On 22 March 2018, the Hanseatic Higher Regional Court in Hamburg ruled that a supplier of food supplements and various toiletries may prohibit distributors from selling its goods over certain online sales sites known as third-party platforms. This judgment referred to a 6 December 2017 Coty ruling by the European Court of Justice (ECJ) on third-party platform bans of selective distribution of luxury goods, but extended the ruling to non-luxury products.
High-quality and market-specific image of the products
The claimant in the Hamburg case distributes food supplements, cosmetics, fitness drinks and toiletries throughout Germany through a closed distribution system using network marketing. Made from quality raw materials with pure active ingredients, the products, used by top athletes, are considered sophisticated, high end, and higher priced, a reputation the manufacturer bolsters by providing advice and assistance to customers.
Distribution via eBay against corporate guidelines
The claimant's "corporate guidelines" "presently" prohibit distribution via eBay and comparable online trading platforms since, "as things stand", selling goods via these sites do not meet the company's quality standards. The claimant's formal warning to distribution partners selling their goods over eBay formed the basis of the legal dispute brought to the Hamburg court.
Selective distribution: Metro-criteria of the ECJ
Article 101 TFEU/Section 1 of the German Act against Restraints of Competition prohibits company agreements that restrict competition. But according to a previous ECJ ruling, a qualitative selective distribution network does not fall under this prohibition because these distribution systems are compatible with competition. Why? The ECJ ruled that the high-end nature of a product may necessitate a selective distribution system, and resellers can be chosen reflecting the nature of the product concerned so long as objective criteria is used in the selection process and the criteria laid down does not go beyond what is necessary.
No limit to selective distribution of luxury goods or technically sophisticated products
The Hamburg court deemed that the criteria of the ECJ ruling applied to the present case even though the disputed products were not mechanical/technical, durable or luxury products. The Hamburg court did not consider there were sufficient grounds for dividing selective distribution systems into technically high quality luxury goods on one hand, and non-luxury goods on the other. Furthermore, the court decided there are no clear criteria to distinguish between luxury goods and those that are still high quality or so special their prestigious image appears to justify selective distribution.
According to the law, there is no basis for restricting the selective distribution of luxury goods or technically sophisticated products. The Hamburg judges confirmed that distributing high-quality products also requires additional presentation and consulting services to convey a high-quality image and the positive characteristics of the product.
Third-party platform bans and the Coty ruling
In its 2017 Coty ruling, the ECJ stated that a third-party platform ban is definitely permitted for the selective distribution of luxury goods. Having no competition law reservations about the ban, the Hamburg court ruled that the ban might also apply to the disputed non-luxury products.
However, contrary to the Coty case, the Hamburg court ruled there is no "definitive" prohibition of distribution from third-party platforms. That the prohibition is applicable "at present" over eBay since "as things stand" the platform does not satisfy the claimant's high-quality standards. To what extent such wording makes any real difference is questionable.
The Hamburg court has extended the criteria in the ECJ ruling to cover sophisticated, high-quality and high-priced end products with a special product image. In principle, this ruling is welcomed and is probably in accordance with practice to date.
On the one hand, there are no easily implemented criteria to distinguish between true luxury goods and mere brand name products. On the other hand, there is no reason why a high-quality brand name product may not make the leap into the luxury sector. The ECJ's criteria states it might be legitimate to reduce price competition in favour of competition based on quality that is not limited per se to certain mechanical, technical or luxury products.
That the Hamburg court also extended the ECJ's Coty ruling to non-luxury goods is welcomed by many, and underscores the view of the European Commission (EC). Following the Coty ruling and in contrast to the Federal Cartel Office's tweet, the EC confirmed that it does not distinguish between product categories over whether the third-party platform ban is a hardcore restriction within the Vertical Block Exemption Regulation.
The Hamburg judgment shifts the boundary confirmed by case law between luxury and non-luxury goods to the boundary between high-quality and other goods.
Law-Now's first analysis of the 7 December 2017 ECJ can be found here.
Details on the original ECJ ruling (C-230/16) can be found here.
Details on the 22 March 2018 Hamburg court ruling (3 U 250/16) can be found here.
The EC's analysis of the Coty judgement can be found here.
For more information on how the ruling of the Hanseatic Higher Regional Court in Hamburg or the ECJ may affect your business, please contact: