AG Wahl says that, at certain conditions, suppliers of luxury goods may prohibit retailers from selling on third-party online platforms

Yesterday Advocate General (AG) Wahl issued his Opinion in Coty Germany GmbH v Parfümerie Akzente GmbH, C‑230/16 [the Opinion has already received a thorough and interesting commentary by leading competition law blog Chillin’Competition].

This is a reference for a preliminary ruling from the Higher Regional Court, Frankfurt am Main (Germany), seeking guidance from the Court of Justice of the European Union (CJEU) on how to interpret relevation competition law provisions [Article 101(1) TFEU and of Article 4(b) and (c) of Regulation (EU) No 330/2010] in the context of selective distribution agreements.

This case is linked to, on the one hand, the increasing popularity of electronic marketplaces over which producers have no influence [eg Amazon, eBay] and, on the other hand, the question whether a supplier may prohibit authorized resellers from making use of non-authorized third undertakings over fear that the relevant products would otherwise lose or risk losing their ‘luxury’ image.

Background

As readers may imagine, the latter is indeed the core issue in the background national proceedings, brought by Coty Germany [an undertaking that supplies luxury goods and is certainly not new to having its cases referred to the CJEU: eg here, here, and here]against one of its authorized distributors (Parfümerie Akzente), which has been selling Coty’s products for years both at (Coty-approved) brick-and-mortar locations and online (through amazon.de). When Coty sought to extend the control that it has over physical retail to the online sphere, Parfümerie Akzente refused.

As a result, litigation ensued.

In 2014 the first instance court sided with Parfümerie Akzente, and held that the objective of preserving a prestige brand image does not justify the introduction of a selective distribution system which by definition restricts competition.

The decision was appealed to the Higher Regional Court, which was unsure whether the one at first instance was a correct application of CJEU case law, notably the 2011 judgment in Pierre Fabre Dermo-Cosmétique. The court thus decided to stay the proceedings and refer the case to the CJEU.

AG Wahl

The AG Opinion

AG Wahl noted at the outset that the decision in Pierre Fabre Dermo-Cosmétique has been subject to divergent interpretations by national competition authorities and courts: this case is therefore an opportunity for the CJEU to clarify the meaning and scope of its earlier jurisprudence.

According to the AG, the interpretation given at first instance in the background national proceedings is not the correct one: the seller of luxury products is not prevented at the outset from requiring its authorized retailers to sell products at certain conditions and locations – whether offline (brick-and-mortar shops) or online.

This is because price competition is not the only form of effective competition [para 33], and – indeed – “it is on the basis of that premise that selective distribution systems [based on qualitative criteria] should be seen” [para 34].

The CJEU has recognized the legality of selective distribution systems based on qualitative yet objective criteria (determined uniformly and applied in a non-discriminatory fashion – including preserving a certain product image) since the seminal decision in Metro.

The AG also recalled that it has been gradually accepted that selective distribution systems of this kind may even have positive effects on competition: by favouring and protecting the development of the brand image,

“[t]hey constitute a factor that stimulates competition between suppliers of branded goods, namely inter-brand competition, in that they allow manufacturers to organise efficiently the distribution of their goods and satisfy consumers.” [para 42; on intra-brand competition, see para 44].

Furthermore,

“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. However, that stability cannot be guaranteed when it is not the same undertaking that distributes the goods. The rationale of selective distribution systems is that they allow the distribution of certain goods to be extended, in particular to areas geographically remote from the areas in which they are produced, while maintaining that stability by the selection of undertakings authorised to distribute the contract goods.” [para 43]

Eau de Toilette ... for Kats

While in principle selective distribution agreements are not contrary to Article 101 TFEU, there are some conditions [the Metrocriteria] that sellers must respect [paras 52 ,65-66]:

1.    It must be established that the properties of the product necessitate a selective distribution system, in the sense that such a system constitutes a legitimate requirement, having regard to the nature of the products concerned, and in particular their high quality or highly technical nature, in order to preserve their quality and to ensure that they are correctly used.

2.    Resellers must be chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all potential resellers and applied in a non-discriminatory manner.

3.    The criteria defined must not go beyond what is necessary.

The AG then focused on the particular case of luxury goods, and recalled [para 72]that:

“In the context of trade mark law, the Court [notably in Diorand Coty Prestige] has emphasised that luxury and prestige goods are defined not only by reference to their material characteristics, but also on the basis of the specific perception which consumers have of them, and more particularly of the ‘aura of luxury’ which they enjoy with consumers. As prestige goods are high-end goods, the sensation of luxury emanating from them is essential in that it enables consumers to distinguish them from similar goods. Therefore, an impairment of that aura of luxury is likely to affect the actual quality of those goods. In that regard, the Court has already held that the characteristics and conditions of a selective distribution system can, in themselves, preserve the quality and ensure the proper use of such goods.” 

Comment

The Opinion of AG Wahl appears both correct and sensible, including from an IP perspective [but see herefor a critical take].

Readers will remember in particular that in Diorthe CJEU linked the grant of a licence in the context of a distribution agreement concerning luxury products (in that case, "corsetry goods") to the exercise of Dior’s trade mark rights, notably the right to put relevant goods into circulation for the first time. In Coty Prestige the CJEU noted that the exclusive nature of trade mark rights means that any unauthorized use of a trade mark may amount to an infringement [see paras 89-90 of the Opinion].

Let’s see if now the CJEU also agrees with the AG. Stay tuned!