Case C-230/16, Coty Germany – trade mark selective distributorship agreements and hardcore restrictions on competition

When a company sells expensive ‘luxury’ goods, can it contractually ban its commercial customers from reselling those goods via third party websites like Amazon? Or would such a condition constitute a hardcore restriction on competition contrary to EU cartel law?

Background
Coty Germany is a company that sells cosmetics in Germany. For years, it has been selling its products to another company in Germany which sells a whole range of cosmetic products on to other companies in Germany.

A legal problem in this arrangement arose when Coty Germany discovered that the company buying its goods was selling part of the consignment on to consumers via two internet sites. Although the first website belonged to the purchasing company, the second site belonged to Amazon.

Coty Germany objected to what the purchasing company was doing. It recalled the wording of the supply contract with the purchasing company which expressly prohibited the sale of Coty Germany’s goods via third-parties. Since Amazon’s website was such a third party, Coty Germany took the view that the purchasing company was acting in breach of contract.

After having flagged up the breach, Coty Germany also set about amending the terms to its distribution agreement. A key term of the 2012 contract was that any internet sales would now have to be organised through an ‘electronic shop window’, and that window must not affect the luxury image of the goods. The clause also went on to ban internet sales organised by any third party.

Coty Germany explained that the new terms were in line with the latest EU law on ‘vertical agreements’ (the EU Commission’s 2010 Regulation (EU) No 330/2010 on vertical agreements), a Regulation which governs the conditions under which parties may purchase, sell or resell certain goods and services.

However, the German purchasing company refused to accede to Coty Germany’s new terms. The reason for its refusal lay in its belief that the Commission Regulation was no longer good law, and had been superceded by a 2011 judgment from the CJEU.

That is to say, Case C-439/09 Pierre Fabre Dermo-Cosmétique was a judgment from the CJEU about a selective distribution network that governed the sale of cosmetics. In the contested contract, there had been a general and absolute ban on internet sales. It was a ban which had been imposed by the supplier on to its authorised distributors.

According to the German company, the CJEU in Pierre Fabre had held that running a selective distribution agreement for the purpose of preserving the luxury image of trade mark goods could not be justified, for this was a ‘hardcore restriction’ on competition contrary to EU cartel law.

Unable to agree, Coty Germany and its German customer went to court over the legality of the new terms in Coty Germany’s contract.

At first instance, the judge agreed with the German customer’s interpretation of EU law, and added that there were no circumstances in this case which would warrant an individual exemption being granted to Coty Germany. Coty Germany appealed to the OLG Frankfurt.

At the OLG Frankfurt
The cartel law division of the OLG Frankfurt recognised that the CJEU in Case C439/13 Pierre Fabre had said:

41 In that regard, the Court has already pointed out that the organisation of such a network is not prohibited by Article 101(1) TFEU, to the extent that resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, that the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use and, finally, that the criteria laid down do not go beyond what is necessary (Case 26/76 Metro SB‑Großmärkte v Commission [1977] ECR 1875, paragraph 20, and Case 31/80 L’Oréal [1980] ECR 3775, paragraphs 15 and 16).

However, the CJEU had also gone on to say:

46 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.

The German court noted that the legal effect of para 46 Pierre Fabre was unclear to legal commentators. While some writers had taken it to mean that a prestigious image could no longer function as a justification to a restriction in competition, other writers had taken the view that the CJEU was only talking about a prestigious image of a trade mark in that particular situation, and thus the CJEU had not espoused a general rule about a prestigious image never justifying a restriction in competition. Writers adopting the latter approach had supported their view by noting that the Advocate General in Pierre Fabre had indeed talked in terms of a general rule but that this reasoning had not been reflected in the reasoning produced by the CJEU.

Faced with such legal uncertainty on this crucial point, the OLG Frankfurt decided to make a preliminary reference to the CJEU.

Questions Referred
According to today’s Official Journal (OJ [2016] C260/26), the OLG Frankfurt am Main has asked:

1. 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?

2. 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?

3. Is Article 4(b) 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 the retailer’s customer group ‘by object’?

4. 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’?

Comment
The validity of a selective distribution agreement that permits a shop to sell Samsung goods in the shop but not via the shop’s own website is at issue in another preliminary reference; see further, Case C-618/15, Concurrence – a French court’s jurisdiction to hear a dispute involving Luxembourg’s Amazon.

Update – 13 January 2017
The ability of a trade mark holder to artificially partition the market is at stake in a fresh reference from the German Supreme Court; see further, Case C-642/16, Junek Europ-Vertrieb – can its sticky label stop the artificial partitioning of the internal market?