Selective distribution agreements for luxury products and the ban to sell on online marketplaces. : How has the Coty case changed the views on this issue?

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Selective distribution agreements for luxury

products and the ban to sell on online

marketplaces.

How has the Coty case changed the views on this

issue?

Andrea Gil Gaspar 08/01/2018 E-mail: andreagilgaspargmail.com Student number: 11312343 Master track: Competition law Name of supervisor: René Smits University of Amsterdam

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ABSTRACT

E-commerce has evolved rapidly these last past years bringing new competition concerns in the European market. The Commission started an investigation in this sector (e-commerce) in order to detect any competition law breaches on the European online market since they were unsure about it. One of the main findings of this sector inquiry was the fact that even though a lot of Europeans buy online, only 15% do it outside their Member State which is rare. This led the Commission to think that some firms may be threatening cross-border trade.

The fashion and luxury sector is big in Europe. Recently the presence online of fashion firms online has grown significantly, being this one of their main distribution channels. However, luxury firms seem to be reticent to open their online shops, this is mainly due to their protective selective distribution systems.

These restrictive selective distribution systems usually contain certain requirements or prohibitions to their authorised distributors in order to protect their image. The main cases of study in this thesis are the Pierre Fabre and the Coty case which are both based on the same issue, the ban of online sales via third party platforms. The jurisprudence regarding this has been inconsistent, which also affected national European courts, until the Coty case judgement this past December clarified it. However, the Court has left certain overly broad points and that will need further clarification in the future.

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1. Creating a digital European single market. The Commission’s

e-commerce sector inquiry main competition concerns on

consumer goods.

One of the basic pillars of the European Treaties is the free movement of goods and the European institutions have worked hard to achieve it. However, with the development of the digital market in the European Union, new situations have raised. E-commerce has grown at a high speed these recent past years, and according to the Ecommerce Europe, EuroCommerce and the Ecommerce Foundation in the European Ecommerce Report 2017, it is supposed to increase 19% this year in respect to last year and reach 602 billion euro turnover1.2 Therefore, it has become an essential part of commerce within the EU. The aim of the Commission now is to create a common digital single market where all the Europeans can trade freely, such as it is stated in the Treaties. In a press release Margaret Vestager shared important data regarding e-commerce nowadays: ‘A lot of Europeans buy products online everyday, however, only 15% have

bought something from a seller based in another EU Member State.’ She then

highlighted a number of reasons why this could be happening, such as language barriers, different consumer preferences, technical barriers that companies create for example, geo-blocking or restrictions created by agreements between manufacturers and distributors.3 These situations jeopardize cross-border commerce and European consumers and something has to be done. Therefore, the Commission with the E-commerce sector inquiry wanted to research what are the competition problems in the digital market as well as what makes cross- border online trade difficult.

1.1 Competition problems that may raise online:

a) Regarding selective distribution systems: the e-commerce Sector Inquiry has not

changed the general approach of the Commission towards them. However, when it

1_{Europe has a 25.64 percent share, with a ecommerce turnover of about 400 billion euros. 'Ecommerce In}

Europe Grows 19 Percent In 2017' (ecommercenews.eu, 2017) <https://ecommercenews.eu/ecommerce-europe-grows-19-percent-2017/> accessed 20 October 2017.

2_{E- commerce news, 'E-commerce in Europe: €602 billion in 2017' (Ecommercenewseu, 26 june}

2017) <https://ecommercenews.eu/ecommerce-europe-e602-billion-2017/>accessed 20 October 2017

3_{European Commission, Press release of 6 May 2015, Antitrust: Commission launches e-commerce}

sector inquiry, IP/15/4921 <http://europa.eu/rapid/press-release_IP-15-4921_en.htm> accessed 15

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comes to online commerce, these distribution systems may facilitate the implementation of certain vertical restrains that in fact, may raise competition concerns.4

Selective distribution agreements are generally covered by the Vertical Block Exemption Regulation (hereinafter ‘VBER’)5 as long as they are within the parameters established. However when they are exclusively used in order to exclude other online players from the selective distribution network without any valid justifications, they are in breach of competition law.6

b) Restrictions on selling and advertising online: as shown in the graph7the proportion of retailers with contract limitations online is big, especially with pricing limitations/recommendations. These kind of limitations are usually aimed at preserving a distribution system in accordance to the product they are selling, and do not harm competition. However the problems rise when they are directly aimed at restricting competition.

• Pricing restrictions/recommendations: This is by far the most extended practice in the EU’s digital market. Manufacturers should let retailers set their own prices without making a recommended retail price or establishing a maximum, minimum or fixed retail price. Any agreement that contains these pricing restrictions is against competition law, and listed as a hard-core restriction from Article 4(a) of the VBER8 and a restriction of competition by object under 101(1) TFEU.9 The Commission has not enforced a single resale price maintenance (hereinafter ‘RPM’) case over the past few years, but now with the era of e-commerce this has changed and now it is widespread throughout the EU.10 This is mainly because firms now use pricing software which identifies retailer’s deviations from

4_{European Commission, Report from the Commission to the Council and the European Parliament. Final}

report on the the E-commerce Sector Inquiry. Brussels, 10 May 2017. Para. 25

5_{Commission Regulation 330/2010 on the application of Article 101(3) of the Treaty on the Functioning}

of the European Union to categories of vertical agreements and concerted practices [2010] OJ L 102

6 _{Final report on the the E-commerce Sector Inquiry [2017] paras. 26-27, ibid. 4}

7_{Attachment 1, pag. 49}

8_{Commission Regulation 330/2010 [2010] ibid. 5}

9_{Final report on the the E-commerce Sector Inquiry [2017] para. 30, ibid 4}

10_{Yves Botteman, Jean-Nicolas Maillard, Camille Keres and Chiara Conte, 'Online Distribution Practices}

Under EU Fire: Are You Ready?' (Lexologycom, 19 June 2017)

<https://www.lexology.com/library/detail.aspx?g=dc7d80fb-6049-4ba0-9b15-1441b36a4b1f> accessed 23 October 2017

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manufacturers pricing recommendations. The main disadvantage of this is that manufacturers can now easily exclude distributors which deviate from the desired price level.11

• Restrictions on selling on online marketplaces: this focuses on the ability of retailers to sell the products via online marketplaces (e.g. Amazon). 12 This has grown more importance over the past last years, witch cases such as Pierre Fabre

1314_{or the recent Coty}15_{judgement. These restrictions generally occur in selective}

distribution systems that concern branded/ luxury goods. The Commission’s findings on this matter are that the importance of these bans to sell on online marketplaces depend on the size of the retailers, the Member State concerned and the categories of products concerned.

