ECJ clarifies third-party platform bans in Internet sales (Coty ./. Akzente)

In its ruling of December 6, 2017, the European Court of Justice (ECJ) provided important clarifications regarding the assessment of third-party platform bans in internet distribution, which clarification of antitrust law are of great relevance for internet distribution. For a long time it was disputed whether manufacturers of branded goods may,under applicable antitrust laws, legally prohibit retailers from selling online  via third platforms such as Amazon and Ebay. In particular, the German Federal Cartel Office (Bundeskartellamt) had taken a strict view and outlawed comprehensive third-party platform bans imposed by manufacturers such as Adidas and Asics. In its ruling, the ECJ clarifies that third-party platform bans within selective distribution systems for luxury products do not violate the cartel Prohibition even if they primarily serve to safeguard the luxury image of these goods. This clarification is particularly welcome from the perspective of manufacturers; since the EuGH, however, explicitly restricts this finding to luxury goods without providing a definition of this term, third-party platform bans should not be imposed too readily, in particular where they concern branded goods which are not, beyond any doubt, to be classified as luxury goods. A further welcome clarification is provided in the judgement as the ECJ holds that third-party platform bans, even if they do not meet the aforementioned requirements, are covered by the block exemption regulation for vertical agreements, insofar as ist conditions of application, in particular the market share thresholds, are fulfilled. The ECJ clearly rules in the present judgement that third-party platform bans do not constitute hardcore restrictions, which would hinder a block exemption.

1. Background and initial lawsuit 

The procedure before the EuGH referred to a law case between Coty (a leading manufacturer of luxury cosmetics in Germany) and a perfumery named “Aktzente”, which Coty for many years had supplied under the Terms of a selective distribution System; Akzente distributed the contract products via its own homepage, but in large quantities via Amazon.de too. Akzente refused to agree to an amendment Coty made to the rules on internet distribution, which included a ban on the sale of Coty products on the internet via third-party platforms.  Therefore, Coty filed for an injunction with the Frankfurt Regional Court. The prevailing question of the lawsuit was whether and under what conditions a manufacturer of branded goods may prohibit its customers at the retail level from using third-party platforms when selling the contract goods on the Internet (third-party platform ban). The Frankfurt Regional Court ruled in the first instance that such a third-party platform ban was prohibited under antitrust law, whereas, on Appeal, the Higher Regional Court referred several questions on the interpretation of EU antitrust law to the European Court of Justice for priliminary ruling. Whilst the interpretation of European Union anti-trust law the ECJ now handed down in ist priliminary ruling is binding for the parties of the initial law case, it will no doubt have effects far beyond the case at hand.

2. Application of the cartel prohibition to selective distribution systems for luxury goods

In selective distribution systems, the supplier undertakes to sell the contract goods only to dealers selected on the basis of predefined criteria and in which the dealers undertake not to sell the contract goods to dealers other than those selected by the supplier. Selective distribution systems do impact competition, but according to settled case-law of the Court of Justice they do not fall under the prohibition on cartels established by Article 101(1) TFEU if they fulfil certain conditions. With regard to perfumes, the European Court of Justice had affirmed  in settled case-law since the 1980s that selective distribution may also be necessary to maintain the prestige character of goods – and then would not violate the ban on cartels. Considerable legal uncertainty regarding the continuation of this case law was created by a 2011 ECJ ruling in which the European Court of Justice held: „The aim of maintaining a prestigious image is not a legitimate aim for restricting competition and cannot therefore justify a finding that a contractual clause pursuing such an aim does not fall within Article 101(1) TFEU“. Often – especially by the German Federal Cartel Office – this passage was interpreted to the effect that the preservation of the luxury image could not justify restrictions for internet distribution imposed on dealers in a selective distribution system.

a) Clarification of the requirements for selective distribution systems for luxury goods which do not violate the cartel prohibition

Against this background, the Higher Regional Court of Frankfurt asked the ECJ for a preliminary ruling on whether a selective distribution system for luxury goods, which primarily serves to safeguard the luxury image of these goods, can be compatible with the ban on cartels.

The ECJ reaffirms its established practice that the organisation of a selective distribution network does not infringe the cartel prohibition in Art. 101 (1) TFEU, provided that the following conditions are met:

• resellers are selected on the basis of objective qualitative criteria,
• these criteria are laid down uniformly for all eligible resellers and are applied without discrimination,
• the characteristics of the product in question require such a distribution network in order to maintain its quality and ensure its correct use; and
• the criteria laid down do not go beyond what is necessary.

