The opinion of the AG Wahl in Coty Germany: is the end of luxury brands on sale on on-line marketplaces?
The opinion
of the AG Wahl in Coty Germany: is the end of luxury brands on sale on on-line
marketplaces?
On 26th July 2017, the AG Wahl has handed
down his long-awaited opinion on the Coty
Germany-Parfumerie Akzente case (C-230/16), which may have a serious impact
on e-commerce, especially with regard to the sale of branded luxury products
through online platform.
The
facts of the case
Coty Germany (CG) sells certain luxury cosmetic brands
via a selective distribution network. Parfümerie Akzente (PA) is long-standing authorised
retailer admitted to the selective distribution network of CG. PA sells the CG’s
both at brick and mortar locations and over the internet. Internet sales are
made partly through its own online store and partly via the platform ‘amazon.de’. In March
2012, CG revised the contracts governing its selective distribution network
contracts. The new contractual provisions entitle the authorised 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’. The new
clauses also expressly prohibit the use of a different business name and the
recognisable engagement of a third-party undertaking which is not an authorised
retailer of Coty Prestige. A footnote to that clause states that ‘accordingly,
the authorised retailer is prohibited from collaborating with third parties if
such collaboration is directed at the operation of the website and is effected
in a manner that is discernible to the public’.
As PA refused those amendments to the distribution
contract, CG sued PA seeking an order prohibiting the latter from distributing the
CG-trademarked products via the platform ‘amazon.de’. The first instance judge dismissed all the claims of
GC that, then, filed an appeal before the Higher Regional Court, Frankfurt am
Main (HRCF). The HRCF stayed proceedings and referred to the CJEU the following
preliminary questions:
‘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?
If the
first question is answered in the affirmative:
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?
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”?
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
Opinion of the AG
In practice, the main question submitted to the
CJEU is whether and to what extent selective distribution systems relating to
luxury and prestige products, and designed mainly to preserve the ‘luxury
image’ of those products, are aspects of competition that are compatible with
Article 101(1) TFEU. The HRCF also sought guidance from the CJEU on whether
an absolute ban the retailers admitted to a selective distribution system from making
use in a discernible way of third undertakings for internet sales is compatible
with Article 101(1) TFEU. Lastly, the HRCH requested the CJEU to determine
whether, according to Article 4(b) and Article 4(c) of Regulation
No 330/2010, the above arrangements constitute a restriction ‘by object’
of the retailer’s customer group and/or of passive sales to end users.
EU courts have traditionally taken a cautious approach
in assessing whether selective distribution networks based on qualitative
criteria constitute a competition restraint. Since Metro (Case 26/76) it is well settled case law that such arrangements
do not breach competition. It is also generally accepted that selective distribution
networks have neutral or even pro-competitive effects on the level of inter-brand
and intra-brand competition. As for inter-brand and intra-brand competition,
the AG said that:’Selective
distribution systems are, especially for goods with distinctive qualities, a
vector for market penetration. Brands, and in particular luxury brands, derive
their added value from a stable consumer perception of their high quality and
their exclusivity in their presentation and their marketing. However, that
stability cannot be guaranteed when it is not the same undertaking that
distributes the goods. The rationale of selective distribution systems is that
they allow the distribution of certain goods to be extended, in particular to
areas geographically remote from the areas in which they are produced, while
maintaining that stability by the selection of undertakings authorised to
distribute the contract goods’ (para.
43). As far as intra-brand competition is concerned, the AG
stated that: ‘owing to the equality between authorised distributors
that results from the application — in principle objective and
non-discriminatory — of selection criteria of a qualitative nature,
selective distribution may indeed mean that all the member undertakings are
subject to similar competitive conditions of the selective distribution network
and, accordingly, lead to a potential reduction both in the number of
distributors of the contract goods and in intra-brand competition, in
particular in terms of price. Paradoxically, the stricter the selection
criteria which the supplier imposes, the greater its exposure, owing to the
ensuing reduction in the distribution of its goods, to a loss of market and of
customers. Therefore, and unless it has significant ‘market power’, the
supplier — the network head — is, in principle, led to
‘self-regulate’ its conduct in a way that conforms to the competition rules (para. 44).’
