Selective distribution – preserving the “aura of luxury”

To what extent should brands be able to prevent retail distributors from selling the brands’ products on eBay and Amazon?

Last month the Advocate General to the European Court expressed the view that Coty Germany (the luxury beauty supplier behind Calvin Klein, Chloe and Marc Jacobs’ fragrance and cosmetic product lines) should be able to prevent retailers from selling its luxury products on third-party platforms such as eBay and Amazon. In the opinion of the Advocate General, the consumer perception of the “aura of luxury” is so important to the definition of luxury and prestige goods that criteria intended by brands to preserve their luxury image means that retailers could be prevented from using online marketplaces.

If the Advocate General’s view is followed by the European Court it will present a significant development in respect of the legal treatment of clauses in selective distribution agreements which prohibit retailers from selling luxury and prestige products on third-party platforms including Amazon and eBay. His opinion is also of particular interest as it has been delivered following the German competition authority finding that Asics’ ban on sales of its shoes on eBay and Amazon was an infringement of competition law.

“Quality control” in selective distribution systems

Selective distribution systems can enable brands to impose an element of “quality control” on the distribution of their products without breaching competition law. In a selective distribution system, the supplier (brand) agrees to appoint certain distributors (retailers) provided that the retailers meet certain criteria. A selective distribution system can therefore enable the brand to have greater influence over the marketing of its products.

However, brands using selective distribution systems must do so within the extent allowed by competition law. Certain vertical agreements (including selective distribution agreements) can escape being caught by the legal restrictions on anti-competitive arrangements. In addition, the European Commission has published guidelines on vertical restraints which explain that selective distribution systems will not infringe competition law provided that the “quality control” criteria are:

• fair; and
• applied objectively,

to all retailers in the system or those seeking to join the selective distribution system.

In practice, this means the criteria must:

1. concern the nature of the product which is such that there is a legitimate requirement for imposing stricter controls (such as to preserve quality or ensure proper use);
2. be qualitative not quantitative (such as concerning the quality of the retail environment rather than aimed at reducing the number of authorised retailers); and
3. not go beyond what is necessary to preserve the quality or proper use of the product.

Restrictions on online sales

In addition, selective distribution agreements must not include any “hardcore restrictions” as they will not escape being caught by the restrictions as anti-competitive arrangements. It is a “hardcore restriction” for a supplier to:

1. restrict the number of authorised distributor; and
2. impose restrictions on authorised distributors’ ability to determine final customers (including through internet sales).

These particular hardcore restrictions present a problem for brands which seek to control online sales and to prevent their retailers from using third party online marketplaces.

Some six years ago a judgment given by the European Court confirmed that absolute bans on internet sales in a selective distribution system are not permitted unless the ban serves a legitimate aim (such as for a pharmaceutical product where resale is limited to pharmacies).

From the European Commission’s guidelines on vertical restraints it is also clear that criteria which are imposed on retailers in respect of their online sales which are not of overall equivalence to the criteria imposed on sales from brick and mortar shops will also be considered as hardcore restrictions.

In May 2017, the European Commission’s e-commerce sector inquiry also concluded that requirements on retailers in a selective distribution system to operate at least one brick and mortar shop, without any apparent link to distribution quality, could be anti-competitive if the main aim was to essentially exclude pure online players from the selective distribution system.

Good news for luxury brands?

If the Advocate General’s view in this latest case is followed by the European Court, it will provide some comfort to luxury brands which consider that online marketplaces such as Amazon and eBay do not have sufficient prestige to sell their products but who may be wary of falling foul of competition law restrictions.

However, before rushing to impose a blanket restriction on the use of Amazon and eBay, brands should ensure that they conduct an individual assessment of whether such a restriction is legitimate, qualitative, and, of course, necessary.