EU court ruling will help luxury goods makers preserve the quality and prestige of their brands, says expert

Out-Law News | 06 Dec 2017 | 3:16 pm | 4 min. read

A ruling by the EU's highest court will be welcomed by the makers of luxury goods because it will enable them to preserve the quality and prestige of their brands, a competition law expert has said.

Alan Davis of Pinsent Masons, the law firm behind, said, however, that the judgment by the Court of Justice of the EU (CJEU) does not favour online marketplaces and third party resellers.

The CJEU ruled on Wednesday that EU competition law does not stop luxury goods manufacturers from banning retailers that are part of their selective distribution network from using third-party online marketplaces to sell their goods to the public where that ban is aimed at preserving the brand's luxury image.

"The ruling today allows luxury goods makers to keep control of how their products are sold online in order to maintain the quality and prestige of their brands," Davis said. "In particular, it allows the brand owners to prevent the sale of the products by their authorised distributors on online market places such as Amazon and eBay. Being able to protect this image is of great importance and worth a huge amount to the market. It prevents third party resellers from being able to free-ride on the huge investments that the manufacturers make in developing the brand image."

"The ruling confirms that manufacturers compete not just on price but on quality and innovation. Without this protection, there is a risk that luxury brands would not have the incentive to make the investments necessary to develop high quality products and create the aura of prestige. It is less good news for the online platforms and also for small businesses that rely on those platforms for their route to market," he said.

The CJEU was ruling in a case referred to it by a court in Frankfurt, Germany. The case concerns a dispute between US beauty products manufacturer Coty and German business Parfümerie Akzente, which sells perfumes and other toiletries over the internet. Coty has objected to Parfümerie Akzente selling its cosmetics via Amazon's marketplace.

In its ruling, the CJEU confirmed that a selective distribution system designed primarily to preserve the luxury image of those goods is compatible with EU competition rules provided that certain conditions are me.

It said luxury goods manufacturers must ensure that resellers chosen to participate in the distribution system "are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, that the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally, that the criteria laid down do not go beyond what is necessary".

Placing restrictions on the sale of luxury goods via online platforms where "goods of all kinds" are sold can contribute to preserving the luxury image of those products, and further address potential harm that could arise to that brand image, the CJEU said.

"The internet sale of luxury goods via platforms which do not belong to the selective distribution system for those goods, in the context of which the supplier is unable to check the conditions in which those goods are sold, involves a risk of deterioration of the online presentation of those goods which is liable to harm their luxury image and thus their very character," the CJEU said.

The CJEU said that the specific ban Coty has placed on sales of its goods via third party platforms "does not go beyond what is necessary in order to preserve the luxury image of those goods". Relevant to that finding was the fact that its distributors are not barred from selling the Coty goods via their own websites as well as the fact that the European Commission's e-commerce sector inquiry found that "distributors' own online shops", and not third party platforms, are "the main distribution channel" used in the context of online distribution.

EU competition law generally prevents companies from using agreements which have as their object or effect the restriction of competition. However, exemptions from that position apply under the Vertical Agreements Block Exemption (the VABE), including in respect to selective distribution systems.

In its ruling, however, the CJEU said that exemptions under the VABE Regulation do not apply to "vertical agreements which have the object of restricting the territory into which, or the customers to which, a buyer party to the agreement can sell the contract goods or services, or restrict active or passive sales to end users by members of a selective distribution system operating at the retail level of trade".

It said it is therefore up to national courts to determine whether luxury goods manufacturers rely on contract clauses that restrict who their authorised distributors can sell to or whether those distributors are barred from making 'passive sales' over the internet to consumers, the court said.

The CJEU noted, however, that Coty allows its authorised distributors under certain conditions to advertise the sale of its luxury goods via the internet on third-party platforms and to use online search engines. It also said that, from papers submitted as part of the case, it "does not appear possible to circumscribe, within the group of online purchasers, third-party platform customers".

It will ultimately be up to the Frankfurt court to resolve the dispute between Coty and Parfümerie Akzente based on the CJEU's interpretations.

Michael Reich, a German competition law specialist at Pinsent Masons, said: "The German competition authority and courts have tended to take a much stricter view on whether bans on the use of third party platforms by authorised distributors are justified and have veered towards treating such prohibitions as equivalent to an outright online sales ban. This judgment may require the German authorities and courts to reassess their approach so as to allow genuinely prestigious luxury brands to restrict online sales via third party platforms by their authorised distributors."

"We would expect the German authorities to apply this ruling narrowly and scrutinise closely which products qualify for this limited exception from the general principle that goods may be sold freely online whether on resellers’ own websites or on third party platforms," he said.

In May, the European Commission said it was its view that it is not an automatic breach of EU competition rules for manufacturers to prevent retailers from selling their goods on online marketplaces. However, it admitted at the time that its position could change depending on the CJEU's ruling in the Coty case. The significance of the Coty case was also noted by the UK's competition authority last year.