Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Case C‑230/16, Coty Germany GmbH: common sense prevails (by Pablo)

with 11 comments

it is only Common sense

The Court Judgment in Case C-230/16 is out (available in French and in English). And, in the spirit of times, here is an online channel providing the first comment on it.

The judgment follows faithfully AG Wahl’s Opinion, which came out in July (and which we discussed on the blog). It seems to be also in line with the position consistently expressed by the Commission since the Guidelines on vertical restraints.

The vast majority of our readers will remember that the case is about the legality of a ban on the use of online marketplaces by the members of a selective distribution system. The Court has ruled the following:

  • Where the conditions of Metro I are fulfilled, a restraint aimed at preserving the luxury image of a product is presumptively lawful – in other words, it falls outside the scope of Article 101(1) TFEU altogether.
  • A selective distribution system that provides for an online marketplace ban is not caught by Article 101(1) TFEU where the conditions of Metro I are fulfilled (that is, where the nature of the product requires the use of the system). Such a ban does not go beyond what is necessary to preserve the luxury image of the product.
  • An online marketplace ban is not a hard-core restriction within the meaning of Article 4 of the Vertical Block Exemption Regulation if it does not limit passive sales and/or the customers to which the distributor can sell the product.
  • The ruling in Pierre Fabre is confined to the specific circumstances of that case, i.e. an absolute ban on online sales (paras 33-34).

More important than the ruling are the implications than one can infer from it, which can be summarised as follows:

  • The Court makes it clear beyond doubt that the object of an online marketplace ban is not the restriction of passive sales and/or the customers to which distributors can sell. This is in line with the position expressed by the Commission in the context of the e-commerce sector inquiry.
  • By way of consequence: the Court strongly signals that an online marketplace ban is not a restriction by object within the meaning of Article 101(1) TFEU.
  • What are the implications? The first implication is that a case-by-case analysis of effects would in any event be required for non-luxury goods. Byzantine discussions about whether Asics or Mizuno shoes qualify as luxury goods seem entirely irrelevant in this regard. The ‘by object’ shortcut would not apply, irrespective of the nature of the good.
  • Insofar as an online marketplace ban is not a hard-core restraint within the meaning of the Regulation, the benefit of the block exemption applies irrespective of the nature of the product. Again, the ‘luxury or not luxury’ dilemma will be largely irrelevant in practice as a result.

I have summarised my understanding of the ruling in the table below:


Nature of the product Outcome Hard-core restriction under VBER? Can benefit from Block Exemption?
Luxury or hi-tech product (Metro I) The ban is presumptively lawful No Yes
Other products The ban is not by object, case-by-case No Yes

 

Other comments

Copad was the key precedent all along

The Court approaches the question in the way I would have done it. As I mentioned in July, the key precedent was Copad, an intellectual property case. In Copad, the Court ruled that a trade mark licensor can invoke its rights to prevent a licensee from selling to non-members of a selective distribution system.

That ruling is based on a key premise: if companies cannot protect their intangible property (brand image, trade mark, goodwill) when dealing with third parties, they will refrain from licensing and from selling via independent distributors. Why would firms do something that would force them to lose control of the image they want to convey?

More importantly: why would EU law penalise firms that sell or produce via third parties and favour those that produce in-house? Copad and Coty suggest that EU law is agnostic about the business model that companies choose. There is no reason why vertical integration should be favoured over licensing and/or selling via third parties. And there are many good reasons why the latter should not be treated more strictly.

The protection of intangible property is important for all producers, not only the producers of luxury goods. Asics or Mizuno shoes may not be seen as a luxury product (it is all in the eye of the beholder). This, at the end of the day, does not really matter. What matters is that conveying a particular image may also be important for these companies.

Trade mark law seeks to protect all producers, not only producers of luxury goods. There is no reason why EU competition law should be different. Coty appears to be in line with this position.

