Can Suppliers Prevent Distributors Selling on Third Party Websites - CJEU to Decide?

In an age where the importance and influence of the internet on retail is continuously on the rise, retailers, particularly those of brands aiming to build a reputation of luxury, may find themselves wondering to what extent they can stop or control how customers and distributors sell their products.

The outcome of a recent referral to the Court of Justice of the European Union (CJEU) will provide further guidance in this area, particularly with regard to online sales which, at present, remains unclear.

Facts

Coty Germany ("Coty"), a supplier of products in Germany, has issued court proceedings against a distributor ("Defendant"), claiming that it has breached the distribution agreement between them by selling the products via a third party website owned by Amazon. However, the Defendant argues that a ban on its sale of goods via third party websites is contrary to European Law.

Consequently, a complex series of questions on this point has been referred to the CJEU.

Full details of the referral can be found here but in essence the questions in the referral are whether and to what extent a supplier aiming to protect its 'luxury' reputation can control the channels used by its sellers or distributors to re-sell its products.

Legal Position

The Treaty on the Functioning of the European Union (TFEU) (Article 101) sets out the requirements and conditions that apply in respect of parties purchasing, selling and re-selling foods, and aims to achieve free competition in the EEA. It prohibits agreements which have as their object or effect the restriction of competition.

However, selective distribution networks are not prohibited under Article 101(1) TFEU, provided they are formed objectively on qualitatively based criteria which are openly operated and not applied in a discriminatory fashion. A seller of goods cannot restrict the territories or customers to whom a buyer may sell, but it can, under what is referred to as the Block Exemption, restrict active sales (not passive sales, e.g. selling products on a website) into a territory or customer group reserved to the seller or allocated by the seller to another customer group.

In a case before the CJEU in 2011 (detailed summary here), the court held that a blanket ban on internet sales with the aim of preserving the prestigious image of a trade mark amounted to a restriction of sales, and so was prohibited. However, it is not clear whether in that case the Court intended to set a precedent that the preservation of a prestigious mark will never justify a restriction in competition, or to introduce a test which is dependent on circumstance.

German competition authorities have reportedly interpreted the 2011 case as authority than any ban on third party sales has at its object the restriction of competition and so is contrary to Article 101 despite being a condition that still allows online sales (on the seller's own website). However, this position is not accepted across Europe and in the UK many practitioners adopt the position that the Commissions Vertical Restraints Guidelines permit suppliers to prevent sales on Amazon and eBay because they constitute standards of use in respect of internet sales, which it is suggested are permitted.

Questions referred to CJEU

It will be interesting to see the outcome of the referral to the CJEU as it is likely to provide much welcome clarity on whether, to what extent, and on what grounds a supplier can limit its distributors sales of its products on, for example, Amazon and eBay.

If you have any questions on the above or are experiencing a dispute or uncertainty on a commercial agreement, please do not hesitate to contact the team at McDaniel & Co. on 0191 281 4000 or legal@mcdanielslaw.com