The definition of “luxury” is coming into question in the EU, as the Court of Justice of the European Union (CJEU) ruled last week that brands have the right to restrict where their goods are sold. With its ruling, the CJEU aims to give luxury brands more control over the prestige of their brand. After all, if you could fill your online basket with a luxury high priced item, as well as a low priced commodity item, something would seem amiss.
Controlling the distribution of their goods has been hailed as a victory for luxury brands in that they would gain the ability to preserve their brand value by deciding where resellers are allowed to list their wares. In particular, the CJEU’s ruling gives brands the right to legally choose to limit online sales if a reseller hampers their ability to preserve their brand image. This clause is reminiscent of the 2007 US Supreme Court decision to allow brands to determine minimum advertised price (MAP) for their products and choose to no longer do business with distributors that broke their MAP policy.
The ruling came about because the German cosmetics brand, Coty, told its distributors that they were only allowed to sell their products through their own proprietary channels. In addition, they also made the distinction that using a third-party distribution channel was only acceptable when the consumer couldn’t tell that this third party platform was being used. While this is a potential win for brands, there are many uncertainties within this ruling.
Why the Ruling Could Be Beneficial
The CJEU ruled in favor of Coty because, “A selective distribution system for luxury goods, designed primarily to preserve the luxury image of those goods, does not breach the prohibition of agreements, decisions, and concerted practices laid down in EU law.” This allows brands to determine to only do business with resellers who uphold their prestigious brand image, as well as their margins.
Impact and Ambiguities of the EU Brand Ruling
Luxury brands have welcomed this ruling with open arms, as it gives them the right to exercise much greater control over their brand image and where their products are sold. With the proper monitoring and enforcement plan, brands will not have to worry about their products showing up on online marketplaces, such as Amazon and eBay.
The wording of the ruling left a bit to be desired. First, what exactly constitutes a luxury brand? Even within the retail industry, we may all have different definitions of what a “luxury” brand is. The CJEU will have to tighten up their wording in order to make enforcement possible. Second, the ruling does not mention the extent to which brands can control how their products are marketed. Third, whether or not a consumer “knows” that the retailer they are buying from is using a third party platform to sell to them or not is a bit too subjective to enforce.
Action Items for EU Luxury Brands
The first step EU luxury brands will need to take is reviewing all the distribution agreements they have in place. Where can you tighten up language to be more specific about restrictions and guidelines? Where can you add in limitations to third-party channels in European regions?
Once you get resellers to agree to new terms, how will you monitor and enforce those policies? Keeping an eye out for your products on third-party platforms will help you determine which resellers aren’t adhering to your policies. Spell out in your new arrangement what will happen if a reseller is caught violating your policies and make it clear that you will be keeping track of your products across channels so that they don’t think they can easily fly under your radar. Whether you decide to enforce a “three strikes and you’re out” or a “one and done” policy, make sure resellers fully understand what is expected of them.
Monitoring third party sites will also come with the added bonus of unearthing counterfeit products or a leaky distribution system. If you catch your products being sold for much lower than the usual price and by a seller you don’t do business with, then either what they’re selling is fake or they’ve gotten ahold of your product illegally. Either way, being aware of the problem is the first step towards fixing it.
This ruling could have implications far beyond the EU, as brands worldwide aim to preserve their brand image, no matter what their price tier is. Could EU brands gain an appetite for more control over their businesses and inspire legislation closer to MAP policies in the US? There is no telling what impact this will ultimately have on brands in the EU. But it is clear that it will have to be amended slightly to really put brands in the driver seat of their reseller agreements. Maybe MAP will eventually find its way to the EU and in the meantime, brands will need to determine whether an in-house or third-party brand compliance solution is right for them. After all, manually checking for product presence on third party sites is an overly time-consuming task that no luxury brand should have to bother with.