Living a life of luxury

23 / 04 / 2018

It is not so often that the official press release about an EU case opens with the words ‘A supplier…can prohibit…’.

After all, the EU tends to disapprove of internal trading bans and prohibitions, to put it mildly. But there are exceptions to every rule, and the recent judgment of the Court of Justice of the European Union (CJEU) in Coty Germany v Parfümerie Akzente[1] provides an important example of that.

We explain that judgment and see what lessons can usefully be drawn from it.

The issues in suit

The case involved the selective distribution network operated by Coty Germany GmbH (Coty Germany).  The Coty empire, famous for its luxurious cosmetics for over a century, needs little introduction; nor do selective distribution networks, for they have their very own definition in the EU’s Vertical Agreements Block Exemption regulation (the Regulation) 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.’

But despite that definition, and the express provisions about selective distribution systems that are to be found later on in the Regulation, difficult questions can arise when those provisions bump into the internet.  Which is precisely what happened in the instant case for, following the entry into force of the Regulation, Coty Germany decided to amend the terms of its pro-forma selective distribution network (SDN) contracts.  The amendments permitted the authorised retailers:

‘…to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an ‘electronic shop window’ of the authorised store and the luxury character of the products is preserved’.

They also expressly prohibited the use of a different business name, as well as the recognisable engagement of a third party undertaking which was not a retailer authorised by Coty Germany.

Some of Coty Germany’s retailers were prepared to swallow these clauses.  But Parfümerie Akzente GmbH (Akzente) was not.  Akzente had for many years distributed Coty Germany goods both in bricks-and-mortar outlets and also online, and it wanted to continue to do so on Amazon, specifically via the platform www.amazon.de.  If it were prohibited from so doing EU law would thereby be contravened, it argued.  Coty Germany disagreed so strongly that it sued Akzente in the local courts which, after a certain amount of head-scratching, asked the CJEU to sort it all out by means of a request for a preliminary ruling.

The ruling

Before pronouncing on the legitimacy or otherwise of the contractual amendments that Coty Germany had proposed, the CJEU stood back to look at the big picture.

Could it be said that SDNs designed primarily to preserve the luxury image of the supplier’s goods were in principle incompatible with the prohibition of anti-competitive agreements in Article 101(1) of the Treaty on the Functioning of the European Union?

For this was what Akzente was arguing; and not only it, but also a couple of EU member states, which had by now joined in the fun.

The arguments rested on a paragraph of one of the court’s previous rulings, in the Pierre Fabre[2] case.  So the CJEU hastened to clear up any misunderstanding.  It explained that the Pierre Fabre case was distinguishable from the Coty one, not only because the latter involved goods of a luxury nature, but also because the former (in contrast to the Coty Germany contracts) involved a blanket prohibition on all online selling by distributors.

So Coty’s arrangements caused no incompatibility in principle with Article 101; on the contrary, that Article must be interpreted as meaning that an SDN for luxury goods designed primarily to preserve their luxury image did comply with its provisions to the extent, the court ruled, that

‘… resellers are chosen on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion and that the criteria laid down do not go beyond what is necessary.’

Having sorted out that muddle, the court could turn its brain-power to the wording of the clauses upon which Coty Germany was insisting, as quoted above.  Did they, as Akzente maintained, drive a coach and horses through Article 101?

A qualified ‘No’ was the answer that the court returned.  Subject to various if’s and but’s, it ruled that the prohibition in Article 101 does not preclude a SDN from

‘…using, in a discernible manner, third-party platforms for the internet sale of the contract goods’.

Which were the if’s and but’s?  There were four boxes, apparently, that needed to be ticked, namely: that the clause had the objective of preserving the goods’ luxury image; that it was laid down uniformly; that it was not applied in a discriminatory fashion; and that it was proportionate in the light of the objective pursued.  And the question of whether the box-ticking had been accomplished in any particular case would fall to be determined by the national courts.

But what if those national courts were to find, on the facts, that one or more of those four conditions did not apply, and that the prohibition in Article 101 had therefore been contravened in principle?

In that situation the Regulation might provide an invaluable safety net, for, provided that its market share thresholds are not exceeded, it is capable of exempting a multiplicity of vertical agreements. However, that exemption will not benefit any of the ‘hard-core’ restrictions listed in Article 4 of the Regulation.  And that loophole was seized on by Akzente, who argued that the Coty clauses were hard-core in not just one but two respects, in that their object was to restrict customers and also to restrict passive sales.

It was clearly not Akzente’s day, however, for the court rejected both of those arguments.  The clauses were not an outright ban on internet sales, it held: on the contrary, Coty’s SDN, even when amended, would still allow authorised distributors to advertise via the internet on third-party platforms and to use online search engines.  Accordingly, even if it restricted specific types of internet sales, the clauses would neither restrict customers nor restrict passive sales.

Lessons to be learned

The ruling may have been bad news for Akzente, but it was very good news for those trying to pick their way through the interface between brands, the law and contracts for the selective distribution of goods online.

The guidance that it provides on the subject is much more recent – and more binding – than the somewhat rambling paragraphs of the European Commission’s Notice on the subject.

What, in summary, is that guidance?

Firstly, and generally, if your SDN is primarily designed to preserve the luxury image of your goods, and if it ticks the boxes of being objective, uniform, proportionate and non-discriminatory, you can be fairly confident that it is compatible with Article 101 in principle.

Secondly, and more specifically, a clause in any such SDN that prohibits your authorised dealer from using in a discernible manner third-party platforms (like, for example, Amazon) for the online sales of your goods won’t contravene Article 101 provided that it is intended to preserve those goods’ luxury image and ticks the boxes listed above; and, if so, it can’t thereby be characterised as a hard-core restriction on customers or passive sales.

Conclusion

Too many CJEU judgments raise more questions than they answer; and some are as clear as mud.  But the Coty judgment, whilst not necessarily a model of clarity, is fairly self-explanatory, and also relatively concise.  Its guidance is therefore a very welcome step forward for brands worried that their SDN contracts will contravene the law.

But, of course, it still remains to be seen how national courts choose to apply that guidance at the coal-face.  And with the interface between the law and online sales being such a hot topic, it can only be a matter of time before the CJEU is, once again, called to pronounce on the subject.

[1] See Coty Germany GmbH v Parfümerie Akzente GmbH, Case C-230/16, Judgment dated 6 December 2017

[2] See Pierre Fabre Dermo-Cosmétique SAS v President de l’Autorite de la Concurrence, C-439/09, Judgment dated 13 October 2011