Additionally, the Commission stated in the Inquiry that ‘marketplace bans do not

generally amount to a de facto prohibition on selling online or restrict the effective use of the internet as a sales channel irrespective of the markets concerned.’16

• Geographic restrictions to sell and advertise online: with the expansion of e-commerce, buyers may find it easier to purchase goods online from another Member State instead of travelling to a different country to buy the product in a brick and mortar store.17 However, this is sometimes not possible, due to certain limitations. These limitations are referred as geo- blocking,18and it concerns three different kinds of practices that are as follow:

11_{Final report on the E-commerce Sector Inquiry [2017] para. 33, ibid. 4}

12_{Final report on the E-commerce Sector Inquiry [2017], ibid. 4}

13_{European Commission, 'Summaries Of Important Judgements: C-439/09 Pierre Fabre Dermo}

Cosmétique SAS, Judgment Of 13 October 2011' (ec.europa.eu, 2012)

<http://ec.europa.eu/dgs/legal_service/arrets/09c439_en.pdf> accessed 11 November 2017.

14_{C- 439/09, Pierre Fabre Dermo Cosmétique SAS v Président de l’Autorité de la concurrence y Ministre}

de l’Économie, de l’Industrie et de l’Emploi [2011] ECLI:EU:C:2011:649 see point 5.2 b) for the judgement

15_{Case C-230/16, Coty Germany GmbH v Parfümerie Akzente GmbH [2017] EU:C:2017:603 see point}

5.3 for the judgement

18_{“Geo-blocking refers to commercial practices whereby online providers prevent users from accessing}

and purchasing consumer goods/digital content services offered on their website based on the location of the user in a Member State different from that of the provider.” European Union: European Commission, Commission staff working document: Geo-blocking practices in e-commerce, 18 March 2016, SWD

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a) Blocking Access to websites of users located in another Member State

b) Automatic re-routing users to another website (from the country where they are accessing) and sometimes with different prices

c) Delivery and or payment refusals based on the location of the buyer19 These territorial restrictions may bring competition concerns.

- Contractual restrictions that establish the territory where a distributor can sell the products, are hardcore restrictions under the VBER.20 These are however, distinguished between active and passive sales restrictions in which the first ones are generally allowed if they fulfil certain requirements and the latter are normally unlawful.

- Restrictions that limit authorised retailers the ability to actively or passively sell to customers outside their member state, may also bring competition concerns. 21

Some members from selective distribution agreements may be exempted from selling to all customers within the territory where the selective distribution agreement is applied. This is a restriction which may definitely jeopardize retailers.

1.2 How will this inquiry change the way competition is in the digital market?

New concerns have emerged in online commerce different from the competition concerns that already existed before. The Commission wants to make sure now that all the aspects of competition law are being observed by all the sellers online and that all the obstacles that may occur in trading between the different member states will disappear soon. Consequently, the Commission has two main objectives after publishing this report. On the one hand, they will target the enforcement of the European Union’s competition rules22 in order to make sure the Single Digital Market functions properly and with no restrictions to trade. On the other hand, the

19_{Final report on the E-commerce Sector Inquiry [2017] paras. 46-49, ibid. 4}

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Commission has the aim to communicate broadly with national competition authorities in order to achieve a consistent application of EU competition rules in e-commerce.23

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2. How have the internet and e-commerce changed the fashion

and luxury sector in the recent years?

The fashion and luxury sector has a long supply chain that starts from the fibres, then fabric formation to garmenting, designing and retailing. Some years ago this industry was more locally oriented meaning that the products were created nearby the consumer’s market. However, from the 1990’s and early 2000’s the industry has experienced a huge change. Most fashion and luxury firms now use the Internet as a distribution channel which makes them more efficient as well as saving costs and reaching to a bigger range of possible buyers.24 The main systems they use to distribute their products are as follow:

• Online market places: Online market places are usually known as the department stores of the internet. While having their own name and distributors, they sell other brand’s products on their website. This way, they are visible to a bigger number of customers while at the same time they gain their own loyal clients. Marketplaces have the benefit that consumers do not have to download multiple apps or go to different websites to check for a product, they can find a big range of products from different brands in just one click. However, the disadvantage is that sometimes the information about the product is not as detailed as it could be in a more specialised web-shop or the aesthetics of the website is not compatible with the product that is being sold. 25 An example of a luxury fashion online marketplace is Farfetch. Farfetch is a company that sells luxury branded goods such as bags, or shoes or high designer clothes. Certain luxury brands like Gucci or Fendi use this platform to reach to a higher number of consumers. However, luxury brands are usually the most reticent to sell on online marketplaces, with the excuse that they have to maintain their luxury brand image.

24_{Christian Schindler, 'The Effect Of E-Commerce On The Fashion Supply Chain' (credit-suisse.com,}

2016) <http://The Effect of E-Commerce on the Fashion Supply Chain> accessed 9 October 2017.

25_{Richard Kestenbaum, 'What Are Online Marketplaces And What Is Their Future?' (forbes.com, 2017)}

<https://www.forbes.com/sites/richardkestenbaum/2017/04/26/what-are-online-marketplaces-and-what-is-their-future/#1b20ce03284b> accessed 18 October 2017.

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• From the brick and mortar shop to the online shop: this is the model most fashion brands use. It combines online and offline resources for better efficiencies. Usually these brands are vertically integrated which means that they own all the steps from production to distribution. Also, when they sell online, the manufacturer is directly selling the product, without the need of any retailers. An example of this is Zara. Zara is part of the Inditex group and they are widely known for their vertical integration model, they manage their own supply chain, organise its own designs, manufacture the products, and also manage the selling and delivery operations. They launch thousands of new products every season making it difficult for their rivals to catch up with them.26

• Exclusive online brands: these are online brands that are only sold online and they do not have brick and mortar shops. An example is Loavies a small Dutch clothing brand. They do not have brick and mortar stores and buyers can exclusively buy their clothes through their website. Online shops have the advantage that they are totally vertically integrated and they save a lot of costs since the manufacturer sells directly to the consumer without depending on distributors or other intermediates in the supply chain.

