In the recent Coty Germany ruling from 06.12.2017 of the EuGH/ECJ (European Court of Justice) is about the compatibility of contracts to protect the luxury image of a brand with EU- primary and secondary law.
Circumstances of the case
This case is about Coty Germany, a corporation for cosmetic goods with a range of products in the luxury segment. Some of their brands are distributed carefully to preserve the luxury image in the context of a selective distribution network by authorized retailers. Their selling places have to suffice a rash of requests according environment, endowment and establishment. The retailers may the goods in question sell in the internet, if they use their own electronic shop window and cannot use not authorized third-party undertakings, whereas this may not be distinguishable for the consumers. It is explicitly banned in the contract to sell goods over third-party platforms, which clearly appear to the consumer.
Coty Germany sued before the higher regional court Frankfurt am Main (Oberlandesgericht – OLG) against the perfumery Akzente, which is licensed reseller of Coty Germany, but selled the brands not just at its own Shops and Website but also at “Amazon.de”.
In the distribution contract between the parties for sales over internet there was merely agreed, that “the authorised retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorised”.
Following the entry into force of the Regulation No. 330/2010 Coty Germany revised the distribution agreements in such a way as to enable the Retailer “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.” Moreover the clause contains the interdiction to use third-party corporations, which are not a contractual partner of Coty Germany. The perfumery didn’t want to consent with this whereupon Coty sued.
The referred Questions
The OLG Frankfurt decided subsequently to stay the case and to institute a preliminary ruling at the ECJ to clarify the following questions:
(1) Do 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 Article 101(1) TFEU?
(2) Does it constitute an aspect of competition that is compatible with Article 101(1) TFEU 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?
(3) Is Article 4(b) of Regulation No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of the retailer’s customer group “by object”?
(4) Is Article 4(c) of Regulation No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of passive sales to end users “by object”?’
The Judgement
The ECJ states in agreement with the Opinion of the advocate general and case-law, selective distribution systems for luxury goods, which primary serve the preservation of the luxury image of these goods, are not against cartel law per se (1.). They have to fulfill particular conditions:
(i) resellers 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; and (ii) the criteria laid down must not go beyond what is necessary.
Whereupon the ECJ states, the quality of such 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. For that purpose a certain presentation can be used, which shall be ensured by these selective contracts.
The ECJ states furthermore, that the ban of cartels in Article 101 para. 1 TFEU under certain circumstances doesn’t conflict with a contractual clause, which prohibits authorized retailers of an selective distribution system for luxury goods, which aims essentially to preserve the luxury image of these goods, to weight in third-party platforms by selling these particular goods for all eyes to see in the internet. Requirement for the compatibility (2.) of such a clause is it preserves (a) the luxury image of the respective goods, (b) it is uniformly determined and applied without discrimination, and (c) it stays in adequate proportion to the aspired objective. The Prohibition of a provider of luxury goods to its authorized retailers, to use no third-party platforms with internet sales, is from the point of view of the ECL appropriate to ensure the luxury image of its goods. The ban is from the viewpoint of the ECL in accordance to the principle of proportionality especially because there is no relation of contract between the supplier and the third-party platforms, which would allow the supplier to demand the compliance with the quality standards he hold with his authorized retailers. A possibility for the retailers to use such platforms under the condition to fulfill pre-defined quality standards will according to the ECL not reach the same protection level to preserve the luxury image.
The court has decided question 3. and 4. Combined and stated, if the OLG Frankfurt decides the disputed clause infringes the cartel prohibition of the union law, it would be possible to consider a block exemption according to Act (EU) No. 330/2010 of the Commission at the 20th April 2010 for the Usage of Article 101 para. 3 TFEU for groups of vertical agreements and coordinated behavioral patterns (Abl. 2010, L 102 S. 1).
Ultimately in this special case is neither an improper restriction of the retailer’s customer group, nor an improper restriction of passive sales to end users. The court presumes the group “online purchasers” is not distinguishable in the customers at the website of the distributor and the customers at the website of third-party undertakings, whereby the group is not excluded resp. limited. Furthermore the court assumes the accessibility of the products is ensured per advertisement and results on search engines, so as to the restriction of third-party undertakings, means no substantial inhibition of the passive sales.
Conclusion
The last decision of the compatibility of the distribution agreements of Coty Germany and cartel law is now with the OLG Frankfurt. Beyond the, on the base of the ECL ruling, suspected ruling in favor of cartel law conformity, this ruling is also interesting to the field of media law: It may lend an additional impulse in the actual debate about a reformation of platform regulations, so a stronger competition on the market of platform suppliers could be interesting for commercial platform users. On the other hand it points out the importance of search engine operators to secure (even in economical connections meaningful) protection of diversity.
The ruling of the ECL is here. The short press release is here.
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