The administrability trap in EU competition law

The ‘by object’ prohibition of online marketplace bans has been defended by many in the past few months. One of the arguments that has frequently been invoked is the ease of administration of a ‘by object’ rule. If we know that a practice can be bad for competition, is it not better to lay down a prima facie prohibition so we all know where we stand?

Coty shows that the Court was not impressed with these arguments. If everything were about the easy administration of a rule, then every practice would be prohibited by object, and this is clearly not the case.

What is more, this view ignores that prima facie legality rules are also easy to administer, and are an integral element of EU competition law.

Metro I, where the Court clarified that, in some circumstances, selective distribution systems are presumptively compatible with Article 101(1) TFEU (irrespective of the market share!) is a wonderful example. We know now that the legality rule may apply even when the agreement provides for an online marketplace ban.

Written by Pablo Ibanez Colomo

6 December 2017 at 12:19 pm

Posted in Uncategorized

11 Responses

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  1. Dear Pablo,

    Many thanks for the interesting insights. I’m still not entirely sure how the luxury/non-luxury distinction would be irrelevant, in particular given that the Court refers to it as a condition throughout the judgment. It even explicitly tries to distinguish between luxury products and ‘cosmetics and body care [my rough translation from ‘Kosmetika und Körperpflegeprodukte’], and that is a contrast that is fundamentally flawed. It’s like saying that there is a distinction between sweet fruit on the one hand and apples and peaches on the other. Anyway, this distinction is part of the ‘clarification’ of PierreFabre.

    To my mind the Court distinguishes Coty from Pierre Fabre on two grounds: the latter concerned a (1) blanket online sales ban and (2) it didn’t concern a luxury product (para. 32). We now have two precedents concerning online retailing leading to different outcomes and they are distinguished on two grounds, one of them being the non-luxury nature of the products. In other words: I wouldn’t rule out litigation on this issue.

    Finally, you write ‘Trade mark law seeks to protect all producers, not only producers of luxury goods. There is no reason why EU competition law should be different.’

    One reason for this difference would be that EU competition law is not about protecting producers. Depending on the case you refer to it is about the ‘well-being of the European Union’ (TeliaSonera, para 22) or about ‘not only the immediate interests of individual competitors or consumers but also to protect the structure of the market and thus competition as such’ (T-Mobile, para. 38).

    all the best,
    hans

    Hans

    6 December 2017 at 2:44 pm

  2. Hi Hans,

    Thanks for taking the time to react on the blog! We really appreciate it.

    On the luxury/non-luxury distinction:

    – Whether an online marketplace ban amounts to a hardcore restriction within the meaning of the VBER does not depend on the nature of the product. In other words: the question of whether the practice restricts active and/or passive selling over the Internet does not depend on whether the agreement is about running shoes or luxury handbags instead. This is in fact apparent from the analysis of the Court in Coty. Would you not agree?

    – If that is so, many, if not most, selective distribution systems will benefit from the exemption under the VBER. It is in this sense that I mean that the difference between luxury and non-luxury products will matter little in practice.

    – What is more, the Court’s position, which implies that an online marketplace ban is not an object restriction, means that an analysis of the appreciable effects on competition would be required when the agreement is outside the scope of the VBER. This factor further reduces the implications, in practice, of the luxury/non-luxury divide.

    – I fully agree with you that further litigation is likely to come. It would seem that some competition authorities will insist that online marketplace bans are ‘by object’ infringements when they do not relate to luxury goods, and the question may even reach the Court again. For the reasons that I explain above, this position is not likely to prevail.

    On trade mark and competition: my point is not related to the objectives of competition law. It is a different one. The question is whether EU competition law should acknowledge the rationale underpinning trade mark protection only in relation to luxury goods. As I explain, I fail to see why. What is more, according to a long-standing principle, EU law does not question the existence of intellectual property rights.

