Sales are Offline - Advocate General Allows for the Restriction of Third-Party Sales of Goods Online

Selling goods online can be incredibly lucrative, since the potential reach of your business can be near anywhere in the world to millions of people. Many companies therefore sell their goods either exclusively online, or through various third-parties, who could even purchase your goods and then resell them elsewhere without your permission. While the exhaustion of rights is quite pertinent in this scenario (e.g. more on which in relation to patents can be found here), could you still be able to prevent others from selling your goods? After a lengthy spell in the European Courts, a case dealing with just this question has landed on an Advocate General's desk, who has given their opinion on it only some weeks ago.

The case of Coty Germany GmbH v Parfümerie Akzente GmbH dealt with the sale of luxury cosmetics, made by Coty. The company sells its goods through a variety of distributors in a select network, all of which are contracted to do so under a distribution agreement (and its various undertakings). Akzente has been a Coty distributor for some years selling their goods via their retailer stores, including physical locations and via the Internet, primarily through Amazon.de. Coty wanted to make changes to their distributor agreement, which, among others, required that all goods sold online be sold via an electronic store window (not using websites like Amazon) to protect the brand and its image. Akzente refused the amendments, and Coty took the matter to court, which ultimately ended up going to the CJEU.

The crux of the case revolves around the Treaty of the Functioning of the EU and its provisions preventing the distortion of competition. Article 101 of the TFEU, in short, prevents companies from employing contractual measures that affect trade between Member States in a negative way. This could potentially include selective distribution systems, such as Coty's.

The CJEU faced four questions from the referring court, which primarily focussed on the applicability of Article 101 to the above facts.

The first question, as summarized by the Court, asked "…whether selective distribution networks for the distribution of luxury and prestige goods aimed mainly at preserving the luxury image of those goods are caught by the prohibition laid down in Article 101(1) TFEU".

The AG considered both parties' submissions relating to the first question, ultimately deciding that, in his opinion, that selective distribution networks for luxury goods would not be caught by Article 101. Following previous case law, the AG set out the three criteria that have to be met for purely qualitative selective distribution systems not to be prohibited under Article 101:

(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; and (3) the criteria defined must not go beyond what is necessary.

Online sales definitely make life easier

The first criteria, necessity of the selective distribution system, needs to take into account the qualitative characteristics of the goods themselves, i.e. that it maintains the high quality of the goods when sold. This can include both the physical characteristics and the 'luxury' image of the goods. The AG summarized that "…the selective distribution networks relating to the distribution of luxury and prestige goods and seeking mainly to preserve the brand image of those goods are not caught by the prohibition laid down in Article 101(1) TFEU". Even so, the AG wanted the CJEU to clarify the possible prohibition of these types of clauses, which has been asserted under case law (particularly in Pierre Fabre Dermo-Cosmétique).

The AG considered that the case should not negate prior case law regarding the allowance of selective distribution networks under EU law, as its judgment only related to the review of the proportionality of a clause preventing the sale of goods online outright. However, he still observed that should the objective of protecting the prestige of the goods not be legitimate and therefore not allowed under EU law. Retaining the exemption for the above distribution systems is important for the preservation of trademark rights, which could be compromised if not allowed to be protected.

Ultimately, the AG set out that the answer to question one should be that such selective distribution systems should be allowed under Article 101, provided they conform to the three criteria set above.

The second question was summarized by the AG asking "…whether and to what extent Article 101(1) TFEU must be interpreted as meaning that it precludes the prohibition imposed on the members of a selective distribution system for luxury products, who operate as authorised retailers on the market, from using in a discernible manner third-party platforms for internet sales of the products concerned".

Following Metro SB-Groβmärkte, the AG set out that, to answer the above question, one would have to assess whether "…operators were chosen by reference to objective criteria of a qualitative nature, determined uniformly for all potential resellers and applied in a non-discriminatory fashion, whether the properties of the product(s) concerned require, in order to preserve their quality and to ensure that they are correctly used, such a distribution network and… whether the conditions defined are consistent with the principle of proportionality". He did note that only the necessity and proportionality criteria would have to be considered in this instance.

Should the prohibition of the use of third-party platforms be used legitimately to protect the quality of the goods, the AG considered this to be allowable. Not only does it potentially ensure that the goods are authentic, but also protects the brand. Therefore the prevention of the use of third-party websites in a distribution agreement would not be contrary to competition law. Coty didn't prevent the parties from selling them online altogether, allowing the goods to be sold on the sellers' websites, just not on third-party sites like Amazon.

The AG also considered that the clause would not be disproportionate to the objective pursued. Due to the original supplier not being able to control the third-party pages in the absence of a direct contractual relationship with them (as opposed to with the distributors), the clause would be proportionate to reach the means of controlling quality. He concluded that the clause would therefore be compatible with Article 101.

Finally, the AG, under the guise of a hypothetical determination of an infringement of Article 101 in a clause such as in the matter, set out possible further provisions that might come into play in that event. This would be Article 4(b) and 4(c) of the Vertical Agreements Regulation. These relate to the restriction of the territory in which goods can be sold, and a restriction of passive sales respectively.

In short, the AG considered that the prohibition imposed on members of the distribution system was not a restriction on the seller's customers under Article 4(b). The clause only prevents the seller from selling on third-party websites, and not online entirely, which does not limit the territory or customers accessible to the seller. The prohibition was not a restriction of passive sales under Article 4(c) either, as the restriction only applies to third-party websites, and not the entire internet. Passive sales can happen via the seller's website just as well as from a third-party site.

The case will be very important to suppliers of luxury goods who wish to maintain the image and the distribution networks selling the goods in a very close and controlled fashion. The AG's opinion would seem to be correct, since the disallowance of these types of restrictions could genuinely dilute the image and value of luxury goods, and only guide the way in which the goods are sold, not preventing some avenues like online sales. In the end the CJEU will decide the matter, but it seems unlikely they will deviate from the AG's opinion.

Source: IPKat