In distribution contracts, manufacturers and suppliers tend to restrict distributors in selling the goods online (I.). Though this practice is quite common, there is no clearly established rule if and which restrictions are allowed by antitrust law (II.), especially in case of luxury goods within selective distribution networks (III.).
Now, it is up to the Court of Justice of the European Union (CJEU) to give a preliminary ruling on the internet sales restrictions (IV.). In the meantime, the question is: how to deal with resale restrictions now (V.).
Resale Restrictions in E-Commerce
E-Commerce keeps growing – worldwide and also in Germany, where it accounts for about 10% of total retail turnover (according to the 2016 figures from “Handelsverband Deutschland” [Trade Association of Germany]). Also manufacturers of renowned brands try to take advantage of the market opportunities of e-commerce, and at the same time try to preserve their brand’s image. Consequently, manufacturers have imposed several kinds of restrictions on their distributors, in particular:
- total ban of internet sales,
- prohibition of sales via third parties’ online platforms (especially “marketplaces”),
- operation of a brick and mortar shops as a prerequisite for internet sales,
- dual pricing, or
- quality criteria for internet sales.
Antitrust limits to online resale restrictions
Antitrust authorities, however, however, have lately put such restrictions under scrutiny and enforce antitrust rules in e-commerce as well. Accordingly, there have been quite a few court judgments and antitrust authorities’ decisions, both in favour of and against such restrictions, e.g. on:
- bags (“Scout” re third party platforms),
- sportswear (“Asics”re price comparisons, logo clause, “Adidas” re third party platforms),
- electronics (“Sennheiser” and “Casio”both re third party platforms),
- luxury cosmetics / perfumes (“Coty” re price comparisons, third platforms), or
- software (“Google” requiring manufacturers of to pre-install apps, cf. European Commission’s press release of 20 April 2016).
Now, the luxury cosmetics case of Coty Germany has reached the European level.
The current Coty Case
Facts of the case are as follows: The supplier (Coty Germany GmbH) has set up a selective distribution network. Distributors may sell via internet, under the following restrictions. They shall
- use their internet store as “electronic store window” of their brick and mortar store(s), thereby maintaining the products’ character as luxury goods, and
- abstain insofar from engaging third parties as such cooperation is externally visible.
The parties’ intentions: The supplier wants to enforce especially the last restriction, stopping a distributor (Parfümerie Akzente GmbH) from selling supplier’s products via Amazon’s marketplace. The distributor, obviously, intends to be free from such restrictions.
The court of first instance, the district court of Frankfurt, decided that the ban of sales via third party platforms is an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”), namely a hardcore restriction under article 4 lit. c Regulation (EU) No. 330/2010 (Vertical Block Exemptions Regulation or “VBER”). The court of second instance, the Higher Regional Court of Frankfurt, however, does obviously not see the answer that clear. Therefore, the court has requested the Court of Justice of the European Union (CJEU) to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c VBER (decision of 19.04.2016, ref. no. 11 U 96/14 [Kart]).
Questions referred to the CJEU
The CJEU has filed the case as “Coty Germany” (reference no. C-230/16). These are the four questions on which the CJEU is requested to answer:
- Do selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure a ‘luxury image’ for the goods constitute an aspect of competition that is compatible with Article 101(1) TFEU?
If the first question is answered in the affirmative:
- Does it constitute an aspect of competition that is compatible with Article 101(1) TFEU if the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case?
- Is Article 4(b) of Regulation (EU) No 330/2010 to be interpreted as meaning that a prohibition of engaging thirdparty undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of the retailer’s customer group ‘by object’?
- Is Article 4(c) of Regulation (EU) No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of passive sales to end users ‘by object’?
How to deal with Restrictions now
There is quite some case law in Germany about the ban on online sales, some decisions in favour, some against. Online sales restrictions have lately also been under scrutiny of the German Bundeskartellamt (federal antitrust authority), which in general rather takes a critical position against such restrictions, including restrictions on selling via third-party platforms.
A decision of the highest German court is, however, still missing. Still missing is therefore also a clear answer to the question which restrictions suppliers and distributors can validly agree upon, especially in case of luxury goods. The CJEU’s preliminary ruling should provide such clarity.
Until the CJEU’s preliminary ruling, the current legal situation should be as follows – based especially on the Guidelines on Vertical Restraints 2010 (which do not have the quality of a law and do not bind the courts, but set out the principles which guide the European Commission’s assessment of vertical agreements and thus in principle bind the European Commission itself):
- A total ban of online sales is hardly valid because online sales are considered as passive sales (cf. Guidelines on Vertical Restraints 2010, para. 52). Hardly an option either is restricting the webstore’s language options because it does not change the passive character of such selling (cf. Guidelines on Vertical Restraints 2010, para. 52). The same goes for restrictions on the turnover made by sales via the internet.
- Allowed should, however, especially be
- qualitative requirements for the design of e-commerce platform (without resulting in a total ban and without restricting the use of languages),
- the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer (article 4 lit. b (i) VBER), e.g. territory-based banners on third party websites, cf. Guidelines on Vertical Restraints 2010, para. 53),
- general qualitative restrictions for becoming a member of the supplier’s selective distribution system, e.g. requiring that distributors have one or more brick and mortar shops or showrooms (Guidelines on Vertical Restraints 2010, para. 54, 176).
The CJEU’s decision will bring more clarity – Legalmondo will keep you updated on the Coty Case and possible implications on online distribution.