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The Day After Coty:

Implications for Online Distribution of Brands in Europe

On December 7, 2017, 24 hours after the EU Court of Justice (CoJ) handed over the eagerly awaited

Coty judgment, Steptoe hosted the first roundtable discussion on the implications of the CoJ ruling for the

future of online distribution of luxury and other branded goods in Europe. The panel was moderated by

Steptoe Partners Yves Botteman and Jean-Nicolas Maillard and included:

■ Ms. Emma Trogen, Legal Director, Cosmetics Europe

■ Mr. Stefan Krawczyk, Associate General Counsel & Head of Government Relations International,

eBay

■ Mr. Jakob Kucharczyk, Vice President, Competition & EU Regulatory Policy, Computer &

Communications Industry Association (CCIA)

■ Ms. Julie Bousin, Lawyer at the Ministry of Europe and Foreign Affairs, acting for the French

Government before the EU Court of Justice in the Coty case

The Panel

Steptoe Moderators

Yves Botteman

Partner

ybotteman@steptoe.com

Jean-Nicolas Maillard

Partner

jmaillard@steptoe.com

A video recording of the debate is also available online.

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1. First Reactions of the Panelists

The Coty Case in a Nutshell

Coty Inc., a US-based perfume manufacturer, amended its selective distribution agreement with a view to

preventing its retailers from reselling the contract products through online marketplaces, such as

Amazon. A German authorized reseller, Parfumerie Akzente, did not agree with this limitation and

engaged in the resale of the Coty products through the Amazon.de website.

In a reference for preliminary ruling relating to the compatibility of this clause with EU competition law, the

CoJ ruled that:

■ First, selective distribution systems intended to protect the luxury image of a brand are compatible

with EU competition law, provided that the qualitative criteria for selective distribution (i) are related to

the properties of the product, (ii) are applied consistently and uniformly without discrimination across

the system and (iii) are not disproportionate.

■ Second, as part of such selective distribution systems, luxury brand owners may prohibit authorized

distributors from using third party platforms for the online sale of the contract goods, provided that this

restriction is proportionate to the objective of protecting the aura of luxury around the branded product

■ Third, marketplace bans imposed by luxury suppliers do not amount to hardcore restrictions of

competition within the meaning of the VBER. In particular, such bans do not amount to an absolute

ban against online sales (à la Pierre Fabre) nor a limitation as to the customer group to whom the

reseller may sell the luxury goods.

The moderators shared the first reactions from a number of key stakeholders. Coty

published a short, but enthusiastic press release; similarly, the European Commis-

sion (EC) welcomed the judgment, insofar as it provides more legal certainty and

should ensure uniform enforcement across the EU internal market. Contrasting with

these reactions, Andreas Mundt, President of the German Bundeskartellamt, noted

that the Coty judgment does not affect its decisional practice, which is focused on

branded, as opposed to luxury goods.

Unsurprisingly, the brand owners side of the panel warmly welcomed the judgment as very satisfying,

noting that it was fully in line with the positions they advocated before the CoJ. They noted that the judg-

es endorsed the ban on account, among others, that the third-party platforms’ logos are discernible and

could be a source of confusion to consumers. They also praised the CoJ for clarifying the scope of the

Pierre Fabre judgment to confine it to absolute online sales bans.

Equally unsurprisingly, platforms representatives showed more circumspection as to the practical

implications of the judgment. More specifically:

■ The judgment validates marketplace bans only insofar as they apply to luxury goods. As a result, the impact of the judgment on marketplaces’ business model would be limited since they primarily resell mass market products, where the debate is arguably still open.

■ Coty deprives resellers from an important online sales channel as they do not have the technical skills and financial means to develop online retail spaces to sell cross-border or through mobile apps.

■ They took issue with a couple of specific points in the judgment, namely: the creation of a quasi-

presumption that online marketplaces cannot protect the luxury image of a product, and the lack of in

-depth discussion on the proportionality of a marketplace ban, in particular since less onerous

alternatives to such bans were available.

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2. What Does Luxury Mean?

While the scope of the CoJ judgment appears to be strictly limited to luxury goods, the concept of luxury

is not as such defined in the judgment. The CoJ reiterates, however, that luxury must be assessed not

only by reference to the material characteristics of a given product or service, but also in view of ‘the

allure and prestigious image which bestows on them an aura of luxury’.

All panelists agreed that this definition of luxury is ambiguous and expect

that the concept will trigger more debates, and probably more legal disputes.

The brand owners side of the panel somewhat minimized the impact of the

judgment on this front, noting that the questions referred to the CoJ by the

referring court focused on luxury goods. This explains why the definition of

luxury was not debated at the hearing and why the judgment does not

provide practical guidance with regards to other branded goods.

For the platforms side, however, the ambiguity of the concept of luxury is one of the main issues

raised by the judgment. The CoJ gives a glimpse of what it considers as luxury goods, when noting that

the Pierre Fabre products, only distributed in pharmacies in accordance with selective distribution

agreements, are not luxury products, but merely ‘cosmetic and hygiene goods’. This is a confusing re-

mark: the CoJ here seems to somehow depart from the ‘aura’ approach it advocated in the judgment to

adopt a ‘product-based’ approach. This exemplifies how blurry the dividing line between luxury and non-

luxury goods can be and prefigures the debates to come.

