Ab Extra: Luxury: a state of mind?
30 October 2017. By Stephen Kinsella.
Stephen Kinsella OBE is partner and head of the European antitrust group at Sidley Austin, based in the Brussels office. He has practiced European competition and regulatory law for 30 years. Stephen has extensive experience in the application of EU competition law, including merger control, cartel investigations, litigation and antitrust counseling on a broad variety of commercial practices.
Read the original of this article as published on MLex here.
The purpose of this brief article is to consider the implications of an opinion of Advocate General Nils Wahl of the European Court of Justice (ECJ). It was delivered on July 26 in answer to questions raised by the Higher Regional Court of Frankfurt am Main, Germany, in a dispute between the luxury cosmetics company Coty and one of its authorized distributors Parfümerie Akzente. I have a number of problems with the Coty Opinion, but my observations are made essentially without reference to the companies involved and focus only on the questions of principle raised.
An oft-quoted expression in the UK is that hard cases make bad law. And if I had wanted to test the interpretation of the antitrust rules governing online distribution, particularly as they relate to e-commerce platforms, I would not have done so by way of a reference from a national court in a dispute concerning luxury goods. But we now have the Opinion and we need to make the best of it.
For those who do not know the background, for which I will here rely on the Opinion, the supplier was content for its goods to be distributed in the normal course by its authorized distributors from premises that met certain standards in terms of environment, décor and furnishing, as further specified in the contract. Those requirements were justified by the need to protect the luxury image of the products. The contract further provided that the distributor could advertise and sell the products using the Internet, but an amendment was introduced to ensure that it did not make use of online marketplaces bearing the name of a third party (or “discernible” as the referring court described it). The distributor objected to the amendment and the restriction on marketplaces, claiming that it amounted to an unjustified restriction of competition in breach of Article 101.
Faced with a refusal by Akzente to accept the amendment, Coty sought an injunction. Initially the Frankfurt Regional Court dismissed the application on the grounds that the ban infringed Article 101(1), but an appeal to the Higher Regional Court in Frankfurt resulted in it putting the following questions to the ECJ:
Extract from Higher Regional Court of Frankfurt questions to the ECJ
- Do selective distribution systems – which 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) 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 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 the retailer’s customer group “by object”?
- Is Article 4(c) of Regulation 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”?
AG Opinions are typically quite short. The average for AG Wahl tends to be around 15 to 20 pages, so at 31 pages the Coty Opinion is relatively long. It cannot of course be expected to reference all the arguments and evidence submitted to the Court, but we are entitled to assume it identifies the key considerations that it believes should influence the outcome. In the event, it offered the following guidance to assist the ECJ in responding to the questions, and in doing so followed very closely the wording of those questions:
Extract from AG Wahl’s Opinion to the ECJ
- Selective distribution systems relating to the distribution of luxury and prestige products and mainly intended to preserve the “luxury image” of those products are an aspect of competition which is compatible with Article 101(1) TFEU, provided that resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers, that the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used, and that the criteria established do not go beyond what is necessary.
- In order to determine whether a contractual clause incorporating a prohibition on authorized distributors of a distribution network making use in a discernible manner of third-party platforms for online sales is compatible with Article 101(1) TFEU, it is for the referring court to examine whether that contractual clause is dependent on the nature of the product, whether it is determined in a uniform fashion and applied without distinction, and whether it goes beyond what is necessary.
- The prohibition imposed on the members of a selective distribution system, who operate as retailers on the market, from making use in a discernible manner of third undertakings for Internet sales, does not constitute a restriction of the retailer’s customers within the meaning of Article 4(b) of Commission Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) TFEU to categories of vertical agreements and concerted practices.
- The prohibition imposed on the members of a selective distribution system, who operate as retailers on the market, from making use in a discernible manner of third undertakings for Internet sales, does not constitute a restriction of passive sales to end users within the meaning of Article 4(c) of Regulation 330/2010.
The ECJ is now deliberating, and might normally be expected to issue its judgment before the end of this year.
It is important to keep in mind the wider context, which is the application of competition law to e-commerce against the backdrop of a determination by the EU to build a healthy digital economy and use that to assist the completion of a true internal market. Online sales are particularly apt to help crossborder trade, and any artificial barriers to such trade are treated with suspicion. That is clear not only from public statements of various European Commissioners over the years, but also from the Guidelines on Vertical Restraints published in 2010 to accompany block exemption Regulation 330/2010 (the “BER”). The BER provides a generous safe harbor for vertical agreements containing restrictions that would otherwise be prohibited by Article 101.
