The COTY-JUDGEMENT: Luxury products on the Internet?

Thursday, 7 December 2017

ECJ of 6 December 2017 (C-230/16)

In its judgement of 6 December 2017 in the case Coty, the European Court of Justice (ECJ) clarified key issues relating to internet distribution. The facts of the case at hand concerned a conflict between Coty Germany GmbH, a manufacturer of cosmetics, and one of its distributors about online sales restrictions contained in a selective distribution agreement.

First, the decisive question was if the luxury image of a brand product may justify selective distribution systems. This had been called into question by German courts in recent years, citing the decision of the ECJ in the case of Pierre Fabre (C-439/09). In Coty the ECJ now clarified that the preservation of luxury image justifies selective distribution systems. If the quality criteria of the system are objective, consistent and do not go beyond what is necessary, the selective distribution system is compatible with the prohibition on restrictive agreements (except when applied on a discriminatory basis).

Furthermore, the ECJ clarifies the extent to which manufacturers may restrict online sales through their selective distribution partners. In Pierre Fabre, the ECJ had ruled that a total ban on online distribution was not compatible with EU competition law. Coty, however, does not concern a total ban but only the prohibition of sales through third-party platforms (such as Amazon Marketplace or eBay). The ECJ clarified that restrictions of this kind in a selective distribution system may be necessary to protect the luxury image of products and are therefore consistent with competition law. However, such platform bans must be proportionate and imposed equally on all distributors in a non-discriminatory way. In the case at hand the ECJ also indicated that the test of proportionality of a platform ban should not be too restrictive.

Even if these criteria are not met, a platform ban may be legal. According to the Coty judgement, such a prohibition does not constitute a hard core restriction within the meaning of the Block Exemption Regulation on Vertical Restraints (Regulation (EU) No 330/2010). If neither party exceeds the 30% market share threshold of this Regulation, a platform ban agreement between the parties is therefore permissible.