Selective distribution: Frankfurt court confirms the legality of third-party platform bans

EU

On 12 July 2018, the Higher Regional Court of Frankfurt ruled on the appeal procedure in the Coty case (No. 11 U 96/14 Kart) and decided that the third-party platform ban agreed by the luxury cosmetics manufacturer Coty in its selective distribution agreement with the perfumery Akzente is permissible.

The judgment comes after the Court of Justice of the European Union (ECJ) had already declared – albeit in an abstract manner – that third-party platform bans in the selective distribution of luxury goods were permissible under competition law (see our blog article of 6 December 2017). The latest judgment largely corresponds with the sailing instruction of the 2017 ECJ ruling, but contains further explanations on the admissibility of third-party platform bans and helpful indications for determining the luxury character of products.

Coty’s third-party platform ban

Coty defended its selective distribution policy by explicitly citing the luxury image and prestige of its brands. In regard to online sales, Coty Germany's authorised dealers are not permitted to use a different name for their online shops. This third-party platform ban prohibited dealers from openly engaging with third parties and thus prohibited sales via internet marketplaces like Amazon and eBay.

Selective distribution: ECJ's Metro criteria

According to the so-called Metro case law of the ECJ, the organisation of a purely qualitative selective distribution network does not fall under cartel prohibition if certain criteria are fulfilled, and the selective distribution system is then an element compatible with the competition. To this end, the criteria include: the nature of the products in question require a selective distribution network, for example to maintain quality and ensure that the products are used in the correct way; the selection of resellers must be based on objective qualitative criteria, uniformly defined and applied to all potential resellers; and the established criteria must not go beyond what is necessary.

Legal uncertainty and referral to the ECJ

The lawsuit between Coty and the defendant has become famous among competition lawyers when the Frankfurt Senate, in a 19 April 2016 decision, asked the ECJ to clarify several disputed issues relating to selective distribution, Metro case law and third-party platform bans.

The legality of third-party platform bans has been the subject of numerous debates and divergent court rulings in recent years. One reason for this was the ECJ's judgment in the 2011 Pierre Fabre case (C-439/09) in which the court made it clear – with reference to cosmetics – that "the aim of maintaining a prestigious image is not a legitimate aim for restricting competition". Germany's Federal Cartel Office interpreted this statement to mean that the preservation of a luxury image could no longer justify selective distribution systems and platform bans. This led to uncertainty among luxury and brand product manufacturers.

The ECJ clarifies selective distribution

After the referral by the Frankfurt Higher Regional Court, the ECJ removed this uncertainty with its judgment of 6 December 2017 (C-230/16) – at least for luxury goods. According to its ruling, a selective distribution system for luxury goods that preserves the goods' luxury image is lawful when taking into account the other Metro criteria. The court stressed that the quality of luxury goods is not only linked to material characteristics, but also to their prestigious image. Any impairment of that image can affect the quality of the goods.

The ECJ further held – at least in regard to luxury goods – that a third-party platform ban did not represent a hardcore restriction within the meaning of Article 4 lit. b) or c) of the Vertical Block Exemption Regulation (VBER), and thus could be exempted. This means that it did not place restrictions on either the customer group or on passive sales to end consumers. If the market share of the supplier and its retailers does not exceed 30%, a selective distribution agreement for luxury goods containing a third-party platform ban can then benefit from VBER protection.

Frankfurt judges implement ECJ’s sailing instruction in concrete terms and go further

Since the ECJ only needed to decide abstractly on the legal questions submitted to it, the Higher Regional Court of Frankfurt still had to rule on the legal dispute in concreto on the basis of the EU court's response. Their judgment supported the ECJ’s sailing instruction and went even further.

The Frankfurt judges left open whether the criteria of the Metro case law had been met and whether Article 101 (1) on the Treaty of the Functioning of the EU (TFEU) even applied. According to the judges, the Metro criteria had likely been met. At the same time, however, the judges also indicated that there may be situations in which a third-party platform ban is not necessary. In this context, the judges noted that the ECJ had probably not taken into account that platform distribution plays a far greater role in Germany than in the other EU member states.

Luxury image: Consumer views, marketing and placement are relevant

In regard to the question regarding when a product actually possesses a luxury image, the ruling states that the consumer's view is decisive. Only when he perceives and values the product's "luxurious" profile is it in his interest that this quality be protected. The court made other observations including: a product's luxury image is largely based on the manufacturer's corresponding marketing activities. The manufacturer can define a product through marketing measures and instill a connotation understood by the customers, which goes beyond the purely functional meaning of the product, and is essential to product differentiation.

Another basis for establishing a product's luxury character is its placement in a high-quality market segment (e.g. by distributing it in a distinct channel separate from "mass-produced goods".) In this context, selective distribution is an element characterising luxury and prestige. It is the brand owner's decision whether to formulate a luxury claim for certain brands and develop it appropriately. The judges further stated that the overall luxury image associated with a product line would not be impaired if other individual products in this line did not meet a high-priced criteria.

Third-party platform bans can be exempted

As a result, the Metro case law did not matter. In any case, the exemption under Article 101 (3) TFEU and the VBER applied. A platform ban does not partition markets or customers. It regulates in which form a trader may sell, but not to whom he may sell. Therefore, there is no hardcore restriction. This assessment was made by the court without reference to the luxury image and selective distribution. In the opinion of the Higher Regional Court of Frankfurt, this means that third-party platform bans can easily be exempted.

The judges' ruling is in line with the opinion of the European Commission (EC), but contradicts the German Federal Cartel Office’s first Twitter reaction to the ECJ's decision in the Coty case that the ruling will only have a limited impact on its practice and that brand manufacturers have not received carte blanche to issue blanket platform bans. A welcome headwind came from the EC. Following the Coty ruling, the EC took the view there was no need to distinguish between product categories on the question of whether third-party platform bans are hardcore restrictions within the meaning of the VBER (Competition Policy Brief 2018-01). In contrast, in its decision in the Asics case (No. KVZ 41/17) the German Federal Court of Justice declared price comparison tools to be undoubtedly unlawful.

OLG Hamburg: Third-party platform bans permissible for non-luxury goods

The Higher Regional Court of Hamburg also assumes that third-party platform bans are admissible for non-luxury goods. On 22 March 2018, the judges ruled that a manufacturer of high-quality food supplements, cosmetics, fitness drinks and toiletries with a market-specific image may effectively prohibit distributors from selling through certain online sales platforms. The judgment extended the Coty ruling to non-luxury products (see our blog article of 6 June 2018).

Relevance for branded products without a luxury image

The judgment of the Higher Regional Court of Frankfurt could have been foreseen in the ECJ's guidelines. The Frankfurt judges referred to the narrow framework that the ECJ had set for them. In regard to the proportionality of the platform ban in the sense of Metro case law, they wondered – in view of the ECJ's detailed consideration – whether they were still authorised to make their own assessment while taking further arguments into account. They were able to leave this question undecided by resolving the case with reference to the VBER.

Particularly helpful are the fundamental indications the Higher Regional Court of Frankfurt provides to practitioners regarding how to distinguish between luxury and non-luxury goods. This distinction still seems relevant. As mentioned, the interplay between the product category in question,  the Metro case criteria and the VBER is not entirely worked out. The German Federal Cartel Office and the EC seem to have expressed different views on this matter.

For more information on this eAlert and how the case law described here can affect your business, please contact the authors.