    Pablo Ibanez Colomo

    7 December 2017 at 4:51 pm

  3. Dear Pablo,

    I’ve not commented before, but I have always enjoyed your and Alfonso’s site. Pleasure to combine insight with a smile also 🙂

    On the luxury / non-luxury point you pick up in your response to Hans above – actually, is it so clear that the Court said platform bans were not customer restrictions (and passive sales, but let’s simplify to customer restrictions) pure and simple? If you look closely at the judgment, it is curious. Questions 3 and 4 to the Court (see para 20 of the juddgment) are GENERAL, not confined to luxury goods. The Court then proceeds to answer a different question, and confine – or at least link clearly – its answer to luxury goods. And it does this not once, but twice, in the recital (69) and in the operative part of the judgment (para 3).

    This surely must be deliberate. I agree with you that from a common sense point of view the level of luxury (or lack of) attached to the goods should not make a difference as to whether it is a customer restriction. The customer issue is about platforms being a route to market – why should that be affected by the nature of the goods. But, for whatever, reason, the Court appears so far to have been cautious. I am not saying we should similarly be cautious. In advising clients, I am minded to say if you are in the block you are in the block. The key questions on 4(b) and (c) VBER have been answered. But we’ll have to wait for the next case for clarity on that.

    Some of my German colleagues produced a piece on this which I co-authored. I posted it on my Linked In.

    Happy Christmas everyone.

    Brian Sher

    12 December 2017 at 8:35 am

    • Thanks, Brian!

      I look forward to reading that piece! And look forward to explaining all the above in detail – the key is what you write: from a common sense perspective I struggle to see how the nature of the good can change the objective purpose and effect of a contractual clause

      All the best for the new year!

      Pablo Ibanez Colomo

      12 December 2017 at 8:43 am

  4. Hi,

    I read the opinion as well as the judgment. I notice the usage of the term “discernible manner” a lot. Can you please explain what would this mean in the context of this decisions? What is the difference between “discernible” and “non-discernible” in the context of this decision?

    Thanks.

    Danish Khan

    12 December 2017 at 10:48 am

    • Hi! The question is whether you can identify (discern) who runs the third-party platform (e.g. Amazon or eBay) or whether the logos and/or identity of this third party are concealed. As simple as that! You may want to take a look at para 54 of the Guidelines on vertical restraints

      Pablo Ibanez Colomo

      12 December 2017 at 6:41 pm

  5. Hi Pablo,

    It’s great to see the exchange of ideas here. As to the luxury/non-luxury distinction, the Court departs from the assumption that selective distribution may be necessary for the luxury image (the Copad precedent in paras. 25 – 28). It then frames the whole distinction of Coty from PierreFabre in terms of ‘selective distribution for luxury goods’ This, I think, would not be about the changing the objective purpose and effect of a clause, but it would be about the economic context in which this clause is applied. To paraphrase the Copad Court: there needs to be ‘the allure and prestigious image which bestow on them an aura of luxury’. In the absence of this aura, the Copad precedent gives way to the PierreFabre precedent. The common sense here is that there could be good reasons for excluding (certain forms of) online retailing. These may be related to the nature of the product (certain goods and services require significant presales advice or even compliance checks) or they may be related to the distribution of the goods and services and how that distribution adds value to the good or service. In other words: there needs to be some reason to exclude online retailing, and one of them is the luxury image and that is what could explain the Court’s no so general answer to the generally phrased questions 3 and 4 (Brian’s point).

    As to the IP rights, yes standard Court case law does not challenge their existence. However, there is an equally long line of cases that then distinguishes the existence from the exercise of those rights. Moreover, EU competition law has been used to do exactly that: limiting the exercise of IP rights. Applied to the distribution of goods, a company would need to substantiate a claim that extends the specific subject matter of a trademark to the specifics of the distribution of the goods and one way of doing that would be to argue that they are luxury goods. In other words: I’m looking forward to cases on what constitutes the ‘aura of luxury’.
    All the best,
    Hans

    Hans

    13 December 2017 at 10:21 am

  6. I also agree with the statement that the court made the luxury/non-luxury issue irrelevant from the perspective of the analysis under the VBER block exemption. Although it is true that the word “luxury” features in the court’s response to Q3-4 (para 69), it does not have any significance at all in the actual legal analysis (in paras 65-68).

