June 2018

Legal Update: Combatting the Grey Market: Manufacturers of Luxury Goods May Have New Options


On December 6, 2017, the European Court of Justice (“CJEU”) issued a landmark decision that could allow manufacturers of luxury products to restrict the sale of their goods on online marketplaces, such as Amazon or eBay.

This decision could act as a powerful tool for manufacturers of luxury goods to combat the grey market and infringement on online marketplaces.

Context and questions raised to the Court

The dispute arose between Coty Germany GmbH, a manufacturer and supplier of luxury cosmetics established in Germany, and Parfümerie Akzente GmbH, one of their authorized distributors, over the interpretation of their selective distribution agreement. In its selective distribution contract, Coty specifically required its distributor to limit their online sales to a fully owned “electronic shop window” so as to “preserve the luxury character of the product” and reserved the right “to prohibit {its} authorized retailer to use a different name or to engage a third-party undertaking which is not an authorized retailer of Coty.” In practice, this was equivalent to prohibiting the sale by its distributors of any of their products on any third-party online marketplace, such as Amazon or eBay.

When Parfümerie Akzente refused to sign the clauses, Coty brought an action before the German national court in Frankfurt, seeking an order prohibiting the distributor from selling the products on amazon.de.

In July 2014, the court dismissed the action on the ground that the provision in the selective distribution agreement violates Art. 101 (1) TFEU (Treaty on the Functioning of the European Union). In line with the EUCJ Fabre decision in 2009, the court found that the purpose of supporting and maintaining the luxury image of its brands did not justify the selective distribution system and this anti-competitive provision. Further, the court found the clause to be a “hardcore restriction” pursuant to Article 4 (c) Regulation No 330/2010.

Coty brought an appeal to the Higher Regional Court of Frankfurt, who decided to refer the dispute to the EUCJ with the following questions:

  1. Are selective distribution systems with the purpose to protect a luxury image compatible with Article 101 (1) TFEU?
  2. Are clauses in the selective distribution agreement that prohibit the authorized retailer from engaging third-party undertakings to handle internet sales compatible with Art. 101 (1) TFEU?
  3. Does this prohibition clause on authorized retailers from selling on third-party internet websites constitute a “hardcore restriction” under Article 4 (b) and (c) of Regulation No 330/2010?

Court’s judgment

In regards to the first question, the court stated that a selective distribution system for luxury goods, designed primarily to ensure the luxury image of those goods, does not violate Art. 101 (1) TFEU if the following elements are met: (1) resellers are chosen on the basis of objective criteria of a qualitative nature, (2) laid down uniformly for all potential resellers, (3) these criteria are applied in a non-discriminatory fashion, (4) the characteristics of the product in question necessitate such a network in order to preserve its quality and ensure its proper use, and (5) the criteria laid down do not go beyond what is necessary.1

In this instance, the court focused on whether such a system was necessary to ensure the luxury image of the goods. The court stated that the luxury image came not only from the material characteristics of the product, but also from the prestigious image and the luxury aura of the product. The Court found that such aura/reputation may be impaired if the right holders were not able to control or restrict the distribution of their products on unauthorized third-party websites.2 As a result, the court ruled that the agreement was appropriate and did not go beyond what was necessary in the light of the sought after purpose.

In regards to the second question, the court found that the same principles apply. The main question was whether the specific clause is appropriate and proportionate to accomplish the preservation of the luxury image of the goods. The court found that Coty’s third-party sale restriction provided the business with a guarantee that the goods will only be associated with their selected and authorized distributors and that such a provision enables the business to control the conditions under which the products will be sold online.3 Further, the court considered that this specific provision also provided right holders with an opportunity to take actions against their distributors for non-compliance, while they did not have such an option with third-parties such as online marketplaces, since they don’t have any contractual relationship with these third-party sellers.4 Finally, the court found that the sale of luxury products on a platform which sells all kind of goods may have the effect of diminishing the image of luxury among consumers, which is an argument that the Court had generally rejected until now.5

The third question involved the issue of whether the selective distribution agreement, including this specific limitation, could benefit from an exemption under Article 2 of the Regulation No. 330/2010 or whether such an exemption could not apply because the clauses constituted a hardcore restriction, either because it was limiting the seller’s ability to serve specific customers (Article 4 (b) of the Regulation) or because it was limiting its ability to respond to passive sales to end users (Article 4 (c) of the Regulation).

The court found that the clause did not constitute a hardcore restriction for the following reasons: (1) “the clause does not prohibit the use of the internet as means of marketing the goods” but only the sale of goods by unauthorized third-party distributors on their online platforms, (2) “it does not appear possible to circumscribe, within the group of online purchasers, third-party platforms,” and (3) the selective distribution agreement “allows authorized distributors to advertise via the internet on third-party platforms and to use online search engines, with the result that passive sales are not restricted.”6

Difference to previous decision in Fabre

This court decision appears to be a departure from what the court had found in its previous decision in Fabre7 and is a real win for any right holders or manufacturers in the luxury industry.

In Fabre, the court had ruled that the need to preserve the prestigious image of cosmetic and body hygiene goods was not a legitimate objective for the purpose of justifying a comprehensive ban on the internet sale of such goods. Without overruling Fabre, the Court in Coty found that the principles above are not meant to be such that the preservation of a luxury image cannot be a legitimate objective to justify a restriction on unauthorized third-party internet sale.8

However the court added that its findings should be read and interpreted in the light of the context of the Fabre decision.9 The main difference between these two cases is that in Fabre, the goods covered by the selective distribution system were not luxury goods, but cosmetics and body hygiene goods. Further, in Fabre, the court dealt with an outright ban on online sales in a selective distribution network, which it found anti-competitive; in Coty, the sale ban was limited to third-party online marketplaces, while the sale of luxury products on the distributors’ own platform was expressly authorized under the contract.

Impact of this decision for companies in the luxury industry

Pursuant to this decision, as long as the objective of the selective distribution system is to preserve the luxury image of the product and the conditions are necessary and appropriate to accomplish the objective, clauses limiting the sale of luxury products on third-party online marketplaces, such as the one found in Coty, should be held valid under EU competition law.

This decision could have a major impact on manufacturers and right holders in the luxury industry as it should not only allow them to control the distribution of their products, but also restrict the sale of their goods on online marketplaces where they often encounter massive grey market and infringement issues.

It remains to be seen whether right holders in the luxury industry will try to enforce this decision on a larger scale, or if the stream of revenue coming from the distribution of their products on these online marketplaces has become so essential to their business that they will forgo implementing this decision and embrace unrestricted online distribution with its inherent risks and advantages.

If you have any questions about this Legal Update, please contact Beatrice Martinet

[1] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 24.
[2] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 25.
[3] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 47.
[4] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 48.
[5] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 50.
[6] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 65, 66, 67.
[7] EUCJ Judgment of October 13, 2011, Pierre Fabre Dermo-Cosmétique (C‑439/09).
[8] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 34, 35.
[9] EUCJ Judgment of December 6, 2017, Coty Germany (C-230/16) paragraph 31.