European Court confirms ban on online sales via third party platforms

On 6 December 6, 2017, the Court of Justice of the European Union (“ECJ”) gave its judgement in the Coty-case.  The judgments supports that manufacturers of luxury goods can prohibit their selective distributors to sell the luxury goods via third party platforms like, Amazon or Marktplaats.

Selective distribution systems
First of all, the ECJ remarked that the use of selective distribution systems is not prohibited under Article 101 TFEU provided that they comply with the following three conditions:

  • the characteristics of the product in question necessitate a selective distribution network in order to preserve its quality and ensure its proper use;
  • 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;
  • the criteria laid down do not go beyond what is necessary.

Regarding the question whether the luxurious image of products can justify the use of a selective distribution system (the first condition), the ECJ replies in the affirmative. The quality of a product does not only concern material characteristics, but also the allure and the prestigious image. Any impairment to that aura of luxury is likely to affect the actual quality of those goods.

It follows from the above that also selective distribution systems aiming to preserve the luxurious image of a product are compatible with Article 101 TFEU as long as they fulfil the conditions that apply to selective distribution systems.

Selective distribution systems – conditions for online sales
Regarding the specific clause concerning Coty’s restrictions on online sales, the Court ruled that these clauses are subject to the same conditions that apply for selective distribution systems in general.

The specific contractual clause as used by Coty prohibited Coty’s selective distributors to resell its products on third party platforms in a discernible manner, that is to say, via platforms that are recognisable for consumes as third party platforms. The products of Coty can only be sold via an “electronic shop window” (i.e., the web shop of the selective distributor). Coty’s selective distribution policy prohibits reselling via third party platforms like Amazon or eBay, because consumers can see that, instead of the website of the selective distributor, the website of a third party is used. Coty only allows its selective distributors to resell via a third party platform when this is not “visible” to the final consumer.

The clause as imposed by Coty was laid down in a supplemental agreement on Internet sales. Clause I(1)(3) of that supplemental agreement expressly prohibited the use of a different business name as well as the recognisable engagement of a third-party undertaking which is not an authorised retailer of Coty.

The ECJ concluded that this clause complies with the above-mentioned conditions and is therefore compatible with European competition law. It is however, the national judge that has the final say as to whether all the conditions are fulfilled, taking into account all the circumstances of the case.

The importance for practice
The European e-commerce market reached a turnover of over € 500 billion in 2016. Moreover, it is expected that the turnover will continue to grow in 2017 and that the online B2C-turnover in Europe will reach over € 600 billion this year.

The sales of luxury goods in classic brick and mortar stores is frequently subject to strict conditions on the façade, interior décor, floor coverings, sales space, lighting, etc. of the store. Similarly, it is also desirable to impose certain restrictions on online ‘stores’ in order to preserve the luxurious image of the products in question. In Coty’s case, if its selective distributors had been allowed to sell the products via third party platforms in a discernible manner, the luxurious image of its products would have been impaired.

In a case preceding the ruling of the ECJ, the District Court of Amsterdam ruled in October 2017 on a case lodged by Nike concerning Nike’s selective distributor “Action Sport”. Contrary to Nike’s distribution policies, Action Sport was selling Nike products on Amazon. The Amsterdam Court ruled that Nike was allowed to keep Action Sport from selling products via Amazon, citing and following one-on-one the opinion of Advocate-General Wahl. The current judgment of the European Court confirms that the Amsterdam judgement applied the Coty-case-law in a correct manner.

As stated in our previous blog in which we discussed the opinion of A-G Wahl, different European Member States had different outcomes as to the compatibility with competition law of online sales restrictions in selective distribution systems. The ruling by the European Court creates a uniform European approach. This brings legal certainty for manufacturers of luxury goods throughout the European Union.

Manufacturers of luxury goods can thus prohibit their selective distributors in the EU to sell their products via third party platforms, if the use of third party platforms is visible for consumers. The manufacturers of luxury goods will most probably welcome this development.

The ECJ explicitly refers to “luxury goods” and leaves little consideration to the notion of “brands”. It does not seem the case that (registered) brands in general can impose restriction on their selective distributors when it comes to selling via third party platforms. It can very well be the case that a product with a registered brand can qualify as non-luxurious or as a non-quality product. Question is whether this judgment also applies to non-luxury branded goods. It is to be expected that further case law will develop focussing on the scope of this ruling and on the exact definition of “luxury goods”.