An update on Luxury Goods and Internet Selling

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You may have seen a recent article about the possibility of luxury goods NOT being allowed to be sold on online platforms – the European Court of Justice has now ruled that luxury firms have the right to restrict online sales to protect their brands.

We are currently exploring how “luxury” is defined and, indeed, how this might apply to certain instrument brands.

Our legal partners at Eversheds have kindly sent the following update including a useful television interview with Aysha whom we work with:

Landmark ruling gives high-end luxury brands tighter control over online sales

See Legal Director Aysha Fernandes being interviewed live by the BBC on the morning of the judgment (click here).

On 6 December 2017, the European Court of Justice (“ECJ”) confirmed that luxury brands can prevent retailers in a selective distribution network from using ‘discernible’ third party platforms to sell products. The ECJ considers that such restriction is a proportionate way of preserving the luxury image of the goods.

The judgment is an important victory for high-end luxury brands as it will enable tighter control of the online channels through which their products are sold, preserving an ‘aura of luxury’.  However, it may make it more difficult for some retailers to reach consumers online.

The big question left unanswered by the ECJ judgment is whether online platform bans may be permissible other than for the really prestigious luxury brands.

What?

The case before the ECJ is a reference by a German appeal court for a ‘preliminary ruling’ in relation to German proceedings brought by Coty Germany against Parfumerie Akzente.  Coty is a luxury cosmetics company which markets certain of its brands via 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 appeal court, Frankfurt am Main, which in turn sought guidance from the ECJ on the following questions:

  1. Whether and to what extent selective distribution systems, designed to preserve a ‘luxury image’ are compatible with Article 101(1) TFEU, i.e. can they fall altogether outside the prohibition on anti-competitive agreements;
  2. Whether an absolute ban on members of a selective distribution making use in a discernible way of a third-party for internet sales is compatible with Article 101(1) TFEU; and
  3. Whether such a prohibition is compatible with the Vertical Agreements Block Exemption Regulation (“VBER”).

Key points from the ECJ judgment

The ECJ confirmed that:

  1. A selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, is capable of falling altogether outside the Article 101 prohibition on anti-competitive agreements;
  2. A ban on authorised distributors of luxury goods from using third-party platforms in a ‘discernible’ manner for internet sales is also capable of falling altogether outside the Article 101 prohibition on anti-competitive agreements; and
  3. Even where a ban on authorised distributors of luxury goods from using third-party platforms falls within Article 101, it can benefit from the safe harbour of the VBER since such a ban is not a hardcore restriction.

Is a selective distribution system for luxury goods compatible with Article 101(1)?

The ECJ confirmed that a selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not breach the prohibition on anti-competitive agreements, provided that:

  • The properties of the product necessitate a selective distribution system, e.g. due to their high quality or technical nature;
  • Resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly; and
  • The criteria laid down do not go beyond what is necessary.

The ECJ recognised that the quality of luxury goods stems not only from their material characteristics, but also from the allure and prestigious image which creates an ‘aura of luxury’.  An impairment to the aura of luxury is likely to affect the actual quality of those goods.

The ECJ drew a distinction with its previous ruling in Pierre Fabre (see our briefing here).  It clarified that the Pierre Fabre judgment does not mean that the preservation of a luxury image can no longer be such as to justify selective distribution.  The Pierre Fabre case was confined to the lawfulness of an outright ban on internet sales in the context of cosmetic/body hygiene goods which the ECJ did not regard as luxury goods.

Is a ban on using online marketplaces compatible with Article 101(1)?

The ECJ considered that a contractual clause which prohibits authorised distributors within a selective distribution network from using online marketplaces is not precluded by EU law provided that:

  • The clause has the objective of preserving the luxury image of the goods in question;
  • It is laid down uniformly and not applied in a discriminatory fashion; and
  • It is proportionate in the light of the objective pursued.

Ultimately, it is for the Frankfurt appeal court to decide whether an absolute ban on using online marketplaces is a proportionate means of preserving the luxury image of the goods.

However, the ECJ made clear its view that such restriction is appropriate and goes no further than is necessary to achieve its objective.  It particular, the ECJ noted that the supplier has no contractual nexus with the third party platforms, which is an obstacle to the supplier ensuring the platforms’ compliance with quality standards.  Additionally, the ECJ observed that the aura of luxury comes from the very fact that the goods are only available through the online shops of authorised distributors.

The ECJ also noted that online platforms are not yet an essential route to market:

despite the increasing importance of third-party platforms in the marketing of distributors’ goods, the main distribution channel, in the context of online distribution, is nevertheless constituted by distributors’ own online shops, which are operated by over 90% of the distributors surveyed.[2]

If the ban restricts competition within the meaning of Article 101(1), would the VBER apply?

Within the context of a selective distribution network for luxury goods, the ECJ considered that a ban on using third party platforms is not a hardcore restriction of competition and therefore that the safe harbour of the VBER can apply:

even if it restricts a specific kind of internet sale, a prohibition such as that at issue in the main proceedings does not amount to a restriction of the customers of distributors… or a restriction of authorised distributors’ passive sales to end users…[3]

Commentary

The judgment clarifies that selective distribution aimed at preserving the luxury image of goods can fall altogether outside the prohibition on anti-competitive agreements, which some had doubted on the back of the Pierre Fabre case.

Importantly, the judgment confirms that a supplier of luxury goods operating a selective distribution network can impose an absolute ban on authorised retailers from using third party platforms in a discernible manner.  This is good news for high-end luxury brands as it will enable tighter control of the online channels through which their products are sold, preserving an ‘aura of luxury’.  However, it may make it more difficult for some retailers to reach consumers online.

The big question left unanswered by the judgment is whether online platform bans may be permissible other than for the really prestigious luxury brands.  The answer may depend on how tightly the brand controls offline ‘brick and mortar’ sales and whether any platform ban can be regarded as equivalent to offline standards.  It may also depend on the importance of online marketplaces in facilitating retailers’ online sales, and whether a marketplace ban could be regarded as a de facto passive sales ban.

Currently, most retailers operate their own websites, with around a third also using online market places, whilst only around 1 in 20 solely use online marketplaces.  However, use of online marketplaces is increasing and the law may need to evolve to keep pace with e-commerce developments.

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