Can luxury brands prevent retailers selling via online marketplaces?
2 August 2017
On 26 July 2017, the European Court of Justice (“ECJ”) published an opinion issued by Advocate General Nils Wahl (the “AG’s Opinion”) indicating that luxury brands may prevent retailers from selling via online marketplaces in order to preserve the luxury image of the products in question.
The AG’s Opinion is not legally binding, and the landmark judgment of the ECJ is awaited in the coming months. The judgment will give clarity on an issue that has divided regulators and courts around the EU. If the judgment follows the AG’s Opinion, it will be seen as an important victory for brands in the fight to retain control over online sales.
The case before the ECJ is a reference for ‘preliminary ruling’ by a German court in relation to German proceedings brought by Coty Germany against Parfumerie Akzente. Coty Germany, a luxury cosmetics company, operates a selective distribution network. Authorised retailers are permitted to sell online, but only via an ‘electronic shop window’ of the authorised shop and provided that the luxury character of the goods is preserved. One of Coty’s authorised retailers, Parfumerie Akzente, sold Coty products via amazon.de and Coty issued proceedings seeking to prevent this.
The case reached the Court of Appeals, Frankfurt am Main, which in turn sought guidance from the ECJ on whether a ban on using online third party platforms in a selective distribution agreement may be compatible with the EU competition law, in particular Article 101(1) TFEU and the Vertical Block Exemption Regulation (“VBER”).
Key points from the AG’s Opinion
The AG’s Opinion considers that a ban on authorised retailers (in a selective distribution network) using third party platforms may fall outside the Article 101 prohibition on anti-competitive agreements if: (1) it is dependent on the nature of the product, (2) it is determined in a uniform fashion and applied without distinction and (3) it does not go beyond what is necessary. While these issues are ultimately for the German court to decide, the AG observed that the ban in question does not appear to be caught by the prohibition.
In fact, the AG’s Opinion considers that the ban in question is likely to improve competition based on qualitative criteria. The AG’s Opinion emphasises the importance of guarding against ‘parasitism’, so that investments and efforts made by the supplier and authorised retailers to improve quality and brand image do not benefit other firms.
The AG’s Opinion draws a distinction with ECJ’s previous ruling in Pierre Fabre. In the Pierre Fabre judgment, an absolute ban on online sales was considered to be a restriction of competition by object, and the products’ prestigious image was not accepted as a valid objective justification. In the present case, AG Wahl noted that the restriction on online sales leaves open the possibility for distributors to sell via their own online channels, as well as to use third party platforms in a way that is not discernible to the public.
The AG also considered whether, if the ban in question is caught by the Article 101 prohibition on anti-competitive agreements, it might nonetheless benefit from exemption under the VBER. The AG’s Opinion is that a ban on third party platforms is not a hardcore restriction within the meaning of the VBER, and therefore not automatically excluded from the benefit of the VBER.
The AG’s Opinion is not legally binding on the ECJ and we await the ECJ’s final judgment. If the ECJ follows the AG’s Opinion, it will be seen as an important victory for brands in the fight to retain control over online sales.
The AG’s Opinion indicates that luxury brands operating selective distribution may ban their authorised retailers from using third party platforms and online marketplaces. Such a ban may fall outside the Article 101 prohibition altogether, or otherwise may benefit from exemption.
The AG’s Opinion also leaves open the possibility that non-luxury brands may impose such a ban within the safe harbour of the VBER. If this is the case, this could have potentially wide reaching implications.
The views expressed in the AG’s Opinion are consistent with those of the European Commission, but at odds with the position adopted by certain national courts and competition authorities. The Commission considers that online marketplace bans do not generally amount to a de facto prohibition on selling online and should not be regarded as hardcore restrictions within the VBER. (See our briefing on the Commission’s Final report in its e-commerce sector inquiry, which covered cosmetics and other consumer products most sold online.)
The ECJ will have the final word in this case, and we await the ECJ’s judgment with interest. We will keep you posted on e-commerce developments of interest.
For further information or to discuss what the AG’s opinion may mean for you please contact Aysha Fernandes.