The Court of Appeal’s judgment in Coty France further confirms the shift initiated by the Court of Justice and the French Supreme Court following recent decisions under EU and French law in the Coty Germany and Caudalie cases. In doing so, the judgment generally favours the protection of brand owners over the development of e-commerce platforms.
Type: Client Alerts
In a recent judgment of 6 December 2017, the Court of Justice of the European Union (CJEU) upheld a clause prohibiting authorised retailers in a selective distribution system from selling luxury goods on third-party online platforms, such as Amazon (see our previous alert on the Coty case).
On 28 February 2018, the Paris Court of Appeal applied the conclusions of that judgment in a separate case, involving litigation this time SAS Coty France (Coty France) and Showroomprive.com (Showroomprive).
The case concerned Coty France, a French luxury perfume manufacturer, and the selective distribution network through which it distributes its products. Coty France initiated a lawsuit against Showroomprive, an unauthorised reseller, which had sold Coty France’s products on its website in 2009 and again in 2013.
Showroomprive responded by challenging the legality of Coty’s selective distribution network, based on the prohibition of specific contractual provisions under Article 101 (1) of the Treaty on the Functioning of the European Union (TFEU). In addition, Showroomprive disputed the legality of the bailiff’s report which established Showroomprive’s business practices. The Court of Appeal ruled that:
- no prior authorisation from a judge is required before a bailiff can draw a report on Showroomprive’s practices. A website does not qualify as a private residence, for which prior judicial authorisation would be required before drawing such a report.
- contrary to Showroomprive’s argument, the bailiff could not be required to disclose its identity when checking the website as this was technically impossible on the website.
Consequently, Showroomprive had failed to establish that there had been a violation of the loyalty principle in the production of evidence. The Court of Appeal went even further in stating that brand owners are obliged to ensure the integrity of their networks, which would not be possible if they were unable to identify any threat to such integrity through bailiff’s reports.
The legality of a selective distribution network
Unsurprisingly, the Paris Court of Appeal strictly applied the CJEU’s reasoning by ruling that selective distribution systems for luxury goods aimed at preserving the luxury image of the relevant brands are not subject to the prohibition under Article 101 of the TFEU, as long as:
- resellers are chosen on the basis of objective criteria of a qualitative nature that are applied uniformly and without discrimination to all resellers; and
- restrictions imposed by these criteria do not go beyond what is necessary to achieve the aim of preserving the luxury image.
As Showroomprive challenged specific contractual provisions, the Court of Appeal had to assess whether each of those provisions complied with the above criteria.
After having established that the contractual provisions at hand were necessarily aimed at preserving the luxury image of Coty France’s products, the court mainly assessed the proportionality of the restrictions.
A reversal of previous case law with respect to bundling to members of an employees’ representative committee
On the basis of prior case law of the Paris Court of Appeal, Showroomprive argued that the clause preventing resellers from selling directly to employees’ representative committees that had already negotiated sale prices for their members and requiring such members to collect their purchases directly in a shop was a hardcore restriction.
However, in the case at hand, the Court of Appeal ruled to the contrary, stating that such clause was pro-competitive. Although distance sales cannot be fully prohibited, the brand owner may impose restrictions on resellers in relation to bundling by allowing end-consumers to benefit from negotiated prices while at the same time safeguarding both the luxury image of its products and the integrity of its network.
A careful consideration of the sales restriction on unauthorised resellers
In adopting the opposite view to Showroomprive’s argument, the Paris Court of Appeal confirmed the legality of provisions restricting resellers from selling to unauthorised resellers within the EU, as it guarantees the integrity of the network.
However, the court also emphasised the necessity of having a clear and unambiguous clause that does not contain a general restriction on territories not subject to a selective distribution network. In the present case, although a literal reading would have led the court to consider the restriction to be general and therefore anti-competitive, the court decided that Coty France’s actions to safeguard a selective distribution system were in place in all territories where its products were sold. Therefore, the restriction imposed was not anti-competitive.
Confirmation of prior case law on restrictions imposed during the launch period of a product
The Paris Court of Appeal also confirmed its own prior case law in relation to active sales restrictions on authorised resellers during the launch period of a product, in the territories where the products have not been marketed yet. Such provision is necessary to encourage resellers to invest in the promotion of that new product. In this context, the court did not consider one year to be a disproportionate period of time.
Application of CJEU’s judgment in Coty Germany to Coty France
Following Showroomprive’s challenge to the legality of Coty France’s marketplace prohibition clause, the Paris Court of Appeal directly quoted the CJEU’s reasoning: since a third party platform is used by a reseller without any direct contractual relation with the brand owner, compliance with the brand owner’s requirements for the resale of its goods would be difficult for the brand owner to monitor. Such difficulty could affect the luxury brand’s image.
The court also held that the FCA’s position was not contrary to the CJEU’s as the FCA never considered a third party platform ban to be a hardcore restriction. Finally, the court confirmed the inevitable shift in interpretation following the French Supreme Court’s reversal of the Caudalie decision in September 2017 (see our previous alert on the Caudalie case).
In addition, the Court of Appeal upheld the clause by which Coty France refused to authorise and accept pure players in its network. The court’s reasoning was that such clause is intended to allow consumers to test products and benefit from in-shop advice. It also enables brand owners to fight against ‘free riders’ and avoid any disincentivising of resellers to invest in brick and mortar businesses.
In the case at hand, the court indicated that online and offline consumers have different expectations: online consumers insist on the price of the product, whereas offline consumers rather look for advice and specific service consistent with the product’s prestigious image. From this perspective, the court considered that the general nature of Showroomprive’s offer was incompatible with this luxury sensation.
Consumers have the option to purchase products on the websites of click and mortar resellers’ websites.
Moreover, the court was of the opinion that free riding remains a risk in relation to luxury products, and therefore online distribution and offline distribution should be considered as complementary rather than substitutable.
The court concluded that Showroomprive’s conduct was in breach of Article L. 442-6 I 6 of the French Commercial Code as Showroomprive sold products falling under a selective distribution network, practices constitutive of free riding and of unfair commercial practices since Showroomprive sold products that it clearly knew were sold only by authorised resellers.
It now remains to be seen how exactly this judgment will be received and whether French courts will try to restrict its application, for instance, by limiting its scope to the luxury sector.
How Reed Smith can help
Reed Smith’s EU, Competition & Regulatory team can assist you in setting up a distribution network compliant with EU and French law, and defend your interests before French courts and the French competition authorities.
Client Alert 2018-077