Online distribution in the spotlight: time to ensure your system is fit for purpose

Written on 8 Aug 2017

Later this year, the EU’s Court of Justice (CJEU) will give an important judgment in the case of Coty v Parfumerie Akzente. This will provide a definitive ruling on whether it is permissible, as part of a selective distribution system, to prohibit sales via third-party platforms such as Amazon or eBay.

The case arises from a long-standing dispute between the German business of Coty, whose brands include Marc Jacobs, Calvin Klein and Chloe, and German retailer Parfümerie Akzente, which sells Coty’s goods on sites including Amazon against its wishes. It is regarded across Europe as an important test case, which reflects mounting tension between luxury brands and online retailers.

Advocate General’s Opinion in Coty – a preview of the decision?

Ahead of this important judgment, the CJEU’s Advocate General recently published his opinion on the case, which will be taken into account by the CJEU as part of its analysis, although it is not binding on the court.

The Advocate General has stated that:

  • as a general principle, it is lawful to set up a selective distribution system that seeks to ensure that goods are displayed offline and online in a manner that enhances their value, contributes to the reputation of the goods and therefore sustains the aura of luxury surrounding them;
  • a prohibition on third party platforms by the head of a selective distribution network is legitimate, since such platforms are not required to comply with the qualitative requirements that it imposes on its authorised retailers;
  • a prohibition on third party platforms does not preclude online sales, removing only one of a number of ways of reaching customers via the internet. Accordingly, the Coty case should be distinguished from the CJEU’s ruling back in 2011 in Pierre-Fabre, which related to an absolute ban on online sales; and
  • such a prohibition may be capable of preserving guarantees of quality, safety and identification of the origin of the products, by requiring retailers to supply services of a certain level. The prohibition also allows the protection and positioning of the brands to be maintained in the face of the phenomena of counterfeiting and “parasitism” (free riding on the investment made in bricks and mortar sales).

Perhaps surprisingly, given its strong stance against online sales restrictions, the European Commission’s position in this case has also been more supportive of marketplace bans, saying that these can be justified in some circumstances (read more) . If the CJEU agrees, the Coty case should give business greater clarity on when the use of marketplaces can be restricted. We will provide a briefing on the CJEU’s judgment when it is handed down, probably in the Autumn.

What should businesses be doing in the meantime?

Across Europe, we are seeing a significant shift towards competition authorities investigating distribution agreements, which were previously considered low risk. It is recognised that the explosion in internet shopping has led to issues such as free-riding for manufacturers and their high street retailers. However, the increase in price transparency and choice for consumers – and the scope for sales across EU borders – is seen by the European Commission and Member States as fundamental to the economy. Although we have seen some cases such as Coty in favour of preserving brand image, we are also seeing significant numbers of investigations into other steps taken by manufacturers to control distribution – including resale price maintenance, restrictions on advertising prices online, price parity clauses and outright online sales bans.

As businesses in Europe adapt to rapid changes in the retail environment, they should consider whether their approach to online distribution is fit for purpose, given this changing enforcement environment and other impending legal changes such as the ban on geo-blocking. Companies that wish to maintain and enhance their brand equity through online channels are increasingly looking to implement more sophisticated distribution models to ensure that they retain control over their retail networks. If you would like to discuss your distribution challenges and how you can lawfully address them, please contact one of our experts listed below or your usual Osborne Clarke contact.