Chillin'Competition

The much-awaited opinion in Coty is finally out. When reading it, one cannot avoid wondering whether all the excitement was justified. AG Wahl’s take on the issue is so full of common sense that the outcome he suggests to the Court comes across as the logical one.

The Oberlandesgericht in Frankfurt raised two key questions. The first was whether the protection of the brand image of a product is a legitimate requirement that justifies the setting up of a selective distribution system. The second is whether an online marketplace ban amounts to a restriction of competition by object within the meaning of Article 101(1) TFEU – and, by the same token, a hard-core restriction within the meaning of the Vertical Block Exemption Regulation.

AG Wahl takes the view that a selective distribution agreement aimed at preserving the brand image of a product falls outside the scope of Article 101(1) TFEU altogether if the conditions set out by the Court in Metro I are fulfilled. In addition, AG Wahl holds that an online marketplace ban is the sort of restraint that is acceptable in the context of a selective distribution agreement – and as such not restrictive by object. According to the Opinion, any such ban is comparable to the sort of restraints found in the off-line world and which the Court has already ruled are compatible with Article 101(1) TFEU.

AG Wahl also concludes that an online marketplace ban is not a hard-core restriction under Articles 4(b) and/or 4(c) of the Block Exemption Regulation. This is important insofar as it means that such a ban benefits from the exemption without it being necessary to engage in a case-by-case inquiry about whether the conditions laid down in Metro I are fulfilled.

More than the outcome, which does little more than follow the principles laid down in prior case law (full of common sense too), it makes more sense to say a word of the lessons that we can draw from the opinion.

Lesson 1: Selective distribution is primarily about preserving the brand image of a product

The protection of the brand image of the manufacturer is the primary reason behind the use of selective distribution systems. This is particularly obvious in the case of luxury products. It would make little sense for producers to resort to third-party distributors if doing so would jeopardise the image and aura of prestige of their goods. See in this sense para. 43 of the Opinion: ‘Brands, and in particular luxury brands, derive their added value from a stable consumer perception of their high quality and their exclusivity in their presentation and their marketing. However, that stability cannot be guaranteed when it is not the same undertaking that distributes the goods’.

Against this background, it is only reasonable to hold that any restraints aimed at preserving the brand image of the products are not as such restrictive of competition, whether by object or effect. Any such restraints are objectively necessary for the existence of selective distribution systems in the first place (the counterfactual all over again!).

This idea is not new. As AG Wahl holds, it was already in the case law. It is an idea that is also present in the case law relating to franchising – in Pronuptia, the Court held that restraints aimed at preserving the reputation and uniform brand image  of a product are not caught by Article 101(1) TFEU. AG Wahl applies a reasoning that is similar to the one found in the latter; see again para 43: ‘The rationale of selective distribution systems is that they allow the distribution of certain goods to be extended, in particular to areas geographically remote from the areas in which they are produced, while maintaining that stability by the selection of undertakings authorised to distribute the contract goods’.

Lesson 2: Competition is not synonymous with ‘price competition’. It is much more than that

The Opinion is also a valuable reminder that firms do not only compete on price, but also, inter alia, on quality and innovation. This is a key point that the Court understood very well in its lucid Metro I and Metro II judgments. If it was already clear in the late 1970s and early 1980s that firms do not only compete on price, this fact is all the more apparent in 2017 – I am reminded of this every time I am in a classroom full of 20-somethings that have a marked preference for pricey Apple products.

Accordingly, it is plain irrelevant to argue that online marketplaces intensify price competition among retailers. The Court and the Commission have always understood that, while selective distribution systems restrict intra-brand price competition, they promote competition in other parameters. They encourage producers to compete on the quality of their products and they provide an incentives for retailers to improve the shopping experience of end-users. Why would a restraint that is known to have such positive effects be restrictive by object?

AG Wahl summarises these issues particularly eloquently in para 46 of the Opinion: ‘It should be borne in mind that the compatibility of selective distribution systems with Article 101(1) TFEU ultimately rests on the notion that it may be permissible to focus not on competition “on price” but rather on other factors of a qualitative nature. Recognition of such compatibility with Article 101(1) TFEU cannot therefore be confined to goods which have particular physical qualities. What matters for the purpose of identifying whether there is a restriction of competition is not so much the intrinsic properties of the goods in question, but rather the fact that it seems necessary in order to preserve the proper functioning of the distribution system which is specifically intended to preserve the brand image or the image of quality of the contract goods’.

Lesson 3: The scope of Pierre Fabre is confined to outright bans on online sales

Even if the above seemed clear for a long time (I have always told my students that the whole point of selective distribution is to preserve the brand image of a product) Pierre Fabre created some confusion. This is so because the Court appeared to suggest that the protection of the prestigious image of a product is not a legitimate requirement justifying the sort of restraints found in a selective distribution system.

AG Wahl argues – and I agree – that such statement must be confined to the specific circumstances of that case (para 78). In other words, he takes the view that the Court examined whether the protection of the brand image could justify an outright ban on online sales. Thus, Pierre Fabre was not making any general statements about the former. As explained in the opinion, any other reading of that ruling would contradict a consistent line of case law that acknowledges the role of selective distribution in the protection of the brand image of the producer (para 85).

Lesson 4: Competition law and intellectual property law go hand in hand

The single most important and relevant precedent for Coty was not a competition law case, but an intellectual property one. In Copad, the Court held that the licensor of a trade mark may impose restraints on a licensee aimed at protecting the brand image of its products. Accordingly, it may require the licensee to sell the product to members of the selective distribution network.

If one accepts that Copad is good law – and it is – then it is difficult to see how the Court can take a different view in relation to a contractual clause that has the same purpose. As explained by AG Wahl in paras 88 and 89 of the Opinion, any other outcome would lead to an inconsistency that would not be easy to justify.