Some criticize the BER for being overly prescriptive and tying the hands of brand owners and suppliers, putting them in a straitjacket, etc. Those criticisms entirely miss the point. Any limitation on the freedom of suppliers is created by Article 101 as interpreted by competition authorities and the courts. The BER provides an extremely broad exemption, but because of the risks of being overly generous it introduces qualifying criteria and certain exceptions to the exemption. The inclusion of certain “blacklisted” clauses will deprive an agreement of the benefit of the exemption, meaning that it will be necessary for anyone wishing to enforce such clauses to prove either that they do not infringe Article 101, or that they are exemptible under Article 101(3). And any exemptions have to be interpreted strictly, as the Opinion recognizes (paragraph 129) when it states that “it is not necessary to give a broad interpretation to the provisions which bring agreements or practices within the block exemption.”
Criticism of the Opinion
Taking the suggested responses in order, I view the first two (when separated from some of the obiter comments that precede them) as uncontroversial as a restatement of the existing law. The Opinion repeats that selective distribution systems, when they relate to luxury and prestige goods, are normally compatible with Article 101 and it reminds the referring court of its obligation to verify that the nature of the product requires selective distribution and that the restrictions do not exceed what is essential.
However, in relation to the third and fourth questions, the Opinion suggests that where authorized retailers in a selective distribution system are prohibited from making use of “discernible” online marketplaces, such restrictions are not blacklisted under the BER. In doing so, it gives responses that are not justified by the cursory analysis contained in the Opinion, are inconsistent with the scope and purpose of the BER, and represent an unjustified extension from the luxurygoods sector into e-commerce as a whole.
One very striking aspect of the Opinion is that it talks almost exclusively of luxury products. Indeed, within its 31 pages it mentions “luxury” 57 times; “prestige” 23 times; “high quality” or similar eight times, “quality” 28 times and “highly technical” or similar four times. Restrictions are justified by the need “in particular, to maintain a specialist trade capable of supplying specific services for such products” (Opinion paragraph 68). In other words, almost the entire analysis is based on considerations of a small segment of the goods market, but the findings are extrapolated to all vertical agreements without consideration of the justification therefor.
ii) Unsupported assertions
Indeed, we note many sweeping assertions in the Opinion, without any references to supporting evidence, such as that the restriction is “likely to improve the luxury image of the products concerned” or that it is necessary to prevent free riding (Opinion paragraph 106).
On occasion, in order to bolster its conclusions, the Opinion makes wholly unsupported claims regarding e-commerce and the European Commission sector inquiry.1 For instance, in paragraph 149 it claims that “the use of third-party marketplaces . . . is not necessarily a significant distribution channel.” It is presumably this assertion that the President of the Bundeskartellamt and ICN Chair had in mind when he publicly criticized the Opinion, for containing statements that were “not true.” 2 The e-commerce inquiry in fact contained the following finding, noted in Opinion footnote 2 but otherwise disregarded:
- “Marketplaces play a more important role in some Member States such as Germany (62 percent of the respondent retailers use marketplaces), the United Kingdom (43 percent) and Poland (36 percent) compared to other Member States such as (Italy 13 percent) and Belgium (4 percent). (iii) Marketplaces are more important as a sales channel for smaller and medium-sized retailers, while they are of lesser importance for larger retailers. The results show that smaller retailers tend to realize a larger proportion of their sales via marketplaces than the larger retailers.”
The Opinion devotes a few short paragraphs to whether a marketplace ban amounts to an absolute bar on supplying certain customers or territories. However, the judgment in the Pierre Fabre case had already established that a ban on the use of the Internet would be prohibited. The Opinion does not explain – given the undoubted impact that marketplace bans have on the ability of the very companies who would wish to use them, i.e. SMEs – why such a ban would not have a significant impact on competition. Instead, it concludes without explanation that only a provision which prohibits “all online sales” should be treated as a restriction (paragraph 155).
It also does not explain why, if there is any doubt (which the Opinion clearly thinks there is), the correct response should not be to limit rather than extend the scope of the exemption. Moreover, it suggests that distributors could make use of marketplaces “in a non-discernible manner” without attempting to consider how that would work (paragraph 110).
