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Does the EU’s ruling on Coty’s preliminary reference scupper the Kartellampt’s plans?

December 12, 2017By Timothy Cowen

The judgement for a preliminary reference arising from a dispute between Coty Germany GmbH, a supplier of luxury cosmetics, and Parfümerie Akzente GmbH, one of Coty’s authorised distributors was issued by the EU Court on 6 December 2017.

The preliminary reference concerned the application of Article 101(3) TFEU to a selective distribution contract between Coty Germany and its authorised distributors, which included clauses regarding distributors’ use of third-party undertakings for internet sales of the goods in question.

The result of the clauses concerned was to limit online sales of Coty’s products. The preliminary reference was to decide whether this counted as a restriction of the territory into which the goods can be sold, and a restriction of active or passive sales to end users by members of a selective distribution system operating at a retail level of trade, which would constitute a hardcore restriction under Article 4 of the Vertical Block Exemption Regulation, meaning the exemption in Article 4 would not apply.

The dispute, from which the preliminary reference was made, arose because Parfümerie Akzente, as an authorised distributor, had been selling Coty’s products online, both through its own online store and on Amazon.de. The distribution agreement between the two companies included a clause stating that the ‘authorised retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorised.’ This was amended pursuant to the entry into force of Regulation No 330/2010 (the Vertical Block Exemption Regulation) to provide that ‘the authorised retailer is entitled to offer and sell the products on the internet, provide, however, that that internet sales activity is conducted through an “electronic shop window” of the authorised store and the luxury character of the products is preserved.’

The distributor refused to sign the amended distribution agreement, and a dispute arose. In the German court of first instance, it was held that maintaining a prestigious brand image couldn’t, as an objective, justify such a selective distribution system.

Coty appealed, and the German Court of Appeal made the preliminary reference to the European Court of Justice.

The Court of Justice has previously ruled, in relation to bricks and mortar retail, that luxury goods’ value arises from the desirable manner in which they are presented and sold, as well as from their quality and tangible features (see Copad, C-59/08). Such stipulations contribute to ‘sustaining the aura of luxury’ around such goods, as the Court put it in the judgement. Essentially, this judgement clarifies that this concept extends to sales online, subject to the caveats outlined in paragraph 36 of the judgement: the basis for choosing authorised resellers must be “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 do not go beyond what is necessary.”

What has the reaction been to the Court of justice’s decision?

Coty has welcomed the decision, saying it “confirmed that the character of luxury brands necessitates and justifies selective distribution, whatever the distribution channel.”

The European Commission has also welcomed the decision, saying it provides more clarity and legal certainty for market participants.

A lobbying group representing technology companies including Amazon and eBay, the Computer & Communications Industry Association, has echoed the carte blanche comment, arguing that the judgement is “bad news for consumers who will face fewer choices and also less competition when they want to shop online.”

Bloomberg has reported that a spokesman for EuroCommerce, another industry group, Neil McMillan has indicated that retailers will probably “remain vigilant on how suppliers interpret this” in order to ensure that any limits on sales are “only for luxury products” and do not discriminate between different online websites.

Andreas Mundt, the President of the Bundeskartellamt, the German Competition Authority, has said in a statement that the ruling would have “only limited effects on our decisional practice”, arguing it is not a “carte blanche” for manufacturers to impose blanket bans on selling via platforms such as Amazon. As Mundt has previously indicated, the German Competition Authority has been closely looking at the tech giants of retail. It will be interesting to see whether the Court of Justice’s decision has any impact on their approach going forward.

Anyone wishing to discuss the impact of the Coty judgement should contact Tim Cowen.

 

 

AmazonAndreas Mundtarticle 101 TFEUComputer & Communications industry AssociationCotyeBayEU competitionEU RegulationEuroCommerceEuropean CommissioKartellamptTim Cowen
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