Consumer behaviour has changed with technology, now consumers have thousands of products they can choose from at only one click. Therefore, fashion brands had to adapt to this rapid changing market in which consumers wish plenty of options to choose from at a very fast pace. Brands like Versace for example, seemed to get this idea and as Donatella Versace announced ‘We started with a revolution at Versus Versace,

transforming it into a ‘see-now, buy-now, wear-now’ brand. It has been the most extraordinary success, finding a whole new audience who lives their lives online. For my most recent women’s wear collection, we put the sequined leopard-print Palazzo backpacks in some key Versace flagships and ecommerce, because I wanted our customers to get a taste of the catwalk right now. Why should they wait till next season? I believe rules are there to be broken.’27_{Versace by implementing this ‘see-now,}

buy-

26_{Michael McDonnell, 'Evolution Of E-Commerce In The Fashion Industry: F-Commerce' (University,}

University College Dublin 2017).

27_{Wallace Tracey, 'Retail, Fashion, Tech: The Rise Of Haute Couture For The Modern Consumer'}

(bigcommerce.com) <https://www.bigcommerce.com/blog/retail-fashion-tech-the-rise-of-haute-couture-for-the-modern-consumer/> accessed 15 October 2017.

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now, wear-now’ concept could perfectly adapt to this changing world and rapidly fulfil

their clients needs making them a leader company in the fashion sector.

2.1 The e-commerce sector inquiry and its repercussion in the luxury and fashion industry

Out of all the categories of products offered online, clothing, shoes and other fashion accessories are the most sold. Therefore, in the sector inquiry investigation, the Commission revealed that those products are the ones that brought more competition concerns.28 This may be caused by the recent growth of fashion brands in the online market. Due to this rapid grow and the fast development of the online market with the increase of online price transparency and price competition, the brands’ distribution strategies and behaviour on the market made a significant impact.

The Commission identified in the inquiry some market trends in consumer goods, which are as follow:

- Increased use of selective distribution systems, where only pre-authorised resellers, who fulfil certain requisites established by the brand, are able to sell the product. 29 This is helpful for manufacturers that can have more control over the retailers and over the quality and price of their products when sold online. However, this usually comes with contractual restrictions that may be against competition law and therefore do not benefit consumers.

- Increased use of contractual restrictions such as pricing restrictions, market place selling bans, restrictions on the use of price comparison tools or exclusion of online competitors from distribution networks. While some of these practices may be justified

28_{Francesco Carloni and Alessandro di Mario 'Key antitrust enforcement trends in the fashion industry in}

Europe' (Luxurylawalliancecom, 23 February

2017)<http://www.luxurylawalliance.com/news-features/key-antitrust-enforcement-trends-in-the-fashion-industry-in-europe/1387489779> accessed 1

November 2017

29_{Bertold Bär-Bouyssière, 'E-Commerce Inquiry May Affect The Fashion Sector' (dlapiper.com, 2015)}

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in order to maintain the quality and image of the product (see Coty case for example30), most of them jeopardize consumers. 31

- Increase of competition, since manufacturers started selling their products directly on their own online retail shops, and therefore, competing with their distributors. 32 This may result in barriers of entry from manufacturers or vice versa, and it may bring also the creation of anticompetitive agreements.

Usually when the Commission does a Sector Inquiry is because they have previous suspicions of anticompetitive behaviour that may be happening in a certain sector. Consequently, the Commission wanted to make sure that all the brands come into terms with competition law so they do not have to open a case against them.

2.2 How will the sector inquiry affect the luxury and fashion industry?

The Commission declared in a press release that ‘Certain practices by companies in

e-commerce markets may restrict competition by unduly limiting how products are distributed throughout the EU. Our report confirms that. These restrictions could limit consumer choice and prevent lower prices online.’33 They specifically targeted fashion and luxury brands and urged them to ‘(…) review their current distribution contracts

and bring them in line with EU competition rules if they are not.’ 34_{before they have to}

open a formal investigation. 35_{They specifically targeted certain fashion brands such as}

Mango, Oysho, Pull& Bear, Dorothy Perkins and Topman.

Furthermore, the Commission opened a formal investigation into the distribution practices of Guess, a well-known fashion and luxury brand. The investigation is focused on Guess’ distribution agreements that may restrict authorised retailers from selling to

30_{Coty Germany Judgement [2017] ibid.15, The European Court of Justice ruled in Coty that a supplier}

of luxury goods can prohibit its authorised distributors to sell their goods on third-party platform. See point 5.3 B) of this thesis.

31_{Commission staff working document: Geo-blocking practices in e-commerce [2016] ibid. 18}

32_{Commission staff working document: Geo-blocking practices in e-commerce [2016] ibid. 18}

33_{European Commission, Press release of 10 May 2017, Antitrust: Commission publishes final report on}

e-commerce sector inquiry, IP/17/1261 <http://europa.eu/rapid/press-release_IP-17-1261_en.htm> accessed 30 October 2017

34_{Margarethe Vestager, 'Competition And The Digital Single Market' (Paris, 2016)}

<https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/competition-and-digital-single-market_en> accessed 28 October 2017

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consumers or to other retailers online, that live in a different Member State. These restrictions limit the ability to sell online and this is in breach of EU competition law (article 101 TFEU).36

Consequently, with the on-going investigation of Guess and the declarations of the European Commission targeting other fashion brands, the Sector Inquiry has already had an impact on fashion and luxury brands.

36_{European Commission, 'Antitrust: Commission Opens Formal Investigation Into Distribution Practices}

Of Clothing Company Guess' (2017) <http://europa.eu/rapid/press-release_IP-17-1549_en.htm> accessed 2 January 2018.

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3. Is the fashion and luxury sector anticompetitive?

According to the European Commission the fashion and high-end sector plays an important role in the European Union’s industry by employing directly 5 million and 1 million people respectively and being one of the biggest exports in the EU.37 It is also one of the most important consumer goods markets, experiencing a continuous and steady growth.