Also with reference to its previous case-law, the ECJ states that the quality of luxury goods is not based solely on the material characteristics of the goods, but also on their prestige character as an essential distinguishing feature, so that damage to the luxurious appearance can equal an impairment of the goods themselves. Selective distribution may therefore be suitable for maintaining the luxurious appearance of the goods and thus their quality.

Distinguishing the Pierre Fabre ruling, the ECJ states that, on the one hand, the compatibility of a selective distribution system with the cartel prohibition was not the subject of said case, but a single clause (namely a complete exclusion of internet distribution); on the other hand, the ECJ states that Pierre Fabre was “not about luxury goods, but about cosmetics and personal care products”. 

This restriction to the undefined concept of luxury goods is just as regrettable as it is likely to cause problems of differentiation in the future. Nevertheless, the ECJ has clarified in its ruling that, in accordance with the case law in the 1980s perfume cases, a selective distribution system for luxury goods may be necessary even if the restriction of the group of dealers is primarily intended to safeguard the luxury image of those goods.

b) Necessity and adequacy of a third-party platform ban in selective distribution systems for luxury goods

The ECJ has thus generally confirmed that a selective distribution system for the protection of the luxury Image, operating with uniform and non-discriminatory objective selection criteria of a qualitative nature, may be necessary for the distribution of luxury goods without infringing the prohibition of cartels. This does not, however, constitute a carte blanche for any distribution requirement: rather, each qualitative selection criterion must both suitable and adequate to maintain the quality of the contract product (in the form of its prestige character).

Accordingly, the Frankfurt Higher Regional Court continued to ask the ECJ for a preliminary ruling on whether the prohibition on cartels precluded authorised dealers in a selective distribution system for luxury goods, which primarily serves to ensure the luxury image of these goods, from using third-party platforms when selling the contract goods on the internet.

The ECJ replied that in order to answer the question whether in the context of a selective distribution system for luxury goods, with which the luxury image of the same is to be preserved, a third-party platform ban is compatible with the Prohibition in Art. 101(1) TFEU, the four criteria of the Metro case law mentioned above must be examined. Whilst this is for the national court to determine, the ECJ sets out detailed criteria for this examination in its judgment. As the submitting Higher Regional Court of Frankfurt considers the third-party platform ban to be applied objectively, uniformly and without discrimination, the ECJ is particularly concerned with the necessity and adequacy of a third-party platform ban in order to achieve the goal of ensuring the luxury image of the products.

The ECJ affirms the need for a third-party platform ban imposed by a supplier of luxury goods on its authorised dealers in order to ensure the luxury image of these goods. The ECJ reasons that a third-party platform prohibition is suitable to ensure that the luxury goods are sold online via authorised deales only, which in view of the characteristics of the selective distribution System the ECJ considers as a „limitation which is coherent“. Only the prohibition of third-party platforms would enable the provider of luxury goods to monitor compliance with the quality requirements set up for internet sales and to take action against the customer in the event of infringements, as the manufacturer only has a corresponding influence on the contractually bound dealer, but not vis-à-vis the operator of a third platform; therefore there is a “risk of deterioration of the online presentation of those goods which is liableto harm their luxury image and thus their very character”. According to the ECJ, the consequence of a third-party platform ban, i.e. that luxury goods are only sold online via shops of authorised dealers, but not via platforms offering goods of all kinds, contributes to the luxury image as the main characteristic of luxury goods appreciated by consumers.

The ECJ also affirms that the ban on third-party platforms is adequate, i.e. does not go beyond what is necessary to achieve the desired objective. In contrast to the Pierre Fabre case, the prohibition of third party platforms does not completely exclude the sale of the contract goods on the internet; on the contrary, authorised dealers may distribute them through their own online shops, which – in line with the results of the recently completed sector inquiry on electronic commerce – constitute by far the most important distribution channel in internet distribution; in addition, authorised dealers are authorised to distribute via third-party platforms where the consumer is not aware of their involvement. In particular, the ECJ does not consider it as equally effective like the third-party platform ban to oblige authorised dealers to maintain quality standards when selling via third-party platforms: Because in the absence of a contractual relationship, the provider of third-party platforms could not demand compliance with the quality requirements.

c) Conclusion

The ECJ therefore concludes that third-party platform bans do not violate the cartel prohibition of Article 101(1) TFEU if they are intended to ensure the luxury image of these goods, are uniformly defined and applied without discrimination and are proportionate to the desired objective.

