Coty v Akzente – ECJ has ruled in favour of luxury!
In our previous update, we discussed online sales restrictions and how these were being treated in both UK and EU competition law. Last week, the ECJ handed down its decision in the Coty v Akzente case and affirmed that luxury brands are allowed to restrict online sales through selective distribution clauses in contracts, in order to protect brand image.
Coty (a luxury cosmetic company in Germany) sought to enforce terms of a contract on Akzente (one of its selected distributors) that prevented Akzente from selling its products on third party platforms such as Ebay and Amazon. Coty justified this restriction by stating that it was necessary to protect the luxury image of its brands.
Akzente had refused to sign an updated contract with Coty and began selling Coty products on Amazon. Coty then brought an action against Akzente and the German Court of First Instance ruled in favour of Akzente, deciding that the contractual provision and the selective distribution provisions were a hardcore restriction of competition and therefore not covered by the Vertical Block Exemption Regulation (VBER).
This decision was appealed to the German Court of Second Instance who referred three questions to the ECJ for a preliminary ruling on EU competition law:
- Does a selective distribution system for luxury goods comply with EU competition law?
- In the context of a selective distribution system for luxury goods, is an online marketplace ban compatible with EU competition law?
- Does an online marketplace ban entail a hardcore restriction of competition law under VBER?
The ECJ Decision
The ECJ agreed with Coty and said that the ban did not go beyond “what was necessary to preserve the luxury image of the goods”. This is a landmark case that will set a precedent for luxury brands to restrict resale distribution.
The ECJ held that luxury brands did require protection due to “the allure and prestigious image which bestows on them an aura of luxury. That aura is an essential aspect of those goods”. The ECJ held that “any impairment of that aura of luxury if likely to affect the actual quality of those goods”.
The First Question
The Court has previously ruled in Dior v Copad (Case C 59/08) that selective distribution networks are not prohibited by EU competition law, so long as resellers are chosen by criteria which is uniformly applied and not applied in a discriminatory fashion, and the products concerned require such a selective distribution system so as to protect the quality of the product and the requirements do not go beyond what is necessary.
Therefore, such a selective distribution system does comply with EU competition law provided it does not breach any of the above conditions.
The Second Question
The ECJ agreed with Coty that it was necessary in the circumstances to protect the luxury brand image among customers and, since the restrictions were laid down uniformly amongst distributors and not applied in a discriminatory fashion, they were considered proportionate by the Court.
The Court also highlighted that the ban was not a prohibition on online sales, but a restriction on the platforms the products could be sold; which was considered proportionate and necessary to protect the luxury brand image of the products.
The Third Question
The Court then considered whether the restriction on online sales would be considered a hardcore restriction and therefore unable to take advantage of the Vertical Block Exemption Regulation (VBER).
In order to consider whether the restrictions would benefit from the VBER, the Court examined whether the restrictions would restrict the customers to whom the authorised distributors can sell the luxury goods or whether it restricts authorised distributors’ passive sales to end users. The Court held that customers were able to find the online offer of authorised distributors by using search engines and the exclusion of third party platforms did not exclude a section of customers from buying products.
Therefore, the restrictions did not amount to a hardcore restriction of competition law, prohibited by the VBER.
The ECJ has therefore ruled that Coty did not breach EU competition law by compelling authorised retailers to refrain from selling products through third party platforms such as Amazon or Ebay.
This follows the decision of the UK Competition and Markets Authority (CMA) who recently ruled that PING had breached UK competition law by ensuring two retailers were not able to sell products online at all. It was held that a complete ban on online sales was a breach of competition law and such objectives could have been achieved through less restrictive means.
Since Coty allowed online sales of their products through the authorised retailers own website, there was not a complete ban on online sales, but a restriction which was considered necessary to protect the luxury brand status of the products (and which Coty felt was being damaged through sales on Amazon etc.).
This article was co-written by Rebecca Ferguson.