Preserving the image of luxury brands in the EU – what is permitted under competition law?

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In its recent judgment in Coty Germany GmbH (“Coty”) v Parfumerie Akzente GmbH (“Parfumerie Akzente”) (C-230/16), the European Union’s Court of Justice (the “Court”) has clarified the position in relation to balancing the interests of luxury brand owners and EU competition rules.

The Court has held that, under certain circumstances, restricting distribution channels for such brands will not constitute a breach of competition law.

In this article, we will take a closer look at the Court’s decision and its consequences for preserving the image of luxury brands.

The issue

Coty is an internationally-known supplier of luxury beauty products, including brands such as: Burberry, Gucci and Chloe, based in Germany. Its products are distributed via a selective distribution network of authorised resellers, which included Parfumerie Akzente. Coty sought to renew its distribution agreement with Parfumerie Akzente. The relevant agreement between the parties included a clause pursuant to which Parfumerie Akzente could only sell the products supplied by Coty on their own website, not on third party websites. Coty’s intention was to ensure that the luxury image of its brands was not diluted by Parfumerie Akzente allowing the products to be sold on third party websites, such as Amazon.de.

In turn, Parfumerie Akzente took the view that the clause imposed by Coty was restricting competition in breach of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and sought to challenge it in the national courts in Germany. The Higher Regional Court in Frankfurt decided to stay the proceedings and to refer a number of questions to the Court for a preliminary ruling.

The law

The purpose of Article 101(1) TFEU is to prohibit parties from entering into agreements which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market. Such agreements are considered to be anti-competitive and contrary to the free movement of goods between Member States, regardless of the intention of the parties.

The decision

The Court was asked to interpret Article 101(1) TFEU and of Articles 4(b) and (c) of Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) TFEU to categories of vertical distribution agreements and concerted practices.

The Court has reiterated that, as a general rule, selective distribution systems necessarily affect competition in the internal market.

However, the Court has held that selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure their “luxury image” are compatible with Article 101(1) TFEU as long as the following criteria are met:

  • Resellers are selected based on objective criteria of a qualitative nature that do not go beyond what is necessary and that are applicable uniformly and in a non-discriminatory fashion to all potential resellers; and

  • The characteristics of the products in question necessitate a selective distribution system in order to preserve their quality and to ensure their proper use. Importantly, the characteristics or properties of such products are not limited to their physical or material qualities - they also include the luxury image of the products, the so-called “aura of luxury” that enables consumers to distinguish them from similar goods and an impairment to which is likely to affect the actual quality of the goods.

Suppliers who set up the selective distribution networks primarily to preserve the luxury image of certain products will also be able to include the relevant restrictions in their agreements with their authorised distributors. The Court has held that the inclusion of contractual clauses prohibiting authorised distributors from selling luxury goods in a discernible manner via third party online platforms in the selective distribution agreements with their suppliers is lawful, as long as:

  • The objective of such clause(s) is to preserve the luxury image of the relevant products

  • It is laid down uniformly and not applied in a discriminatory fashion; and

  • It is proportionate in the light of the objective pursued.

  • Interestingly, the Court has also clarified that limiting the use of third party online platforms in circumstances such as those in Coty does not constitute a restriction of customers or a restriction of passive sales to end users under Articles 4(b) and 4(c) of The Block Exemption Regulations No 330/2010 in relation to vertical agreements and concerted practices (“VBER”).

Geldards’ comment

The Court’s decision is a welcome clarification in the areas of brand protection and competition law, aimed at striking the right balance between the interests of the suppliers of luxury goods and protecting healthy competition in the market.

The judgment will no doubt be of assistance to the suppliers of luxury brands. Whilst there is no clear-cut definition of a “luxury” brand, it appears that suppliers of those brands that have acquired a significant reputation and goodwill, especially in a market of high-end goods, are likely to benefit from this added protection of their brands’ image.

The suppliers should, however, ensure that the provisions included in their distribution agreements are not overly-restrictive and that they comply with the criteria set out by the Court.

For further information, please do not hesitate to contact our Intellectual Property Dispute Resolution team.

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