German court rules that Coty may ban the distribution of its luxury perfumes via third-party platforms

The Court based its decision on criteria established by the European Court of Justice ("ECJ"), which had been asked to determine whether such restrictions concerning the use of third-party online platforms violate EU competition law.

Coty is a manufacturer of fragrances, cosmetics and hair care products for brands such as Burberry, Gucci, Hugo Boss and Escada, and specialises in the distribution of luxury perfumes in Germany. Coty operates a selective distribution system, pursuant to which only those retailers that fulfil specific quality requirements are authorised to distribute its products. Parfümerie Akzente is one of those authorised retailers. 

At the relevant time, Parfümerie Akzente distributed Coty's goods via bricks and mortar outlets, as well as online via its own website and via amazon.de (a third party platform). In its agreements with its authorised retailers, Coty only permitted retailers to distribute its products online if the exclusive luxury character of those products was maintained, but Coty prohibited the sale of its products via third-party platforms for which authorisation has not been granted. Therefore, by distributing Coty's products via "amazon.de", Coty alleged that Parfümerie Akzente had violated the prohibition set out in its distribution agreement and Coty asked the district court to prohibit the sale of its fragrances on Amazon.

After the complaint was dismissed, Coty appealed the decision. On 19 April 2016, the Higher Regional Court of Frankfurt made a reference to the ECJ seeking guidance on the interpretation of third-party platform bans under EU competition law. The Higher Regional Court's questions were answered by the ECJ in a judgment on 6 December 2017 (see our earlier article). According to the previous case law of the ECJ, qualitative selective distribution systems are permissible and are therefore not subject to the prohibition pursuant to Article 101(1) TFEU:

• if the selection of resellers is based on objective qualitative criteria that are consistently established and applied without discrimination;
• if the characteristics of the products in question require such a distribution network in order to safeguard their quality; and
• provided that the specified criteria do not go beyond what is necessary.

The ECJ has refined the above criteria and found that the establishment of a selective distribution system can be justified not only to ensure the luxury image of products whose quality is based on their physical characteristics, but also for those products whose quality is based on their prestigious character. Since a reseller's poor reputation or damage to the prestigious character of luxury goods is likely to affect the goods' perceived quality, third party platform bans may be justified in order to preserve the quality of luxury goods.

On 12 July 2018, the Higher Regional Court of Frankfurt ruled that the products concerned qualified for selective distribution and the luxury image of those products would be jeopardised if third-party online platforms such as Amazon were given free admission to that distribution system. Moreover, the Court applied the criteria established by the ECJ and decided that the quality objectives of the selective distribution system had been applied consistently and without discrimination since Coty imposed the prohibition on the use of third-party platforms uniformly on all its distribution partners.

The German court did not need to answer the question of whether or not Coty's distribution agreements are prohibited by Article 101(1) as it also found that the third-party platform prohibition did not constitute a so-called hardcore restriction within the meaning of Article 4 b) or c) of the EU's block exemption regulation on vertical agreements.  This finding was based on the fact that the prohibition: 

• did not restrict the types of customers that authorised dealers could supply; and
• did not prevent authorised dealers from responding to unsolicited requests for products since, in certain circumstances, they were allowed to advertise via the internet and to distribute the goods via their own online shops). 

In addition, the market shares of the parties involved did not exceed 30%, therefore the third-party platform ban was block-exempted by the regulation.

Accordingly, Coty may prohibit Parfümerie Akzente from selling its products through "amazon.de" and the related restriction of competition (i.e. the third-party platform ban) is permissible. However, mere advertising cooperation between authorised distributors and third party websites, pursuant to which customers are directed from a third party website to an authorised distributor's own online shop, cannot be prohibited by manufacturers.  

Parfümerie Akzente's application to appeal the judgment was denied by the Court, although it may still challenge the denial of permission to appeal before the German Federal Court of Justice.

Consequences

Although total bans on online sales are still generally prohibited, the ruling opens up greater possibilities for manufacturers of luxury branded goods to impose third-party platform bans. 

The judgment also provides further guidance on the circumstances in which products actually have a luxury image which is not based solely on their physical characteristics. In particular, the judgment indicates that the following factors are relevant to the assessment of whether certain products have a luxury image:

• consumers' perception of those products; 
• the manufacturer's marketing activities in connection with those products; and 
• the placement of products in a high-value market segment. 

Strictly-speaking, the judgment provides legal clarification only in respect of luxury goods which are sold on Amazon. Therefore, manufacturers of luxury goods should continue to consider sales bans in relation to other third-party platforms on a case-by-case basis.

With thanks to Martha Janik of Ashurst for her contribution.