A current debate in competition law is whether a company can restrict online sales for their products. In a recent development, the European Court of Justice (ECJ) has decided that restrictions on online sales may be justified in some circumstances, specifically if they are intended to preserve a product's luxury image.
Cosmetics maker Coty had prevented one of their distributors from selling their products on online platforms such as Amazon. Instead, Coty only allowed distributors to sell their products through shops that adhered to specified standards, or online through websites directly associated with Coty. Coty sued one of their distributors after they chose to sell Coty products on Amazon's German website.
The ECJ determined that as a luxury image is a critical aspect of some products, restricted distribution was acceptable if it assisted in maintaining the quality of such products from "any impairment to that aura of luxury."
Under New Zealand's competition law, a supplier restricting its customers from selling on online platforms could be caught if:
- the supplier has market power, and is imposing those restrictions to take advantage of that market power for an anti-competitive purpose;
- those restrictions have the purpose or effect of substantially lessening competition in a market; or
- that supplier also competes downstream with those customers (i.e. by selling directly to consumers itself), in which case the restriction could be regarded as an "output restriction" between competitors under the new expanded cartel prohibition.
However, legitimate/pro-competitive justifications can be a relevant factor in assessing the legality of any such restrictions under any of these prohibitions:
- the market power prohibition requires a firm's "substantial purpose" to be preventing someone else from competing, or eliminating someone else from the market;
- the substantial lessening of competition effect test is a "net test", whereby pro-competitive effects (including efficiencies) need to be balanced against any anti-competitive effects in the relevant market, and the purpose test looks at what the firm's substantial purpose is; and
- the new expanded cartel prohibition is subject to an exemption in vertical supply contracts that exempts any restrictions that do not have the "dominant purpose of lessening competition between the parties".
Accordingly, the ECJ's recognition that businesses have a legitimate interest in protecting the luxury image of their brands through restricting online sales could well be a factor that is also relevant in considering such restrictions under New Zealand law.
The ECJ's judgment can be found here.
If you have any questions in relation to the issues discussed in this Alert, please contact one of the contributors.