While dealing with the first preliminary question
whether a selective distribution network for luxury products aimed mainly aimed
at the preserving the luxury image of those products is within the ban of
Article 101(1) TFEU, from the outset the AG noted a divergent interpretation of
the ruling made by the CJEU in the previous Pierre
Fabre case (Case C-439/09). More precisely, the bone of contention was how
to interpret para. 46 of the judgment that reads as follows: ‘The aim of maintaining a prestigious image
is not a legitimate aim for restricting competition and cannot therefore
justify a finding that a contractual clause pursuing such an aim does not fall
within Article 101(1) TFEU’. According to some, the contracts which
organise a selective distribution system for the sale of luxury and prestige
goods, aimed mainly at preserving the luxury image of those goods are caught by
the prohibition in Article 101(1) TFEU. This provision applies to
selective distribution systems intended to preserve a luxury or prestige image,
without there being any need to consider whether the properties of the product
in question require that a selective distribution system be put in place,
whether the requirements of the system are applied without discrimination and
whether they are appropriate for the purpose of preserving the luxury or
prestige image. Incidentally, this was the position of the German Government
and of the Germany’s Federal Cartel Office. Conversely, others believed that
such selective distribution systems may fall outside Article 101(1)
TFEU. They pointed out that Pierre Fabre was not concerned about selective distribution
systems, but solely the contractual clause examined in that case.
The AG reminded that purely quantitative selective
distribution networks are not caught by Article 101(1) TFEU if they meet the
criteria set out in Metro. ‘First, it must be established that the properties of
the product necessitate a selective distribution system, in the sense that such
a system constitutes a legitimate requirement, having regard to the nature of
the products concerned, and in particular their high quality or highly
technical nature, in order to preserve their quality and to ensure that they
are correctly used. Second, resellers must be chosen on the basis of objective
criteria of a qualitative nature which are determined uniformly for all
potential resellers and applied in a non-discriminatory manner. Third, the
criteria defined must not go beyond what is necessary’ (para. 66). Then, the AG focused on the first
criterion, the necessity of the selective distribution network. The EU settled
case law shows that qualitative selective distribution systems may be accepted
in the high-quality consumer goods production sector without infringing
Article 101(1) TFEU to maintain a specialist trade capable of supplying
specific services for such products. What may make a selective
distribution system competition compliant is the specific characteristics or
properties of the products concerned. Those properties not only include the
physical qualities of the products but also their ‘luxury’ image.
Next, the AG considered the way in which the luxury
image of products is protected under trade mark law. In this context, ‘the Court has emphasised that luxury and
prestige goods are defined not only by reference to their material
characteristics, but also on the basis of the specific perception which
consumers have of them, and more particularly of the ‘aura of luxury’ which
they enjoy with consumers. As prestige goods are high-end goods, the sensation
of luxury emanating from them is essential in that it enables consumers to
distinguish them from similar goods. Therefore, an impairment of that aura of
luxury is likely to affect the actual quality of those goods. In that regard,
the Court has already held that the characteristics and conditions of a
selective distribution system can, in themselves, preserve the quality and
ensure the proper use of such goods’ (para. 72). From that the AG reached
the conclusion that: ‘It follows from
that case-law that, having regard to their characteristics and their nature,
luxury goods may require the implementation of a selective distribution system
in order to preserve the quality of those goods and to ensure that they are
properly used. In other words, the selective distribution networks relating to
the distribution of luxury and prestige goods and seeking mainly to preserve
the brand image of those goods are not caught by the prohibition laid down in
Article 101(1) TFEU’ (para 74).
In practice, the AG rejected the restrictive
interpretation of Pierre Fabre
according to which selective distribution networks for luxury products are within
the reach of Article 101(1) TFEU. In support, he distinguished Pierre Fabre from Coty Germany on the facts of the case. Pierre Fabre was about the competition
compatibility of a contractual clause containing a general and absolute ban on
internet sales of the contract goods (cosmetics and personal care products) to
end users, imposed on authorised distributors admitted to a network of a
selective distribution. Unlike
Coty Germany, the selective
distribution system in its entirety was not at issue in Pierre Fabre. Therefore, the AG claimed that Pierre Fabre must not be interpreted as overturning the previous
case-law, according to which the head of a selective distribution network is
generally free to organise that network.