The nature of the fashion and luxury industry is that consumer preferences change very quick. Therefore, with these changing needs, the fashion industry needs to focus on innovating and developing new products to fulfil the needs and demands of consumers. National and European competition authorities have not investigated too much in this sector until these past recent years. In March 2015 the Competition and Markets Authority (the competition authority in the United Kingdom) announced that they were starting an investigation in the United Kingdom’s (hereinafter ‘UK’) fashion sector, suspecting anti-competitive behaviour that could breach UK and European Union’s competition law. The investigation’s outcome was that FM Models, Models 1, Strom and Viva and their trade association The Association of Model Agents (all modelling agencies) were colluding. The CMA found out that they were exchanging confidential information in order to obtain more lucrative deals for their models and of course, themselves. Therefore, the CMA classified those agreements as a horizontal cartel for the purposes of paragraph 78 of the Effect on Trade Guidelines and contrary to 101(1) TFEU38 (para. 4.140 of the Decision of the Competition and Markets Authority)39. This case seemed to lead other national competition authorities to have a look at their own fashion and high- end sector. Consequently, in France, French competition authorities found out that several top modelling agencies were involved in a scheme in which they were drawing up and enforcing its pricing guides for campaigns and fashion

37_{European Commission, 'Fashion and high-end industries in the}

EU' (Eceuropaeu) <https://ec.europa.eu/growth/sectors/fashion/high-end-industries/eu_en>accessed 14 October 2017

38_{Consolidated Version of the Treaty on the Functioning of the European Union [2008] O.J. C 115/47}

[hereinafter TFEU].

39_{Decision of the Competition and Markets Authority: Conduct in the modelling sector [2016]}

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shows, with little or no room for negotiation. The agencies were having secret meetings to fix those prices. Consequently, this was in violation of French law and European law and the agencies were collectively fined over 2.7 million euro.

Additionally, Italy opened an investigation in March 2015, in which the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato) investigated eight companies which were in the model agency services and their relationship with Assem, the association who represents them, alleging confidential information exchanges, coordination of contractual and membership conditions and price fixing.40 Consequently, the fashion and luxury sector seems to be now on the eyes of the Commission and it will definitely be affected after these investigations.

3.1 Are vertical agreements and mergers making the fashion and luxury sector anticompetitive?

The main competitive concerns under 101(1) TFEU in the luxury fashion industry are vertical agreements41. The fashion industry is shifting rapidly to a model of vertical integration, which can lead to more efficiencies such as cutting costs since they do not outsource any channel, cutting times which is essential in fast fashion or avoiding conflicts that may emerge from different channels. However, it can also carry competition concerns such as foreclosure in the market or mergers that create dominant positions in the market amongst others.42

Mergers have also attracted the attention of the Commission lately. An example of this is the merger between Essilor and Luxottica. The EU Commission opened an investigation in the beginning of 2017 to assess the proposed merger between those two firms. On the one hand Luxottica is a company which owns almost 80% of the eyeglasses industry in Europe and has the rights to design, manufacture, and distribute eyewear of luxury brands including Burberry, Prada, Chanel, Miu Miu, and Versace

40_{Bertold Bär-Bouyssière [2015] ibid. 29}

41_{“(…) an agreement or concerted practice entered into between two or more undertakings each of}

which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services" European Commission Notice - Guidelines on Vertical Restraints

[2010] Official Journal C 291, 13.10.2000, p. 1-44 OJ C 291

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but also owns Ray-ban and Oliver Peoples. On the other hand, Essilor is the largest supplier of ophthalmic lenses, both worldwide and in Europe. This merger would create the strongest firm in the European Union’s market, therefore, the Commission decided to start the investigation to see if the ‘merged entity may use Luxottica's powerful

brands to convince opticians to buy Essilor lenses and exclude other lens suppliers from the markets.’ Since this merger could lead to raising prices or limiting purchasing

options for consumers. 43

The investigation is suspended for now after the companies failed to provide the requested data.44 However, the fact that two big firms merge and become the largest supplier of lenses in Europe may probably bring competition concerns in the eyes of the Commission.

43_{European Commission, 'Mergers: Commission Opens In-Depth Investigation Into Proposed Merger}

Between Essilor And Luxottica' (2017) <http://europa.eu/rapid/press-release_IP-17-3481_en.htm> accessed 5 October 2017.

44_{Foo Yun Che, 'UPDATE 1-EU Regulators Suspend Luxottica, Essilor Probe, Await Data' (reuters.com,}

2017) <https://www.reuters.com/article/luxottica-group-ma-essilor-eu/update-1-eu-regulators-suspend-luxottica-essilor-probe-await-data-idUSL8N1N966Q> accessed 2 January 2018.

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4. Restrictions on selling online, is this a new trend for luxury

brands?

4.1 Luxury fashion brands and selective distribution agreements

Luxury products are well known for their high quality and distinct design. Consumers value the luxury feel of the goods and they buy them not only to enhance their self-perception but also the one they project to others45. The image of the brand is therefore a crucial part of the product, thus, they highly invest in advertising, promotions and other factors in order to preserve that luxurious perception. What consumers value the most about buying these products is the experience. Buying a luxury product is not only choosing the product and paying, but also, the attention received and the extra help given in order to find the perfect match of the product with the consumer. This is what consumers that buy luxury goods are mainly looking for, and therefore, where the luxury brands have to invest in. 46

This approach has also appeared in European case law. In the judgement Copad v

Dior47 the European Court of Justice (hereinafter ‘ECJ’) in its paragraph 25 held that ‘the quality of such goods is not just the result of their material characteristics, but also

of the allure and prestigious image which bestow on them an aura of luxury, that that aura is essential in that it enables consumers to distinguish them from similar goods and, therefore, that an impairment to that aura of luxury is likely to affect the actual quality of those goods’48, confirming then that a luxury product is not because it only has good quality materials, but also because of other external factors.

45_{CRA International, 'Selective Distribution Of Luxury Goods In The Age Of E-Commerce. An}

Economic Report For CHANEL' (CRA International 2008)

<http://ecp.crai.com/publications/Selective_distribution_Caffarra_Kuehn.pdf> accessed 6 December 2017.

46_{CRA International [2008] ibid. 45}

47 _{C-59/08, Copad SA v Christian Dior couture SA [2009] ECLI:EU:C:2009:260}

48_{Mario Strebel and Lukas Bühlmann, 'Coty - Carte Blanche For Luxury Brand Owners?' (lexology.com,}

2017) <https://www.lexology.com/library/detail.aspx?g=f7b4887f-5479-4e0a-9496-58c61ca2969a>

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In order to preserve that ‘aura ’of their products, brands generally use a selective distribution network49 in order to protect them. Normally, their selective distribution agreements contain limitations from the manufacturers.

