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Focus on Regulation

Selective Distribution & Online Sales: Higher Regional Court of Frankfurt confirms CJEU findings and provides further guidance

After the Court of Justice of the European Union (CJEU) had issued its landmark judgment in the Coty case1 on reference for preliminary ruling, the Higher Regional Court of Frankfurt (HRC Frankfurt) has issued its now published final ruling on 12 July 2018. As expected the HRC Frankfurt decided that the specific ban for online sales via non-authorised third-party platforms in the selective distribution system at issue does not violate Art. 101 TFEU.2 The judgment provides further practical guidance on the definition of the ‘luxury image’ of a product, as well as on the application of the so-called Metro criteria in cases of ‘incomplete selective distribution systems’.

In its recently published Annual Report 2017, the German Federal Cartel Office (FCO) welcomed the clarifications provided by the CJEU’s judgment, but made it clear that many questions in relation to platform bans for online sales still remain open.

1. The CJEU Coty Judgment

In its topical Coty judgment the CJEU on 6 December 2017 held that EU competition law does not preclude a contractual clause that prohibits authorised distributors of a selective distribution system of luxury goods designed, primarily, to preserve the luxury image of those goods, from using, in a discernible manner, non-authorised third-party platforms for online sales, as long as the prohibition is non-discriminatory and proportionate.

In particular, the CJEU concluded that such a clause does not amount to a total ban of sales through online platforms, as opposed to the Pierre Fabre-case, as it still allows authorised distributors to distribute the contract products via their own internet sites or via third-party platforms in a non-discernible manner.

In the event that a competition law authority or court was to conclude that the clause at issue is caught by the Art. 101 TFEU prohibition, for example because it was discriminatory, that clause could still benefit from the EU Vertical Block Exemption Regulation (VBER). The VBER creates a presumption of legality for vertical agreements depending on the market share of the supplier and the distributor (the supplier’s and the distributor’s market share must each be equal to or less than 30%) and the absence of hard-core restrictions of competition, which are automatically excluded from the benefit of the VBER.

2. The HRC Frankfurt confirms the CJEU’s ruling and provides further guidance

On 12 July 2018, the HRC Frankfurt applied the CJEU’s judgment to the present case following the Court’s reasoning and deciding that the specific third-party platform ban did not violate Art. 101 (1) TFEU.

Existence of a ‘luxury image’

Dealing with the ‘luxury image’ of the goods at issue, the HRC Frankfurt notes that the goods covered by the selective distribution system do enjoy the luxury image claimed by the plaintiff and require selective distribution in order to preserve the quality of the product. As the CJEU stated in its judgment, the quality of luxury goods is not just the result of their material characteristics, but also of the “allure and prestigious image which bestow on them an aura of luxury. That aura is an essential aspect of those goods in that it thus enables consumers to distinguish them from other similar goods.” In addition, the HRC states that the assessment of a ‘luxury image’ does not require the collection of evidence about the actual perception of consumers. The HRC argues that a ‘luxury image’ is not essentially created by itself, but is largely based on corresponding marketing activities of the manufacturer. According to the HRC, in the current case the plaintiff specifically positions and sells the products at issue as ‘luxury cosmetics’ on the basis of its own distribution channel.

Completeness and consistency of selective distribution system is not required

The HRC further considers that the quality criteria laid down by the plaintiff for the distribution of the products at issue are applied uniformly and in a non-discriminatory fashion. It clarifies that the legality of a selective distribution system does not depend on the supplier having to guarantee its consistency. The defendant had claimed that the plaintiff’s products at issue were offered for sale via the same non-authorised third-party platform mentioned in the prohibition clause as well as in a ‘non-luxury’ ambience, e.g. in airplanes or in duty free shops at airports. According to the HRC, the incompleteness and inconsistency of a selective distribution system does not prevent non-discriminatory application as long as the gaps in the distribution network are based on a comprehensible and non-arbitrary sales policy.

Question of proportionality of the clause finally left open

In examining the proportionality of the prohibition clause in light of the pursued objective, the HRC recognizes that other clauses could have been drafted which interfere less with the distributor`s freedom without disproportionately affecting the plaintiff`s legitimate interests. In this context, the HRC also holds that the CJEU did not take into account the fact that in Germany, in particular, sales via online platforms are far more important than in other Member States. However, it questions its power to make its own assessment of the criterion of proportionality with regard to the detailed considerations of the CJEU. Since the facts on which the CJEU had based its judgment are still considered to be correct, the HRC concludes that there is much to suggest that a further review is not within its competence, but finally leaves the question open.

Clause benefits from the VBER

In any case, the HRC concludes that the clause at issue can benefit from an exemption under the VBER, as both the defendant and the plaintiff have a market share of less than 30% in the relevant market. The exemption is also not excluded under Art. 4 of the VBER, as the clause does not contain a hardcore restriction, mainly for the following reasons: (i) the use of the internet is not completely excluded; (ii) within the group of online buyers, customers of third-party platforms cannot be distinguished; and (iii) distributors are actually allowed to advertise online under certain conditions, e.g. via online search tools.

3. Outlook

The judgment is not yet final as the appeal is currently pending at the German Federal Supreme Court. The statements of the German FCO in its recently published Annual Report 2017 make it clear that although the CJEU’s ruling contains important clarifications, it only deals with certain factual constellations. The discussion about the assessment of distribution restrictions for online sales under EU competition law is far from over.

For example, it remains to be seen whether the CJEU’s position that platform bans for ‘luxury goods’ in a selective distribution system do not constitute a hard-core restriction under the VBER also applies to branded goods other than ‘luxury goods’. In a recent statement at the 45th Annual Conference on International Antitrust Law and Policy at Fordham University School of Law, New York, Advocate General at the CJEU Wahl reportedly stated that according to his understanding the reasoning behind the Coty judgment is not limited to the distribution of ‘luxury goods’. In practice this is important as many manufactures of consumer goods have market shares below 30%. So the question of hard-core restriction is often decisive in whether a platform ban can be block-exempted under the VBER, especially as the German FCO, so far, has taken a stricter approach in relation to brand owners imposing bans for sales via third-party platforms.

Although the CJEU’s judgment technically has a binding effect beyond the national court on whose initiative the reference for a preliminary ruling was made, Member State authorities will continue to play a key role in enforcing competition rules. Companies should therefore continue to carefully monitor the developments in Germany and on an EU-level, especially keeping in mind the following points:

  • The Coty judgment does not seem to offer a “carte blanche” for all companies and all circumstances. In fact, the judgment imposes certain conditions that companies will have to follow.
  • It remains to be seen whether the Coty judgment findings will be applied only to the luxury and prestige sector or also to other types of consumer and technological goods, e.g. branded goods other than ‘luxury goods’.
  • As recently restated by the German FCO, the Coty judgment only dealt with a specific constellation with still many questions to remain open with regard to the competition law assessment of vertical restraints of competition in online markets.

1 CJEU, judgment of 6 December 2017, C-230/16, EU:C:2017:941, Coty Germany v Parfümerie Akzente (Coty).

2 Higher Regional Court of Frankfurt, judgment of 12 July 2018, 11 U 96/14 (Kart), DE:OLGHE:2018:0712.