Luxury brands' EU court win shifts fight over online-sales bans to national authorities
🔊 Podcast: Luxury goods, online marketplaces & a heated antitrust debate
For background on this topic, listen to this August 2017 podcast as MLex Senior Correspondent Matthew Newman and Brussels Managing Editor James Panichi examine the debate raging across Europe over whether luxury goods producers should be allowed to defend their brands' reputation – even at the expense of competition concerns.
6 December 2017. By Matthew Newman.
Luxury-brand owners breathed a sigh of relief today after the EU’s top court backed their right to restrict retailers from using online marketplaces such as Amazon.com and eBay to sell their products.
The EU Court of Justice said that luxury brands are allowed to ban sales on Internet platforms when they’re seeking to preserve their products' "aura of luxury."
While this is music to the ears of LVMH and Chanel — as their products clearly qualify as luxury items — other brand owners will still face a battle to control their online sales as the fight over e-commerce shifts back to national competition authorities.
Germany’s antitrust authority, for example, pursued footwear makers Adidas and Asics in 2013 and 2014, arguing that small retailers should be allowed to sell their running shoes on Internet platforms.
Brands that have more than a 30 percent market share will have to argue that their “high quality” products deserve the same protection as luxury goods. Companies below that market share will most likely qualify for antitrust exemptions under EU distribution rules.
A recent survey of e-commerce by the European Commission showed that online marketplaces have become increasingly important for selling goods in some countries. In Germany, two-thirds of retailers use marketplaces and in the UK the number stands at 43 percent.
Today’s judgment is great news for luxury-goods makers, but the struggle to restrict online marketplaces will enter a new phase as these platforms gain more influence in retail.
Today’s ruling stems from a dispute between US luxury cosmetics maker Coty — which owns brands such as Marc Jacobs, Calvin Klein and Chloé — and German retailer Parfumerie Akzente, which sold Coty’s products on Amazon without authorization.
Coty sued the perfume seller in a German court, which then sought guidance from the EU Court of Justice on whether Coty’s ban was legal under EU rules governing “selective distribution” systems run by luxury brand owners.
These systems spell out strict quality criteria for online retailers selling luxury goods, including a requirement to have a bricks-and-mortar store. EU rules state that retailers can ban sales on marketplaces if the platforms don’t meet the quality criteria.
Moreover, resellers can be forbidden from using online marketplaces because the marketplace's logo is displayed on the website.
The court upheld these rules, saying that luxury-goods makers' restriction on selling their products on Internet marketplaces is lawful and “appropriate to preserve the luxury image of those goods.”
The court’s decision sites EU case law dating back 40 years to support Coty’s right to control Internet sales. In the 1977 Metro decision, the Court of Justice established that restrictions on distributing products are allowed, provided that resellers are chosen based on "objective criteria of a qualitative nature."
The court dismissed arguments by Parfumerie Akzente, the German and Luxembourg governments that a 2011 EU court ruling concerning a French cosmetics company, Pierre Fabre Dermo-Cosmétique, altered that case law.
In the Pierre Fabre case, the court "did not intend to set out a statement of principle according to which the preservation of a luxury image" can no longer be used to justify luxury-goods makers' restrictions on distributing their products. In fact, the case didn't deal with a question on the selective distribution system in general, but whether a complete ban on Internet sales was legal, the court said.
The court added that the clause at issue in the Coty case doesn't involve a total ban on Internet sales. Distributors can still use their own websites to sell products, the court said.
No carte blanche
Andreas Mundt, the president of Germany's competition authority, warned in September that if the EU court backed Coty’s argument, the fight between small retailers and brands would fall to national competition authorities.
That’s because today’s court decision deals with luxury brands only. It’s not a blanket decision that allows all manufacturers to ban sales on marketplaces.
"The Bundeskartellamt’s decisional practice relates to brand manufacturers outside the luxury industries, Mundt said in a statement today. "Our preliminary view is that such manufacturers have not received carte blanche to impose blanket bans on selling via platforms.”
This means antitrust officials will have to look at the specific facts of each case.
They will have to determine if luxury-goods makers meet three conditions to maintain bans on Internet sales: Resellers have to meet objective quality criteria; the nature of the products requires a selective distribution system to preserve an image of prestige and the product’s quality; and the qualitative criteria don’t go beyond what’s necessary.
Mundt pointed out that the EU Court of Justice "made great efforts to limit its judgment to genuinely prestigious products."
"At first glance, we see only limited effects on our decisional practice," he said.
This raises the question of how brand owners will react to today’s ruling. If they start forbidding sales on marketplaces, they will have to justify that their products meet the criteria for selective distribution systems — provided that their products have more than a 30 percent market share.
That might not be too difficult, if a retailer can argue that a backpack is a premium brand that demands specialized knowledge and advice from a sales person.
This argument might also be convincing for running shoes that cost more than 100 euros ($118). But what about shoes that are available at discounts at any large retailer? Can they qualify as "high quality" products?
Mundt would probably argue that some of these restrictions aren’t justified. But he’s likely to face a long slog. When speaking in September, he acknowledged that he’ll have to evaluate “every product with regard to every market to prove that we have here a restriction that is not in line with competition law.”
If Mundt continues to pursue marketplace bans, German judges might soon be called on to rule on whether brand owners with “high quality” products can clamp down on Internet marketplaces.