify a selective distribution system with quality criteria for sale of these products.

In relation to Coty’s prohibition against its distributors’ use of online platforms, the ECJ attached importance to the fact that the distributor cannot control the quality requirements concerning sale and marketing if the products are sold via platforms that do not belong to the distributor. There is thus a risk that the products’ luxury image is impaired.

The ECJ concluded that a prohibition against sale via third party platforms in a selective distribution system for luxury products was not contrary to article 101 of the TEUF, but that the prohibition must be subject to the same assessment as any other criteria in a selective distribution system. This means, among others, that the prohibition must be necessary in order to maintain the luxury image, and that it must not be applied in a discriminatory fashion.

IS THE PROHIBITION A hardcore RESTRICTION, OR IS IT SUBJECT TO BLOCK EXEMPTION?

The ECJ further examined whether a prohibition against sale via online platforms was exempted under the vertical block exemption. This means that the prohibition is not covered by the competition rules if the parties’ market shares do not exceed 30 % as described in the block exemption. The ECJ assessed whether the prohibition was a hardcore restriction meaning that the block exemption cannot be applied.   

The ECJ found that the prohibition was not a general prohibition against Internet sale. The ECJ emphasised that the authorised Coty distributors can sell on the Internet via their own websites or third parties, which are not visible to the customers. Further, the Coty distributors are under certain circumstances entitled to advertise on third parties’ online platforms and use online search engines for advertising purposes so that the customers can find the distributors’ offers on the Internet.

Based on the above, the ECJ concluded that: In those circumstances, even if it restricts a specific kind of internet sale, a prohibition such as that at issue in the main proceedings does not amount to a restriction of the customers of distributors […] or a restriction of authorised distributors’ passive sales to end users […]".

The ECJ thereby concluded that a prohibition against sale via third party platforms in a selective distribution system for luxury products was not a hardcore restriction. In general, the provision in the agreement is therefore protected under the block exemption if the market share does not exceed 30 %, and if the agreement does not contain any other hardcore restrictions.

THE IMPORTANCE OF THE JUDGMENT

In the Coty judgment, the ECJ ruled that a prohibition against sale via online platforms such as Amazon and Ebay may lawfully be a part of a selective distribution system for luxury products. The ECJ also ruled that the prohibition is not a hardcore restriction. Distributors of luxury products may therefore apply this judgment if they wish to introduce such prohibition in a selective distribution system.

Even though the judgment only lays down general guidelines for selective distribution systems for luxury products, the judgment should also be expected applied by others with a distribution network. Especially in situations where the parties do not exceed the 30 % market share in the vertical block exemption. Distributors are, however, to specifically substantiate that the product qualities they wish to protect justify a restriction of the sale via online platforms.

The Coty judgment is in line with the European Commission’s investigation of e-trade from May 2017. The European Commission concluded - subject to the judgment in the Coty case - that a prohibition against sale via online platforms should not be considered a hardcore restriction. The European Commission has also stated that the Coty judgment has thrown more light on the legal position of market players.

It will, however, still be interesting to see how the judgment will be interpreted nationally - so far there have been deviating positions as to the prohibition against the use of third-party online platforms. For example, the German competition authorities stated shortly after the judgment that it is not expected to have any impact on pending cases, and that the judgment, in their opinion, only aims at luxury products.

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