    What is a less discussed aspect is how the court viewed the real nature of the platform ban, which reveals why the court did not see the ban as a classic customer allocation (ie object type) restriction. In para 68, the court in summary states that the ban restricts “a type of internet sales” (in German: eine bestimmte Form des Internetverkaufs) as opposed to excluding a specific group of customers. Now this reminds me of the good old notion of “selling arrangements” in the free movements of goods case-law (Keck), which are of course treated more leniently: are we back to the usual creeping convergence of EU internal market laws?

    Asimo

    13 December 2017 at 11:21 pm

  7. Please take some time to appreciate this very special moment for the blog. At long last, Asimo agrees with a view expressed here! 😉

    Actually, your point, Asimo, is key: nothing in these paragraphs suggests that the luxury image influences the analysis of the ban under Article 4 of the VBER.

    There is another point that has not been mentioned but that is equally crucial. Article 4 of the VBER is meant to apply to non-luxury goods. Where the conditions of Metro I are fulfilled, the agreement is not caught by Article 101(1) TFEU. It is not even necessary to resort to the VBER, which only applies insofar as the agreement restricts competition within the meaning of Article 101(1) TFEU.

    It would be paradoxical, against this background, to argue that Article 4 of the VBER does not apply in the context in which it is meant to apply (non-luxury goods) but applies where it may not even be necessary (luxury goods).

    On Hans comments:

    He points out that ‘in the absence of this aura [of luxury], the Copad precedent gives way to the PierreFabre precedent’.

    It seems to me that this view is directly contradicted by para 35 of Coty, where the Court was careful to clarify, expressly, that Pierre Fabre was not a statement of principle about selective distribution of ‘all goods’ (i.e. luxury and non-luxury).

    On another point I agree: there has to be a rationale for an online marketplace ban. The point is that many companies selling branded goods, not only the producers of luxury items, are interested in protecting their brand image

    BTW; Asimo, I like the analogy with Keck! Makes sense!

    Pablo Ibanez Colomo

    15 December 2017 at 11:52 am

  8. Dear Pablo,

    Thanks for your post and thanks for all useful comments. I write a comment for the first time here. Also a fair warning: Sorry for my english 🙂
    I am not sure if this is a valid point to be made but I am confused: I cannot see in the decision any debate about the nature of the internet as being a place for sales or as a method of sales. If the ECJ asserts that the internet is a method of sales in Pierre Fabre and defends the point that bans on the internet sales would amount to restricting passive sales, why the same conclusion does not apply in this case? Of course many arguments are put forward in the decision about why this is a different case but I think most of the arguments put forward by the ECJ in Coty fictionalizes the internet as a place for sales, not as a method of sales.

    Happy new year!
    Regards

    Safa

    19 December 2017 at 2:02 pm

  9. Dear Pablo,

    I completely agree with your comment on the irrelevance of the luxury/non luxury dilemma in light of the block exemption regulation.
    Just have a couple of extra thoughts.
    First, would the platform ban be block exempted also in non-selective distribution systems if the other criteria are fulfilled?
    I would say so, also in light of your reasoning.
    Secondo point: what if the manufacturer sells to marketplaces (meaning sell the property of the goods, as it sometime happens in reality)?
    In selective distribution systems, in my view, the platform would then be considered as an authorized reseller (and the other members should be allowed to sell to – and arguably through – such platform).
    In non selective distribution system, the manufacturer under the VBER should be allowed to reserve to itself certain group of customers (e.g. marketplaces). In such scenario, resellers would be prevented from actively selling to (and arguably through) marketplaces.
    Any view on that?

    Luca

    22 December 2017 at 4:24 pm


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