Other justifications for maintaining such a restriction are manifestly unfounded. The Opinion proceeds on the assumption that marketplaces “are not required to comply with the qualitative requirements [imposed upon] authorized distributors” (paragraph 109). This is followed by an assertion that the supplier “is not in a position to exercise control over the distribution of its products through third-party platforms” (paragraph 113) and that such platforms would “escape the influence of the supplier” (paragraph 114). Entirely missing is any recognition that the supplier could have required its authorized distributor to use only marketplaces which met certain objective criteria. Therefore, to the extent that the Opinion is founded upon the notion that presentation via third parties cannot be controlled, the reasoning is clearly defective.
iii) Block exemption and guidelines
A curious omission is the lack of any detailed discussion of the provisions of the BER or the Guidelines. The Opinion correctly notes that the Guidelines are not binding and “cannot on their own guide the analysis,” but also that the Court “may adopt the legal guidance and assessment contained therein” (paragraph 57). Having recited the Guidelines in the introduction, one would have expected the Opinion to contain some reflections on how far they should be taken into account. Therefore, in paragraph 138 there is reference to paragraph 54 of the Guidelines, which states that the supplier can require that quality standards be imposed upon online selling just as it could for a brick-and-mortar shop. But other than a passing reference early in paragraph 15 of the Opinion, there is no subsequent discussion of Guidelines paragraph 56, which provides that it is only possible to have online restrictions which are “overall equivalent” to those imposed on brick-and-mortar outlets.
Even more inexplicable is the failure to discuss the last sentence of Guidelines paragraph 54 (cited in Opinion paragraph 14 but thereafter not mentioned), which refers to the possibility of preventing customers from accessing the website of a distributor “through a site carrying the name or logo of the third-party platform”. One might have expected the Opinion to be founded upon that sentence. However, any attempt to do so, and therefore to rely upon the Guidelines, would have foundered upon the prohibition in Guidelines paragraph 56 on “imposing criteria for online sales which are not overall equivalent to the criteria imposed for the sales from the brickand-mortar shops.” Unfortunately, nowhere in the Opinion is there any consideration of the importance of this notion of “equivalence” and how it would apply. This is even more surprising, given that Opinion paragraph 28 notes that the lower Frankfurt court had suggested that there were other appropriate means of achieving the supplier’s objectives “that are less restrictive of competition, such as the application of specific quality criteria for the third-party platforms.”
A proposed solution
So much for the criticism. But how do I propose that the Court should answer the third and fourth questions?
I agree with the Opinion that we are discussing a block exemption regulation where there is a need for some certainty and compliance that cannot “be dependent on a detailed analysis of the market conditions” or a “sophisticated and thorough examination of the restrictive effects” (Opinion paragraphs 130 and 132). However, I also agree that the BER should be limited to agreements where it can be assumed “with sufficient certainty” that they meet the conditions of Article 101(3) and that exemptions must be interpreted narrowly (Opinion paragraphs 126 and 129). And it is necessary to recognize, as has already been pointed out by national competition authorities, and as the Opinion itself states that “where appreciable anticompetitive effects occur, the benefit of the BER is likely to be withdrawn” (paragraph 16). Such an outcome would not itself be a recipe for certainty.
Therefore my proposal to the Court would be that it recognize that the Opinion is useful insofar as it discusses the circumstances in which an agreement for the supply of luxury goods may escape Article 101 entirely. But that since its reasoning is based almost exclusively on a discussion of luxury goods, it provides no foundation for absolute platform bans being block exempt in all cases and for all goods. In the circumstances, the responses to Questions 3 and 4 should refer back to the Guidelines, which already provide that where the nature of the goods demands it, resellers who impose strict criteria upon the way in which their goods are sold in the High Street can impose comparable limitations upon online sales. However, if they wish to go further, they would need to show individually that they meet the criteria of Article 101(3).
Such an approach would strike the right balance. Otherwise, we will inevitably see a growing number of non-luxury goods introducing marketplace bans (as already noted by Andreas Mundt), with the consequence that we will see increasing divergences in the application of EU competition law between Member States, a number of whom will feel themselves compelled to withdraw the benefit of the exemption.
- Final report on the E-Commerce Sector Inquiry, issued on May 10, 2017 (the reference in the Opinion is to para. 39, page 11, of the report). http://ec.europa.eu/competition/antitrust/sector_inquiry_final_report_en.pdf
- Andreas Mundt’s address to the IBA Annual Competition Conference, Florence, Sept. 8, 2017.
Stephen Kinsella OBE is partner and head of the European antitrust group at Sidley Austin, based in the Brussels office. The views expressed in this article are personal to the author and do not necessarily reflect the view of Sidley or any of its clients. Stephen Kinsella advises a number of e-commerce companies, including price-comparison sites and online marketplaces, but the views expressed here are entirely his own.