Examining the legal challenges around selective distribution of fashion and cosmetic goods in the European Union Market

Article by Reva Naidu

Introduction

This article analyses how selective distribution practices can pose legal challenges to luxury as well as non-luxury fashion brands by analysing EU legislations and the impact of two landmark cases in European Union competition law, the criteria that brands must make sure to comply with, in order to avoid possible repercussions by the EU Commission, and what those repercussions might be.

What is selective distribution and why do brands employ this strategy?

Selective distribution is a way in which brands aim to improve and maintain their exclusivity in the market and in the eyes of their consumers. Selective distribution is a marketing strategy defined as actions taken by brands to only supply their products in a limited number of stores and retailers, or at a specific type of retailer. This method of distributing fashion products creates an aura of exclusivity around them, making them seem elusive and difficult to obtain. This leads to high demand, as consumers often see such goods as ‘status symbols’ or as more valuable. 

Higher demand allows luxury brands to increase their pricing, leading to large profit margins. The rarer a product is, the more likely consumers are to go to extreme lengths to obtain it as it gives them a sense that the product is of higher quality compared to its existing competitors in the market. This strategy further allows large profit margins as it allows brands to market their products to a more specialised and targeted audience, leading to lower marketing and distribution costs. 

An example of a company successfully selectively distributing their products is ‘Coty,’ who own leading luxury fashion and cosmetic brands. Calvin Klein, Gucci, Hugo Boss, Kylie Cosmetics, Davidoff, and Wella are only a few of the brands covered by Coty’s vast and far-reaching umbrella. In Europe, Coty uses only specific distributors to sell their products, such as DCS Group UK and StandOut Field Marketing, requiring distributors to adhere to certain conditions. As a result of these conditions, Amazon and eBay are not permitted to sell Coty’s brands. The case of Coty in the Court of Justice of the European Union (CJEU) was a landmark case in the laws surrounding selective distribution and vertical arrangements for luxury brands, where one of Coty’s distributors began selling Coty products on e-commerce platforms. The judgement and its implications are explored further in this article.

What laws govern selective distribution in the European Union Market?

The European Union’s Competition Policy aims to ensure a strong amount of competition in the market, preventing discrimination between consumers and ensuring that consumers have a sufficient choice of products accessible to them. These policies seek to ban the abuse of a dominant market position by a brand and avoid tying and predatory pricing. The two main pieces of legislation that cover selective distribution strategies are the EU Regulation 33/2010 and Article 101 Treaty on the Functioning of the European Union (TFEU).

The EU Regulation 330/2010 defines vertical agreements as a deal between firms at varying levels in the supply chain of a product, and states that selective distribution is an example of one such agreement, while Article 101 (Treaty on the Functioning of the European Union) governs the rules that brands employing the use of selective distribution practices must follow. Article 101 TFEU states that any agreement between businesses that may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the internal market are prohibited. This includes limiting or controlling markets.

From this we must consider that if luxury brands aim to control markets by selectively distributing their products, how can they not be liable to the breach of Article 101 TFEU?

How can luxury brands comply with these regulations while still maintaining exclusivity?

The Case of ‘Coty’ was a landmark case in which one of Coty’s distributors, Parfümerie Akzente, began selling Coty products through the online Amazon marketplace, in contrary to the brand’s distribution conditions. Upon Coty’s appeal, the ECJ stated the principles that luxury brands must adhere to in order to ensure compliance with the European Union’s competition policy if they aim to use a selective distribution marketing strategy. The Court of Justice affirmed that, provided the following three requirements are satisfied, a selective distribution method that protects the products’ exclusive image does not fall under the purview of Article 101 (1) TFEU.

These conditions are that it must be determined that the qualities of the products in question call for a selective distribution system, and that this system is a legitimate necessity given the nature of the products taken into consideration; the selection of resellers must be based on objective, qualitative standards that are established for all potential resellers equally and applied without discrimination; and the criteria defined cannot be more stringent than what is absolutely necessary.

Therefore, luxury brands must prove that their product is of such a nature that necessitates the use of selective distribution in a proportionate manner, and that the distributors they choose must be based on an objectively justifiable and non-discriminatory reason. If brands do so, antitrust policies are not violated by their selective distribution.

Another way luxury fashion brands can be exempt from Article 101 is through the vertical block exemptions, as stated in Article 101(3). Selective distribution agreements are a type of vertical agreement under EU law under Regulation 330/2010. Luxury fashion brands may qualify for this exemption if their combined market share, in conjunction with their relevant product market and their relevant geographic market, is no more than 30%. This has been set out in the Vertical Agreements Block Exemption Guidance by the Competition and Market Authority. This is not a problem for most luxury fashion goods manufacturers, considering their preference to have a smaller, more targeted market of consumers with a higher purchasing power. According to a market analysis by McKinsey & Company, Chanel, despite being synonymous with the market of luxury fragrances, holds only 5% of the market share of perfumes.

Can non-luxury brands legally use selective distribution in the EU?

Since the Coty case allowed luxury brands to selectively distribute their products, albeit with certain restraints, we now take a look at whether non-luxury goods may do so too. This is a particularly contentious issue, as non-luxury brands inherently do not need to maintain exclusivity due to their nature, which was a requirement set out by the ECJ in Coty. Yet, the Amsterdam Court of Appeal confirmed the right of even non-luxury goods to decide the retailers of their products, as seen in the Nike case. The Court confirmed that Nike’s selective distribution activities were in alignment with the EU’s competition policies, and that the Coty exemptions applied to non-luxury products too.

Despite this ruling, other European courts have not necessarily followed this line of judgement for non-luxury goods. The German Federal Court held in the case of Bundesgerichtshof that only luxury goods undertaking selective distribution would be exempt from the scope of Article 101 TFEU due to the significant usage of price comparison websites in Germany, while stating that such decisions would also depend on the exact context in which a fashion brand aims to distribute its products. 

Therefore, fashion and cosmetic brands must ensure that the nature of their goods are such that they require an ‘aura of luxury’, as stated by the ECJ, in order to promote them and ensure their trade.

What are the practical consequences of a breach of EU Competition Policy?

If a fashion brand was found to be in breach of EU Competition Policy, specifically Article 101 TFEU, they would be subject to an investigation by the EU Commission or by the national courts of the country they are based in. If found guilty, they may be fined up to 10% of their global revenue. 

In order to facilitate maximum compliance with the competition policies set out in EU Regulation 330/2010 and Article 101 TFEU, fashion brands attempting to trade in the EU market should individually analyse the nature of their product contextually, to decide whether a selective distribution marketing strategy will benefit their sales.