The first concern for manufacturers of luxury products is the place where their products will be sold. The shop needs to fulfil certain requirements such as location, lightning, presentation of the products etc. An atmosphere that does not match the image of the brand with the product will make consumers not attracted to them.50

Secondly, in order to achieve that match between the product and the consumer, the retailer normally prefers that their authorised distributors sell their full range of products however, retailers may not only distribute for only one brand but for multiple, and therefore the incentive to sell the whole range of products is diminished. In order to avoid this situation, brands create sometimes too strict contractual restrictions so that they can preserve their image. 51

Even though they may enter into vertical agreements that may contain certain limitations, they can be often justified with efficiencies, however it is not always like that and there is where competition law comes into play.

4.2 Selective distribution agreements and the Internet as a distribution channel for luxury brands

The Internet as a distribution channel brings many benefits such as the low costs or the rapidity of the transactions. Also the concern of manufacturers when a retailer does not want to carry the whole line of products is diminished since the Internet has space for

49_{‘Distribution system whereby a supplier enters into (vertical) agreements with a limited number of}

selected dealers in the same geographic area. Selective distribution agreements, on the one hand, restrict the number of authorised distributors. On the other hand, they prohibit sales to non-authorised distributors, which leaves authorised dealers only other appointed dealers and final customers as possible buyers. Selective distribution is almost always used to distribute branded final products. The possible competition risks are a reduction in intra-brand competition, the facilitation of collusion between suppliers or buyers and the foreclosure of certain type(s) of distributors, especially in case of cumulative effects of parallel networks of selective distribution in a market.’ European Commission,

'Glossary Of Competition Terms. SELECTIVE DISTRIBUTION' (concurrences.com) European Commission, 'Glossary Of Competition Terms. SELECTIVE DISTRIBUTION' (concurrences.com)

<http://www.concurrences.com/en/competition-law/glossary-of-competition-terms/Selective-distribution> accessed 24 October 2017.

50_{CRA International, 'Selective Distribution Of Luxury Goods In The Age Of E-Commerce. An}

Economic Report For CHANEL' ibid.41

51_{Marina Markova, 'Online Sales In Context Of Selective Distribution' (Master Thesis, Lund University}

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everything. However, for luxury brands the Internet may not bring only positive aspects into their business but also some disadvantages.

Knowing how important it is to preserve the brand image for luxury brands, selling online may sometimes be rather a disadvantage than an advantage. This may be because by making retailers sell their products in a brick and mortar shop, manufacturers can make sure easier that retailers create that luxury experience by setting certain requirements and limitations in their agreements such as the atmosphere of the shop or the attention of the sellers. An example of this is the brand Chanel which developed an “internet sales module” in which retailers can access directly into their website.52 Furthermore, free- riding is a big problem for luxury brands that may want to sell online. Some of their consumers may visit the brick and mortar store to obtain that personal attention and advice but then purchase the product in an internet store different than the one from the website or their authorised distributors. In those cases, the costs of pre-sales services make it difficult for the brand to recoup. 53

52_{Marina Markova [2013] ibid. 51}

53_{European Commission Fact Sheet, ‘Antitrust: Commission Publishes Final Report On E-Commerce}

Sector Inquiry – Frequently Asked Questions' (European Commission 2017)

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5. Luxury brand’s selective distribution agreements and their

contract limitations to sell online.

Even though luxury brands have been more reticent to go online, they are slowly opening web shops also. This may be because their restrictive selective distribution systems, but why do they choose selective distribution to sell their products?

1. As a way to enhance the luxury image of the brand: some brands like for example sportswear brands, choose them in order to turn usual products such as running shoes or sports clothing more exclusive.

2. A possibility to select their dealers so they can easily control the way their products are displayed to consumers according to the brand’s aesthetics.

3. In order to control unauthorised re-sellers: brands can control their network and they can prohibit unauthorised sellers to sell their products in order to maintain their image.

4. For some suppliers it gives the opportunity to maintain high level of prices under certain conditions.54

In order to protect their image and that their products are sold according to their requirements manufacturers of luxury products can establish restrictions in their distribution agreements. This is settled in the Vertical Guidelines55 which establish that if a manufacturer operating in a selective distribution system wants to impose certain restrictions (for example, to have at least one brick and mortar shop in order to open an online store) on authorised dealers in their distribution agreements, they are in principle allowed to. However, those restrictions may sometimes bring competition concerns that I will discuss in the following paragraphs.

54_{Corinne Khayat, 'Why Selective Distribution For The Fashion Industry?' (Union Internationale des}

Advocats- Valence, 2015).

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5.1 Online sales restrictions, how are they regulated?

Article 101TFEU makes a difference between selling on the internet ‘passive’56 opposed to ‘active’ sales57. While restrictions on passive sales are regarded as restrictions by object, restrictions on active sales may be permitted under the criteria of 101(3) TFEU. Furthermore, restrictions on passive sales (e.g. restriction on internet selling) are black listed in the VBER not being able to benefit from any exemptive criteria from that regulation.58

These sales restrictions are regulated in the same way as offline restrictions, however when online, their regime is extended as established in the Guidelines59. The Guidelines indicate that any of the following restrictions on a reseller must be considered a hardcore restriction, 60 ‘(1) obligations to prevent customers located outside an

allocated territory from viewing its website (2) obligations automatically to reroute customers to the manufacturer's or another franchisee's website; (3) obligations to terminate consumers' internet transactions where their credit card data reveal an address outside an allocated territory; (4)limits on the proportion of overall sales that may be made on the internet; (5) requirements to pay a higher price for products intended to be resold online than for products intended to be sold offline.’ 61

However, the total ban of internet sales is not included in those. Therefore, this has opened a debate in the recent years.

56_{‘(…) passive selling means responding to unsolicited requests or orders from individual customers.’}

Richard Eccles, 'Online Sales And Competition Law Controls' (2015) 13 International Journal of

Franchising Law

<https://www.twobirds.com/~/media/pdfs/news/articles/2015/online-sales-and-competition-law-controls.pdf?la=en> accessed 2 January 2018.

