The basic argument of this paper – which can be found here – is that the ECJ in Coty reversed its earlier judgment in Pierre Fabre as regards luxury products, in order to ensure that the treatment of selective distribution systems under EU trademark and competition law was aligned.
- A first section provides an overview of the treatment of online selling restrictions under European competition law.
Some luxury brands fear that retailers might damage their valuable brands’ reputation by offering branded goods in an inadequate online environment, e.g. without adequate costumer service; and that allowing online sales by retailers could lead to an increase in trade of counterfeited goods over the internet. As such, they have imposed on their retailers considerable restrictions on the possibility of using the internet as a selling channel, often in the context of selective distribution systems. These restrictions have led to competition law cases being brought against manufacturers who impose them.
These cases build on prior case law on selective distribution systems. That case law carved an exception to the rule that the distributor’s freedom to choose its selling strategy should not be curtailed. In the Metro I and Metro II decisions, the ECJ set out that, as long as a product needs a selective distribution system to preserve its quality and ensure its proper use, its producer would be able to choose retailers based on objective criteria of a qualitative nature – as long as it applied those criteria in a non-discriminatory and proportionate way.
In the Pierre Fabre case, blanket bans on online sales were held to be restrictions of competition by object. The court further held that: ‘the aim of maintaining a prestigious image is not a legitimate aim for restricting competition’, and therefore contractual clauses in selective distribution systems pursuing such an aim were contrary to Article 101 (1) TFEU. It was nonetheless unclear how online selling restraints falling short of an absolute ban should be treated. The vertical block exemption regulations were silent on whether online selling restraints constitutes a hard-core restriction; and while the vertical agreement guidelines held that an absolute ban of online sales was a hard-core restriction, they do not provide guidance as to where the line between legal and illegal online selling restraints should be drawn. This uncertainty is reflected in the academic debate surrounding Pierre Fabre and in a number of German judgments which reach different conclusions regarding the legality of restrictions on online sales.
- The author then discusses the Coty Coty prohibited its distributors from selling its products on online market places or on price comparison websites where consumers could buy the product directly.
The ECJ distinguished this case from Pierre Fabre on two grounds. First, Coty’s goods were luxury goods, unlike those in Pierre Fabre. Second, the distribution of luxury goods can justify the adoption of a selective distribution system as long as resellers are chosen on the basis of objective qualitative criteria in a non-discriminatory fashion, and the criteria do not go beyond what is necessary. In Pierre Fabre, the nature of the goods and the severity of the restriction (a complete ban of using the internet for sales) failed to meet these requirements. In Coty, on the other hand, the online restrictions were held to be appropriate for preserving a luxury image for a number of reasons. First, the online selling ban helped to create an exclusive association in the context of e-commerce with the manufacturer. Second, the online platform ban allowed the manufacturer to better monitor whether the qualitative conditions for online sales had been met by its distributors. Non-compliance by one of the distributors allowed the manufacturer to take action on the basis of the contractual agreement, whereas the manufacturer was unable to adopt such actions against third-party platforms with which it had no contractual relationship. Third, the imposition of a requirement of exclusive sale in authorised online shops contributed to the luxury image of the goods in question, which is a characteristic valued by consumers. Lastly, the restrictions did not go beyond what was necessary to preserve the luxury image of the goods in question because they did not completely restrict online sales and because online platforms did not constitute the most relevant outlet for online sales.
- A second section looks at the treatment of online selling restrictions in the light of EU trademark law.
The CJEU’s outright rejection of brand image protection as an objective justification for selective distribution systems under EU competition law in Pierre Fabre sits in tension with its judgment in Copad, a trademark case decided two years earlier. According to the author, the facts of these cases were similar, with the crucial difference that in Copad the distribution systems had been set up as a trademark licensing arrangement.
In Copad, it was held that, since luxury goods are high-class goods, the aura of luxury emanating from them is essential in that it enables consumers to distinguish them from similar goods’. The ECJ went on to say in Copad that ‘an impairment of that aura of luxury is likely to affect the actual quality of those goods’ and that ‘the characteristics and conditions of a selective distribution system can, in themselves, preserve the quality and the proper use of such products’. As a result, selective distribution systems which exclude certain distribution channels, such as discount stores and mail-order companies, to maintain the repute and prestige of the trademark are worthy of protection under EU trademark law, particularly as regards luxury products – to such an extent that the manufacturer has rights against the third-party distributor which is not part to a trademark licensing agreement.
While Pierre Fabre and Copad created a tension between EU trademark and competition law, Coty drew heavily on Copad regarding how competition law should treat selective distribution systems for luxury goods. The result is that EU competition and trademark laws seem to be more in sync now.
- A third section discusses how a dialogue between competition law and trademark law in this area might be profitable.
Despite constant references to Copad in its reasoning in Coty, the CJEU failed to specify how interests protected under EU trademark law could be directly factored into the evaluation of selective distribution systems under EU competition law.
In Germany, it has been argued that instead of relying on the quality of the goods subject to a selective distribution system (i.e. whether they are luxury products or not), the existence of a trademark right protecting the branded goods should provide a sufficient justification for restricting online sales. This could be done by reference to European case law on the object of IP rights – in particular, by reference to how that case law holds that the protection of the substantive core of an IP right can justify competition restrictions.
The author thinks that such an approach might lead to cases revolving around the identification of the substantive core of trademark. Instead, she thinks it would be better to think in terms of the whole brand image of which trademark is a part. She also suggests that a case-by-case analysis on this basis could lead to fair outcomes.
Comment: This is a good piece, which speaks to my intuition that we should always keep in mind that competition law is part of a wider legal system which has, as one of its founding principles, internal coherence and the absence of contradictions (if anyone is into legal philosophy, drop me a line! It’s been a while).
As regards the substance of the piece, I am not sure that the proposed focus on ‘brand image’ is that different from how Coty focused on the ‘nature of the goods’ to determine the lawfulness of a selective distribution system. To be clear, both concepts strike me as being vague and subjective. At the same time, I am sympathetic to the idea of building on the ways in which competition law already deals with IP law – such as protecting the object or substantive core of an IP right from competition law scrutiny – in order to ensure systemic coherence and to provide a better foundation for the assessment of selective distribution systems than an artificial distinction between luxury and non-luxury products.