In a major victory for luxury brands in Europe that could have far-reaching effects on e-commerce sales of luxury products in the future, the European Court of Justice (COJ) recently held that a luxury goods supplier can stop authorized distributors from selling those products through third-party online marketplaces such as Amazon and eBay.

The decision by the EU's highest court resolves a dispute between Coty Germany GmbH and Parfümerie Akzente GmbH. Coty is one of Germany's leading luxury cosmetics suppliers, and it sells those products through select authorized distributors, including Parfümerie Akzente. Coty requires its distributors to comply with requirements designed to preserve the "luxury image" of Coty's goods, including meeting "look-and-feel" standards in brick-and-mortar stores and internet sales restrictions.

While authorized distributors were allowed to sell Coty's luxury goods through their own websites, they could not sell via third-party platforms. Parfümerie was subject to such restrictions, but began selling Coty products through Coty brought proceedings before the German courts to prohibit Parfümerie from distributing its products through online marketplaces.

EU law was not clear on whether Coty's online restrictions were valid or invalid as inconsistent with EU competition law, which protects the free trade of goods through the internet. The German courts sought guidance from the COJ. On December 6, 2017, the COJ ruled that selective distribution systems—such as the one Coty implemented for the sale of its luxury products—do not run afoul of EU competition laws, provided that the following conditions are met: resellers are chosen on the basis of objective criteria, which must be laid down uniformly for all potential resellers and not applied in a discriminatory fashion; and the criteria must not go beyond what is necessary—for example, prohibiting all online sales.

The COJ also found that agreements prohibiting luxury goods authorized distributors from selling via third-party online platforms are lawful provided that such a clause or agreement: (1) has the objective of preserving the luxury image of the goods in questions; (2) is laid down uniformly and not applied in a discriminatory fashion; and (3) is proportionate in light on the objective pursued.

Although the Coty ruling is limited to the sale of luxury goods in Europe (said to account for 70 percent of all luxury sales), this is an important decision for brand owners—and, in particular, luxury brand owners—who must be continually vigilant in protecting the image and exclusivity of their brands, including through distribution-channel control. Distribution-channel restrictions can be an important tool for reducing the likelihood that counterfeit sellers will benefit from unauthorized sales and erode the "aura of luxury" of these brands.

Ballard Spahr's Intellectual Property Group works with clients to protect their brands around the world. The Group has significant experience with strategic trademark portfolio creation and protection, clearance, registration, licensing, and litigation. Our Retail and Fashion team is designed to provide a comprehensive, coordinated approach to addressing the specific needs of clients in the retail sector. We enable clients to stay in front of pivotal and emerging issues impacting their business using our industry and legal knowledge, judgment, and creative problem-solving.

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