A favourable opinion for the owners of exclusive brands – Does selective distribution guarantee that the luxury image of a brand is maintained?
On 26 July 2017, the advocate general of the EU Court of Justice issued a very interesting opinion of benefit to the owners of exclusive brands. The dispute the opinion addresses has been going on for many years between the companies Coty German GmbH (“Coty”) – a leading supplier of luxury cosmetic products in Germany – and Parfümerie Akzente GmbH (“Parfümerie Akzente”) – an authorized distributor of those products. It concerns the possibility of a supplier prohibiting authorized entities involved in further selling in a selective distribution system from using unauthorized third companies.
The EU Court of Justice will have to consider whether, and within what scope, selective distribution systems for luxury and prestige items that primarily ensure the “luxury image” of those goods constitute an element of competition pursuant to Article 101 par. 1 of the Treaty on the Functioning of the European Union (TFEU).
Coty sells selected luxury brand cosmetics in Germany in a selective distribution system on the basis of deposit agreements. Those agreements are applied by Coty and by its affiliates in a uniform manner throughout Europe. One of Coty’s distributors for many years has been the company Parfümerie Akzente, an authorized entity for retail sales in physical sales outlets and on the internet. Internet sales are conducted by that distributor partly through its own internet shop and partly through the portal “amazon.de”.
The deposit agreements Coty concluded with its partners, including Parfümerie Akzente, set out the detailed conditions under which sales of Coty products are to take place. Provisions of those agreements concern, for example, the furbishing of shops, their décor and lighting, and the overall order and cleanliness of retail premises. The purpose of such strict provisions is to maintain the luxury image of the brand.
In 2012, Coty amended its agreements within the scope of internet product sales. Pursuant to the new provisions, an associate of Coty is entitled to offer and sell goods through the internet through the agency of an authorized internet shop but on condition that the luxury image of Coty products is maintained. An associate cannot use any other trade signs and cannot engage in any cooperation that could result in a third company taking visible part if it is not an authorized depositor of Coty.
The introduction of those changes led to a dispute between Coty and Parfümerie Akzente. The distributor did not agree to the amended conditions of cooperation. As a result, Coty approached the court to prohibit Parfümerie Akzente from distributing Coty products through “amazon.de”.
In the first instance, Coty’s demand was dismissed. The German court found that the contested provision of the agreement is contrary to Article 101 par. 1 TFEU, which prohibits businesses from concluding understandings that lead to a restriction or disruption of free competition on the internal market, and also that it is contrary to the provision of German law on fighting restrictions in competition. The court showed that the means employed by Coty constitute a severe restriction of competition and that the company cannot make such a group exclusion against the prohibition on restricting competition. Further, in the opinion of the court, in order to achieve its purpose, rather than totally prohibiting sales through sales portals, Coty could, for example, require a certain level of quality of the services offered. Coty appealed against that ruling, and the case went to the court of second instance, which suspended the proceeding and turned to the Court of Justice with the pre-trial question stated in the first part of this article.
Consequently, the advocate general of the Court of Justice presented his opinion (C-230/16). He referred to current stances taken by the Court of Justice. He cited an opinion that the structure of the market does not rule out the existence of varied channels of distribution adapted to the characteristics of particular manufacturers and to the needs of different groups of consumers. Selective distribution systems, therefore, help and protect the development of a brand and brand image within the scope in which they provide certain products to authorized distributors based on quality criteria that are necessary due to the nature of those products.
Such systems help ensure that distribution is effective and that customers are satisfied. In the opinion of the advocate general, in the case at hand, selective distribution systems for luxury and prestige goods are compliant with Article 101 par. 1 TFEU, provided that the choice of entities involved in further selling is made based on objective, qualitative criteria. Those criteria should be defined in a uniform way for all and should be applied in a non-discriminatory manner in relation to all entities potentially involved in further selling, where the nature of a product and its prestige image require selective distribution in order to ensure the quality of the product and its proper use. Those criteria should not extend beyond what is necessary.
The advocate general also noted that consumers’ perception of luxury goods does not result solely from their material characteristics but is also strictly linked with the “aura of luxury” that surrounds them. That “aura of luxury” results from the fact that when a producer puts its trademark on a specific product, it guarantees the consumer that that product was manufactured under its control and that the quality will not differ from that of other luxury goods of the same company. The purpose of a selective distribution system is to maintain and protect the feeling that the goods are luxury goods. Taking into account these arguments, the advocate general states that the luxury image, as a particular feature of the goods, can be deemed to be a factor that makes such distribution system compliant with Article 101 par. 1 TFEU.
The advocate general also responded to the question of whether a prohibition against members of a selective distribution system, including third-party portals, in a recognizable manner is in accordance with Article 101 par. 1 TFEU.
In his opinion, in such a case, it is vital to determine whether such a prohibition is justified, above all, by the purpose of the selective distribution system, and whether it is proportional. Applying these criteria to the case at hand, the advocate general found that such a prohibition may serve to maintain the luxury nature of the goods. What is more, in the opinion of the advocate general, such a prohibition may have a beneficial effect on competition, for it provides consumers with access to goods with regard to which there is no doubt that they are genuine.
Since it is in accordance with the competition regulations of Article 101 par. 1 TFEU for a network leader to exercise control over the conditions of distribution in the case of a selective distribution network, there are no grounds for holding that a tool giving the network leader control over how products are distributed through the internet is contrary to those regulations.
The advocate general deemed that a prohibition against third parties in a recognizable way in a selective distribution system is admissible, in a way similar to the possibility of creating sales conditions in a physical outlet, which, in accordance with the Court of Justice case law, does not constitute an infringement of the competition regulations.
The Advocate General did not question the proportionality of such a solution either. In his opinion, only such a solution gives Coty the possibility of controlling how its products are distributed. The company would lose such control if third parties having no contractual relationship with Coty were to be included in the selective distribution system.
Within the next few months, the Court of Justice will issue a ruling in this case. That ruling will be of vital importance for producers of luxury goods because it will lay down the scope of control such producers are able to exercise over how their products circulate on the internet. If the Court of Justice agrees with the arguments and conclusions presented by the advocate general in his opinion, producers of luxury goods will be more able to decide what websites can be used to sell their products.