Having said that, the AG reached the conclusion that:
‘selective distribution systems the
object of which is to preserve the luxury image of the products may always
constitute aspects of competition which are compatible with Article 101(1)
TFEU. As the Commission has correctly observed, however, it must be
inferred from that judgment that, depending on the properties of the products
in question, or in the case of particularly serious restrictions, such as the outright
ban on internet sales that resulted from the clause at issue in the judgment
in Pierre Fabre, it is possible that the objective of
preserving the prestige image of the products in question may not be
legitimate, which would have the consequence that an exemption for a selective
distribution system or a clause pursuing such an objective could not be
justified.’ (para. 84).
The second preliminary question is whether
Article 101(1) TFEU is infringed by a clause banning the authorised
retailers admitted to a selective distribution system for luxury products from
using in a discernible manner third-party platforms for internet sales of the contractual
products. To address this question, the AG relied on the three criteria in
Metro. In particular, he focused on the proportionality criterion according to
which the above restrictions may be justified by the need to preserve the
luxury image of the contractual products. The AG took the view that this
criterion was met by the challenged clause. With the view to preserving the
luxury image of its products, indeed, the head of a selective distribution
network may prohibit its distributors from using third undertakings in a
discernible manner. This prohibition not only may guarantee of quality, safety
and identification of origin of the products but also protect the brands from counterfeiting
and parasitism. Importantly, when relying on third-party platforms for the
distribution of the products, the authorised distributors as well as the
network head no longer have control over the presentation and image of the
products. Hence, the absolute prohibition on the members of a selective
distribution system from using third undertakings in a discernible manner for
their internet is comparable to a justified and necessary restriction for the
working of a brick and mortar selective distribution network.
The conclusion drawn by the AG is that ‘the prohibition on authorised distributors
making use of third-party online platforms may be excluded from the scope of
Article 101(1) TFEU in that it is likely to improve competition based on
qualitative criteria. By expanding on the considerations hitherto applied in
relation to selective distribution, that prohibition is likely to improve the
luxury image of the products concerned in various respects: not only does it
ensure that those products are sold in an environment that meets the
qualitative requirements imposed by the head of the distribution network, but
it also makes it possible to guard against the phenomena of parasitism, by
ensuring that the investments and efforts made by the supplier and by other
authorised distributors to improve the quality and image of the products
concerned do not benefit other undertakings’ (para. 106). Importantly,
the AG noted that whereas Pierre Fabre
imposed an absolute ban on internet sales, Coty
Germany still allowed authorised distributors to sell the contractual
products via their own web sites. Even ‘online platforms, such as the platform at
issue in the main proceedings, are capable of devising methods that ensure that
the products concerned are represented in an appealing manner, just as
authorised distributors do. However, compliance with the qualitative
requirements which may be lawfully imposed in the context of a selective
distribution system can be effectively ensured only if the internet sales
environment is devised by authorised distributors, who are contractually linked
with the supplier/head of the distribution network, and not by a third-party
operator, whose practices escape the influence of that supplier’ (para.
114).
The third and the fourth preliminary question concerned
whether the prohibition on the retailers admitted to a selective distribution
system from making use in a discernible manner of third undertakings for
internet sales constitutes a restriction of their customers and/or a
restriction of passive sales to end users for the purpose of Article 4 of
Regulation No 330/2010. Interestingly, the AG outright replied in the
negative to the other preliminary question whether the above arrangement
constituted a competition restraint by object. He pointed out that this concept
only refers to arrangements with a sufficient
degree of harm to competition so that the examination of their
effects is unnecessary. Currently, a prohibition on the use of third-party
platforms does not have such a degree of harm to competition.
Concerning the question whether the above arrangements
fell within the hardcore restrictions enlisted by Article 4(b) and Article 4(c)
of Regulation No 330/2010, the AG observed that these provisions intend ‘to exclude from the benefit of the block
exemption certain contractual clauses designed to restrict the territory into which, or the customers
to whom, the distributor may sell. On the other hand, it seems to me
that those provisions cannot be interpreted as excluding from the benefit of
the block exemption restrictions that determine the methods whereby the
products can be sold. In my view, it must be borne in mind that the head
of a selective distribution network must be able to enjoy great freedom in defining
the methods whereby those products can be distributed; these are all factors
designed to stimulate innovation and the quality of the services provided to
customers that are capable of having pro-competitive effects. As stated in
paragraph 54 of the Guidelines, under the block exemption regulation, the
supplier may require quality standards for the use of the internet site to
resell its goods, as it would for a brick and mortar shop’ (para. 138).
