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Prohibition of online sales of luxury products?

Can an authorized retailer be prohibited from selling online or on a third-party online platform?

The perfume industry, including its luxury end, largely relies on selective distribution channels. These channels are usually founded on extensive agreements detailing the obligations associated with the principles of selling perfumes or décor of  points of sale, but also prohibiting specific activities. Meanwhile, authorized retailers are increasingly selling perfumes online or on third-party internet platforms. To what extent can the leader of a selective distribution network intervene in such sales? Can it completely prohibit an authorized retailer from selling online? Can the party restrict such sales?

Total ban on online sales

In its selective distribution agreements, the company Pierre Fabre Dermo-Cosmétique SAS (“PFDC”) provided for a total ban on online sales of cosmetic and personal care product brands such as Avène, Klorane, Galénic and Ducray. PFDC distribution agreements specified that the sale of these brands should take place under strictly defined conditions and in the mandatory presence of a qualified pharmacist. Therefore, online sales were out of the question. PFDC justified the requirement for the physical presence of a pharmacist at the point of sale by pointing at the nature of the products and the need to allow the customer to seek an individual opinion of a specialist based on direct observation of skin, hair or scalp epidermis.

The French competition authority found that the prohibition on online sales imposed by the PFDC distribution agreements was inconsistent with competition law. Indeed, the prohibition of online sales in combination with a selective distribution system has a competition restricting purpose. The authority considered that the prohibition on online sales imposed on retailers by the PFDC corresponded to the ban on active and passive sales, which is not allowed. It was not convinced by the argument that the ban on online sales would improve the distribution of dermo-cosmetics, preventing the risk of trademark infringement and unwarranted enrichment at the expense of authorized entities, or that the nature of products and the desire to make the consumer comfortable required physical presence of a pharmacist. The case, as a result of PFDC’s appeal, was forwarded to the CJEU.

In its judgment of October 13, 2011, case C-439/09, the CJEU reverted to an in-depth analysis of the contractual clause in question in the light of the antitrust case-law and regulations. It accepted in principle the argument concerning the selective distribution network and its pro-competitive nature, provided that the selection of resellers  is based on objective qualitative criteria established in a uniform manner for all resellers and is applied in a non-discriminatory fashion. The CJEU also agreed that, to maintain quality and ensure proper use of a given product, such distribution network is required and that the defined criteria do not go beyond what is necessary. Whereas it rejected the argument concerning the need to protect the prestigious image of distributed brands. According to the CJEU, the protection of a prestigious image cannot justify the restriction of competition. A contractual clause in a selective distribution system that completely excludes online sales may in the CJEU’s view constitute an unlawful restriction of competition.

Partial ban on online sales

The dispute between the company Coty Germany and its authorized retailer Parfümerie Akzente concerns the ban on the sale of luxury perfumes on a platform belonging to a third party. Parfümerie Akzente runs sales of distributed products via the Internet, partly through its own online store and partly on Coty Germany introduced the following provision in its selective distribution agreements: “the authorised retailer is entitled to offer and sell the products on the internet, provided, however, that the internet sales activity is conducted through an “electronic shop window” of the authorised store and the luxury character of the products is preserved”. The agreement also prohibits the use of a different business name as well as a recognisable (to clients) engagement of a third-party undertaking which is not an authorised retailer of Coty Prestige.

Coty has lost the case before the domestic court. The court, referring to the principle described in the judgment issued in the Pierre Fabre Dermo-Cosmétique case (C-439/09), considered that the contractual clause was inconsistent with the relevant provisions of antitrust law. The case was presented to the CJEU (C-230/16). The Advocate General provided his opinion on July 26, 2017.

The Advocate General recalled that the Court has consistently taken a cautious approach when dealing with selective distribution systems. Such systems may be declared compliant with antitrust law provided that the choice of resellers is based on objective criteria of a qualitative nature, determined in a uniform manner and applied in a non-discriminatory fashion. As a rule, the Court’s case-law indicates that selective distribution systems favour and protect the development of the brand’s image. They also stimulate competition between suppliers of branded goods, in that they allow manufacturers to organize efficiently the distribution of their goods and satisfy customers. Selective distribution systems are, especially for goods with distinctive qualities, a vector for market penetration. Brands, and in particular luxury brands, derive their added value from a stable consumer perception of their high quality and their exclusivity in their presentation and their marketing. Whereas that stability cannot be guaranteed when it is not the same undertaking that distributes the goods. The Advocate General stated that the effects of selective distribution systems are neutral and may even be beneficial from the point of view of competition.

The Advocate General devoted a considerable amount of space to a detailed analysis of Coty’s selective distribution network and the context of the disputed contractual provision. Selective distribution systems of luxury and prestigious articles serve to protect the brand image of these goods and preserve their quality. Therefore, as long as they meet the conditions developed in case-law, and the selective distribution agreements themselves do not contain “hardcore” restrictions of competition, they should be assessed as compliant with antitrust law.

