Ercüment Erdem Att. Elif Mungan

Selective Distribution Systems under the Light of Coty Decision

December 2017

Introduction

In its decision dated December 6, 2017, the European Court of Justice (“ECJ”) answered the questions referred by the Frankurt - Higher Regional Court in its request for a preliminary ruling.[1] The questions raised are with regard to the Coty Germany GmbH’s (“Coty”) contractual clause against its reseller Parfümerie Akzente GmbH’nin (“Akzente”), which prohibits Akzente from making online sales through third party platforms (amazon.de) or through the use of a different business name. The ECJ held that Coty is allowed to apply such clause, provided that it operates a lawful “selective distribution system.”

Selective Distribution System

The selective distribution system is mostly applied in the sales of branded products. It is a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria, and where these distributors undertake not to sell such goods or services to unauthorized distributors within the territory reserved by the supplier to operate that system.[2] For instance, cosmetics and electronic products are appropriate products that are sold under selective distribution systems.

Background Information

Coty sells luxury cosmetics in Germany. It markets certain brands in that sector via a selective distribution network, on the basis of a selective distribution contract, also used by the undertakings affiliated to it. For many years, Akzente has distributed Coty Germany goods, as an authorized distributor, both at its brick-and-mortar locations, as well as over the internet. Internet sales are carried out partly through its own online store, and partly via the platform ‘amazon.de’.

Coty revised the distribution contracts by providing an online sales restriction through third party platforms. Akzente refused to sign the amendments set forth in the selective distribution contract. Coty, therefore, brought an action before the national court of first instance, seeking an order prohibiting, in accordance with the said clause, the defendant in the main proceedings from distributing products bearing the brand at issue via the platform ‘amazon.de’. The German court, however, dismissed Coty’s action, since its request is contrary to European Union and German competition laws. Following Coty’s appeal, the Frankfurt Regional Court stayed the proceedings, and referred a number of questions to the ECJ for a preliminary ruling.

The Decision

ECJ’s resolutions are enlightening with regard to the selective distribution systems that are applied for luxury products.

Firstly, the ECJ concluded that a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods, complies with that provision to the extent that resellers are chosen on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion, and that the criteria laid down does not go beyond what is necessary.

The ECJ then evaluated Coty’s internet sales restriction via third party platforms. According to ECJ, firstly, this restriction provides the supplier with a guarantee, from the outset, in the context of electronic commerce, that those goods will be exclusively associated with the authorized distributors. Secondly, the prohibition enables the supplier of luxury goods to check that the goods will be sold online in an environment that meets the qualitative conditions that it has agreed with its authorized distributors. Thus, this clause is appropriate to preserve the luxury image of those goods.

ECJ considered the fact that the supplier does not impose restrictions with regard to the internet sales, in general, but the sales only made through third party platforms or a different business name. Accordingly, the ECJ concluded that the restriction is proportionate. The ECJ also refers to the resolutions of the Preliminary Report on the E-commerce Sector Inquiry carried out by the Commission[3] that are approved by the Final E-Commerce Report.[4] It notes that despite the increasing importance of third-party platforms in the marketing of distributors’ goods, the main distribution channel, within the context of online distribution is, nevertheless, constituted by distributors’ own online shops, which are operated by over 90% of the distributors surveyed.

Conclusion

In light of the Decision, a contractual provision which prohibits internet sales on third-party platforms in a selective distribution system designed for luxury goods, is not contrary to competition law. This is valid on the condition that that the clause has the objective of preserving the luxury image of those goods, that it is laid down uniformly, and not applied in a discriminatory fashion, and that it is proportionate in light of the objective pursued, these being matters to be determined by the referring court.

The Decision is enlightening for the undertakings that apply selective distribution systems. On the other hand, it is important to note that this Decision covers “luxury products,” and should not be interpreted, broadly. Furthermore, the Decision will be beneficial for the discussions with regard to the Turkish Competition Authority’s recently published Draft Vertical Agreements Guidelines’ paragraphs that concern internet sales. The relevant paragraphs allow suppliers to set forth quality criteria for the third party platforms, provided that the objectives of these criteria cannot to avoid internet sales.

[1] C-230/16 Coty Germany; 6 December 2017: http://curia.europa.eu/juris/celex.jsf?celex=62016CJ0230&lang1=en&type=TXT&ancre= (Access date: 19 December 2017)

[2] The Vertical Agreements Block Exemption Regulation numbered 330/2010, Article 1 (1) (e).

[3]The Preliminary Report on the E-commerce Sector Inquiry carried out by the Commission pursuant to Article 17 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles [101 and 102 TFEU] (OJ 2003 L 1, p. 1; 15 September 2016.

http://ec.europa.eu/competition/antitrust/sector_inquiry_preliminary_report_en.pdf (Access date: 20 December 2017).

[4]The Final E-Commerce Sector {SWD(2017) 154 final, 10 May 2017:

http://ec.europa.eu/competition/antitrust/sector_inquiry_final_report_en.pdf ((Access date: 20 December 2017).