57_{‘(…) active selling means actively approaching individual customers or potential customers to make}

sales.’ Richard Eccles [2015] ibid. 55

58_{Richard Eccles [2015] ibid. 55}

59_{Richard Eccles [2015] ibid. 55}

60_{Vertical Guidelines paragraph 52, ibid, 41}

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5.2 The Pierre Fabre case as the landmark case a) Facts

Pierre Fabre is a brand that manufactures and markets cosmetic and personal care products.62 In their selective distribution contracts with their distributors they established that their products, by nature, need the presence of a qualified pharmacist in the point of sale in order to diagnose the skin of the customers and give them the product that best suits their needs. (par. 17) Therefore, since they have the obligation to always have a pharmacist in the selling point they are basically prohibiting distributors from any form of Internet sales (para. 37). But with this measure they also jeopardize cross- border commerce since in order to buy one of their products, buyers have to go physically to the shop in France. While, if they buy it online, they can do it at home and get it delivered at their door, which is definitely more convenient. Pierre Fabre alleged that the aim of maintaining a prestigious image was the reason why they had to establish those requirements in their distribution agreements. (para. 45) The French Competition authority (Authorité de la concurrence) considered that their de facto ban on Internet sales would necessarily restrict competition. However, the French Court referred the question to the European Court of Justice of whether or not ‘a general and

absolute ban on selling contract goods to end users via the Internet, imposed on authorised distributors in the context of a selective distribution network, in fact constitutes a ‘hardcore’ restriction of competition by object for the purposes of Article 101(1) TFEU which is not covered by the block exemption (…) but which is potentially eligible for an individual exemption under Article 101(3) TFEU?’.63 So the ECJ can give them guidance.

b) The Pierre Fabre judgement

Departing from the fact that article 101(1) TFEU is only applicable when an agreement has ‘as its object or effect the prevention, restriction or distortion of competition within

62_{Pierre Fabre judgement [2011] ibid. 14}

63_{Louis Vogel, 'EU Competition Law Applicable To Distribution Agreements: Review Of 2010 And}

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the internal market’.6465 In order to decide whether the total ban on online sales was a restriction by object66 the European Court of Justice had to assess the content of the clauses in the legal and economic context. The fact that there had to be a qualified pharmacist in every shop where the retailers sold their product ‘constituted a de facto

ban on internet selling, which is equivalent to a restriction of authorised distributors active or passive sales and necessarily have the object to restrict competition’. (para.

23)67 Additionally, the ban was also found to be limiting the commercial freedom of Pierre Fabre’s distributors by excluding means of marketing and the possibility to reach to a bigger number of consumers online.68

Lastly, the Court ruled that ‘a general and absolute ban on selling contract goods to

end-users via the internet, imposed on authorised distributors in the context of a selective distribution network, constitutes a hardcore restriction on competition by object for the purposes of Article 81(1) EC.’69

c) Protecting brand image, as a legitimate aim for a contract clause to the total ban of online sales?

Pierre Fabre alleged that the de facto ban on internet sales was justified in order to protect their luxury brand image. However, the Court ruled that this was not a legitimate aim. Moreover, there are certain limitations in selective distribution agreements that are objectively justified and in conformity with 101(1) TFEU. It is settled case law that ‘(…) the maintenance of a specialist trade capable of providing specific services as

regards high-quality and high-technology products, which may justify a reduction of price competition in favour of competition relating to factors other than price. Systems of selective distribution, in so far as they aim at the attainment of a legitimate goal capable of improving competition in relation to factors other than price (…) are

64_{Consolidated Version of the Treaty on the Functioning of the European Union art. 101(1) (2008), ibid.}

38

65_{Pierre Fabre judgement [2011] para. 34, ibid. 14}

66_{Restrictions that by their very nature are anti-competitive. For example, price-fixing arrangements or}

agreements that divide the markets.

67_{Opinion Advocate General Mazák on the case C-439/09 Pierre Fabre Dermo-Cosmétique SAS v}

Président de l’Autorité de la concurrence en Ministre de l’Économie, de l’Industrie et de l’Emploi [2011]

ECLI:EU:C:2011:113

68_{Opinion Advocate General Mazák on Pierre Fabre [2011] para. 23, ibid. 67}

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requirements that fall outside 101(1) TFEU. 70_{Therefore, even though there can be} certain limitations in the contracts of selective distribution systems, these have to be proportionate, not discriminatory or harmful for competition.

The ECJ in Pierre Fabre considered then that ‘As regards, in particular, the sale of

cosmetics and personal care products, the aim of maintaining a prestigious image of those products is not a legitimate aim for restricting competition and cannot therefore justify a finding that a contractual clause pursuing such an aim does not fall within Article 101(1) TFEU.’ 71 The fact that Pierre Fabre required to have at least one pharmacist where they sold their products via their distributors, amounted to a restriction by object, after analysing the legal and economic context and taking into account the properties of the products at issue.

Knowing that the internet has become essential for everyone and that it makes it way easier for Europeans to buy/sell cross-border, luxury brands should not create those kinds of limitations for their retailers. As it is established in the Vertical Guidelines, the fact that manufacturers may restrict internet sales or create certain requirements in their distribution agreements to have more control of their brand is totally understandable, but in order for these to be fair, they need first of all to be proportionate. What was really missing in Pierre Fabre was in my opinion proportionality. The aim of Pierre

Fabre to protect their luxury image could have been achieved with other means not as

detrimental as the total ban on internet sales.

d) Would it be possible that a de facto ban on internet sales could benefit from

the Vertical Block Exemption Regulation?72

The Court in the Pierre Fabre case ruled that, following article 4(c) of the VBER is not applicable to ‘vertical agreements which directly or indirectly, (…) have as their object

the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment retail level of trade, without prejudice to the possibility of

70_{C- 107/82, AEG-Telefunken AG v Commission [1983] ECLI:EU:C:1983:293, para. 33}

71_{Pierre Fabre judgement [2011] paras. 38, 40-41, 46-47, ibid. 14}

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prohibiting a member of the system from operating out of an unauthorised place of establishment.’73 So since the total ban of internet sales was considered a restriction by object and therefore a hardcore restriction within the meaning of the VBER, the clause cannot benefit from the VBER. However, it may be exempted under article 101(3) TFEU if all the conditions are met.74

5.3 The Coty case as changing perspective

Online marketplaces are like the department stores of the Internet. Amazon or Ebay are an example. On the one hand, luxury brands consider that by selling their products in online marketplaces will damage their brand image since they cannot offer their clients good personal attention or present their products in a determinate way. On the other hand, marketplaces argue that those restrictions not to sell in online marketplaces hurt consumers and are anticompetitive.75

a) The Guidelines and the prohibition to sell on online marketplaces.

