It is legal for a manufacturer of luxury goods to prohibit its authorised retailers from selling its products on third-party platforms such as Amazon or eBay, Advocate General Wahl has recently opined.
Such a prohibition is intended to preserve the luxury image of the products concerned and is not considered to be anti-competitive provided that certain conditions are fulfilled.
EU law as well as Maltese law prohibit agreements which prevent, restrict or distort competition. It is not only horizontal agreements which lead to the creation of cartels which are considered to be anti-competitive but vertical agreements as a rule too may fall foul of competition law.
Vertical agreements are agreements for the sale and purchase of goods or services which are entered into between companies operating at different levels of the production or distribution chain such as distribution agreements between manufacturers and wholesalers or retailers. Such agreements may be considered to be anti-competitive if the agreement contains restraints on the supplier or the buyer.
However, vertical agreements often also have positive effects on a market because they may for instance help a manufacturer to penetrate a new market.
To this end, the European Commission has adopted a block exemption which provides a safe harbour for most vertical agreements and renders EU anti-trust rules inapplicable to vertical agreements which fulfil certain requirements.
Guidelines were also published in order to assist companies to determine whether the vertical agreements which they enter into can actually benefit from the block exemption and hence can be considered legal without any further examination by the European Commission or by the national authorities.
This particular case which came before the CJEU concerned a type of vertical agreement, selective distribution agreements for the sale of luxury products. Coty Germany, one of Germany’s leading suppliers of luxury cosmetics, entered into a number of selective distribution agreements with its resellers. The manufacturer chose this type of agreement in order to preserve the luxury image of some of its brands.
The shops of the retailers who entered into the agreement with Coty had to therefore meet a number of requirements in terms of environment, décor and furnishing.
Authorised retailers were also entitled to offer and sell the goods on the internet.
However, in 2012, Coty inserted a clause in its selective distribution agreements to the effect that the sale of its goods over the internet is only possible if such an activity is conducted through an ‘electronic shop window’ of the authorised shop and the luxury character of the goods is preserved.
The agreements clearly provided that it is forbidden for the authorised retailer to make evident use of unauthorised third parties for the internet sales of the contract goods.
One of the distributors of Coty Germany’s products affected internet sales partly through its own on-line store and partly via the platform amazon.de.
It refused to abide by the contractual conditions inserted by the manufacturer in 2012.
Once certain conditions are fulfilled, such type of agreements are often looked upon favourably both by EU and national competition authorities
To this end, Coty sought an order from the German courts prohibiting its distributor from distributing the contract goods via the platform ‘amazon.de’.
The German national court seized of the case sought a ruling from the CJEU in order to determine whether the contractual clause in question restricts competition and is hence in breach of EU competition law.
In his Opinion, Advocate General Nils Wahl pointed out that previous jurisprudence on the matter maintains that, in view of their characteristics and nature, luxury goods may require the implementation of a selective distribution system in order to preserve the quality of such goods and to ensure that they are properly used.
He observed that, in accordance with established case-law, selective distribution systems relating to the distribution of luxury and prestige products, and mainly intended to preserve the ‘luxury image’ of those products are not necessarily caught by the competition rules.
This is so, provided three criteria are fulfilled: (a) the resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers, (b) the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used, and (c) the criteria established do not go beyond what is necessary.
With specific reference to the contested clause, the AG opined that such a clause is not necessarily caught by EU competition rules provided that it fulfils the above criteria. The AG noted that it will ultimately be for the national court to determine whether this is so with regard to the case under examination.
The AG continued to observe that the prohibition which the contractual clause establishes is likely to improve competition based on qualitative criteria and the luxury image of the products concerned.
He affirmed that not only does it ensure that such products are sold in an environment which meets the qualitative requirements imposed by the supplier, but it also ensures that other undertakings do not take a free ride over the investments and efforts made by the supplier and by other authorised distributors to improve the quality and image of the products concerned.
The AG highlighted the fact that the manufacturer did not impose an absolute prohibition on online sales but only required its authorised distributors not to sell the contract products via third party platforms, since such platforms are not required to comply with the qualitative requirements which it imposes on its authorised distributors.
Indeed, the AG observed that the clause at issue still allows authorised distributors to distribute the contract products via their own internet sites. Nor does it prohibit its distributors from making use of third party platforms in a manner which is not obvious.
The contested clause cannot be therefore considered to be an outright ban on or a substantial restriction of internet sales, the AG concluded.
The AG also considered the clause in question to be proportionate to the objective being pursued by the manufacturer, that is, to ensure compliance with the qualitative requirements which may be lawfully imposed in the context of a selective distribution system.
He also continued to note that should the clause in question be found to be caught by EU competition law, it would still benefit from the block exemption relating to vertical restraints since the contested prohibition does not constitute a serious restriction of competition.
Though companies must always tread carefully in order to ensure full compliance with competition law, vertical restraints in agreements entered into between a manufacturer and a distributor are often considered as being pro and not anti-competitive. It is for this reason that, once certain conditions are fulfilled, such type of agreements are often looked upon favourably both by EU and national competition authorities.
Mariosa Vella Cardona M’Jur, LL.D., is a freelance legal consultant specialising in European law, competition law, consumer law and intellectual property law.
mariosa@vellacardona.com