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Legislation insight: Are online marketplaces under threat?

This is a contributed piece by Assimakis Komninos and Jan Jeram, Partner and Associate, respectively, at global law firm White & Case

The sale of luxury goods online has long been surrounded by contention. Many suppliers have battled to keep their products off third party online marketplaces like eBay and Amazon, fearing the channels constitute a threat to their brand. Meanwhile online platforms have hit back, labelling attempts to restrict sales as a direct attack on competition.

A recent case at the European Court of Justice (ECJ), Coty v Parfümerie Akzente, has put the debate back in the spotlight. An “Opinion” was recently issued by EU court adviser Advocate General (AG) Wahl, with a final ruling expected perhaps by the end of the year. “Opinions” are proposals that Advocates General make to the ECJ and most of the time the Court follows them. So both luxury goods suppliers and online retailers should soon receive some much-needed clarity on acceptable distribution practices.

So, what do AG Wahl’s comments mean for each side, and what should suppliers and retailers be thinking ahead of the ruling?


Coty v Parfümerie Akzente - the facts

Coty is a manufacturer of luxury cosmetics, whose brands include Calvin Klein, Marc Jacobs and Chloé. German retailer Parfümerie Akzente is one of its approved distributors. The dispute between the two surrounds the sale of the goods by Parfümerie Akzente on Amazon, which Coty wants to prohibit.

Coty operates a selective distribution system - a network of agreements setting out terms and conditions which approved retailers need to meet, around maintaining a particular brand image, or providing a certain level of customer service.

This system is typically used in relation to luxury goods, and most suppliers using it impose at least some restrictions surrounding the sale on third party online platforms.

The case requires the ECJ to clarify the legitimacy of online sales restrictions within selective distribution systems, and indeed, to some extent, the legitimacy of selective distribution systems themselves. Do they represent a threat to competition? Or do they offer luxury brands vital protection?

Views differ across Europe, with national competition authorities and courts reaching conflicting decisions. Germany, in particular, has emerged as the main and vocal supporter of the proposition that restrictions on third party online platforms are anti-competitive. Other countries, such as France, Italy, the Netherlands, and Sweden, are more relaxed and favour allowing certain restrictions. The European Commission also endorsed the latter approach in its recent e-commerce sector inquiry.

In July of this year, AG Wahl issued an opinion in favour of Coty. With the ECJ following its advisers’ opinions in four out of five cases, the tide looks set to turn in favour of luxury brand owners. So, what do his observations mean in practice?


Endorsement of selective distribution systems and its impact

AG Wahl has delivered a clear endorsement of both selective distribution systems and the right of suppliers operating them to impose restrictions on sales via third party online platforms. He acknowledges that control over distribution channels is necessary for the maintenance of brand image and says that bans do not automatically violate competition law.

He calls for a new, wider perspective on competition, taking into account qualitative aspects. So it’s not all about price. He claims that restrictions on third party platforms could ultimately enhance competition, as they are likely to preserve a luxury brand image. This will prevent other companies from freeriding on investments in marketing.

AG Wahl even suggests that selective distribution systems could be extended beyond luxury products in future. At one point his comments indicate that any supplier that feels these controls are necessary to sustain its brand image may be justified in implementing them, regardless of the nature of the product.

All of this would give suppliers new and enhanced control over their distribution networks in the EU, leaving online retailers with new hurdles to overcome.

However, it is not all doom and gloom for online platforms. AG Wahl emphasises the limited nature of what Coty is actually asking for. While suppliers will have new powers over channels, this is not a blanket ban on online sales, or even third party platforms.

Firstly, it should be remembered that Coty does not want to prevent its resellers from making online sales through their own webpages.

Secondly, the opinion only addresses the situation when use of the third party online platforms is done “in a discernible manner” and nothing in AG Wahl’s opinion precludes the resellers from using third party platforms in a “non-discernible” manner. The opinion does not explain the meaning of “non-discernible”, but it might include the webpages on which the users do not see any references to third parties, such as logos. Similarly, an agreement with a market platform to direct customers’ searches to the reseller’s webpage is unlikely to be seen as “discernible”. So, there may be some scope for the distributors to keep using the platforms.

Finally, AG Wahl stresses that the threat of any anticompetitive effects stemming from selective distribution systems is limited by the fact that most brand owners will inevitably ‘auto-regulate’. No supplier will want to impose platform restrictions so severely that they lose access to customers and market share. We are therefore unlikely to see restrictions applied across the board.


What next?

Luxury goods suppliers and retailers will now have to await the final decision by the ECJ, which is expected perhaps by the end of the year.


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