The Vertical Guidelines state that all the distributors have the right to sell their products online.76_{Since the internet is a more powerful tool to reach a bigger number of}

customers than by traditional sales methods, it explains that certain restrictions are dealt as (re) sales restrictions.77

The ban on internet marketplaces generally take place in selective distribution systems. This occurs when manufacturers restrict their authorised dealers to sell online, normally with the criteria to open at least one brick and mortar shop that meet certain conditions, or to meet other specifications (of presentation, treatment to clients etc.) in their online shop etc. With these limitations then, the authorised distributors are not able to sell their products via third-party internet platforms (EBay or Amazon for example)78 .

73_{Pierre Fabre judgement para. 53, ibid. 14}

74_{Pierre Fabre judgement para. 59, ibid. 14}

75_{Foo Yun Chee, 'EU Court To Weigh In On Luxury Brands' Attempts To Ban Online Sales'}

(bussinessoffashion.com, 2017) <https://www.businessoffashion.com/articles/news-analysis/eu-court-to-weigh-in-on-luxury-brands-attempts-to-ban-online-sales> accessed 11 October 2017.

76_{Vertical Guidelines [2010] para. 52, ibid. 41}

77_{Vertical Guidelines [2010] para. 52, ibid. 41}

78_{Silke Heinz, 'Ban On Sales Via Third-Party Internet Platforms In Germany And Pierre Fabre – Recent}

Referral To The Court Of Justice' (kluwerlawblog, 2016)

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<http://competitionlawblog.kluwercompetitionlaw.com/2016/06/06/ban-on-sales-via-third-party-internet-

These restrictions are covered in the Vertical Guidelines in paragraph 54 ‘(...) Similarly,

a supplier may require that its distributors use third party platforms to distribute the contract products only in accordance with the standards and conditions agreed between the supplier and its distributors for the distributors' use of the internet. For instance, where the distributor's website is hosted by a third party platform, the supplier may require that customers do not visit the distributor's website through a site carrying the name or logo of the third party platform. ” 79 This seems to confirm the possibility of excluding the sales on online marketplaces in which appear to users under their own trade name. Hence it kind of justifies the option of manufacturers to ban retailers to sell there.

b) The Coty80_case

The Higher Regional Court of Frankfurt am Main decided to submit four questions to the ECJ in order to clarify the prohibition of selling on internet marketplaces to retailers in selective distribution agreements.

Coty Germany is one of the leading manufacturers of luxury cosmetics in Germany. It sells numerous luxury brands via a selective distribution system in order to organise their network. Parfümerie Akzente has been their authorised distributor for many years selling their products partly in brick and mortar shops and partly online in their own website or via the third-platform (Amazon.de). Coty Germany justifies the necessity to operate in a selective distribution system with the need to ‘support the luxury image of

their brand’81_{. Following the entry into force of VBER}82_{Coty Germany decided to}

change its distribution agreements contracts, and one of the clauses stated that ‘the

authorised retailer is entitled to offer and sell the products on the internet, provided, however, that that internet sales activity is conducted through an “electronic shop window” of the authorised store and the luxury character of the products is preserved’.

But also, it expressly prohibited the use of a different business name or the use of logos

platforms-in-germany-and-the-impact-of-pierre-fabre-on-selective-distribution-referral-to-the-court-of-justice-in-coty/> accessed 11 December 2017.

79_{Vertical Guidelines [2010] para. 54, n. 41}

80 _{Coty Germany Judgement [2017] para. 10, ibid.15}

81_{Coty Germany Judgement [2017] para. 10, ibid.15}

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from third party undertakings that are not an authorised retailer of Coty, consequently, banning the use of Amazon.de as a form of selling online.83

Parfümerie Akzente refused to sign the changes and brought an action before the Court of First Instance seeking to avoid the prohibition of selling on amazon.de in the new distribution agreements.84

The German Court of first instance (Landgericht) following Pierre Fabre85 ruled that the contractual clause was a restriction “by object” and that the objective of preserving a luxury image was not justification enough to restrict competition in the market. Moreover, it also determined that since it was a hardcore restriction, it could not benefit from the Block Exemption Regulation, and it also did not fulfil the requirements of article 101(3) TFEU.86

Coty Germany did not agree with the judgement and brought an appeal before the Higher Regional Court of Frankfurt am Main, (Oberlandesgericht). Thus the German Court submitted four questions to the European Court of Justice in order to clarify the situation. The ECJ had then to decide whether selective distribution systems created to preserve the “luxury image” of those products are compatible or not with article 101(1) TFEU. And in that connection it also had to determine whether an absolute ban on the members of the selective distribution systems which operate as retailers on the market and that want to use third party platforms marketplaces to distribute the products is compatible with that provision. Lastly, the ECJ had to determine whether the prohibition is a restriction “by object” and the possible exemption under article 4b) of the VBER87.

In response to the first question, it is clear from previous case law that the agreements constituting a selective distribution system necessarily affect competition in the market.88 However, as a change from Pierre Fabre’s ruling, the ECJ concluded that: when the characteristics and the nature of the products may require an implementation of a selective distribution system in order to preserve the quality of the goods, then selective distribution system is compatible with article 101(1) TFEU. Only on the condition that the criteria is not applied in a discriminatory manner, that the system is

85_{See judgement in point 5.2 b) of this thesis}

86_{Coty Germany Judgement [2017] paras. 17-18, ibid. 15}

87_{Regulation 330/2010, ibid.5}

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strictly used to preserve the luxury of the products and that it does not go beyong what is necessary89

Regarding the second question where the Court was asked whether the prohibition of authorised distributors to sell on online marketplaces in a selective distribution system is compatible with 101(1) TFEU or not. The ECJ ruled that the objective to preserve the luxury image of the brand is enough to justify the establishment of a selective distribution system for those goods as long as it does not go beyond what is necessary to attain its objectives. Therefore, as established in paragraph 49 of the judgement, selling luxury goods via third party platforms that are not an authorised distributor could harm the luxury image of the brand since the supplier is unable to check the conditions in which the goods are sold.90

The prohibition at issue allowed Parfumërie Azkente to sell their products online ‘as

long as they have an electronic shop window for the authorised store and the luxury character of the goods is preserved, and via unauthorised third-party platforms when the use of such platforms is not discernible to the consumer.’91_{Therefore, since it was a}

partial prohibition and it had the aim to preserve the image of the brand, the ECJ ruled that it was proportionate to attain the objectives pursued.