Whether these conditions for the third-party platform ban in the selective distribution system operated by Coty are fulfilled will now have to be decided by the Higher Regional Court Frankfurt, since this question concerns the facts of the case and not the interpretation of the EU law reserved to the ECJ. However, this reservation only concerns the practical implementation of a third-party platform ban, which the ECJ considers to be legally permissible under the aforementioned conditions and not in Violation of the ban on cartels as set forth in Article 101(1) TFEU. 

3. Assessment of third-party platform bans under the Block Exemption Regulation (EU) 330/2010 on vertical agreements

Only if the conditions spelled out above are not fulfilled, a third-party platform ban is not compatible with Art. 101(1) TFEU: In order to avoid an antitrust violation, a justification is required, either directly under Art. 101(3) TFEU or under Block Exemption Regulation (EU) 330/2010 (“vBER”), which specifies Art. 101(3) TFEU for the area of distribution Agreements. In its scope, i.e. in particular where the market share thresholds are respected, the vBER exempts vertical restraints from the cartel prohibition as long as they do not constitute hardcore restrictions. 

If the conditions for the application of the vBER are met, a third-party platform ban which does not fulfil the above requirements may benefit from an exemption if it does not constitute a hardcore restriction.

Two of the hardcore restrictions listed in the vertical BER are to be considered,

Accordingly, the Frankfurt Higher Regional Court asked the ECJ for a preliminary judgement on whether the relevant provisions of the vBER should be interpreted in a way that a third-party platform ban imposed on members of a selective distribution system operating at the retail level constitutes a restriction on the customer group or passive sales to final consumers. 

The ECJ , answering both questions jointly, stresses, first, that the third-party platform ban in dispute does not generally prohibit the use of the internet as a marketing channel (contrary to the situation in the Pierre Fabre case); the use of third-party platforms and online search engines for advertising purposes is permitted to dealers under certain conditions, so that customers are usually able to find the online offer of authorised distributors. With reference to the documents in front of the Court, the ECJ holds that it  “does not appear possible to circumscribe, within the group of online purchasers, third-party platform customers”.

As a result, the ECJ differentiates between the “if” of internet sales and the “how”: As long as the use of the internet as a marketing channel is possible and only a certain form of internet sales is restricted, the ECJ ruling states that the prohibition of third-party platforms in dispute does not impose either a restriction of the customer group or a restriction of passive sales to end consumers under the given circumstances.

This interpretation of the vBER by the ECJ is essentially in line with the Position of the European Commission and clearly rejects the decision practice pursued in particular by the Bundeskartellamt and some courts (including the Frankfurt Regional Court with jurisdiction in the first instance in the present case); the latter had outlawed third-party platform bans as a hardcore restriction, arguing they reduced the reach of the internet offer, namely by the customers of large third-party platforms (such as Amazon or Ebay), which they argued were to be regarded as a separate customer group. According to the interpretation now given by the ECJ, which alone has the power to give a binding interpretation of EU law, this view should not hold. However, it remains possible that the Bundeskartellamt will withdraw the advantage of the block exemption, which, however, is considerably more time-consuming than the previous procedure.

4. Conclusion and significance for practice

The ECJ’s decision is to be welcomed. On the one hand, it contains an important clarification of the judgment in the Pierre Fabre case, and on the other it strengthens the position of manufacturers in the distribution of high-quality branded goods. The limitation of the judgment to the area of luxury goods is to be regretted, as there will be considerable difficulties in drawing a distinction. Although it would be desirable to apply it to all high-quality branded articles, such an Approach cannot be justified on the basis of the judgment: Since the ECJ strongly focuses on the circumstances of the individual case, third-party platform bans should continue to be established carefully in the future and only after detailed examination under antitrust law, especially as it still remains to be seen how the Federal Cartel Office and the courts will implement the provisions of the ECJ. 

The clarifications on the application of vBER to third-party platform bans are to be welcomed unreservedly: Once it is ensured that all conditions for the application of the vBER are met, in particular the market share thresholds, manufacturers can in future rely on an exemption for third-party platform bans, whether they operate within or outside a selective distribution system. Although it is possible to withdraw the advantage of the block exemption, this is time-consuming and requires the Bundeskartellamt to provide evidence of further conditions. 

¹ ECJ, case C-230/16, Coty, not yet published in the Reports of Cases.