Selective networks are the result of selective distribution agreements concluded between suppliers and dealers, through which companies wishing to distribute their products set out certain criteria for the intermediaries.
By Andreea Micu, Partner and Ramona Badescu, Associate, STOICA&Asociatii
Selective distribution is a very useful instrument for brands which create high-end items or luxury products, such as jewellery, premium watches, cosmetics, leather goods, high-end cars or hi-fi sound systems. Allowing an increased control over their image and reputation, this contractual tool entitles companies to distribute their luxury products only to certain dealers that satisfy their requirements in terms of prestige, features of the sales location, advertising or product accessibility.
However, the selection of some dealers means the exclusion of others, with the effect of limiting intra-brand competition on the market. This is why the selective distribution agreements, included in the general category of vertical agreements, are highly supervised by the European provisions regarding competition law.
According to the EU legislation, any agreements and any concerted practices between companies, susceptible to affect trade between member-states and whose object or effect is to limit or alter competition inside the common market of the European Union, are prohibited. Exceptionally, selective distribution agreements for goods that request a certain type of intermediaries (e.g. for luxury goods) are allowed, on the condition that dealers are selected solely on the basis of qualitative criteria. Moreover, the application of such criteria must be non-discriminatory and proportionate to the objective of ensuring that the goods are distributed under appropriate conditions.
Taking into consideration the impact of the new digitalized era and the increasing importance of online commerce, the system of selective distribution applied by the companies offering luxury goods is facing real struggles: on one hand, luxury brands seek to preserve the prestigious image of their products through a selected network of reputed dealers with highly-equipped points of sale, while, on the other hand, the same luxury brands envisage to widen their access to customers through online sales which, however, might not be able to offer them the same guarantees of prestige.
This is the reason for which the producer Pierre Fabre Dermo-Cosmetique (‘PFDC”) chose to insert a clause in the selective distribution agreements concluded with its dealers which prohibited any online sales of the PFDC products, in order to preserve the prestigious brand image and to be able to provide the customers with personal advice. In 2011, in a case brought before the Court of Justice of the European Union (CJEU) against PFDC, the Court considered that an absolute prohibition of any internet sales constitutes a restriction to the competition on the common market, if such clause could not be objectively justified. Further, the CJEU highlighted that neither the necessity to provide customers with personal advice nor the requirements of protection of the brand’s image represent a legitimate purpose justifying for such a clause. Therefore, the contractual clause, which severely restricted passive sales to end-users outside the territory of the suppliers, was prohibited by EU competition law.
The CJEU ruling gave birth to serious concerns for luxury brands, which feared that the interpretation of competition law provisions would actually compel them to consent to the sale of their products by dealers to platforms like Amazon or E-bay, which could, in some cases, affect their prestigious image.
Fortunately, on the 6th December 2017, the CJEU has issued a new ruling on the topic, which brings valuable clarifications regarding the selective distribution and the online sale of luxury cosmetics.
Coty Germany GmbH is a luxury cosmetics supplier which concluded several selective distribution agreements with its dealers, through which it allowed them to offer and sell its products on the internet. However, the internet sales had to be conducted through ”electronic shop windows”, which preserved the luxury character of the products and belonged to Coty’s dealers or to other third parties’ platforms that were not visible to the customers. One of Coty’s dealers refused to accept this clause and started reselling Coty’s products on Amazon’s platform, which determined Coty to file a court claim in view of stopping the online sales initiated by the dealer. In the context of these proceedings, the CJEU was requested to clarify the interpretation of the relevant EU law.
According to CJEU’s decision in the Coty case, a selective distribution system designed, primarily, to preserve the luxury image of goods, is permitted by the EU competition law, to the extent that resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion, that the characteristics of the product in question necessitate such a network in order to preserve its quality and that the criteria laid down do not go beyond what is necessary in order to preserve the quality.
In addition, a contractual clause which prohibits authorised distributors in a selective distribution system for luxury goods from using, in a discernible manner, third-party platforms for the internet sales of the contract goods, is coherent with the EU competition law, provided that the clause has the objective of preserving the luxury image of those goods, that it is laid down uniformly and not applied in a discriminatory manner and that it is proportionate in the light of the objective pursued. Proportionality must be understood in the context of electronic commerce and refers to the necessity to offer the supplier a guarantee in terms of the conditions in which the goods are sold, the preservation of the luxury image of the goods and the quality of the selective network which sells such goods.
In order to rule such a decision, the CJEU was influenced, also, by the fact that Coty Germany GmbH did not prohibit entirely the internet sales, but only the sales through visible third platforms.
In conclusion, according to the latest developments in European case-law, luxury brands can forbid the online sales of their products through third parties’ platforms, if the legal requirements described above are met.
The CJEU ruling brings a more flexible approach on the restrictions of the internet sales in the selective distribution system of luxury products, in a legal frame which must be continuously adapted to the new digitalised era.
In Romania, the market of luxury products is constantly evolving and therefore, a special attention should be given to any new European case-law which brings additional criteria for the interpretation of the relevant competition law provisions. Therefore, do not forget to enjoy luxury wisely!
STOICA&Asociatii is specialized in legal assistance and representation regarding mergers and acquisitions, joint-ventures, horizontal and vertical anti-competitive agreements, abuse of dominant position, state aid, both in front of the Competition Council and the national courts.
Over the years, its lawyers were constantly involved in administrative procedures regarding the investigation of competition law breaches, as well as in litigations in connection with the annulment and suspension of the sanctioning decisions issued by the competent national authorities. STOICA&Asociatii also provides tailored legal advice in relation to different types of commercial contracts, negotiations and exchanges with enterprises acting on the same or related market, as well as in relation to the implementation of distribution structures and pricing policies in compliance with competition rules.