Owing to this ambiguity, they anticipate that certain brand owners may be tempted to stamp their fast-

moving consumer goods as ‘luxury’ for the sole purpose of imposing a marketplace ban to their online

distributors. While large online marketplaces have not taken issue with selective distribution systems

imposing platform bans for luxury products, they see more difficulties in the situation where platform

bans are imposed, sometimes even outside of a selective distribution system, with regards to non-

luxury goods.

A Steptoe comment: what constitutes luxury is expected to be a sticking point going forward. This

said, in the third question put before the Court, the CoJ arguably means that a marketplace ban,

irrespective of the luxury character of the contract products, should not be viewed as a ‘hardcore

restriction’ of competition under the Vertical Restraints exemption rules; in particular, whether or not

the product qualifies as luxury, the ban limits neither passive sales nor the customer groups to whom

resellers may sell the contract products. While this may well be an accurate interpretation of the

judgment, reading between the lines, the Bundeskartellamt may have a different take on the treatment

to be reserved to marketplace bans affecting other branded products, in particular, by prosecuting

them as restrictions by object.

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The CoJ justifies the proportionality of the marketplace ban based on the absence of direct contractual

relationship between Coty and third-party platforms. According to the CoJ, the absence of such

exclusive association between the supplier and the marketplace is an obstacle for Coty to ensure that

the online marketplace complies with the qualitative criteria agreed between Coty and the authorized

distributor.

3. Ban Justified by Absence of Contractual Link Between Supplier and Marketplace

A Steptoe comment: in putting the emphasis on the need for a direct contractual relationship

between brand owners and distributors, the CoJ may have overlooked the complexity of certain tri-

partite relationships between brands, distributors and platforms. This may raise further issues in the

near future.

On the brand owners side, the need for a direct contractual relationship

between brand owners and distributors was a central point of advocacy:

selective distribution is precisely about creating a relationship of trust with a

chosen partner. The recognition of this need by the CoJ was therefore seen as a

positive development.

Incidentally, and while the CoJ does not make this point (contrary to Advocate

General Wahl), the brand owners side noted that establishing a direct contractual

relationship is also the best way to guarantee that distributors do not resell the

products on marketplaces that feature counterfeit goods.

The platforms representatives strongly disagreed. For them, the lack of direct contractual

relationship is a ‘false issue’. A less onerous alternative to a platform ban would be for brand owners

to subject the distribution of products through marketplaces to pre-defined criteria. This solution would

enable brand owners to terminate the selective distribution agreement if the authorized distributor

were to sell the products through marketplaces or in a fashion that does not meet the selective criteria

(e.g. marketplaces that include counterfeit goods).

The moderators then asked what would happen if a brand owner appoints an online marketplace as

authorized distributor or has itself created a boutique on such a marketplace, and, at the same time,

seeks to restrict authorized resellers from using this same online marketplace.

The platforms representatives confirmed that this is a common

scenario. The EC dealt with this issue in the final report of the e-

commerce sector inquiry in a rather satisfying way, by noting that

brand owners who appoint an online marketplace as authorized

distributor should be particularly careful when restricting other

authorized distributors. They also insisted that marketplaces are

increasingly innovating to ensure that resellers can comply with the

qualitative requirements imposed by brand owners (e.g. own reseller

shops that reflect the look and feel of a brand or dedicated brand

showrooms).

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4. Towards Diverging Approaches at National Level?

The moderators noted a risk of diverging national approaches in view of the apparent contrasting

reactions among European competition authorities: the EC welcomed the judgment, while the

Bundeskartellamnt issued a more cautious statement, indicating that the Coty judgment did not impact

its current enforcement agenda, which may mean that they still intend to prohibit certain marketplace

bans as restrictions by object.

The platforms representatives shared the same concern. They noted that luxury carries different

meanings across Member States. Similarly, marketplaces’ market penetration rates vary significantly

throughout Europe. According to the EC e-commerce sector inquiry, 62% of German retailers use

marketplaces, as opposed to only 13% in Italy and 4% in Belgium. Therefore, in practice, a

marketplace ban is likely to be much more impactful in Germany than in Belgium.

Finally, in response to a question from the audience, the moderators noted that an EC intervention

may be warranted in order to ensure that EU Member States adopt a consistent approach in relation to

marketplace bans. In this regard, the EC should probably act sooner rather than later to avoid a

‘Booking.com’ situation, which could preclude the EC from acting in view of pre-existing and ongoing

enforcement at national level. Such intervention could take several forms, including: the review of the

vertical guidelines; the filing of amicus curiae briefs before national courts dealing with platform bans;

or, perhaps, the launch of individual investigations.

A Steptoe comment: divergent approaches have in fact already materialized. This is the case, for

instance, in relation to sport shoes. In a recent judgment, the District Court of Amsterdam ruled that

sports good manufacturer Nike had a luxury image, and therefore was allowed to impose a ban on non

-authorized platforms to its selective distributor in order to protect this image. By contrast, in France

and Germany, the national competition authorities compelled Asics and Adidas, Nike’s competitors, to

remove marketplace ban clauses.