On 6 December 2017, the Court of Justice held that, under certain conditions, suppliers will not breach EU competition law where they prohibit authorised retailers from selling their products on third party platforms such as Amazon and eBay. Given the recent focus of European competition authorities on the e-commerce sector, this provides useful clarification of the law in a hotly-contested area.
Further developments on the horizon in this sector include a proposed ban on “unjustified” geo-blocking and proposed action to deal with unfair contracts and trading practices in platform-to-business relations.
Coty Germany GmbH (“Coty”) is one of Germany’s leading suppliers of luxury cosmetics. It markets its products through a “selective distribution network” of authorised distributors and retailers i.e. the resellers cannot supply products for resale outside the authorised network. These authorised retailers’ bricks and mortar shops must meet a number of requirements in terms of environment, décor and furnishing. Authorised retailers can also sell Coty products online, provided that the sales are made through an “electronic shop window” of the authorised retailer and the luxury character of the goods is preserved. Sales are not permitted in a discernible manner via online resale platforms such as Amazon or eBay; the agreement expressly prohibits the use of a different business name as well as the recognisable engagement of a third-party undertaking which is not itself an authorised retailer.
In 2012, Coty brought an claim before the German courts seeking an order preventing its long-term authorised retailer, Parfümerie Akzente GmbH (“Akzente”), from selling Coty goods through the website Amazon.de.
The lower German court held that Coty’s platform ban infringed European competition law and was therefore unenforceable. Coty appealed this decision to the Frankfurt Supreme Regional Court, which stayed the proceedings and made a reference to the Court of Justice (the “Court”).
The Court’s judgment
The Court confirmed that Article 101 of the Treaty of the Functioning of the European Union (“Article 101”) does not preclude a platform ban of the type used by Coty where it is used in a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods, and on condition that the clause:
- has the objective of preserving the luxury image of those goods;
- is laid down uniformly and not applied in a discriminatory fashion; and
- is appropriate for preserving the luxury image of the goods and does not go beyond what is necessary to achieve that objective.
In relation to the contested clause, the Court found that, although it was for the referring court to determine whether these criteria were met, they appeared to be so. First, it was common ground between the parties that the clause had the objective of preserving the image of luxury and prestige of the goods at issue. Second, the clause was objective and uniform and applied without discrimination to all authorised distributors. Third, the prohibition was appropriate for preserving the luxury image of the goods:
- it provided the supplier with a guarantee, from the outset, that those goods would be exclusively associated with the authorised distributors;
- the contractual link between the supplier and the distributor enabled the supplier to check that the goods would be sold online in an environment that it had agreed with its authorised distributors, whereas there was no such link between the supplier and the third-party platforms; and
- the ban contributed to the products’ luxury image among consumers and thus to the preservation of one of the main characteristics of the goods sought by consumers.
Finally, the clause did not go beyond what was necessary to preserve the luxury image of the goods:
- the European Commission’s e-commerce sector inquiry found that the main distribution channel for online sales was distributors’ own online shops, which were operated by over 90% of the distributors surveyed; and
- the absence of any contractual relationship between the supplier and the third-party platforms meant that allowing distributors to use such platforms subject to their compliance with pre-defined quality conditions could not be regarded as being as effective as the prohibition at issue.
Importantly, the Court also found that a platform ban of the type imposed by Coty does not amount to a ban on unsolicited or “passive sales”. A passive sales ban is regarded as a “hardcore restriction”, which has the effect of dis-applying the safe harbour protection afforded to common forms of vertical agreements under the EC Vertical Block Exemption Regulation (provided that relevant market share thresholds are not exceeded).
The Court found that the platform ban under consideration did not amount to a ban on passive sales since: (i) it did not amount to a blanket ban on authorised resellers making online sales; (ii) the class of online consumers that purchase products via third party platforms could not practically be identified and excluded from buying from authorised online resellers; and (iii) consumers had multiple means to access the products at issue (e.g., through online search engines or a root supplier’s own website). This impact-focused assessment by the Court provides useful guidance beyond the high-level principles on this topic set out in the European Commission’s 2010 Guidelines on Vertical Restraints.
The Court’s judgment largely follows the conclusions of Advocate General Wahl in his opinion of July this year (see our previous coverage on this).
Practical implications for businesses
Suppliers of both luxury and non-luxury products will welcome the Court’s judgment, which provides useful clarification of the law in this area.
It remains the case, as the Court held in its 2011 Pierre Fabre judgment, that an outright ban on online sales in a selective distribution agreement is a restriction of competition “by object”. A consideration of the limited circumstances in which such a ban may be justifiable (with reference to a broader pro-competitive agreement or associated efficiencies) is currently the subject of an appeal in the UK by golf club manufacturer, Ping, of a recent fining decision against it by the UK Competition and Markets Authority, and which is likely to be heard by the UK Competition Appeal Tribunal in May 2018.
However, the Court’s judgment in Coty has made clear that platform bans may be consistent with legitimate exclusive and selective distribution systems. This may encourage suppliers to consider amending their distribution terms accordingly and exerting greater control over how their products are sold online.
Other developments in e-commerce
Another development which many manufacturers and retailers will be following with interest is the EU’s proposed ban on “unjustified” geo-blocking within the EU (see our coverage of this). In November, the Council of the European Union confirmed that an agreement had been reached with the European Parliament in this regard.
The Geo-blocking regulation will prevent discrimination on access to prices, sales or payment conditions when buying products and services in another EU country. This will include sales of goods and services online, where traders will not be allowed to block or limit customers' access for reasons of nationality, and will have to give a clear explanation if customers are redirected to a different website. The Commission’s press release announcing the proposals provided three examples as to how they will apply in practice:
- a Belgian customer who wishes to buy a refrigerator will have to be entitled to order the product from a German website and collect it at the trader's premises or organise delivery himself to his home;
- a Bulgarian consumer who wishes to buy hosting services for her website from a Spanish company will have to have access to the service, be able to register and buy this service without having to pay additional fees compared to a Spanish consumer; and
- an Italian family will have to be able to buy a trip directly to an amusement park in France without being redirected to an Italian website.
The Council and the European Parliament will endorse the draft regulation in 2018. Following formal adoption, the regulation will be applicable nine months after its publication in the EU Official Journal.
Separately, the EU has been reviewing business practices in the online platforms sphere and recently announced that it would deliver action (possibly by way of new legislation) to deal with unfair contracts and trading practices in platform-to-business relations. Final proposals are expected to be announced early next year.
We have extensive experience in advising clients on antitrust issues relating to e-commerce. If you have any questions about the implications of the Coty case, the proposed Geo-blocking regulation or your competition law obligations more generally, please do not hesitate to get in touch.