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European court rules luxury brands may protect image by restricting web sales

By Natalia Drozdiak in Brussels and Matthew Dalton in Paris 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 7, 2017).

Luxury brands can restrict retailers from selling their products on web platforms like Amazon.com Inc. and eBay Inc. to protect their image, the European Union's top court ruled Wednesday.

The decision gives luxury companies a powerful tool in Europe to safeguard their exclusivity, which has become a key concern as the sector expands online sales.

In its judgment, the European Court of Justice said companies are allowed to impose certain conditions in their contracts with retailers if the goal is to preserve a brand's luxury image and as long as the company doesn't discriminate among retailers.

The case stems from a dispute between U.S.-based cosmetics manufacturer Coty Inc. and German retailer Parfümerie Akzente GmbH, which sells Coty's products on Amazon. Coty, whose brands include the cosmetics lines of Calvin Klein, Marc Jacobs and Chloe, objected to the practice, citing contractual clauses that prevented the sale of its goods through third parties.

A German court referred the case to the ECJ.

"The quality of luxury goods is not simply the result of their material characteristics, but also of the allure and prestigious image which bestows on them an aura of luxury," the ECJ said. "That aura is an essential aspect of those goods in that it thus enables consumers to distinguish them from other similar goods."

Coty welcomed the ruling. "After years of uncertainty, this means luxury brands can determine how they are placed on digital platforms," it said.

Oliver Spieker, a partner at law firm GÖRG, who represents Parfümerie Akzente, said: "This decision will have an impact on selective distribution systems for a variety of brand-name products as the manufacturers of such goods might argue they are also protecting a luxury image."

Parfümerie Akzente welcomed the clarity provided by the ruling, Mr. Spieker added, however.

In the U.S., third-party retailers frequently use Amazon to sell luxury merchandise online, to the chagrin of many brands.

However, U.S. law gives little leverage to luxury brands over e-commerce companies. The so-called first-sale doctrine limits the ability of brands to control how their brands are sold once they are distributed to wholesalers.

The ruling comes as the EU is pushing to eliminate online obstacles to the sale of goods and services across borders in Europe, known as the digital single market. Internet advocates say restrictions like Coty's deprive consumers of choice and lower prices.

"Today's verdict does nothing to help foster the digital single market... this judgment is bad news for consumers who will face less choice and also less competition when they want to shop online," said Jakob Kucharczyk, vice president for competition and EU regulatory policy at the U.S.-based Computer & Communications Industry Association, a lobby group that represents Amazon and eBay.

Luxury conglomerates such as LVMH Möet Hennessy Louis Vuitton, Kering Co. and Cie. Financière Richemont SA are opening their own e-commerce sites or working with specialized luxury internet retailers, such as Yoox Net-a-Porter. This week, Céline, the French fashion house owned by LVMH, opened its own e-commerce operation.

The luxury industry worries that these efforts could be undermined by unauthorized sales over the internet. Luxury goods displayed on websites run by Amazon or other independent e-commerce sites are often sold at discounted prices and displayed next to mass-market brands. Luxury companies say that undermines the aura of exclusivity they strive to build around their merchandise.

Companies like Swiss watchmaker Swatch Group have shunned mass-market platforms on concerns they don't proactively police their sites for counterfeits and unauthorized retailers.

The court's decision appears narrowly tailored to the demands of marketing luxury goods online while most marketplace bans relate to mass-market products that can be found in most physical stores, according to Mr. Kucharczyk.

Those types of restrictions are still the focus of some competition regulators.

"Our preliminary view is that such manufacturers [outside the luxury industries] have not received carte blanche to impose blanket bans on selling via platforms," said Andreas Mundt, head of Germany's Federal Cartel Office, which has scrutinized similar restrictions by Adidas AG and Asics Corp.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Matthew Dalton at Matthew.Dalton@wsj.com

(END) Dow Jones Newswires

December 07, 2017 02:47 ET (07:47 GMT)

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