Then, the AG looked at the content, objectives of the
clauses under scrutiny and their legal and economic context to establish
whether these clauses amounted to a hardcore restriction for the Regulation
No 330/2010. The content of the clauses required internet sales be
conducted through an electronic shop window of the retailer’s store or on a
third-party site if that was not discernible. In other words, the clauses did not
ban all online sales, but only one of a number of ways of reaching customers
via the internet. Thus, the content of the clauses did not have a
market-partitioning effect.
The objective of
the clauses was the preservation of the luxury character of the products by
requiring that the online business be conducted by means of an ‘electronic shop
window’ of the retailer’s store. This restriction did not have as object the partition
the market by limiting the territory into which or the customers to whom the
authorised distributors were allowed to sell.
As for the economic and legal context, economic evidence showed that third-party
marketplaces were a significant distribution channel. Hence, the prohibition
imposed on retailers from making use of such platforms could not be compared
with to outright ban on online sales in Pierre Fabre.
Therefore, the restrictions
imposed on the retailers admitted to the CG’s selective distribution networks
did not amount to a restriction of passive sales or a restriction of the
retailer’s customer base.
What next ?
The Opinion of the AG Wahl,
if accepted by the CJEU as generally happens in most of the cases, may have a
substantial disruptive impact on e e-commerce, affecting in particular the
capability of retailers of selling luxury branded products from online
platforms. Is that true? What will the practical implication of Coty Germany
be? The main findings of the AG may be summarized as follows.
First, the AG considered
that selective distribution may be appropriate for manufacturers aiming to
preserve the brand image of their products where these products are luxury cosmetic
products. This finding is consistent with the previous case law (Case 99/79 Lancome
SA v Etos BV [1980] ECR 2511; Case T-19/92 Groupement d’Achat Leclerc v
Commission [1996] ECR II-1851; Case T-88/92 Groupement d’Achat Leclerc v
Commission [1996] ECR II-1961).
Second, and more
importantly, the AG considered under which circumstances manufacturers may ban
their authorized retailers, admitted to a selective distribution network for luxury
products whose main aim is to preserve the luxury image of the contractual products,
from selling the contractual products on third parties’ online platforms. To have
a sounder grasp of the implications of the AG Opinion, it may be helpful to
look at which marketing strategies suppliers and retailers may pursue. Three different
scenarios can be identified:
A)
The authorised retailer sells the contractual
products via its own corporate websites. For retailers this is a can-do
scenario. The insertion in the contracts governing the selective distribution networks
of a clause banning this activity would amount to a competition restraint barred
by Article 101(1) TFEU
B)
The authorised retailer sells the contractual
products by making use in a not
discernible manner of online marketplace owned by a third party. This is
also a can-do scenario for retailers. Suppliers cannot prohibit this activities
without infringing competition.
C)
The authorised retailer sells the contractual
products by making use in a discernible
manner of the online marketplace owned by a third party. Unlike the previous
scenarios, this may a cannot-do scenario for retailers. In other words, as
clarified by the AG, suppliers may lawfully prohibit retailers from marketing
the contractual products in this way. For this restrictive clause to be considered
to comply with Article 101(1) TFEU, it is necessary to assess whether it meet
the criteria set out in Metro. The proportionality criteria may be of
particular relevance, because it must be established whether the restrictive clause
at issue is an appropriate tool to preserve the luxury image of product.
The key factor to distinguish the B) scenario from the
C) scenario is whether the external online platform is used in a discernible
manner or not. Arguably, national judges might be required to determine what ‘discernible’
does mean to adjudicate on invalidity claims of restrictive clauses similar to
those examined in Coty Germany. Moreover,
the AG clarified how Pierre Fabre should
be read, stating that this judgment concerned only a restrictive clause
imposing an absolute ban on internet sales rather than the competition
compatibility of a selective distribution network as a whole.
On balance, Coty
Germany might be a welcome development from the viewpoint of trade mark
owners. The powers of suppliers to control the commercialization of their
trade-marked products would be strengthened. Suppliers might prevent authorised
retailers from marketing selling the contractual products in ways that might
tarnish the aura of luxury of the contractual products. However, this may be
achieved at the expense of consumer’s welfare, which may be reducing by
limiting the range of consumer choices. Unless they meet the Metro criteria,
online platform used in discernible way by authorised retailer, may no longer
host the sale of luxury branded products, which often were sold at relatively
low prices.
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