Digitalizing Distribution – Two trends: Directing the Distributors & Direct Distribution

1. Directing the Distributors

The importance of Internet distribution has been increasing for years, and so have the restrictions set out in distribution contracts. Manufacturers of renowned brands in particular aim to take advantage of the market opportunities of e-commerce, and preserve their brand’s image. Consequently, they have imposed several kinds of restrictions on their distributors, in particular:

European Commission, Final report on the E-commerce Sector Inquiry, 10.05.2017, Page 9

Such measures occur in selective, exclusive, franchise and open distribution systems. Some may serve legitimate interests to secure a high-quality distribution, while others may be anticompetitive restrictions on territory and resale prices. While restrictions in the online business have been rising, their regulation is lagging behind. The Court of Justice of the EU set a first milestone in 2011 with its „Pierre Fabre“ decision on the general ban of Internet sales and in 2018 another one with its “Coty Germany” decision – both covering the distribution of luxury cosmetics. Result:

“A supplier of luxury goods can prohibit its authorised distributors from selling those goods on a third-party internet platform” (Press release no. 132/17 of 6 December 2017).

Alternatively, more succinctly, in 2018 the Higher Regional Court of Frankfurt held:

“Luxury goods justify online sales bans”.

(Press release no. 30/2018 of 12 July 2018, applying the European top court’s guidelines on online sales bans).

Questions have been answered and new ones raised: Can only manufacturers of luxury goods ban their distributors’ online sales – and if so, what is luxury? The German competition authority Bundeskartellamt declared in its first reaction that the Coty ruling should apply exclusively to original luxury products:

“#Brand manufacturers still have no carte blanche on #platform bans. First assessment: “Limited impact on our practice” (Twitter, 6 December 2017).

The European Commission takes the opposite position, stating that the court’s argumentation in the Coty decision should apply as well to the distribution of other products, regardless of their luxury character:

„The arguments provided by the Court are valid irrespective of the product category concerned (i.e. luxury goods in the case at hand) and are equally applicable to non-luxury products. Whether a platform ban has the object of restricting the territory into which, or the customers to whom the distributor can sell the products or whether it limits the distributor’s passive sales can logically not depend on the nature of the product concerned.“

(Competition Policy Brief, April 2018)

More than one year after the Coty decision, the rules are not 100% clear: Among the German courts, the Higher Regional Court of Hamburg allowed banning sales on third-party platforms also for non-luxury, high-quality goods (decision of 22 March 2018, file no. 3 U 250/16) – specifically within a qualitative selective distribution system for food supplements and cosmetics.

“if the goods sold are high-quality and the distribution is combined with parallel customer consulting and support services, with the aim, among other things, of illustrating to the customer an overall sophisticated, high-quality and upscale end product and building up or maintaining a specific product image” (translated text from the original German version).

Recently, the German Bundeskartellamt gave its opinion once more, reaffirming its first position:

“The statements of the Court of Justice of the EU in this regard are limited to luxury products and cannot easily be transferred to other (high-quality) branded products.”

(Wettbewerbsbeschränkungen im Internetvertrieb nach Coty und Asics – wie geht es weiter?, 02.10.2018).

Suppliers who want to take only limited risks should be cautious with platform bans outside the selective distribution of luxury goods. There are, however, good arguments for also allowing such online bans for other products. For an overview of the current practice with model contract clauses, check Rohrßen, Vertriebsvorgaben im E-Commerce 2018: Praxisübersichts und Folgen des “Coty”-Urteils des EuGH, in: GRUR-Prax 2018, 39-41.

2. Direct Distribution

Alternatively or additionally, manufacturers rely on direct distribution, either all by themselves with their own employees or through commercial agents or commission agents. This means that the distribution risk lies only with the manufacturer. The big advantage in all those cases is that suppliers are free from the restrictions of antitrust law and can even set their resale price. This trend permeates through all product categories – including new cars.