CJEU strengthens suppliers of luxury goods – their third-party platform bans do not violate antitrust law

In a landmark judgment of 6 December 2017 (C-230/16 – Coty Germany), the Court of Justice of the European Union (CJEU) has put a preliminary end to the discussions on antitrust issues concerning third-party platform bans for luxury goods - essentially providing that they are lawful provided certain conditions apply.

Selective distribution systems and online sales

Based on established CJEU case law, suppliers may under certain conditions (the so-called “Metro-criteria”) establish a qualitative selective distribution system, in order to preserve the quality of a product and to ensure its proper use. It has also generally been accepted that a similar approach may be taken in the online world to that taken in the offline world.

Coty's platform ban

One particular issue that has arisen, however, is the lawfulness of platform bans, and this is the issue that arose in Coty. The basic facts underpinning this case are as follows. Luxury cosmetics supplier Coty Germany markets certain brands via a selective distribution system. It defends its system by reference to the luxury image and the prestige character of its brands. As regards online sales, Coty Germany's authorised dealers are not permitted to use a different name for their online shops. Such third-party platform ban prohibits the dealers from openly engaging third parties and thus prohibits sales via internet marketplaces like Amazon or eBay.

Uncertainty after the Pierre Fabre case

The lawfulness of such third-party platform bans has been the subject of numerous discussions and divergent court rulings. One reason for this was the CJEU's judgment from 2011 in the Pierre Fabre case (C-439/09). In that case the Court stated – as regards cosmetics – that "the aim of maintaining a prestigious image is not a legitimate aim for restricting competition". The General Court also referred to this statement recently in its judgement of 23 October 2017 in the Swiss Watchmakers case.

The German Federal Cartel Office, in particular, had interpreted this statement as though the preservation of a luxury image could no longer justify selective distribution systems and platform bans as such. Other authorities, by contrast, notably including the European Commission in its e-commerce sector inquiry report of May 2017, have taken a more sympathetic view towards platform bans. This divergence of views has led to significant uncertainty for suppliers of luxury or branded goods.

CJEU clarifies: selective distribution systems are still lawful when aimed at the preservation of a luxury image

Upon referral by the Frankfurt Court of Appeals, the Luxembourg judges have removed this uncertainty. The judgment is clear and explicit on this point. It seems likely to end the debate on third-party platform bans aiming at preserving a luxury image.

According to the judgment, a selective distribution system for luxury goods which primarily serves to preserve the luxury image of such goods is lawful when taking into account the other Metro-criteria. The Court underscored that the quality of luxury goods is not only the result of their material characteristics, but also of their prestigious image. Any impairment to that image of luxury is thus likely to affect the actual quality of those goods.

In this regard, the CJEU pointed out that the statement in the Pierre Fabre judgment referred to above concerned only the total ban of internet sales of cosmetic products at issue in that case. The Court reasoned that this judgment should not be interpreted in such a way that the preservation of a luxury image can no longer justify a restriction of competition, such as that which stems from the existence of a selective distribution network, in regard to all goods, including in particular luxury goods. In particular, a third-party platform ban would be appropriate and necessary to preserve the luxury image of luxury goods.

Impact for non-luxury goods owners: less clear

What is slightly less clear from the judgment is the position of non-luxury brand owners so far as platform bans are concerned. The way this arises from a technical legal perspective is slightly different from the way the main issue discussed above arose. As well as asking the Court whether a platform was anti-competitive in the first place (within Article 101(1) of the Treaty on the Functioning of the European Union and the so-called Metro-criteria), the Frankfurt Court of Appeals also asked some very specific questions about the Vertical Block Exemption Regulation (“VBER”) – namely whether a platform ban in a selective distribution system involved a "hardcore” customer or passive sales restriction under the VBER.

The Court said that it did not. However, in doing so it appears, somewhat curiously, to have linked its answer on the application to the VBER to the luxury quality of the goods whereas in the context of the application of the Metro-criteria to prestigious products it used the phrase "in particular luxury goods". Given that the question of exemption under the VBER is a distinct and separate one from the issue of the Metro-criteria, the latter issue being where the luxury quality of products comes in, this leaves a degree of uncertainty as to whether platform bans for non-luxury branded goods are similarly unobjectionable under competition law. Put another way – even if a restriction is anti-competitive in the first place, it can fall under the VBER if the market share of the supplier and its retailers does not exceed 30 % and there are no hardcore restrictions. The Court seemingly says that a selective distribution agreement with a third-party platform ban does not contain a hardcore restriction, but - at least on its face - it says this only for luxury goods. It would appear strange to interpret this limitation to the effect that restrictions on the use of online platforms for non-prestigious goods are hard-core restrictions. However, the full implications of this judgment will need to be digested and considered in the weeks and months ahead.