Chillin'Competition

Among pending cases before the Court, Coty certainly stands out. Its practical implications are difficult to overestimate. The judgment will have important consequences for online commerce and the luxury industry, on the one hand, and major Internet players, on the other. Coty is so sensitive that most practitioners (including my co-blogger extraordinaire) are particularly cautious not to comment publicly about it. Enjoy the silence, some say. For those who like to break it, here are some thoughts on the case.

The fundamental question raised in Coty is in fact fairly straightforward. The Oberlandesgericht Frankfurt am Main asks, in essence, whether a prohibition on the members of a selective distribution system to sell via online marketplaces amounts to a restriction of competition by object. In the same vein, the national court asks whether the preservation of a ‘luxury image’ is an aspect of competition that is compatible with Article 101(1) TFEU.

The point of selective distribution is to ensure that only retailers that satisfy certain criteria are entitled to sell a given product. By definition, this method of distribution only works if the retailers that are members of the system are prevented from selling to third parties that are not. Accordingly, a clause prohibiting resales to non-members is a textbook example of an ancillary restraint that falls outside the scope of Article 101(1) TFEU altogether.

Against this background, one key issue in Coty is whether prohibiting retailers from selling via online marketplaces is comparable to a clause prohibiting sales to third-party retailers. It is not unreasonable to argue, in this sense, that the objective purpose of the two clauses is the same. From this perspective, an online marketplace ban is simply an adaptation of a contractual device to the challenges that are specific to e-commerce. If so, there would be no reason to treat the two clauses differently – again, it is all about legal consistency.

According to the case law, however, it would not be sufficient to conclude that a marketplace ban is identical in its nature and purpose to a clause prohibiting resales to non-members of the system. The creation of a selective distribution system only falls outside the scope of Article 101(1) TFEU if it relates to a ‘legitimate aim’. If it does not, any clauses would be restrictive of competition by object. This is something that the Court emphasised in Pierre Fabre. It is a sensible point that captures the essence of the case law on restrictions by object particularly well.

The reason why manufacturers of luxury products rely upon selective distribution systems is not a secret. When products are sold through independent retailers, their reputation may suffer. There is also a risk that end-users’ experience is not the same in all stores. By imposing a set of a criteria to be satisfied by retailers, a manufacturer of luxury products can preserve the reputation of its products and a uniform end-user experience without resorting to vertical integration (which can be costly and thus limit its ability to expand or even enter the market).

So does a clause – for instance, an online marketplace ban – that seeks to preserve the reputation of a product and the uniformity of a distribution system (or a ‘luxury image’, if one prefers) relate to a ‘legitimate aim’ within the meaning of Pierre Fabre? The Court ruled in Pronuptia that a clause aimed at achieving these two objectives is not restrictive of competition. It would be reasonable to argue that what is true of franchising agreements must also be true of selective distribution. After all, a franchise constrains retailers’ freedom considerably more than a selective distribution system.

This analysis would also need to consider the counterfactual (about which Alfonso wrote last week). Is it reasonable to assume that manufacturers of luxury products would rely upon independent retailers even if they are not entitled to use contractual mechanisms aimed at preserving the reputation of their products and a uniform end-user experience? Is it unreasonable to lay down a rebuttable presumption whereby clauses aimed at preserving the brand image of a product are objectively necessary and thus compatible with Article 101(1) TFEU?

As far as I have been able to gather, the Commission appears to agree with the above and does not see online marketplace bans as hard-core restraints (which I understand also means, in this case, they are not a ‘by object’ infringement either). Apparently, it has made this clear in its submission to the Court.

There is case law supporting the perspective of the Commission (the Court dealt with three cases on ‘luxury selective distribution’ back in 1980 that implicitly endorse the above). However, a passage in Pierre Fabre can be interpreted as suggesting that a selective distribution system is not justified if it seeks to preserve the brand image of a product (the Court held in that case that ‘the aim of maintaining a prestigious image is not a legitimate aim for restricting competition’).

Thus, Coty will have to address the seeming tension between these rulings. This is not unusual in preliminary references. If Pronuptia suggests that clauses aimed at preserving reputation and uniformity within a distribution system are (presumptively) compatible with Article 101(1) TFEU, Pierre Fabre suggests the opposite. Perhaps the scope of Pierre Fabre is confined to outright online sales bans (which is what the case was about), or perhaps not. The answer, in a few months.