Finally, regarding the third and fourth question, the Court had to examine if the prohibition imposed on the retailers in a selective distribution system of making use of third party platforms for internet sales constitutes a restriction of their customers from article 4b) of the VBER or a restriction of passive sales to end users within the meaning of the same regulation.92 The ECJ determined, in contrast to the clause in Pierre Fabre, that the prohibition at issue does not fully impede internet sales as it was explained in paragraph 65 of this judgement. 93 The clause allowed authorised distributors to advertise on third party platforms and to use searching engines so then consumers can find the distributors’ websites easily.94

89_{Coty Germany Judgement [2017] paras. 28-30, ibid.15}

90_{‘luxury goods via platforms which do not belong to the selective distribution system for those goods, in}

the context of which the supplier is unable to check the conditions in which those goods are sold, involves a risk of deterioration of the online presentation of those goods which is liable to harm their luxury image and thus their very character. Coty Germany Judgement [2017] para. 49, ibid..15

91_{Coty Germany Judgement [2017] para. 53, ibid.. 15}

92_{Coty Germany Judgement [2017] para. 62, ibid..15}

93_{Coty Germany Judgement [2017] para. 65, ibid. 15}

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Consequently, in those circumstances, even if it restricts a specific kind of internet sale, such as that at issue in the main proceedings it does not amount to a restriction of the customers of distributors, within the meaning of Article 4(b) of Regulation No 330/201095, or a restriction of authorised distributors’ passive sales to end users, within the meaning of Article 4(c) of that regulation.96

c) The game changers from the Coty judgement

AG Wahl brought a pinch of clarity in this matter. He states in paragraph 43 of his Opinion on the Coty case that ‘selective distribution systems are, especially for goods

with distinctive qualities, a vector for market penetration. Brands, and in particular luxury brands, derive their added value from a stable consumer perception of their high quality and their exclusivity in their presentation and their marketing. However, that stability cannot be guaranteed when it is not the same undertaking that distributes the goods’.97 By allowing their distributors to sell on third- party platforms, manufacturers loose track on how their products are being sold and displayed to consumers. This is because there is no direct contractual relationship between the manufacturer and the third-platform. Consequently, manufacturers cannot set up any requirements on how they want their products to be sold on their website.9899An example of this would be if Chanel a luxury brand that has that ‘aura’ AG Wahl talks about100, sold their products in a platform like Amazon, next to other non-luxury products, in a website with the logos of Amazon and according to Amazon’s aesthetics.101 This would jeopardize the image of Chanel since the consumers will not get that special ‘something’ luxury brands can bring to their clients.

95_{VBER, Regulation No 330/2010, ibid. 5}

96_{Coty Germany Judgement [2017] paras. 68, ibid.15}

97_{Opinion of Advocate General Wahl on the case C-230/16, Coty Germany GmbH v Parfümerie Akzente}

GmbH [2017] ECLI:EU:C:2017:603, para. 43

98_{van den Broucke Emanuelle and Magnus Adrian, 'The Coty Case - The CJEU Rules In Favour Of}

Selective Distribution Networks Against Third-Party Online Platforms' (lexology.com, 2017)

<https://www.lexology.com/library/detail.aspx?g=22aa9a44-5533-44cf-9060-45d6f0491d37> accessed

13 December 2017

GmbH, para. 103, ibid.96

GmbH, para. 43, ibid.96

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Also, this ban on selling on third party platforms could go hand by hand with intellectual property rights. In third-party marketplaces where the manufacturer has no control of what is being sold, other distributors may sell counterfeited goods next to the original goods, and when a client buys it, they get the fake product instead of the real one, which again damages the image of the brand. 102 This matter is not new to the Court and it was already seen in the L’Oreal v eBay case103. In the main proceedings amongst other questions, L’Oreal argued that eBay and its users infringed their trademark rights by selling counterfeited goods, or unpacked products that are given to distributors free of charge and others.104 From here derives the importance of luxury brands to check where their products are being sold. L’Oreal could not control how their products were being sold on eBay and therefore, their consumers were buying or counterfeited goods, or unpacked goods that jeopardized that luxury image they are trying to protect. This is mainly because the perception consumers have about their brand is the most important intangible asset that deserves protection from the law.105 To conclude, the ECJ did not leave quite clear was when does a product qualify as ‘luxury product’106_{What is clear from the judgement is that a luxury product is more}

than just a product with good quality but that it also entails that ‘aura’ AG Wahl mentioned. It is on the hands of the manufacturers to demonstrate that. In my opinion that could be done by proving a certain quality of the goods, their marketing, their personal attention towards consumers their packaging and presentation in a shop etc.

102_{Joana Whyte, 'COTY: A Luxury Case' (officialblogofunio.com, 2016)}

<https://officialblogofunio.com/2017/10/16/coty-a-luxury-case/> accessed 12 December 2017

103_{Case C-324/09 L’Oréal SA and Others v eBay International AG and Others [2011]}

ECLI:EU:C:2011:474

104_{Cecilia Sbrolli, 'Coty, Distribution Agreements And Luxury Brands'}

<http://ipkitten.blogspot.com.es/2017/12/coty-distribution-agreements-and-luxury.html> accessed 3 January 2018.

105_{Alice Edwards, 'A New Wave Of Trade Mark Protection: The "Aura" Of A Luxury Brand'}

<http://intellectualpropertyblog.fieldfisher.com/2017/a-new-wave-of-trade-mark-protection-the-aura-of-a-luxury-brand/> accessed 4 January 2018.

106_{Alan Hunt and Alicia Mietus, 'Comment: Protecting An ‘Aura Of Luxury’' (essential retail.com, 2017)}

<http://www.essentialretail.com/comment/article/5a37ea049ee4c-comment-protecting-an-‘aura-of-luxury’> accessed 4 January 2018.

Selective distribution agreements for luxury products and the ban to sell on online marketplaces. : How has the Coty case changed the views on this issue?