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EU court to rule on whether competition rules permit brands to restrict retailers' distribution channels

The EU's highest court has been asked to rule whether brands can place restrictions on the channels through which their goods can be bought for the purpose of ensuring those products are viewed as luxury items.

A court in Frankfurt has asked the Court of Justice of the EU (CJEU) whether such "selective distribution systems" accord with EU competition rules.

The German court has asked for the CJEU's guidance in a case that involves US beauty products manufacturer Coty and German business Parfümerie Akzente, which sells perfumes and other toiletries over the internet.

Generally EU competition rules, under Article 101 of the Treaty on the Functioning of the EU (TFEU), prohibit businesses from putting in place agreements which have as their object or effect the restriction of competition. However, certain exemptions have been written into EU law to legitimise anti-competitive agreements in some circumstances.

One such exemption from competition law scrutiny applies where vertical agreements satisfy the criteria of the Vertical Agreements Block Exemption (the VABE). Vertical agreements are agreements struck between companies at different stages of a supply chain.

Selective distribution systems qualify as one type of vertical agreement that can benefit from the VABE.

Under the VABE Regulation, a selective distribution system is defined as "a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system".

The CJEU has been asked whether selective distribution systems that "have as their aim the distribution of luxury goods and primarily serve to ensure a ‘luxury image’ for the goods constitute an aspect of competition that is compatible with [the TFEU]".

The Frankfurt court has said that if the answer to that question is yes then it wants the CJEU to determine whether competition rules are still adhered to if "the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case".

In addition, the German court has asked the CJEU to rule on whether agreements that prohibit retailers from using third party distributors to sell goods online either "constitutes a restriction of the retailer’s customer group ‘by object’" or "constitutes a restriction of passive sales to end users ‘by object’".

If the CJEU rules that either restriction applies in that context then those type of vertical agreements would not benefit from the VABE.

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