The Authors' Take - CJEU addresses restrictions by object under Article 101 TFEU in the context of online sales platforms

CJEU addresses restrictions by object under Article 101 TFEU in the context of online sales platforms

by Stephen Barratt

On 6 December 2017, the Court of Justice of the European Union (CJEU) revalidated the assertion that the preservation of luxury is an aim capable of shaping the presumption that a practice is outside the scope of Article 101 Treaty on the Functioning of the European Union (TFEU).

The CJEU had appeared to reject this proposition in Pierre Fabre Dermo-Cosmétique, C-439/09 EU:C:2011:649 (Pierre Fabre). Not so, said the CJEU in Coty Germany GmbH v Parfumerie Akzente GmbH, C-230/16, EU:C:2017:941, explaining that the – seemingly unequivocal and independent – assertion at paragraph 46 of Pierre Fabre was actually a function of the specific factual background.

The German court of first instance, Landgericht Frankfurt am Main (Regional Court, Frankfurt am Main, Germany), had been required to assess the legality of a distribution contact, by means of which Coty Germany, a luxury cosmetics supplier, was seeking to prevent its distributor selling via online outlets with any discernible third party presence. This would prevent the distributor, Parfumerie Akzente, from using its preferred online outlet, Amazon.de.

Litigation ensued when Parfumerie Akzente refused to agree to the supplementary terms (an agreement regarding physical sale locations was already in place). The court of first instance applied Pierre Fabre, judging the agreement to be in violation of Article 101 and hence unenforceable.

The matter was brought, on appeal by Coty Germany, before the referring court, the Oberlandesgericht Frankfurt am Main (Higher regional court, Frankfurt am Main, Germany). This court asked the CJEU to delineate Article 101 in relation to agreements designed to preserve the luxury aura of products, and also with regard to the specific agreement under dispute. The first question asked which principles are engaged when determining a restriction by object for the purposes of Article 101(1) TFEU. The second asked it to weigh these principles against the factual matrix outlined by the referring court, a proportionality enquiry. The CJEU was also asked to advise on the application of Regulation (EU) No 330/2010 (The Block Exemption Regulation). Coty Germany did not exceed the market power threshold so, even if the agreement did invoke Article 101, it could be presumed exempt if not deemed to be a ‘hardcore restriction’.

The CJEU, having dealt with Pierre Fabre, referred to a trade mark case, Copad v Dior, C- 59/08, EU:C:2009:260, in which it had expounded the link between a product’s luxury aura, its quality and its value to consumers. Unfortunately, the CJEU’s reasoning begs the question of how a normative assertion grounded in trade mark law retains its validity in the markedly different legal context of competition, especially given that commentators remain equivocal about such extension of a trade mark’s origin function.

On the proportionality of the measures, the CJEU’s view was that, unlike the blanket internet ban in Pierre Fabre, the agreement in question was allowable because internet customers could still purchase the goods, albeit via the distributor’s own website. It relied on a Commission report which showed that 90% of consumers used this purchase method. Significantly - as is habitually the case in the internet age - the value of this aspect of the judgment is transient, rooted as it is in current consumer behaviour.

Less easily expunged and all the more deserving of critical attention is the CJEU’s conclusion regarding luxury auras. It must be hoped that a future case will give the CJEU the chance to clothe the essentially subjectivist stance it took in Coty with an adequate rational framework. In the meantime, the matter returns to the referring court for adjudication, with Coty Germany – and the luxury cosmetics industry in toto - expected to be vindicated.

[This is an Authors' Take post, which provides readers with an insight into current IP scholarship, featuring preliminary comments and thoughts from authors of articles accepted for publication in forthcoming issues of the Journal of Intellectual Property Law & Practice (OUP).]

The Authors' Take - Coty Germany v Parfümerie Akzente

AG WAHL interprets competition provisions in relation to selective distribution agreements for luxury cosmetics

by Stephen Barratt

University of Southampton, School of Law

In his Opinion of 26^th July 2017 in Coty Germany GmbH v Parfümerie Akzente GmbH, C‑230/16, Advocate General (AG) Wahl provided his interpretation of Article 101 TFEU and Regulation (EU) No 330/2010 (the Regulation). The request for a preliminary ruling came from the German Higher Regional Court (Oberlandesgericht Frankfurt am Main), and was made in the context of a dispute between cosmetics giant Coty Germany and one of its distributors, Akzente.

The question is whether Coty’s new selective distribution agreement, which prohibited the discernible use of third party websites, is precluded by EU antitrust provisions. Azkente wanted to use Amazon.de to market the goods, thereby gaining access to Amazon’s enormous active user base as well as lower marketing costs and the option to have orders fulfilled by Amazon itself.

Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements which distort competition, either by object or effect. Under the Regulation, vertical agreements are presumed to be exempted from Article 101(1)  TFEU via Article 101(3) TFEU, provided that neither the supplier’s nor buyer’s market share exceeds 30%.

Does the agreement distort competition?

According to the AG, the agreement falls outside Article 101(1) TFEU. This is because, when factors other than price are taken into account, Coty’s requirement does not cause appreciable anti-competitive effects.  In reaching this conclusion the AG adopted the view – extant in both competition and trade mark decisions – that a luxury product loses its value to the consumer if it becomes commonplace. The preservation of this ‘aura’ is therefore capable of offsetting anti-competitive effects. This qualitative assessment, or ‘appreciability’ test, is a source of uncertainty for parties when drafting agreements. The Opinion, if followed by the Court, should be welcomed by the Luxury Cosmetics industry, worth €203b in 2016. Its effect is to create a presumption that an agreement aiming to preserve prestige is not caught out, provided it is non-discriminatory and proportionate.

Clarifying Pierre Fabre

However, if the ‘object’ of an agreement is deemed to be anti-competitive, Article 101(1) applies and no qualitative analysis occurs. This, the AG explained, was what led the court in Pierre Fabre Dermo-Cosmétique , C-439/09, EU:C:2011:649 (Pierre Fabre), to declare ‘the aim of maintaining a prestigious image is not a legitimate aim for restricting competition’.  In that case an absolute ban on internet sales was classified as restriction by object. A full and much needed delineation of the ‘object’ category will have to wait for a future reference but a comparison between Pierre Fabre and the instant case indicates that proportionality is a key factor whether a ‘sufficient degree of harm’ has occurred.

The AG went on to confirm that, even if Article 101(1) did apply, the agreement would qualify for the Block Exemption under the Regulation. An agreement cannot benefit from the exemption if it is deemed to be a ‘hardcore restriction’. This is along the same lines as a restriction by object under Article 101(1), but more user-friendly because it sets out prohibited restrictions. The AG concluded that a restriction on discernible third party platforms constitutes neither a territorial limitation nor a restriction of passive sales.

So, a probable reprieve for luxury cosmetics suppliers, but the rapid evolution of the e-commerce sector means the proportionality assessment could soon favour distributors. Nor is the debate settled about law’s role in protecting prestige, although the interdependent evolution of trade mark law means the concept is fairly entrenched. 

[This is an Authors' Take post, which provides readers with an insight into current IP scholarship, featuring preliminary comments and thoughts from authors of articles accepted for publication in forthcoming issues of the Journal of Intellectual Property Law & Practice (OUP).]