The Advocate General recognized that the ban on using third-party platforms may be justified by the objective of maintaining and controlling quality criteria, which requires, in particular, the provision of certain services when selling articles, as well as the presentation of sold products in a specific manner. This prohibition, in the Advocate General’s opinion, also allows maintaining the protection and positioning of brands in the face of such phenomena as counterfeiting of products and parasitic use of third-party trademarks, which are likely to restrict competition.

The leader of a selective distribution network may require quality standards for the use of the Internet site to resell its goods, just as he may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general. However, in making use of third-party platforms in  distribution of the products, the authorised distributors — and, what is more, the network leader — in particular no longer have control over the presentation and image of the products, since, inter alia, those platforms frequently display their logos very prominently at all stages of the purchase of the contract goods. According to the Advocate General, the absolute prohibition imposed on the members of a selective distribution system from using a third-party online platform for their Internet sales thus constitutes a restriction comparable with the restriction which is justified and necessary in order to ensure the functioning of a selective distribution system based solely on brick and mortar trade, and is therefore legitimate in the light of competition law. In other words, when certain conditions are met, a contract clause prohibiting members of the selective distribution network from selling on third-party online platforms is lawful.

Judgment in the Coty Germany vs. Parfümerie Akzente case (C 230/16)

The Court agreed with the position of the Advocate General and, on December 6, 2017, issued a judgment in which it stated that antitrust law did not preclude prohibiting in contracts with authorized retailers of luxury perfumes the use, in a manner discernible to clients , platforms belonging to third parties which are not authorised retailers for Internet sales, provided that the following conditions are met:

  • The contractual clause aims to preserve the luxury image of the goods;
  • It is laid down in a uniform manner and is applied in a non-discriminatory fashion;
  • It is proportionate in the light of the objective pursued.

Incidentally, the use of third-party platforms in a manner discernible to clients seems to be a very important criterion given that online sales via the Internet using a third-party platform, but in a manner not discernible to the client , should not be restricted.

The CJEU reiterated in the judgment that the quality of luxury products is not just the result of their material characteristics but also of the allure and prestigious image which bestow on them an aura of luxury. Recalling the Copad judgment (C-59/08), the Court stated that the aura of luxury is essential in that it enables consumers to distinguish them from similar goods.

In the justification of the judgment the Court accepted that the contractual clause under consideration aims to preserve the luxurious and prestigious image of Coty’s goods, that it is objective and uniform and that it is applied without discrimination to all authorized retailers. The Court also noted that a different assessment of the case would in fact deprive the leader of the selective distribution network of control over the appropriate conditions for the sale of luxury goods online. The lack of a contract between third party vendors and third-party platforms would prevent the vendor from enforcing compliance with quality requirements from these platforms, which could consequently contribute to the destruction of the luxury aura of these goods. Like the Advocate General, the Court stated, based on studies carried out by the European Commission, that online retailer stores form the preferred online distribution channel. In these circumstances, the Court found that the contractual clause under consideration is adequate and proportionate to the preservation of the luxury image of goods.

The Court also pointed out that, should the domestic court conclude that the clause at issue is caught, in principle, by the prohibition of agreements, decisions and concerted practices laid down in EU law, it is possible that that clause might benefit from a block exemption under Regulation 330/2010. The Court concluded that, in the circumstances of the case, the contractual clause under consideration neither constitutes a restriction of customers nor a restriction of passive sales to end users, restrictions which are automatically excluded from the benefit of a block exemption because they are liable to have severely anti-competitive effects (Court of Justice of the European Union, Press Release No. 132/17).

This judgment is important from the point of view of the practice of competition law. It confirms that restrictions of sales on third-party Internet platforms are not among the hardcore restrictions. They do not constitute a restriction of competition prohibited due to the objective. Therefore, when analyzing such restrictions, one should examine their circumstances and effect. Consequently, any such restrictions must always be subjected to prior careful analysis. It is worth noting (as the Court has) that an absolute prohibition of online sales is, in principle, not admissible. This view is fixed in the European competition case-law.

The difference in the assessment of the absolute ban on online sales and the ban on sales on third-party platforms

The Coty case differs from the case of Pierre Fabre Dermo-Cosmétique in that the latter was not about luxury products, but about cosmetic and personal hygiene products, and moreover, the contractual clause introduced an absolute ban on online sales. In the light of competition law, such ban was not justified. Coty, on the other hand, did not envisage an absolute ban on online sales but only obliged its authorized retailers to refrain from selling contract products via third-party platforms, because in the opinion of the network leader such platforms are not required to comply with the quality requirements which he imposes on his authorized retailers. Parfümerie Akzente could sell perfumes via its own websites. On the other hand, it could not sell perfumes on third-party platforms due to the risk of losing its control of the quality of sales of luxury goods.

Both described cases show that luxury products are somewhat governed by their own laws. However, the fact that an authorized retailer of such products may be prohibited from selling via third parties, such as, in a manner discernible by the public, should not lead us to the hasty conclusion that the total ban on selling cosmetics and perfumes online can be successfully defended.

Dr Monika A. Górska, legal adviser, Intellectual Property practice, Wardyński & Partners